First, full disclosure.  I am talking my book.  I own a lot of gold.  Since I have a large position, I am biased.  Always consider the position of the proponent when assessing the validity of the argument, me included.

Also be extremely aware that I may change my mind tomorrow and not tell you.  I own both gold ETFs and call options on gold ETFs.  If I feel that I am wrong or gold is rolling over, I may blow out my entire position.  Owing call options implies an element of timing.  I am not dogmatic and will sell everything if I think the market is turning against me.

Brett Arends had two articles in the Wall Street Journal last week.  The first article was on why gold probably has some ways to go.  I agree.

First, the recent rise [in gold] is deceptive. Yes, gold has risen from around $250 an ounce to $1,200. But that rise started at very depressed levels. Gold had been falling in price for two decades. In 2000-01, it was at the bottom of a very deep bear market. It had touched historic lows compared to consumer prices or other assets like shares. A lot of the past decade's boom has simply seen it recover toward longer-term averages.

Second, before we assume the gold bubble has hit its peak, let's see how it compares with the last two bubbles—the tech mania of the 1990s and the housing bubble that peaked in 2005-06.

The chart is below, and it's both an eye-opener and a spine-tingler.

It compares the rise in gold today with the rise of the Nasdaq in the 1990s and the Dow Jones index of home-building stocks in the 10 years leading up to 2005-06.

They look uncannily similar to me.

So far gold has followed the same path as the previous two bubbles. And if it continues along the same trajectory—a big if—gold today is only where the Nasdaq was in 1998 and housing in 2003.

In other words, just before those markets went into orbit.

Maybe the smart money is out of gold today. But how easily we forget that the smart money got out of these past bubbles way too early. The really smart money knows you make the most money in a bubble right at the end, when it goes manic.

In fact, the rise in gold looks fairly measured.  This is a logarithmic graph of the price of gold since 2001.  Gold has risen at a fairly steady rate in the nine-year bull market thus far.

The top of a bull market / bubble is usually marked by a final surge that explodes higher.  There have been times of frothiness in the gold bull market, but after mild corrections, the price has resumed it's upward trajectory.

Compare gold to the Nasdaq, which exploded higher in 1999 and topped in 2000.  This is a logarithmic of the Nasdaq from 1998 to the top in 2000.  The slope of the final move is steeper than the previous increases in the index.

If Arends's chart is a rough approximation of where gold is headed, it will top out at $2500 to $3000 within a few years.  On some measures of inflation, the real price of gold topped out around $2300 nearly 30 years, so a $2500-$3000 price target is not unrealistic.

Arends's second article was more critical of gold. 

In Part One of this series, when I argued that gold might be about to go vertical, I made a whole bunch of new friends among the gold bugs.

And now I'm going to lose them all.

That's because even though I think gold might be about to take off, I don't recommend you rush out and put all your money into gold bars or exchange-traded funds that hold bullion.

And this is for one simple reason: At some levels, gold, as an investment, is absolutely ridiculous.

Now I can respect someone who says that they will not invest in something they do not understand.  I stay away from biotechnology like the plague because I am utterly clueless about biotech.  I also agree that at some point, gold as an investment will become absolutely ridiculous.  There will be a time when you will want to be far, far away from gold. 

However, I disagree with Arends's premise regarding why gold is ridiculous as an investment.  He makes a mistake, I believe, many people make, including Warren Buffett, whom Arends quotes.

Warren Buffett put it well. "Gold gets dug out of the ground in Africa, or someplace," he said. "Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. [Emphasis added]  Anyone watching from Mars would be scratching their head."

Now, it is a rare occasion when I disagree with the world's greatest investor and richest man, but Buffett is making a fundamental mistake regarding utility. 

Gold bears often argue that gold has no fundamental use or intrinsic value.  This is what Buffett implies in his argument - "We don't use it.  We just pay people to guard it.  What good is that?"  

Well, let us look at a product of one of Buffett's most famous investments, Coca-Cola. 

Buffett made a fortune in Coke.  When he bought the stock decades ago, Buffett realized that Coca-Cola was a powerful and ubiquitous brand that had tremendous global appeal and, at the time, significant cost cutting opportunities.  Plus, the stock was dirt cheap.  Coke was the perfect Buffett investment.

But what is Coca-Cola?  It is flavored sugar-water.  It has no nutritional value.  It makes you fat and it gives you diabetes.  It is loaded with caffeine.  Coke is bad for you.  It is unhealthy.  What "intrinsic value" does Coke have? 

Turns out, it has intrinsic value because it tastes good.  People like it.  From a health standpoint, nobody should ever drink a drop of Coca-Cola, but that does not matter.  We want it.  It appeals to people's tastes.

Fact is, most of what we consume is related to taste.  We do not need to own a big house or an expensive car or nice clothes.  We choose to do so.  Most stuff people buy is not necessary.  We buy most stuff because we like it.  We do not need to eat a restaurant.  We can make things at home.  We do not need to eat steak or drink wine.  We can find nourishment in cheaper foods.  Instead, we do so because we want to, because eating steak and drinking wine appeals to us.  We like it.

Most gold is consumed as jewelry.  Jewelry has utility because it is shiny and pretty and appeals to our tastes.  What intrinsic value does jewelry have other than we like it?  How is that any different from liking a good steak, a fine wine, a nice suit or a Coca-Cola?  

This is all utility.  Utility is the satisfaction something gives us.  We don't need to buy a steak, we can eat lentils and rice instead.  We don't need to end the day with a nice merlot, we can drink water.  We don't need to dress in nice clothes, cheap suits from Sears will do.  We don't need to drink Coke since we will probably live longer if we don't.  But eating steak, drinking wine, wearing nice clothes and craving Coke all gives us utility.  And we get the same utility from owning gold.

"Ah, Toro," you might be saying, "you are talking about jewelry, not gold as an investment.  What utility does gold as an investment give us?"  It gives us the same utility that property insurance or a home security system gives us - peace of mind.  It is money to protect us from the debasement of fiat currencies by governments.  And the debasement of fiat currencies has been occurring at an alarming pace for the past decade.

In his book, Money Mischief, Milton Friedman describes a society in the south Pacific whose money was giant limestone rocks at the bottom of the ocean that nobody had ever seen.  It did not matter that nobody had possession of or even had seen these rocks.  What mattered was the value assigned to those rocks.  The inhabitants used those unseen rocks as a medium of exchange and a store of value.  The submerged rocks were money because people believed they were money.  This unseen money had value, and thus utility, to Micronesians.

Gold is money because people believe it is money.  There is no doubt that gold is money, given the recent scramble to buy gold in Europe because of the Greek debt crisis.

Thus gold, indeed, does provide utility to its owners.  Gold is shiny and pretty and it appeals to our tastes.  And it is money. 

One final word - gold is in a bull market.  There are very few assets in the world today that are in a bull market.  Gold is one of them.

If you don't get it, fine, don't buy gold. You should never invest in anything you don't understand anyways.

But otherwise, don't overthink it.  Gold is in a bull market.  And it is much easier to make money in a bull market than in a bear market.