NEW YORK - David Einhorn the hedge fund manager perhaps stepped out of bounds in the last week when he decided to mock Warren Buffett. Perhaps this is a departure from his idol who he once paid for a date for lunch with the Oracle of Omaha. Buffett, in his latest annual report mocked people owning gold and said it was a poor investment. Einhorn who has large holdings in gold fought back and said the following,
"The debate around currencies, cash, and cash equivalents continues. Over the last few years, we have come to doubt whether cash will serve as a good store of value. If you wrapped up all the $100 bills in circulation, it would form a cube about 74 feet per side. If you stacked the money seven feet high, you could store it in a warehouse roughly the size of a football field. The value of all that cash would be about a trillion dollars. In a hundred years, that money will have produced nothing. In a thousand years, it is likely that the cash will either be worthless or worth very little. It will not pay you interest or dividends and it won’t grow earnings, though you could burn it for heat. You’d have to pay someone to guard it. You could fondle the money. Alternatively, you could take every U.S. note in circulation, lay them end to end, and cover the entire 116 square miles of Omaha, Nebraska. Of course, if you managed to assemble all that money into your own private stash, the Federal Reserve could simply order more to be printed for the rest of us."
Einhorn mocked Buffett by changing Buffett's example from gold to cash. However Einhorn must have skimmed the annual report as he missed the whole Buffett argument. Buffett would surely fail him on his reading comprehension skills.
Buffett never said cash was a good investment. Here is a quote from the oracle, "The one thing I will tell you is the worst investment you can have is cash." Buffett is only saying gold is a bad investment he is not saying cash is a good investment. Buffett prefers owning productive assets such as a rail-road which grows its earnings over time faster than inflation. He does not like to own assets that do nothing. If Buffett had to choose between gold and cash he would probably choose gold.
Finally, I have my own personal opinion on cash and cash is not is stupid as Einhorn thinks. I also believe gold assuming it is fairly valued based on its utility is a better investment than cash since it can gain value over time. Cash on the other hand will lose its value in inflation each year. However, cash should be looked at not as paper that is exchanged but rather a contract. Our world is civilized and we have replaced the barter system such as selling goats for food to money for food. Instead of thinking of cash as cash, thinking of it as a contract.
In the US each member of society signed an informal contract. In this contract they agree that they will exchange their goods for cash. So if you think of it this way it is easier to see why cash makes sense and needs to exist. Buffett is right there is a current gold bubble. Gold should not be worth these absurd amounts. Its utility is nowhere close to $1,500 an ounce and just because its shiny it does not mean it has value.
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