Buffett berates the gold bulls

In a devastating critique penned in Fortune magazine, the Sage of Omaha delivers a withering critique of the gold bubble, one which ought to shake gold bulls to their very cores.

According to the Chairman of Berkshire Hathaway, gold belongs to a category of investment that produces nothing, and one in which the investor buys the metal in the hope that someone else will pay more for it in the future. In order for the price of this type of asset to rise, an expanding pool of buyers is required. Therefore, when you buy gold you are essentially hoping that more and more people will buy gold in the future than have bought it before.

In recent years, gold has performed very well because people have been frightened that paper currencies were rapidly debasing, an entirely legitimate fear. However, gold has two major shortcomings: – it is of no practical use (except for limited industrial and decorative purposes), and it is not procreative. Therefore, in order to own gold, you are assuming that the ranks of the fearful will expand, never a good rationale for making any investment.

Buffett points out that the current stock of gold is around 170K metric tons and, at today’s price is worth a staggering USD 9.6trln. When investors fear currency collapse they rush for gold. If this fear passes then the demand for gold collapses.

Should Europe get its collective act together and ultimately resolve Europe’s debt crisis, and if central banks desist from currency debasement, then the premise for holding gold evaporates.