Worth of Gold

The safe heaven gold evokes a mixed emotion among the investors, the question to be asked is what is the actual worth of gold.

In an interview on CNBC, Charlie Munger, Vice chairmen of Berkshire Hathaway once stated that “Gold is a great thing to sew into your garments if you are a Jewish family in Vienna in 1939. Civilized people don’t buy gold. They invest in productive businesses.”

What’s the value of Gold?

Gold neither earns anything nor has any cash flow like equities. Financial theory states that the intrinsic value of an asset is the future cash flows that the business generates discounted to present year. Since gold has no cash flows which can be discounted back investment in gold becomes completely speculative. The worth of the gold is nothing but what the buyer is ready to pay for it as it has no intrinsic value.

In a 2012 interview, Warren Buffett explained his anti-gold stance: “When we took over Berkshire, it was selling at $15 a share and gold was selling at $20 an ounce. Gold is now $1,400 and Berkshire is $210,000.

If you buy an ounce of gold today and you hold it for a hundred years, you can go to it every day and you could coo to it and fondle it and a hundred years from now, you’ll have one ounce of gold and it won’t have done anything for you in between. You buy 100 acres of farm land and it will produce for you every year. You can buy more farmland and all kinds of things, and you still have 100 acres of farmland at the end of 100 years.

"You could buy the Dow Jones Industrial Average for 66 at the start of 1900. Gold was then $20. At the end of the century, it was 11,400, and you would also have gotten dividends for a hundred years. So a decent productive asset will kill an unproductive asset.”

When comparing holding gold to stocks such as Coca-Cola and Wells Fargo, Buffett once commented that “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.”

Whether gold prices will soon tumble or go higher cannot be told. What one can say for certain is that the ETPs backed by physical gold are an excellent way to gain exposure to the yellow metal for investors and speculators alike.