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Berkshire Hathaway Inc. (BRK.A), The Coca-Cola Company (KO): Why Warren Buffett Hates Gold

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Warren Buffett, the CEO of Berkshire Hathaway Inc. (NYSE:BRK.A), is currently worth about $44 billion, according to Forbes’ list of the world’s richest people. This makes him the world’s third-richest person, behind Bill Gates and Carlos Slim.

Buffett is famous for some great stock picks over the years — picks like The Coca-Cola Company (NYSE:KO), American Express Company (NYSE:AXP) and International Business Machines Corp. (NYSE:IBM), each having increased more than 110% in the past 10 years alone.

But the Oracle of Omaha is also well known for avoiding certain investments — especially gold.

While he’s is quick to point out that gold has served some investors well, particularly during times of high inflation, Buffett has never warmed up to gold as an investment.

Why not?

The answer has to do with the difference between what Buffett calls productive versus nonproductive assets.

He considers gold a nonproductive asset because it doesn’t produce anything of value. To illustrate this point, Buffett proposed this thought experiment in his 2011 letter to Berkshire Hathaway Inc. (NYSE:BRK.A) shareholders:

undefined“Today the world’s gold stock is about 170,000 metric tons. 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 $9.6 trillion. Call this cube pile A.

“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?

“A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.”

So, instead of nonproductive assets such as gold, Buffett prefers productive assets like farmland or companies that generate enormous wealth for shareholders — companies like Exxon Mobil Corporation (NYSE:XOM), The Coca-Cola Company (NYSE:KO) or See’s Candy.

And he clearly explains why:

“Our country’s businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial “cows” will live for centuries and give ever greater quantities of “milk” to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well).

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