, the of Berkshire Hathaway (NYSE: BRK-A), is currently worth about $44 billion, according to Forbes' list of the world's richest people. This makes him the world's third-richest person, behind Bill Gates and Carlos Slim.
Buffett is famous for some great picks over the years -- picks like Coca Cola (NYSE: KO), American Express (NYSE: AXP) and IBM (NYSE: IBM), each having increased more than 110% in the past 10 years alone.
But the Oracle of Omaha is also well known for avoiding certain-- especially gold.
While he's is quick to point out that gold has served some investors well, particularly during times of high inflation, Buffett has never warmed up to gold as an .
The answer has to do with the difference between what Buffett calls productive versus nonproductive assets.
He considers gold a nonproductive asset because it doesn't produce anything of value. To illustrate this point, Buffett proposed this thought experiment in his 2011 letter to Berkshire shareholders:
"Today the world's goldis 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(no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
"A century from now the 400 million acres of farmland unchanged in size and still incapable of producing anything. You can fondle the cube, but it not respond."have produced staggering amounts of corn, wheat, cotton, and other crops -- and continue to produce that valuable bounty, whatever the may be. Exxon Mobil probably have delivered trillions of dollars in dividends to its owners and also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold be
So, instead of nonproductive assets such as gold, Buffett prefers productive assets like farmland or companies that generate enormous wealth for shareholders -- companies like Exxon Mobil (NYSE: XOM), Coca-Cola or See's Candy.
And he clearly explains why:
"Our country's businesses sale of the milk compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well).continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" live for centuries and give ever greater quantities of "milk" to boot. Their value be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the
"I believe that over any extended period of time this category ofprove to be the runaway winner… More important, it be by far the safest."
This last sentence is important.in productive assets carries less risk.
That's because, in the past, irrational exuberance has caused all sorts of nonproductive assets to suddenly skyrocket beyond any sane measure of intrinsic value. The run-up on the prices of tulips in the 17th century is one colorful example.
TheAnswer: In contrast to the "boom and bust" cycle seen in commodities like gold (or tulips), productive assets never go "out of style," as Buffett says.
After all, peoplealways need goods, consume food and require a home to live as they do now. In Buffett's own words, "People forever exchange what they produce for what others produce."
P.S. -- The abundance of natural gas in the United States could lead to a third industrial revolution. One is predicting a could rise 1,566%. Another has already jumped more than 1,000% and is expected to keep going. To learn more about in the natural gas boom, click here.