Einhorn, Buffett disagree on gold

The Oracle says gold is useless, but precious metals are shining in a downward stock market.

By Wall St. Cheat Sheet Jun 5, 2012 9:27AM

"Gold gets dug out of the ground, 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." -- Warren Buffett


When it comes to bashing gold, few do it as publicly and as extremely as the crew at Berkshire Hathaway (BRK.B).


The company's CEO and largest shareholder, Warren Buffett, has provided many analogies over the years involving the precious metal. In a Fortune article earlier this year, the Oracle of Omaha cited gold's limited industrial demand and placed it in a category of assets that "will remain lifeless forever."


Berkshire's attack on gold grew louder as Charlie Munger, the vice chairman, said in a recent interview that "gold is a great thing to sew onto your garments if you’re a Jewish family in Vienna in 1939, but civilized people don’t buy gold, they invest in productive businesses."


Buffett dedicated a decent part of his latest shareholder letter to criticizing gold. He painted an analogy of the world's gold stock as a useless cube that would fit within a baseball infield.


"Today the world's gold stock is about 170,000 metric tons," Buffett wrote. "If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube pile A."


He then compared pile A to another pile. "Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?"


Those statements have not gone unnoticed by hedge fund manager David Einhorn.


Einhorn, the founder of Greenlight Capital, is long gold and provided an analogy of his own.


"Over the last few years, we have come to doubt whether cash will serve as a good store of value," he wrote. "If you wrapped up all the $100 bills in circulation, it would form a cube about 74 feet per side. If you stacked the money seven feet high, you could store it in a warehouse roughly the size of a football field. The value of all that cash would be about a trillion dollars. In a hundred years, that money will have produced nothing. In a thousand years, it is likely that the cash will either be worthless or worth very little."


Einhorn continued: "It will not pay you interest or dividends and it won't grow earnings, though you could burn it for heat. You'd have to pay someone to guard it. You could fondle the money. Alternatively, you could take every U.S. note in circulation, lay them end to end, and cover the entire 116 square miles of Omaha, Nebraska. Of course, if you managed to assemble all that money into your own private stash, the Federal Reserve could simply order more to be printed for the rest of us," said Einhorn in Greenlight Capital's quarterly performance letter.


Interestingly, Einhorn does not make any mention about gold in his letter, but instead leads readers to critically think about dollars as a store of value, all while providing an entertaining response to gold critics like Buffett and Munger.


Rather than place gold against all U.S. cropland or several oil companies, its role in the financial system should be seen as a store of value that cannot be printed at will. The precious metal also offers diversification and is one of the few things that has represented currency for thousands of years.


Eric McWhinnie is an editor at Wall St. Cheat Sheet. As of this writing, he was long EXK, AG, HL, PHYS.


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23Comments
Jun 5, 2012 1:09PM
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Simple fact - Everything is worth only what the next buyer is willing to pay
Jun 5, 2012 12:01PM
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Before I heard Einhorn's response to Buffett, I already thought of how silly Buffett's criticism about gold is. Buffett is comparing gold with cropland, but cropland itself does NOT produce anything. You need labors, you need water, fertilizers, you need food processing facilities, transportation, energy etc in order to make use of the output of the cropland.

 

Yes, if you leave cropland there for a century, it will be like gold - producing nothing.

 

Furthermore, if gold is such useless thing, just look at who is the biggest holders of gold? US government. Why don't Buffett urge federal government to sell gold, just like the way he urged Obama to tax the rich? I am sure China and many other developing countries will be happy to take gold instead of US Dollar.

 

Buffett maybe genius in investing, but sorry to say this to his cult followers, he is an idiot in many other things.

Jun 5, 2012 12:49PM
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  Buffet, Munger (and that eugenicist slime ball Bill Gates) are simply wrong about gold.  The dollar is backed by nothing but debt- a debt that continues to grow larger every year.  If you plot  a graph of the purchasing power of an ounce gold vs. the purchasing power of a dollar over the last one hundred years the dollar has lost almost 96 percent of it's purchasing power while the purchasing power of an ounce of gold is about the same.  Given these facts, why would anyone want their assets in dollars if they could have them in Gold? 
Jun 5, 2012 2:18PM
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The mistake that Buffet is making is that he doesn't seem to understand that gold is money, and businesses are businesses.  You can't compare his two "piles"; it's apples and oranges.  Gold needs to be compared to other forms of money, not productive assets like businesses. 
Jun 5, 2012 6:40PM
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Picture Warren's cube of wealth fitting comfortably inside a baseball field.  David Einhorn's wealth could be first base.
Jun 5, 2012 2:17PM
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Simple fact- gold is denominated in dollars. As the purchasing power of the dollar declines what happens to the price of gold? It goes up. It's not rocket science.  That's why gold maintains it's purchasing power and the dollar doesn't.

 

Jun 7, 2012 9:19PM
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I think Buffett and Munger are closer to the truth than Einhorn and his colleagues who hoard/buy/invest in gold.  Gold will be worthless as time goes on.  Granted it has had a run for thousands of years but it is coming to an end.  Hopefully not in my life time, but sooner than later.  On the other hand, I and many others own water.  And we will sell/trade for water when the time comes, but not for something worthless to most of mankind as is gold.  Now if gold could be used for something besides jewelry, which only the kings really need, or by Dentists, who have come up multitude of substitute materials for teeth, or for any other limited industrial purposes, maybe we could talk.  But for the same thousands of years referred to above, nothing has come up for using gold.  So why does Einhorn ply the non-sequitor of gold vs. cash.  Munger and Buffett did not make that comparison.  Maybe Wall Street types have a better understanding on this issues than many of the rest of us.
Jun 7, 2012 10:39PM
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Eihorn has been a huge purchaser of gold mining stocks  since late last year and  accelerated his  purchases of "physical gold"  late last spring(although I understand his mining stock purchases were funded by selling physical gold). He has seen huge paper profits go up in smoke, and worse. He really shouldn't be "shooting the messenger", it shows lack of character. I don't trust these hedge fund guys. Over the years it has looked very much to me like they get together and decide to all buy something, then they all start touting whatever they bought in the press(pump  and dump?). Einhorn and a few close associates of his are notorious for doing this with shorts on stocks(ex Lehman).  
Jun 5, 2012 2:25PM
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mark twain said it best, gold is a hole in the ground with a liar at the bottom....
Jun 5, 2012 5:19PM
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You can live on cropland, you cant live on a gold coin you idiots. Get that through your brains. I would rather have LAND than a stupid **** gold coin. Do you really think gold is going to be your bomb shelter if the world collapses? I am pretty sure you can have all the gold in the world, but if its indeed a hedge against world collapse, a nuclear bomb shelter seems like a much more viable option compared to gold. Plus, the guy with food and a Hummer is going to kill the idiot trying to use gold as currency. The world will go back to bartering, and then establishing a new currency. Gold is very dumb. Normal people don't quantify gold as real value, and then what will gold be worth when 90% of the population is destroyed, and the entire gold supply is so vast that it looks like shiny garbage?

Jun 5, 2012 2:40PM
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Why are all the banks buying GOLD NOW; these guys are mad because gold been doing great the last 10 years and their insider trading didn't work this time like it does on the worthless paper compaines; Enron's paper stock was great and they lied about productivity until the real AUDIT came, Charlie Munger, Warren Buffett, gates...dont trust Wall Street Trust GOLD and SILVER  listen to these pop farts and you will lose your money in the REAL CRASH coming.
Jun 5, 2012 1:03PM
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Gold is like Facebook. Both worthless. Neither produce anything.
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