Is Gold Really the World's Biggest Economic Bubble?

By 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.

And the reality is: He's right.

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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.

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:

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:

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:

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:

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.

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