Einhorn, Buffett disagree on gold
The Oracle says gold is useless, but precious metals are shining in a downward stock market.
"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.
More from Wall St. Cheat Sheet
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.
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.
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?
Copyright © 2014 Microsoft. All rights reserved.
As the market wades through what many people hope is a sixth bull year, some have grown nervous about how long the run can go.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.