Of Tulips and Gold: The Ron Paul Devolution Marches On

Warren Buffett tears into the gold buggery so favored by nuts like Ron Paul.  Mr. Buffett prefers productive to non-productive assets.

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.


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16 thoughts on “Of Tulips and Gold: The Ron Paul Devolution Marches On

  1. Interesting that the ad that was slugged onto this page suggests we take up currency trading on line!

  2. Anyone who thinks it’s a good idea to have private, international banks create currency out of thin air and charge the American people interest on it is a certifiable wacko.

  3. Unless I missed something, it seems the Berkshire Hathaway article makes no reference whatsoever to reestablishing gold as a monetary standard. Buffet is simply saying that as an investment, gold is an unwise choice as it relates to return on investment. As a matter of fact, this excerpt from the third paragraph above might be congruent with Ron Paul’s sentiments on the subject.

    “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)”

    1. You miss the point entirely. While Buffett hasn’t made a direct statement on the question of a gold standard, he does hold gold in contempt as a vehicle for investment. The best example we have of his thoughts on the gold standard is this, from 1998.

      I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot — and it’s a lot — it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that. The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset.

      Gold is not a magic substance, in fact, it’s a rather non-productive substance. It’s not really a good investment and, for many of the same reasons, it’s not useful as a currency in a modern monetary system.

  4. You have to view gold as a currency pair with US Dollar. As long as there is a weak dollar policy, the trend for gold will be up. I don’t think Buffett disagrees with that premise after all isn’t he saying that he would rather have his money in XOM than U.S. Dollars. (I would too)

    If your viewing gold as an investment, perhaps there are better ways to get a better return. Buffett apparently thinks he can do better investing in other companies’ stock instead of gold. Soros might disagree as his funds have been one the largest holders of gold. In any event, I doubt many gold bulls are complaining.

    I agree with Buffett’s premise that Gold has a greater fool mentality. However, that is true with every investment . What about buying AAPL stock return? It pays no dividend. You get no return unless a greater fool comes along and decides to pay you more. At least with gold, you avoid the risk that the company will implode. I fell pretty confident that 100 years from now gold will still have value. I can’t say whether any company around now will still exist.

    Ironically, what Ron Paul is promoting would lower the price of gold as it would strengthen the U.S. Dollar. With that in mind, its just a hell of a lot of fun to watch. Investing, especially in precious metals is the ultimate experiment in crowd psychology.

    1. Ironically, what Ron Paul is promoting would lower the price of gold as it would strengthen the U.S. Dollar.

      Ummm, bullshit. Complete and total bullshit.

      The truth is that the story is mostly monetary. By introducing a single currency without the institutions needed to make that currency work, Europe effectively reinvented the defects of the gold standard — defects that played a major role in causing and perpetuating the Great Depression.

      The gold standard destroys monetary sovereignty. And not in a good way…

  5. If we were to go back on the gold standard I fail to see how gold would raise against the dollar.

    Just look at the historical gold prices. There weren’t significant increases until the U.S. went off the gold standard.

    Further, look at the historical US Dollar exchange rate against the majors, and you can confirm that the U.S Dollar has weakened against every major since the US went off the gold standard. Against the Yen and Swiss Franc it has lost roughly 60% of its purchasing power.

    1. Wait… Are you proposing to de-commoditize gold??? Because in America, individuals couldn’t buy or sell bullion for many years.

      And what’s wrong with a “weak” dollar? It’s good for exports. Floating exchange rates “self-correct” (remember, money is a commodity as well as a token of value) as capital flows from one currency to another. All you get with a gold standard is the fixing of exchange rates to certain weights of gold which, to me, is quite arbitrary.

      Go read about the Bretton Woods system and learn about the catastrophic shortcomings of the gold standard and why America went off it.

      1. I’m not proposing anything. If any thing I’d support more commodities as it creates a transparent market place. But I’ll leave that to the parties that be.

        A weak dollar may bump corporate profits short term but it also cuts into the purchasing power of the middle and lower class. Income disparity increases the most in periods where the dollar is weak. It’s really just another tax on the poor.

        As the dollar continues to weaken, It also threatens the dollars status as a key currency. Isn’t it all arbitrary? The only reason the dollar (or any other cuurency) has any value is that we believe it will continue to have value. If faith is shaken, that value is gone.

        1. I think you’re not understanding just what the gold standard is and how it works. If I get the energy, I will pull together a posting on what the gold standard is and what it isn’t and why it’s a catastrophically bad idea in the age of sovereign fiat currency.

          1. Your going way beyond the point I was making, which was if we were on the gold standard the price of gold will fall relative to the dollar.

            I’m not arguing whether its good or bad.

            1. There is no connection between the gold standard and the actual price of gold. All the gold standard does is fix the value of the dollar (or any other sovereign currency) to a fixed weight of gold.

              After the Second World War, a system similar to a Gold Standard and sometimes described as a “gold exchange standard” was established by the Bretton Woods Agreements. Under this system, many countries fixed their exchange rates relative to the U.S. dollar. The U.S. promised to fix the price of gold at approximately $35 per ounce. Implicitly, then, all currencies pegged to the dollar also had a fixed value in terms of gold.

              How do you extrapolate “if we were on the gold standard the price of gold will fall relative to the dollar” from that system?

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