"Buffett calls gold an “unproductive” asset, which, as defined in his 2011 letter to shareholders, means “assets that will never produce anything, but that are purchased in the buyer's hope that someone else — who also knows that these assets will be forever unproductive — will pay more for them in the future.”"
Doesn't that apply just as well to public stocks, at least at the scale of most retail investors? Like sure, you "own part of the company" and the company might produce things, but I'm pretty sure everyone knows deep down that they're just purchasing in the hope that someone else with the same mindset will pay more for them in the future.
In theory, stocks can produce dividends. If a stock does not currently yield dividends, presumably the company is reinvesting that money so that the stock might yield higher dividends in the future. So stocks are a productive asset, at least in theory. Of course, in reality, speculative investment does contribute to the value of the stock, but at least it's notionally backed by something.
Yes, that's true of commodities generally. They are worth what people will pay for them; they do not produce cash flows. A pile of copper is not productive either.
The fair criticism, I suppose, is that the "compelling reasons" a person might pay for a pile of copper are much more numerous than for gold (or bitcoin).
But, OK: think of fine art for a moment... it is also an unproductive asset, the value of which depends wholly on what other people feel like paying, since there is no immediately profitable economic activity in which you can engage with a Monet (unlike the pile of copper). Are you therefore calling fine art a pyramid scheme? I think we are watering down the definition into meaninglessness.
I don’t think that’s the point. Copper and most other commodities are productive under Buffet’s definition because you put them into pipes and other things. They are manufacturing inputs. Their price is set by the demand for the things that you make with them. Housing demand goes up => copper price goes up.
Gold is used in manufacturing but not as much as it could be, because the price is set much higher by speculation/hoarding. So Buffet’s point is that the price is set not by its productive use but by its unproductive use.
Bitcoin is the same as gold but without the productive use to set a price floor. If the speculative market for gold tanked you’d settle on something like 5-10% IIRC as the imputed value based on manufacturing uses. Bitcoin has zero value for manufacturing uses. Maybe there is a price floor for smart contract usages if the speculative market evaporated but I think it’s much lower than 5%.
So I suppose when Buffett purchased 130 million ounces of silver in 1998 he was thinking about the manufacturing inputs?
I do think there is in fact a "productive use" for cyptocurrency, which is transacting on the dark web. It has been earnestly used as a currency in that context for a very long time... it's just that bitcoin boosters would rather not talk about it.
Not sure why believing that silver is an unproductive asset would have precluded Buffet from believing that "someone else — who also knows that these assets will be forever unproductive — will pay more for them in the future." Like, yes, he phrased that in a deprecating way, but that doesn't mean he wouldn't shrug and play along.
I… don’t really see how Buffet’s purchases in ‘98 bear on the discussion at hand? You can read his 2011 investor note and see what his definition is about. I don’t know if he classified silver as productive or unproductive at that time.
I strongly agree that dark-web transactions were the largest “productive” component of BTC, but I think the “BTC as payment mechanism” has a much lower equilibrium price than asset-based usages because you essentially buy to make a purchase, and then sell on the other side. So for $1B of transactions in a year you might only need $1M of currency (maybe it’s an order of magnitude higher if you don’t immediately sell your BTC on the receiving side) which would give a price of $0.05/BTC (assuming 21M BTC total). Fermi calculation here, I think this is a lower bound for $1B transactions. The real calc is a bit more involved and I wouldn’t be surprised if it was one or two OOM higher.
As you can see the dark web usecase settles on a much, much lower value for BTC than the current market price. You need $T/yr to be transacting in BTC, or folks to be holding a float in BTC because they are getting paid and plan to pay for things, to get a valuation in the $1000s. Which is fine, but supports the point I made above about the “productive use prices” being a much smaller fraction of current price than even gold’s.
> I… don’t really see how Buffet’s purchases in ‘98 bear on the discussion at hand? You can read his 2011 investor note and see what his definition is about. I don’t know if he classified silver as productive or unproductive at that time.
It's relevant because Buffett is prone to talking his book, and while he does walk the talk about fundamentals/cashflow in general, he almost certainly did not make these comments out of some deeply-held principle (he obviously would not have said these things in 1998). He is not actually the kindly grandpa image he is careful to cultivate and his comments are usually calculated. The context in 2011 was discomfort with the new QE policies and concerns about inflation. Buffett was not really concerned with "greater fool" assets in a moral sense so much as convincing his investors that (1) sitting around and hoping for gold to act as an inflation hedge (2) in the case inflation actually manifested was plainly inferior to just owning cashflows that would scale with the value of the dollar anyway.
(He was right, obviously)
> So for $1B of transactions in a year you might only need $1M of currency
I think that's an insane estimate. That's a money velocity of around 300. The US dollar typically has a velocity between 1 and 2. Nor is $1B in transactions anywhere near the reality for dark web activity.
Still, I tend to agree that illegal use cases limited to just ransomware and buying and selling drugs online, while not necessarily a "small" scope of activity, would probably support a fair price only in the hundreds of dollars.
But it's honestly probably graduated to more utility as a potent money laundering tool now that it is broadly recognized and in some ways "legit" in the eyes of regulators. It's just so easy for someone with dirty cash to buy coins and claim they mined them in 2010 and just now discovered the dusty old drive in a desk drawer. It's next to impossible to disprove or prosecute, and best of all it means you only pay capital gains (as opposed to ordinary income, which would be the case for money washed through a cash business). I don't doubt that kind of activity supports a price in the thousands, at a minimum... the UN estimates 2-5% of global GDP is laundered money.
As someone else observed in this thread, the main "value creation" of the fine art market is similarly money laundering and tax avoidance, which is the primary driver behind the facially ridiculous payouts for individual works at auction rather than "artistic passion" or whatever.
What is interesting about all this, though, is that if the speculative value evaporated such that the illegal activity was all that supported bitcoin, it would seem almost certain that regulators would bring down the hammer (at least to the extent that it would not be useful for laundering money anymore), which makes the "intrinsic value" kind of hazy in an ultra-bearish scenario.
Not that I think the speculative value is likely to evaporate entirely... this isn't the first crypto winter by any means, and historically speaking it's right on time (halfway between block halvings).
The Louvre charges 17€ per person, and I'm pretty sure they're focused on fine art. How much they're profit focused versus just reinvesting profits is up for debate.
> The Louvre is owned by the French government. Since the 1990s, its management and governnace have been made more independent.[91][92][93][94] Since 2003, the museum has been required to generate funds for projects.[93] By 2006, government funds had dipped from 75 percent of the total budget to 62 percent. Every year, the Louvre now raises as much as it gets from the state, about €122 million. The government pays for operating costs (salaries, safety, and maintenance), while the rest – new wings, refurbishments, acquisitions – is up to the museum to finance.[95] A further €3 million to €5 million a year is raised by the Louvre from exhibitions that it curates for other museums, while the host museum keeps the ticket money.[95] As the Louvre became a point of interest in the book The Da Vinci Code and the 2006 film based on the book, the museum earned $2.5 million by allowing filming in its galleries.[96][97] In 2008, the French government provided $180 million of the Louvre's yearly $350 million budget; the remainder came from private contributions and ticket sales.[92]
There are also for profit museums. Not sure how profitable they actually are, but I have come across them. You'll see a lot of them around New Mexico and Arizona where you can see native american artifacts, art, fossils, etc.
Source: https://grow.acorns.com/warren-buffett-why-gold-is-an-unprod...