Warren Buffett Was Right: Gold's Freefall: Look Out Below!

| About: iShares Gold (IAU)


Gold has again proven its intuitive behavior—falling as tensions in Eastern Europe ease slightly.

On Friday May 30, gold futures lost nearly 1%, a trend that shows no signs of reversing.

This behavior reflects whimsical valuation, of which investors should be very wary as trends continue in 2014.

Lately, gold (NYSEARCA:IAU) has once again proven its fundamental instability as an investment medium.

As the ongoing tensions between Russia and Ukraine ease, the outlook for gold is looking grim. On Friday May 30, gold futures lost nearly 1% in a continuation of a trend that shows no signs of stopping.

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Though unusually steep, gold's Friday beating certainly wasn't difficult to predict. In May, gold experienced the largest monthly decline since last November.

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Eastern European Catalyst

By global and historical standards, the Ukraine's ongoing crisis has produced relatively few casualties. However, this crisis has warranted strong attention, in part due to its potential to recreate Cold War-era tensions. Indeed, some see Ukraine's fate as a signpost for the future consequences of Russia's defiant ambition.

Economically, this is taking enormous toll on Russia's economic outlook. The Micex Index (INDEXCF) in Moscow reached 29.7% volatility on May 30th.

However, the conflict is increasingly looking more localized. While combat continues between pro-Russian rebels and state-supported forces, recent developments have decreased the likelihood that this conflict will spread beyond Ukraine.

Specific Impacts on Gold Prices

In general, the de-escalation of international tension is harmful for gold prices. The chart below shows a negative correlation between the Russian ETF (NYSEARCA:RSX) and iShares COMEX Gold Trust. As RSX slightly recovers, IAU begins to decline.

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Weak Investment Basis

This curious dynamic reflects one of several reasons why gold is such a weak investment overall.

While some experienced investors do maintain small gold holdings to hedge against economic disaster, other experts deeply question the wisdom of investing in gold. Warren Buffett (BRK.A,BRK.B) stated: "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction". The image is certainly one that is less than dynamic.

Although plenty of investments are subject to the unpredictable mood of the public, gold prices seems particularly vulnerable to the fickleness of current events.

Asian Demand Also Begins To Disappoint

For quite a few years, Asian demand for gold bullion has further buttressed its price. However, this is another area where recent events are disappointing gold investors. In particular, weak Chinese demand is taking a toll. Last Friday, the price of gold for August delivery fell to its lowest level since February.

Increasingly Intuitive - Gold Not A Strong Investment In 2014

Today, the precious metal is becoming increasingly intuitive.

In Warren Buffett's view, productive assets are assets that continually produce more value for asset holders. For example, farmland periodically produces valuable crops. Profitable companies regularly deliver for shareholders on an ongoing basis.

But despite the occasional spike in prices, gold remains an inert asset, incapable of producing new value.

This argument highlights one of many reasons that gold will likely remain a dubious investment medium; and the recent easing of some international tensions in Eastern Europe supports the theory well.

We suggest investors consider Warren Buffett's own Berkshire Hathaway or PNC Bank (NYSE:PNC), both of which have proven records of generating value for their shareholders.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.