Buffett's Gold Bubble

Help I'm stepping into the twilight zone
Place is a madhouse, feels like being cloned
My beacon's been moved under moon and star
Where am I to go now that I've gone too far?
--Golden Earring

In a preview of his annual letter to Berkshire Hathaway shareholders to appear in FORTUNE, Warren Buffett disses bonds and gold in favor of stocks. He suggests that gold's huge rise over the past 10 years resembles bubble like proportions. As in the past, he refers to gold as a 'non-productive' asset. It pays no dividend. It does no work.

Very true. But what he does not address is gold's function in since the beginning of economic exchange as a store of value. Buffett goes to some length seeking to demonstrate gold's overvalued nature versus 'productive' assets such as cropland and Exxon (XOM). But gold's value is not, as Adam Smith called it, 'value in use.' Gold's value is tied up in 'value in exchange.'

Buffett says that he would rather have all of US cropland +16 Exxons + $1 trillion USD rather than the total world's supply of gold (currently worth about $9.6 trillion). Stated differently, gold seems overvalued to him.

To others, of course, the opposite seems true. If all the gold in the world can buy only 16 large oil companies and one country's worth of crop land, then there is not enough gold in the world to pay for all other productive assets in the world.

Stated differently, perhaps US cropland and XOM are over valued. There are good arguments to be made here, with the market cap of XOM north of $400 billion. If this is indeed the case, then either the price of productive assets needs to come down, or the price and/or quantity of gold must go up.

One other point is that 'productive assets' like those represented by stocks require capital. But in today's debt-laden world, where more and more resources must be allocated toward debt service, real capital available for productive investment is vanishing.

Capital has been consumed rather than saved.

Printing paper money will not alleviate this capital shortage. With less capital, productive assets cannot function fully. If productive assets cannot function fully, then their value declines.

Then perhaps gold will be worth US, EU, and South American farmland, and 300 Exxons.

position in gold, agriculture, SPX