Is Gold Really the World's Biggest Economic Bubble?

By Markets Fool.com

One economist recently declared that gold in all shapes and sizes is "a 6,000-year-old bubble" and suggested that it "can be viewed as shiny Bitcoin," or something similar to a pet rock.

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And the reality is: He's right.


Source: Flickr user tao_zhyn.

The report
In the latest Global Economics View report, Citigroup global chief economist Willem Buiter provided his own perspective on the "Save Our Swiss Gold" initiative in Switzerland that would've required the Swiss National Bank to hold at least 20% of its assets in gold.

The question on the minds of many in Switzerland was whether this would be a worthwhile initiative. Buiter was blunt. "The short answer is: no. The slightly longer answer is: absolutely not."

Buiter was surely happy to learn that Swiss voters struck down the proposal, with 78% voting against it.

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But it turns out his analysis extends well beyond those in Switzerland. Investors everywhere should pay careful attention to his perspective.

Source: Flickr / BullionVault.

The theme
Buiter argues that like Bitcoin and other currencies, gold is only as valuable as people believe it is.

It's costly to produce, and although it is used in some forms as an input in the industrial, medical, and dental industries, or as a consumption item like jewelry, he says gold ultimately "has no intrinsic value."

He goes on to say:

Gold should not be analyzed as one of a set of intrinsically valuable commodities (silver, iron, lead, zinc, platinum, aluminum, titanium etc. etc.) but as part of a set of intrinsically useless and valueless fiat currencies -- the U.S. dollar, the yen, the yuan, the euro, sterling, the rupee, the rouble, Bitcoin etc. ... It is therefore in times that market participants are nervous about the future value of most other fiat currencies that gold will be most attractive.

In short, an investment in gold ultimately isn't much of an investment at all. Rather, it's a speculation that people will believe it's worth more in the future than it is today. And speculating on the price of something is an incredibly dangerous thing to do.

From Buiter to Buffett
Buiter isn't alone in this analysis of gold. Consider legendary investor Warren Buffett's words from his 2011 letter to Berkshire Hathaway shareholders:

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As "bandwagon" investors join any party, they create their own truth -- for a while.

Buffett suggested at the time that all the gold in the world could be melted down and formed into a cube that measured roughly 68 feet per side -- allowing it to fit "comfortably within a baseball infield." Now Imagine this giant cube could do nothing but sit there and collect dust. Buffett called this "pile A" and said it would be valued at an astonishing $9.6 trillion.

But if someone took that same $9.6 trillion and made a separate "pile B," that person could:

Buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 ExxonMobils (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 money (no sense feeling strapped after this buying binge).

To which Buffett rightfully asks, "Can you imagine an investor with $9.6 trillion selecting pile A over pile B?"

The key takeaway
Buiter concluded his report by saying:

Even though I view gold as a pure bubble, that bubble may well be good for another 6,000 years. Its value may go from $1,200 per fine ounce to $1,500 or $5,000 for all I know. Investing a vast amount of money in something whose value is based on nothing more than a set of self-confirming beliefs will make for an exciting ride.

When investing, it is always important to remember we're buying a tangible interest in something, not simply a number on a screen we hope will go up. And if I'm buying something, I'd much prefer a business over a pile of rocks, however shiny they may be.

Or, in other words, it's always smart to pick pile B.

The article Is Gold Really the World's Biggest Economic Bubble? originally appeared on Fool.com.

Patrick Morris owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway and owns shares of Berkshire Hathaway and Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.