Buffett’s Gold Cube is Smaller Than You Think

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Warren Buffett, chief executive officer and largest shareholder of Berkshire Hathaway, is famously known as one of the greatest investors of all-time. His methodology with business investments has placed him among the world’s top billionaires consistently over the years. However, he is also infamously known by some investors for his views on gold, one of the most stable financial instruments in human history. Earlier this year, the “Oracle of Omaha” wrote an article in Forbes describing his preference for investing in productive companies, rather than gold. To illustrate his stance that gold is a “lifeless” asset, he provided an analogy of the world’s entire gold stock as a cube sitting on a baseball field. As it turns out though, that cube is smaller than many people think.

When it comes to criticizing gold, few do it as colorful as Buffett. In the article, he writes, “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 about $9.6 trillion.”

Considering how Buffett made his billions, it is not too difficult to see why he paints gold as a lifeless metal just taking up space. He prefers businesses that produce profits, pay dividends and grow over time. However, the lack of these characteristics in gold is what gives the precious metal value. Gold does not have to please shareholders with quarterly results or dividends, and carries zero counter-party risk. It is a medium of exchange, unit of account and a store of value. Furthermore, gold’s lack of growth also provides value in regards to supply and demand. The demand for gold continues to increase as central banks carry-on with fiat currency debasing monetary policies, but supply growth is constrained. Even the total gold stock on the Earth today is less than previously estimated by Buffett and others.

A new extensive study was recently conducted by James Turk, the founder and chairman of GoldMoney, along with the assistance of Juan Castaneda, who has a PhD in Economics and currently teaches at the University of Buckingham in the United Kingdom. Turk graduated from George Washington University with a BA degree in International Economics, and has held positions at Chase Manhattan Bank and the Abu Dhabi Investment Authority. The study analyzes data between 1492 and 2011 to conclude that official estimates of the world’s gold stock is overstated by 10.3 percent.

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The year that Columbus first made his voyage to the Americas is used as a logical starting point, because it marks the beginning of relatively formal record-keeping. It also accounts for the majority of the difference. According to the World Gold Council, which uses Thomson Reuters data, the world’s gold stock stood at 171,300 tonnes at the end of 2011. However, this total signals the belief that the gold stock in 1492 was 12,780 tonnes. Although this figure is similar to a study done by Govett and Govett (1982), Turk concludes it does not seem reasonable given the primitive mining techniques and technology available at the time when comparing the End of Epoch (gold grams per capita) to other time periods.

The study ultimately finds that the estimated gold stock in 1492 was much closer to 297 tonnes. This figure reflects work done by Velde and Weber (1998) for the Federal Reserve Bank of Minneapolis. The estimate of 297 tonnes also correlates well to the 300 tonnes estimate found through independent research done by Heinrich Quiring. Turk estimates that the historic gold accumulation from 1493 through 2011 is 154,947 tonnes. Adding the 297 tonnes to 154,947 tonnes, Turk estimates that the world gold stock at the end of 2011 was 155,244 tonnes, or 16,056 tonnes below the commonly used World Gold Council estimate. The difference is quite significant considering it is more than five-times the current rate of annual production.

Although there are many different views on gold and its role in the global financial system, the fact that the precious metal is still debated today and has outperformed the market over the past decade shows its relevance. While it is not a productive business like an Exxon Mobile, it’s highly desirable characteristics have allowed it to serve as an asset for more than 5,000 years. Furthermore, its supply is constrained and cannot be improved through a printing press.

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Disclosure: Long EXK, AG, HL, PHYS

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