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Why Warren Buffett may be wrong on gold

July 31, 2012: 1:13 PM ET

Don't expect Warren Buffett to fondle (or buy) any cubes of gold lately. The Oracle of Omaha is not a fan.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.

Warren Buffett is one of the world's most famous and successful investors. You have to take almost anything he says seriously. But his loathing for gold? That's another story.

The Berkshire Hathaway (BRKA) (BRKB) chairman and CEO has had some inspired rants against the yellow metal. Buffett most recently addressed the topic in his annual letter to shareholders in February.

A choice gem? He noted that if you owned 170,000 tons of gold now, 100 years later that cube of gold "will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond."

Buffett prefers stocks over gold and other commodities because public companies own assets that make tangible things. These companies also often pay dividends -- especially the more conservative, mature companies that Berkshire tends to own. In other words, stocks are productive assets. Gold is not.

But what if Buffett is wrong? Have you noticed what gold has been doing lately? The metal is once again above $1600 an ounce and back in positive territory for the year. Sure, gold is still about 15% below last year's all time high of near $1925 an ounce. And gold has lagged the stock market in 2012... even with the recent rally.

But gold has been on a bull run that has outpaced stocks for more than a decade. It's not, to use a gold metaphor, a flash in the pan. Some think gold will soon outshine stocks once again.

With the Federal Reserve and European Central Bank both meeting later this week, many investors are betting that the Fed and ECB will at least open the door for more stimulus if not necessarily announce new easing plans.

Anything that Ben Bernanke and Mario Draghi do or say that is interpreted as a sign that they will soon be willing to flood the markets again with more liquidity would likely be good for gold. Loose monetary policy tends to be bad news for currencies, in this case the dollar and the euro. And since gold is often considered an alternative currency as much as it is a commodity, more easing should drive gold higher.

"If gold goes higher in the short-term, it will be because the Fed and ECB stepped on the gas," said Jeffrey Nichols, senior economic advisor to Rosland Capital in New York. Nichols, a gold bull, said he thinks more easing is in the cards for an extended period of time considering how weak the global economy is. As such, he thinks gold could be back at record highs later this year or sometime in 2013.

Related: Gold bugs need more help from the Fed

But what about Buffett? If the Oracle of Omaha is advising people to steer clear of gold, should investors really dismiss that? Actually, yes.

Steven Feldman, CEO of Gold Bullion International, a firm that allows people to invest directly in the physical metal, said that he'd love to debate Buffett about the merits of gold. Feldman, who used to be a partner at Goldman Sachs (GS), says there is a misunderstanding about gold among novice and sophisticated investors.

Feldman said the anti-gold mantra is somewhat of a unique phenomenon. Both individual investors and central banks in emerging markets like India and China have traditionally been more inclined to view gold as a safe haven investment. Do the math. If a lot of people in China and India want to keep buying gold, the price of the metal is likely to go up ... no matter what we Americans think.

"In the U.S., we are very much in love with our house, stocks and bonds. But that is a very American-centric investing approach not shared around the world," Feldman said. He added that the simple laws of supply and demand make gold a compelling investment. Supply is limited and it is often tough to extract, adding to the scarcity value.

Related: What makes jewelry a good investment?

Feldman also quipped that there appears to be no "fracking" equivalent for gold, i.e. technology that will make it easier to mine, like there is for oil and gas in the energy industry.

So it seems there is a good short-term case (Fed and ECB easing/currency devaluation fears) and long-term case (demographics/Economy 101) for gold. Does that mean you should rush out and put all your money into the metal? Of course not. It's just as reckless to overload on gold as it would be to have all your savings in your house, a bond fund or shares of the company that you work for.

Nichols said that for most investors, having 5% to 10% of their portfolio in gold is probably enough. And both Nichols and Feldman said that buying gold bullion coins also is the most sensible thing to do because you then have that hard asset.

That said, it is often easier to bet on the gold rush through leading companies like Newmont Mining (NEM), Barrick Gold (ABX) or Goldcorp (GG), as well as exchange-traded funds that own miners, such as the Market Vectors Gold Miners ETF (GDX) , or those that directly buy the metal like the SPDR Gold Shares (GLD) and the iShares Gold Trust (IAU).

Still, fans of the metal don't expect the gold critics to back down anytime soon.

"People that spend their lives looking at stocks and bonds think gold is this barbaric metal," said Jeff Sica, president and chief investment officer of SICA Wealth Management in Morristown, N.J. "Gold getting the respect of Wall Street? That's never going to happen. It's always going to be under constant scrutiny."

Nonetheless, Sica thinks gold is likely to top $2000 an ounce sometime before the year is over. And he isn't worried about what Warren Buffett thinks about gold. Neither should you.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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