Goldbugs are cranks. So said an article in The New Yorker last month. Is there any truth in it?

Gold's rise to prominence is due to fears about inflation and dollar weakness. But is gold really superior to paper money? Two MoneyWeek experts give their opinions.

YES, says James Ferguson. Gold is just a commodity and should be treated as such.

"One of the perks of stardom is the indulgence of unusual requests," according to James Surowiecki in The New Yorker. One of the most bizarre of these was Bette Midler's, when she was touring Europe in the late Seventies. Rampant inflation led to her insistence "on being paid not in dollars or pounds or francs, but in gold". She might feel the same way now. "Economic worries," says Surowiecki, "have recently prompted investors to start coveting gold again." But they shouldn't. "Just because it has a history of being used as money", doesn't mean gold has a future. While "goldbugs" pride themselves on being sober realists, the irony is that "buying gold is the purest form of speculation". Why? Because it is only worth something as long as we all agree that it is. "Strictly speaking", explains Surowiecki, gold is no more than a commodity like steel or oil (albeit a less useful one).

Gold's recent rise to prominence is partially attributable to late cycle inflationary effects, and partly to dollar weakness. Early in a cycle, demand is weak but supply has often been boosted by new facilities commissioned when the price had been higher in the previous cycle. For the first few years of any upswing, therefore, increased demand is easily met by stock piles. It is usually late in the cycle (such as now) that these stock piles run down while new facilities have yet to come on stream. Within this window of opportunity, the price rallies. However, this time around, the late cycle effect is being compounded by the weakness in the dollar (commodities are quoted in dollars). Even a casual glance at the gold price in euro terms shows that, rather than a major, multi-year break, gold could just be having a normal short-term trading rally within a long-term bear market downtrend. Gold is thus no more or less exciting a prospect than any other dollar-denominated asset.

You see, gold suffers from a couple of unique over-supply problems. The first is that, because gold is so stable, it doesn't get used up'. All the gold that has ever been mined is still with us. The other problem is that gold is surprisingly abundant. According to Claude Allegre of the Universit de Paris, "gold is ten thousand times more abundant than copper". The thing is that copper, like lead, zinc and tin, has this amazing property of clumping into veins, lodes or beds. Gold is not a clumper and so, while abundant, is more costly to extract. However, relatively small increases in price immediately bring on economically marginal new supplies. A long time ago, if you wanted a hedge against inflation or weak currencies, it made sense to buy stronger currencies. Then, when the oil shock made all currencies equally unattractive, it made sense to buy gold. The financial markets didn't exist then to facilitate buying oil futures, foodstuffs, or other metals or the like to protect yourself instead. But today, they do. Gone are the days when gold was the only proxy for inflation. So why hold it? The goldbugs may say that it is the best thing to be holding when the catastrophic breakdown in the global financial system they expect arrives. But that's nonsense too. Don't forget, gold is bloody heavy. My advice to people expecting ever to have to flee with all their wealth on their backs is this: take platinum or diamonds.

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And what if the end of the world doesn't come? Gold has a terrible track record as an investment. It pays no dividend, the price is much the same as it was in 1988 and it costs a lot to store. Indeed, gold can destroy your wealth more efficiently than any banking crisis. "In 1980," says Surowiecki, "ten ounces of gold would have bought you a nice car. Today, it would get you a nice bike."

NO, says Bill Bonner. Paper currencies always fail in the end, but the value of gold will endure

James Surowiecki's piece on gold in The New Yorker last month was both wise and moronic. His wisdom is based on the insight that neither gold, nor paper money, are true wealth, but only relative measures, subject to adjustment. "Gold or not, we're always just running on air," he writes. "You can't be rich unless everyone agrees you're rich." In other words, there is no law that guarantees gold at $450 an ounce. It might just as well be priced at $266 an ounce, as it was when George Bush took office for the first time. That was just four years ago. But gold wasn't born yesterday or four years ago. Surowiecki notices that the metal has a past, just as it has a present. He turns his head around and looks back a quarter of a century. The yellow metal was not a great way to preserve wealth during that period, he notes. As a result, he sees no difference between a paper dollar and a gold doubloon, or between a bull market in gold and a bubble in technology shares.

"In the end, our trust in gold is no different from our trust in a piece of paper with one dollar' written on it," he says. And when you buy gold, "you're buying into a collective hallucination - exactly what those dotcom investors did in the late Nineties." Pity he doesn't bother to look back a little further. This is the moronic part. Both gold and paper dollars have history, but gold has far more of it. Both have a future, too.

But, and this is the important part, gold is likely to have more of that as well. The expression "as rich as Croesus" is of ancient origin. The king of historic Lydia is remembered, even today, for his great wealth. Croesus was not rich because he had stacks of dollar bills. Instead, he measured his richness in gold. No one says "as poor as Croesus", do they? We have also heard the expression "not worth a continental", referring to America's Revolutionary-era paper money. We have never heard the expression, "not worth a Kruggerand".

Likewise, when Jesus said, "Render unto Caesar that which is Caesar's", he referred to a denarius, a coin of silver or gold, not a paper currency. The coin had Caesar's image on it. Even today, a gold denarius is still at least as valuable as it was then. America's dead presidents, whose images are printed in green ink on special paper, lose 2% to 5% of their purchasing power every year. What do you think they will be worth 2,000 years from now? During gold's long history, humans have often tempted to replace it with other forms of money - which they believed would be more modern, and most importantly, more accommodating. After all, gold is hard to find and hard to bring up out of the earth. As a result, its quantity is always limited. Paper money, by contrast, offers endless possibilities. But the story of paper money is short and always sad. Since the invention of the printing press, a new paper dollar or pound or franc can be brought out at negligible cost. Nor does it cost much to increase the money supply by a factor of 10 or 100 - simply add zeros. It may seem obvious, but adding zeros does not add value.

Still, the attraction of getting something for nothing has been too great to resist. That is what makes goldbugs so irritating: they're always pointing it out. Worse, they seem to enjoy saying "there ain't no such thing as a free lunch", which comes as a big disappointment to most people. Once people were able to create "money" at virtually no expense, no one resisted doing it to excess. So most paper currencies are ruined within a few years. Some take longer, but even the world's two most successful paper currencies - the American dollar and the British pound - have each lost more than 95% of their value in the last century. By contrast, every gold coin (and silver too) that was ever struck is still valuable today - and the coins almost always have more value than when they first came out of the mint.

If you'd like to read more on this subject, see Bill Bonner's article: Why gold is better than paper money, find out why the dollar's collapse will lead to a new gold standard, or visit our section on investing in gold.