Buffett on Farmland & Exxon Mobil vs. Gold

Posted on Posted in Investment Quotes, Warren Buffett

Gold ChartGold and silver prices are crashing this morning and I was reading some news on my Twitter feed I noticed someone link to a post at Ivanhoff.com called Warren Buffett on Gold. Ivanhoff had a nice summary from Buffett’s 2011 Berkshire Shareholder Letter that contains one of my favorite description of gold’s value and how to think about the investment case for the yellow metal.

Here is Buffett on how you should think about gold:

“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.”

I like the line: Can you imagine an investor with $9.6 trillion selecting pile A over pile B?” But yes, many people select their small portion of pile A over pile B when they buy shares of GLD over XOM, etc… in fact, in the area where I live, it only costs about 2 ounces of gold to buy an acre of farmland. As Buffett, says, what will produce more value over the next century or so?

Gold Stocks: Junk?

Although I wholeheartedly agree with Buffett’s case against gold itself, I’ll invert (like Munger tells us to do) his thinking for a moment. In the late 90’s, Buffett did invest a sizable amount into silver, which arguably a similar case could be made against it. And Walter Schloss invested in gold and other metals miners during his career, as long as they were selling at or discounted to book values.

I study the 52 week low list (along with 2-3 year lows as well) and I’ve noticed for weeks that the miners have shown up. I’ve also noticed that the miners are ranked 97th (out of 98) in Value Line’s industry ranking in terms of price performance.

I have kept a small watchlist of miners to watch, and although these are not franchise type companies, they may become cheap enough to make an investment in at some point, if their stock prices become cheaper than their net assets. But these are Enterprising type scenarios, and not for the Defensive Investor. Here is the list I’m watching:

  • Goldcorp (GG): Price to Tangible Book Value (P/TBV): 1.0 (very low debt to equity relative to other miners)
  • Newmont Mining (NEM): P/TBV: 1.2
  • Yamaha Gold (AUY): P/TBV: 1.1 (also very low debt)
  • Barrick Gold (ABX): P/TBV: 1.4
  • Iam Gold (IAG): P/TBV: 0.6 (net cash on balance sheet, but more geopolitical risk)

Most of these stocks have lost 50% or more of their values over the last 6 months. Please note that these are just stocks that I’m watching. Gold miners do not have economic moats, and so if I decided to invest into this industry, I would take a small and diversified position in stocks that are selling for less than their tangible net worth’s. Be careful…

Disclosure: No position. Please do your own research. Nothing I say on this blog should be regarded as personal investment advice. Everyone’s personal financial situation is different. 

2 thoughts on “Buffett on Farmland & Exxon Mobil vs. Gold

  1. I think money can be made if your are diversified and put no more than maybe 10% of your portfolio in a basket of these stocks… I follow all of the companies you mentioned…

    I also want to mention of an ETF called GDXJ, it follows 80 gold companies that are in the early stage of development. Div yield is 6.5%, and the ETF used to have a high of $44, now it is $12, if you could buy at $10 it is a good deal, PE would be like 6.5 to 7 then for this ETF.

    I also like ABX, IAG

    Barrick has a mine coming being developed (Pascua-Lama project) that will be the lowest cost producer and highest gold ore quality in the world on Argentine Chile boarder coming online in the next 18 months, cost 8.5 billion to produce the mine yet the entire company is only 18 billion right now… So los of growth coming online soon…

    In 2011 produced 6 billion in cash from it’s earnings and depreciation… It is now at 1993 stock lows despite having a book value of 1 billion back then and now book is 21 billion, earnings were .74 a share in 1993.. In 2011 it was about $4.00 per share , yet company is the same price as back then?

    Pascua-Lama project is on hold buy by the courts for environmental (water glacier reasons) and shut down for awhile, but these matters will be resolved… Other problems facing this company to, I just could not go into it all, but a basket approach you have to make money on these.

    Read more here…

    http://business.financialpost.com/2013/04/19/barrick-considering-sale-of-3-australian-gold-mines-sources/

    All gold companies have problems or potential problems (Nationalizations, legal problems, windfall profit taxes, changes on royalties after they open a big project) and mining is a very risky business to begin with, unsafe and risky countries to mine in..

    All these companies are having right downs since they paid to much for projects during the boom years and with gold, solver, copper down from the highs cannot be developed, and this is the reason for ABX huge right down in 2012 against earnings. This was a one time charge for such a write down on one of it’s previous copper mines that is now to much to develop compared to were the copper price is today.

    Just wanted to warn you this is why you have to be diversified and careful…

    I could talk for hours why all these companies have problems, but am limited what I can write here, but at the fire sale prices they are at now you will make money..

    If you buy a basket and cheap enough you have to make money….

    Just beware of the risks, these are not APPL or MSFT that is for sure.

    I can give you alot more info on all these companies if you are interested.

    1. Hi Darryl,

      Thanks for the thoughtful comments. I’ll check out this material. Sounds like you know much more about precious metals than I do. I’m simply trying to sift through all of them and cherry pick the cheapest ones relative to tangible assets, and then try to identify a basket of them that might do well. There does seem to be a lot of risk in the business itself, but I like to think of these like Schloss stocks… buying them cheaper than net assets helps provide a margin of safety, along with very small positions and a diversified basket. The ETF you mention is interesting. I’m basically creating a watchlist of my own that might be similar to the ETF… just trying to do some underwriting to cherry pick the best (cheapest) ones… I’ll take a look at your points and give them some more thought.

      Thanks for reading.

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