This column originally appeared on Real Money Pro at 12:32 p.m. EDT on May 28.
NEW YORK (Real Money) --
In many ways, I have shared Warren Buffett's skepticism on gold, as expressed in his seven quotes above. Also, in support of Warren's ursine view of the precious metal, is Oaktree Capital Management's Howard Marks, who has written that gold is a lot like religion. In religion, you either believe in God or you don't. In the gold market, you either believe in gold or you don't. In the past, I have agreed on the subject of gold with both The Oracle of Omaha and The Oracle of Oaktree. In fact, I recently debated with Peter Schiff about gold, providing the bear case for the asset class (albeit, at much higher prices). In essence, the gold market is a state of mind -- the subject of gold is an emotional one. It neither represents a corporate franchise that increases over time as profits are earned and retained such as, say, Procter & Gamble (PG), with a protected moat -- nor is it a productive asset. As such it is hard to ascertain what the intrinsic value of the commodity is. On the latter point, gold doesn't produce profits or cash flow and, as such, fails to provide a stream of income. Its future price is simply dependent upon someone willing to pay more for the asset class compared to its price today. While it might take time for the price of gold to build a real bottom, there is a time, place and price for every asset class.
-- All of the above quotes are from Warren Buffett
- Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
- The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn't going to do anything for you.... [I]t is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something that you expect to produce income for you over time.
- Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid, you make money; if they become less afraid, you lose money -- but the gold itself doesn't produce anything.
- I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side.... Now for that same cube of gold, it would be worth at today's market prices about $7 trillion dollars -- that's probably about a third of the value of all the stocks in the United States.... For $7 trillion dollars ... you could have all the farmland in the United States, you could have about seven ExxonMobils, and you could have a trillion dollars of walking-around money.... And if you offered me the choice of looking at some 67-foot cube of gold and looking at it all day, and, you know me, touching it and fondling it occasionally.... Call me crazy, but I'll take the farmland and the ExxonMobils.
- The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.
- What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade, that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth -- for a while.
- I have no views as to where it will be, but the one thing I can tell you is it won't do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot -- and it's a lot -- it's a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that.
Why Now?This morning, I paid $133.30 for SPDR Gold Trust (GLD) in premarket trading. Below I will discuss my reasons for building a position in gold over the next few weeks and months. Expectations for the price of gold are now low and diminished. Gold experienced a speculative blow-off top 18 months ago as the European debt crisis peaked, the threat of a U.S. default ceiling rose and coincident with the debt rating of U.S. being lowered. A most unpopular asset class provides a contrarian's appeal. Weak price action since September 2011 has created an improved reward vs. risk. Here is the price of gold since 1833. And below is a chart that follows the price of gold since 1970.
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