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"Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head" Warren Buffett (BRK.B).

Over the past few years, gold investors have achieved much in the context of the inconstant U.S economy. Gold prices naturally soar when economic fundamentals are in flux. This year, investors have increasingly shown skepticism towards gold (GLD). A number of revelations jeopardized gold portfolios in the last days of October. On the 28th, gold was holding fairly steady at $1,360 an ounce (IAU). The precious metal was at a five-week high due to expectation that the Fed would continue its quantitative easing program. This program sends $85 billion into U.S financial markets every month. Quantitative easing inevitably weakens the dollar, which bolsters international gold prices. As long a quantitative easing remains in place, gold investors maintain fairly solid footing.

On Wednesday the 30th, the Federal Open Market Committee made statements that immediately impacted gold futures in a negative way. Apparently, the Fed does not believe that the U.S economy faces nearly as much danger as it has in the past. Based on this sentiment, gold investors believe that the Fed will start ramping down quantitative easing fairly soon.

Even though the U.S employment report was fairly weak, the Fed's remarks were so sobering that gold was down sharply on Thursday the 31st. Although many U.S economic indicators are questionable, Wednesday's Fed revelations combined with a strong dollar to spook investors with gold holdings. Further exacerbating this trend, Chinese gold demand is fairly anemic at the moment. Since China is the second largest gold buyer in the world, weak Chinese demand is a major problem for the global gold market. Between the 28th and the 31st, the price of gold dropped more than two percent.

For a few years, gold held its own as an unusual yet promising investment. Recent events have highlighted the oddness and volatility of the gold market. For thousands of years, gold has maintained its status as a nearly universal medium of exchange. No matter how widely they traveled, past explorers like Marco Polo could rely on bullion to purchase food, shelter and other necessities.

Relatively lightweight and portable for such a valuable metal, gold is a durable commodity that is often passed on through generations. Despite these advantages, gold is a specialized commodity with surprisingly few practical uses. Although gold does have some industrial applications, copper is far more useful in commercial and industrial contexts. Consumable foodstuffs are more versatile commodities due to tremendous fundamental demand. Despite the demand for gold jewelry, gold is still a highly specialized commodity that is primarily used for maintaining wealth. With such a specialized role in society, gold may well continue to experience unpredictable spikes and dips in value.

Since gold is so different from other investment assets, it is extremely difficult to weigh the metal's investment potential. At any given time, the most pessimistic economic analysts will tout gold as a safe harbor against stock market crashes and recessions. When the investing public is worried about the state of other investments, gold does very well. If the public is more satisfied with the economic outlook, gold tends to lose value fairly quickly. Due to this bizarre calculus, investment gurus like Warren Buffett question if gold is a truly comparable to more traditional investment assets.

This is a good time for investors to tread cautiously when investing in gold. The outlook for gold ETFs is fairly uncertain for the immediate future. As U.S and global economic indicators show steady improvement, the price of gold should continue to trend downward. Physically owning a bit of gold is a good hedge against unforeseeable economic disasters. However, gold futures will likely remain uncertain for quite some time.

Source: Buffett Is Right On Gold Investing