Inflationomics

Warren Buffett Compares Gold to Capital

Warren Buffett is a well-respected stock picker (and rightly so), whose every word is hung onto by many would-be investors. Unfortunately, Mr. Buffett sometimes strays beyond his area of expertise and comments on things like taxes and gold.

On taxes, he supposedly stated, “I always wanted to have a tax named after me.” Why would anyone in his right mind want a tax named after him? Taxes are levies taken from productive people and given to unproductive people. For someone who wants productive, nay profitable, businesses to do well, you would think that a reduction in taxes would be what he would want named after him, rather than adding one more tax to the already-long list of government extractions on the books. Wouldn’t it be better to reduce everyone’s tax bills rather than raising the taxes on the rich? But then governments might have to curtail spending. So, what’s so bad about that?

But that’s not what I want to focus on, here...it is Mr. Buffett’s comparison of gold with capital in his Berkshire Hathaway 2011 Annual Report that I would like to discuss today.

Mr. Buffett recognizes that businesses, farms, and real estate are productive assets. In fact, I would go one step further and describe them as capital; i.e., assets that produce more productive assets or consumer goods. And clearly (and I agree with Mr. Buffett), this is the best investment of all time, even better than gold or silver, if one looks at gold and silver as investments; however, in my opinion, gold and silver are better thought of as money; i.e., a medium of exchange, more comparable to paper currency than to capital. And when we compare gold or silver with paper money, we find that gold and silver have done a far superior job of maintaining their value over the centuries than have any paper currencies. And it is for this reason that people purchase gold and silver; i.e., to maintain their purchasing power when the currently-in-use paper currency fails to perform this important task, for everyone knows that, without an adequate medium of exchange, exchange breaks down and businesses, farms, and real estate fail. See what is happening in Cyprus when people are deprived of the use of their paper currency.

Perhaps Mr. Buffett doesn’t believe the currently-in-use paper currencies; i.e., U.S. dollar, Euro, Japanese yen, or British pound, could fail to maintain their values, but he does allude to the possibility when he mentions the “fear of currency collapse” and when he raises the possibility that, a century from now, currencies could be based upon gold. In any event, Mr. Buffett concludes that “people will forever exchange what they produce for what others produce.” Once again, he assumes a viable medium of exchange (such as gold or silver) because he probably does not envision a barter economy. (See pages 321–326 in Tap Dancing to Work.)

The bottom line is that people aren’t “investing” in gold and silver to compete for a return against capital, but, rather, to protect/maintain their purchasing power in the face of ever-declining paper currency purchasing power, and government taxation and confiscation of savings! And, a century from now, when the currency is based on gold...those people with gold and silver will be able to purchase the productive assets that Mr. Buffett is so fond of investing in today.

Robert Jackson Smith

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