-- Posted Sunday, 12 February 2012 | | Disqus

The world’s most successful investor Warren Buffett has launched a powerful attack on gold as an investment class saying that the precious metal is a self-inflating bubble and that investors will eventually be faced with a price crash.

In an article in Forbes magazine the Sage of Omaha warned: ‘Bubbles blown large enough inevitably pop, and then the old proverb is confirmed once again: “What the wise man does in the beginning, the fool does in the end”.’

The ultimate bubble

This echoes George Soros’s warning a while ago that ‘gold is the ultimate bubble’ (click here). It is something of a truism that all markets are cyclical with ups and downs. It is also a truism that investors make their money by backing markets on the way up.

‘Markets can remain irrational longer than investors can stay solvent’ as Keynes reminded us. It is not whether gold is a bubble but how much longer and how much bigger that bubble will grow that counts.

Buffett will be right in the end but at what price for gold? $2,000? $3,000? $5,000? There is plenty of reason to think we are not at the end of the road just yet for gold.

The true impact of money printing on commodity prices, for example, is not over. Money supply has doubled or tripled and the price of eggs is not up by nearly as much.

That said gold prices have doubled in the past four years, so Buffett and Soros are not so wide of the mark. And we have certainly come a long way from $400 an ounce in 2004, a level Credit Suisse told this author was the absolute top of the gold boom.

In the inflationary decade of the 1970s gold prices moved from $35 to $850. They slumped in 1975-6 but then rebounded again, just like in 2008-9.

Price weakening?

A further bout of gold price weakness will follow a Greek debt default and part two of the global financial crisis. But that will only result in more money creation by the central banks, higher inflation and higher gold prices.

As Bill Bonner correctly identified last week (click here) the conditions that brought an end to the gold boom of the 70s are just not in place yet.

Warren Buffett sees gold as the enemy of equities where he has tied up the vast bulk of his amazing fortune and if he could prick the gold bubble early then he would love to do it.

Really he ought to acknowledge that the true conditions for a bubble about to burst are simply not present in the gold market. The fools have not quite got it! Is everybody really buying gold?

The real top for gold will only come when the US bond market blows up and everybody rushes into gold and silver.

-- Posted Sunday, 12 February 2012 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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