With more than $70 billion in net assets, SPDR Gold Trust (NYSE: GLD) is a monster when it comes to gold as an investment. It also stands to reason that the folks marketing the trust would highlight some of their sharpest research on gold.
And yet, while reading a recent filing from State Street's senior portfolio manager Chris Goolgasian, I was reminded in the space of 11 words exactly why my portfolio contains no gold. But I'll get to that.
Buffett missed the boat
If you're a gold-focused manager and Warren Buffett takes time in his much-read annual letter to Berkshire Hathaway (NYSE: BRK-A, BRK-B) shareholders to bad-mouth your asset class (yet again), it makes sense to address that for your current and potential investors.
Buffett did give gold a good working-over in his annual letter. He referred to certain asset classes as those 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." Not an auspicious start, particularly since he goes on to use Dutch tulip bulbs as an example of how such asset classes can get out of control.
Zeroing in on gold in particular, Buffett presents the case in his no-nonsense approach, describing a choice between two piles. In pile A, you have the following:
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.
Meanwhile, in pile B, which has roughly the same current price as pile A, there's the following:
For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 [ExxonMobils (NYSE: XOM)] (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).
In so many words, Buffett concludes that no investor in his or her right mind would choose pile A over pile B.
Harsh words. But in Goolgasian's note, he points out that Buffett has missed out before, and he may well be missing out again with gold: "While [Buffett] won't own gold, he also never owned Apple (up around 1,500% since January of 2000) or Google (up 530% since August of 2004) or shorted subprime mortgages."
He additionally points out that gold has clobbered Berkshire over the past decade-plus, saying, "while Berkshire Hathaway has gone up a very respectable 105% since January of 2000, Gold has increased nearly five-fold during the same period."
Is it productive?
Goolgasian's logic of "he missed good investments before, so he could be missing out now" isn't totally unreasonable. However, he ignores the fact that in the shareholder letter, Buffett doesn't simply compare gold to the stocks that he's owned at Berkshire. Rather, he compares gold to "productive assets, whether businesses, farms, or real estate."
In other words, while I hesitate to put words in Buffett's mouth, even though tech stocks aren't really his thing, if given the choice, Buffett would prefer Apple or Google — both productive assets — to a pile of gold any day.
As for the performance of Berkshire, the comparison period of the past decade or so is particularly kind to gold — its value has surged while Berkshire's growth has chugged along at a reasonable rate (roughly 9% per year for its book value per share).
That said, I found this gem in Buffett's 1979 letter to Berkshire shareholders:
One friendly but sharp-eyed commentator on Berkshire has pointed out that our book value at the end of 1964 would have bought about one-half ounce of gold and, fifteen years later, after we have plowed back all earnings along with much blood, sweat and tears, the book value produced will buy about the same half ounce.
At the time, gold was in the middle of a huge run that would continue on into the next year. But what's taken place since then? Today, the per-share book value of a Berkshire share is $99,860. And that half ounce of gold? Right around $850 as I write this. It's not tough to tell which side the math favours there.
11 reasons: 11 words
At the beginning, I mentioned that there was one single quote in Goolgasian's run-down of gold that reminded me exactly why I don't bother with the metal. In the note, Goolgasian discusses three of what he considers the most legitimate ways to value gold, but then concludes the discussion with 11 very simple words: "it is worth what others are willing to pay for it."
I don't invest in art. I don't invest in baseball cards. Nor do I invest in beanie babies, bottles of wine, antiques, or muscle cars. In fact, I have a tough time using the word "investing" with anything that can be described the way Goolgasian describes gold — I think "speculation" is much more fitting. To tap Buffett one final time, on speculation, he wrote back in 1992 that it's "neither illegal, immoral nor — in our view — financially fattening."
I'm sure there are plenty of folks who will vehemently disagree with my view here. To be sure, I don't deny that some people have gotten fabulously wealthy through speculation. But I'll reiterate that this is why — as the title says — "I don't own gold."
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