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The Gold Bubble

Today the world’s gold supply 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 of money. For that we could buy all U.S. cropland (400 million acres with output of $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we could 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 amnounts 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.

By Warren Buffet from the annual report of Berkshire Hathaway, Inc.

In the late 1980’s during the Japanese stock bubble, the shares of Nippon Telephone was equal in value to the entire Dow Jones Industrials.  The Japanese stock market has yet to recover.

One reader noted how those same people who warn of the pending disaster looming for the dollar are too willing to exchange their valuable gold for those same dollars.

While the fear of inflation is not unfounded, the better play than gold is income producing companies with capital appreciation potential.  Inflation is bad for bonds but could be great for stocks.  When interest rates do kick up, the holding costs for gold make it even riskier to hold

Category: Business

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