From the Telegraph:

“Gold really doesn’t have utility, the 80-year old told shareholders at Berkshire Hathaway’s annual general meeting. “I’d bet on a good producing business to outperform something that doesn’t do anything.”

And so would I. My entire economic position is founded on the idea that productivity is better than non-productivity. So why am I so bullish on gold? And why am I so convinced that Warren Buffett — a man who has had such a successful investment career — is so out of step with reality?

The answer is really very simple — Warren Buffett’s investment career, starting seriously in 1947, has existed in the shadow of the greatest sustained gains in stocks & GDP in the history of the world. Let’s look at the S&P500, mapped against GDP from 1950 to 2010:

In these conditions — with the background of the dollar as the global reserve currency, endless Arab oil, and (since the ’80s) endless growth in Chinese factories — Buffett’s famed buy and hold strategy is brilliant. Just so long as the companies you hold are productive, your portfolio will rise on the rising tides of national and global progress. Yet strange winds are beating against the shore, buffeting Buffett. The dollar’s role as the global reserve currency is being slowly strangled away.  Former Federal Reserve Chairman Alan Greenspan now openly talks of printing money to pay debt, default-by-debasement:

The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default

For that reason, Buffett rates American debt as AAAA. But, as Greenspan also noted, the ability to pay nominal debts is not a guarantee to preserve those debts’ purchasing power. Negative real rates puts Treasuries, cash and equities — everything valued in dollars — on a crummy foundation. Business conditions are nothing like Buffett has experienced in his investing career. In truth, they are more like those at the start of the 1930s where poor economic, social, and infrastructural foundations dragged all stocks — even especially productive ones — down against gold, which more than retained its value.

From Bloomberg:

Investors pulled the most money from global stock funds since 2008 in the past week as the Standard & Poor’s downgrade of Treasuries and the deepening European debt crisis prompted a flight into cash and gold.

As I explained yesterday, cash is not the answer, either. Buffett has ridden the rising tide of prosperity; he is too rich to be affected in any meaningful way — he will be a billionaire regardless. But for investors who have not made their millions, there may not be a rising tide of prosperity any time soon. That is why gold may be much better than Buffett thinks.