On Money and Currency

I watched a video on YouTube today entitled “Hidden Secrets of Money – Currency vs. Money” by Mike Maloney.

A small number of people I’ve met pay any mind to this type of thing.

There is value in learning about fiat currencies, just like there is value to learning about Bitcoin.

I can’t endorse going full gold-bug, but there is merit in what is being said out there. There is a reason why the advertisements on TV request you trade in your gold for paper currency. The biggest trouble with this game is that world’s currencies are all fiat currencies.

One point that Mike Maloney captures well is the potential for revolutionary action in reaction to massive inflation, which segues neatly into the reason behind taking on a “prepper” mentality.

Curious to find what famous investors think about the value of investing in hard monies, I searched first for Warren Buffet’s opinion on gold.

Warren Buffet on Gold

(excerpts from transcript of Warren Buffett’s live appearance on CNBC’s Squawk Box on Monday, May 7, 2012)

BECKY: You had a shareholder who asked you a question about gold over the weekend and your response was pretty interesting. Berkshire vs. gold. You want to talk about how that’s performed over the years?

BUFFETT: Yeah, but we can go beyond that. But— certainly, when we took over Berkshire, Berkshire was selling at $15 a share and gold was selling at $20 an ounce. And then gold is now 1600 and Berkshire’s 120,000. But you can take a broader example of that. If you— if you buy an ounce of gold today and you hold it 100 years, you can go to it every day and you could— you could coo to it and you can caress it and you can fondle it and 100 years from now you’ll have one ounce of gold and it won’t have done anything for you in between.

If you buy 100 acres of farmland, it will produce for you every year. You can use that money to buy more farmland; you can do all kinds of things. For 100 years it’ll produce things for you and you still have 100 acres of farmland at the end of 100 years. You could buy the Dow Jones industrial average for 66 at the start of 1900. Gold was then $20. At the end it was 11,400. But you’d have gotten dividends for 100 years. So a productive asset of any kind, a decent productive asset, is going to kill a nonproductive asset over time. Now, in any given one-year period, five-year period, any asset can outperform another asset. I mean, you know… …tulips did very well for a while.

JOE: Why don’t you— why don’t you join me? Warren, why don’t you join me and buy some cows? I mean, I like your farmland but, you know, you’re in Nebraska for— Iowa, you love steak.


JOE: I mean, I— we can have leather, we can have manure, we can have milk, we can have meat.

ANDREW: Milk…(unintelligible)…cheese.


JOE: We’ll employ people…

BUFFETT: Well, you can have— you can have the manure, I’ll take the meat.

JOE: I’ve got plenty of the manure. No, but it would employ people…

BUFFETT: Yeah, I’ve noticed.

JOE: …taking care of the cows. I mean, that little bar of gold that’s worth 50— whatever. We had one in here. Look, I think it was worth like 60 or $70,000. I can get like so many head of cattle for that and be product— that was my point. But you like farmland. You just too lazy to take care of the cattle or something? Pay some people.

BUFFETT: Absolutely. Absolutely.

JOE: Oh, well…

BUFFETT: Have you ever tried to take care of cattle, Joe?

JOE: It must be— I think it might be hard. I know, I’ve tipped a few, but I’ve never…

BUFFETT: Yeah, yeah.

ANDREW: Have you tipped…(unintelligible)?

JOE: No, I’ve never done it. No.

ANDREW: I hope you have not tipped— that is— that’s mean.

JOE: I’ve— it’s cruel. It’s cruel.

ANDREW: It is cruel.

JOE: No, I’ve— they’re sweet, they’re sweet, but they’re not too bright, like me.

BUFFETT: With land you can get somebody else to do all the work, give them a percentage of the crop, and you can sit back there for a hundred years and get a percentage of the crop and you’ve still got the land when you get all through. I will guarantee you that farmland, over a hundred years, is going to be gold, and so are— so are equities.

BECKY: Why do you think gold bugs get so irate? Because they really come out…(unintelligible).

BUFFETT: Yeah, it’s very interesting. If you— if you go on CNBC and say that bonds are kind of a poor investment, you know, people don’t get mad at you; you don’t even hear from the Treasury. I mean— all right, you can— you can knock almost any investment and people may get a little irritated, but when you talk about gold— and of course that says something about their motivations for ownership— they want people to agree with them. They want people— everybody— they want everybody to get so scared they run to a cave with gold. And caves may— might be a better investment than gold. I mean, at least they’re not producing more caves all the time. So they want— they want people to be as afraid as they are because that’s what’s going to produce an increase in prices.

Incidentally, they’re right to be afraid of paper money. I mean, they have a very— their basic premise that paper money around the world is going to get worth less and less and less over time is absolutely correct. But…

BECKY: You just disagree with the investment theory beyond that.

BUFFETT: Yeah, yeah. Where they run from that, and they should run from it, is where, in my view, they make the mistake. But they have a correct basic premise.

(excerpts from Warren Buffett’s letter to Berkshire Hathaway shareholders in the 2011 annual report)

The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else – who also knows that the assets will be forever unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century.

This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce – it will remain lifeless forever – but rather by the belief that others will desire it even more avidly in the future.

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.

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses that can be created by combining an initially sensible thesis with well-publicized rising prices. In these bubbles, an army of originally skeptical investors succumbed to the “proof” delivered by the market, and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles blown large enough inevitably pop. And then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end.”

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?

Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers – whether jewelry and industrial users, frightened individuals, or speculators – must continually absorb this additional supply to merely maintain an equilibrium at present prices.

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.

Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B.

My notes on Warren Buffet’s Opinion on Gold

Cursory research on Warren Buffet’s statement “when we took over Berkshire, Berkshire was selling at $15 a share and gold was selling at $20 an ounce” finds gross contradictions. Warren Buffet was born in 1930, and he began buying stock in Berkshire Hathaway in 1962. Buffet took control of Berkshire Hathaway in 1964. The price of gold hadn’t been $20 an ounce since at least 1932, when Warren Buffet was in no position to take over Berkshire. The price of gold in 1964 was $35 an ounce.

Looking to the history of the United States government’s relationship to gold in desperate times yields disturbing insights.

See Executive Order 6102.

And in case you ever wonder how much gold is currently in the hands of the US Treasury, that information is made publicly available through the Financial Management Service of the US Treasury in a monthly report.