Berkshire Hathaway 2002 Annual Meeting Audience Question # 23

The price of gold has nothing to do with the valuation of businesses

Warren Buffett:

Area 3.

Audience Member:

Dear Mr. Buffett and Mr. Munger, my name is Adrian Chur, and I’m a shareholder from Hong Kong.

Thank you for your leadership and inspiration, as always. It’s wonderful, always, listening to you. If I may, I would like to ask of you both gentlemen, a question in two parts.

Perhaps I can ask the second part after you’ve answered the first part. The first part of the question relates to the Fortune article dated 10th of December you included in our shareholder materials.

In this article, you mentioned that one couldn’t explain the remarkable divergence in markets by differences in the growth of GNP.

However, one could explain the divergence by interest rates.

The first question I have is this: I wonder, sir, if you were to look at the price of gold during the two periods of times you mentioned, that is to say 1948-’64 and ‘64-’81, if the explanation could be even more clear?

Thus, the logical reason would be why the Dow in ’48 was 177 was because… and half the level of 1929, of 381 index points… is because of the 71 percent devaluation of the American dollar from 20.5 cents an ounce to 35 cents an ounce, which would put the fair value of the Dow at 166, after factoring in the record 50 percent per capita gain of the 1940s that you had mentioned.

Warren Buffett:

Yeah, I grew up in a household… and my sisters are here… where gold was talked about frequently. So I’ve been exposed to a lot of thinking on that over the years.

I don’t really think gold has really… the price of gold, I should say… has anything, really, to do with the valuation of businesses.

It may reflect certain things that are going on in prices attached to those businesses at given times.

But I would not regard… I mean, the price of gold does not enter into my thinking in any way, shape, or form, in terms of how I value a business today, a year ago, 10 years ago, or tomorrow.

When we look at Larson-Juhl, the custom picture frame operation, you know, I’m not thinking against… I’m not thinking of that and relating it in any way to what gold has done.

So, I… it’s just not a factor with us, any more than other commodities would be. I mean, you know, whether it’s wheat, whether it’s cocoa beans or whatever.

It has… you know, it has a certain hold on some people and they… but we don’t look at it as an interesting investment and we don’t look at it as a yardstick for valuing other investments.

Charlie?

Charlie Munger:

Yeah, Warren is right when he says that interest rates are very important in determining the value of stocks, generally. And I think he’s also right when he says gold is very unimportant.

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