Warren Buffett's annual letter to shareholders has given we gold bugs a serve. Billionaire Buffett is perhaps the world's best well-known investor.
He equates the current soaring gold price with worthless ''bubbles'' such as the Dutch tulip craze (1637) and the South Sea bubble (1720) that took the keeper of Britain's Mint, scientist Sir Isaac Newton, to the cleaners.
More recently, most of us can recall the dot.com share price bubble at the turn of the century and the Ponzi (pyramid) scheme that sent New York financier Bernie Madoff to jail.
According to Buffett, the gold price is based on fear only. He argues there are productive assets such as agricultural land, and unproductive assets such as gold, only bought by those who assume someone else will pay more for them.
This requires an expanding pool of buyers motivated by fear who know the asset is unproductive but believe it is a safe haven of value.
Gold, he argues, is a bubble like previous bubbles including the United States housing boom, the cause of the 2008-09 world financial crash. Since then, US housing prices in some states have fallen 80per cent.
As an aside - this may make Aussie home owners a bit nervous. Don't worry! In Australia there has been no housing credit explosion similar to the US time bomb: sure prices could fall somewhat but the demand is there, unable to keep up with our migrant-accelerated, expanding population, underwritten by Australia being China's quarry.
Buffett argues the world's gold stock is about 170,000 metric tonnes with a value (at the time Buffett wrote of $US1750 an ounce) of about $US9.6trillion. Buffett calls this Money pile A.
For an equal amount we could buy all US productive agricultural land, 160 million hectares, with an output of $US200billion annually.
After these purchases we would have about $1trillion left over for walking around money. (Money pile B).
The sage of Omaha, Nebraska asks, ''Can you imagine an investor with $9.6trillion selecting pile A over pile B?''
Today's annual production of gold is worth about $160billion. ''Buyers, whether jewellery, industrial users, frightened individuals or speculators, must continually absorb this additional supply to merely maintain an equilibrium at present prices.
''Admittedly, when people a century from now are fearful, it's likely many will still rush into gold. I'm confident, however, that the $US9.6trillion valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B''.
Unfortunately, Warren, life is short. Neither you nor I, or any reader will be here in 2112 so your assumption is pretty hypothetical.
You are an icon for all we investors. You invest in productive businesses to increase wealth: the original purpose of sharemarkets.
Your main market investments are those of a bygone era - not that you haven't made, and lost, money utilising the new financial derivatives that have transformed sharemarkets into gambling casinos.
But you understand the risks involved, unlike those major financial institutions that created and sold these new-world financial derivatives such as the Collateralised Debt Obligations (CDOs) and Contracts for Difference (CFDs).
Billions were poured into CDOs and when they went bad these same institutions relied on the US Federal Government to bail them out with taxpayers' money.
Today, these institutions have turned on the Federal Government denouncing BIG Government! They forget that they caused the biggest financial crash since the Great Depression. The result has so weakened the US, it could be in terminal decline.
The above views come for Jeff Madrick's recently published Age of Greed.
Gold may be unproductive, but what about the trillions in paper money in US dollars and euros being printed, hopefully, to revive the economies of the US and Europe?
Warren, the printing presses can churn out paper money faster than miners can produce gold.
We all know the ''barbarous relic'' accolade economist John Maynard Keynes bestowed on gold that gave central bankers, other bureaucrats and politicians the liberty to outrageously overspend after US president Richard Nixon abandoned the US-gold price tie in 1971 to pay for the Vietnam War.
We old gold bugs believe gold could be an alternative currency that disciplines government expenditure. Unlike tulips, Warren, gold is scarce, inorganic and unique.
Already the writing is on the wall. Last week Iran bought Australian wheat in London with gold bullion to evade US banking restrictions. India is doing similar with oil, it's said.
Perhaps the yuan may soon be tied to gold as the new world currency? Having a few gold stocks is not due to fear, Warren, but commonsense.
+ wharcour@bigpond.net.au
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