The Next Bubble?


Warren Buffett recently wrote an article for Fortune explaining why gold is a bad investment.  Gold is an unproductive asset, meaning it is not going to gain any value over time.  He explained if all of the gold in the world was melted down and formed into a brick it would be worth 9.6 trillion dollars.  With that money you could also buy all of the farmland in the United States along with 16 Exxon Mobils.  He then asked, if you could pick between the gold brick or the farmland what would you choose? Any rational person would pick the farmland.  Over time the farmland will be more productive than a brick and therefore will pay out higher returns. Unlike gold, farmland has actual value.

With that said gold prices are at an all time high.  It is currently trading at $1,750 an ounce, yet carries no fundamental value. The only value it has is for 1000s of years people have given it value. So this means we have people investing in something with no fundamental value.  Not only are people buying gold, but also they are spending more money than ever to acquire it.  This all begs the question as to whether or not the market for gold is a bubble. People are buying gold for a price in excess of its intrinsic value – this is the definition of a bubble.  However, gold is different than most assets because it has been around for so long.  The NPR Planet Money Team asked if gold was 4,000 Year Old Bubble?

 

 

 

 

 

 

 

 

 

Gold is typically bought in greater quantities during recessions and depressions because it is considered safe.  However, with the economy improving this safe bet might come crashing down.  As confidence in the markets increase people will begin to invest in more productive assets and we could see a dramatic drop in the price of gold.  Gold will still carry value but just like home prices that fell in 2008 and have still not recovered, those who have invested in gold may see a dramatic reduction in a portion of their assets.

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