Chuck's bear argument against gold is built on three ideas:

  • Gold doesn't build value.
  • High prices will cause production to increase and flood the market.
  • Prices have already soared into the "stratosphere."

Let's bury these misconceptions right now.

Gold doesn't write bad checks
The idea that a company creates value by making products that people consume is very appealing -- but it comes with a downside. For every Procter & Gamble (NYSE:PG) making toothpaste and shaving cream, there are a few bad apples out there destroying shareholder value through excessive executive compensation, shareholder dilution, options backdating, and outright book-cooking.

Gold also creates value in the gold wedding rings people like Chuck and his wife wear on their fingers. Beyond jewelry, gold has value in medical, electronic, and pollution-control applications. The high price of gold represents that value.

Why the value?
Why do couples insist upon gold wedding rings? Gold is rare, and it never degrades or tarnishes. Chuck claims that high prices will cause mining companies like Barrick Gold (NYSE:ABX) to flood the market with a torrent of increased gold production. Gold isn't like coal or corn. People have been searching for gold for 4,000 years, and there just isn't enough of it around to sate demand. As I pointed out at Christmas, for most of the past decade, annual production has been falling.

Year

Gold Production (Metric Tons)

1996

2,290

1997

2,450

1998

2,500

1999

2,570

2000

2,590

2001

2,600

2002

2,550

2003

2,550

2004

2,430

2005

2,450
Source: U.S. Geological Survey

Firmly down to earth
After posting a 140% gain in the past five years, it may be easy to say that gold has soared into the "stratosphere." This is similar to avoiding investing in a company because its price has already doubled. The real question is whether or not the current price is too high. I believe $672 per ounce rests firmly on terra firma, because prices are driven by supply and demand.

Despite high prices, gold supplies are falling, not rising. Mine production decreased again in 2006, and central banks have reduced their sales of gold. High prices have cut into jewelry demand, but industrial and investment demand continues to increase. Furthermore, current investment in gold is a tiny fraction of the total investment universe. If the market experiences a bit of fear or increased inflation, I expect this demand to increase dramatically.

Finally, the price of gold is still far from its all-time high of $850 per ounce, set in 1980. On an inflation-corrected basis, gold would have to soar to around $2,275 an ounce to reach the same level of exuberance. If the stock market goes sour and we see blood in the streets, investors will likely run to gold, pushing the price much higher. If gold soars, maybe I'll change my tune. Until then, I'll take the gold.

You're not done with the Duel yet! Go back and read the other arguments, then vote for the winner.

Fool contributor Robert Aronen owns a gold wedding ring, but does not own shares of any company mentioned in this article. The Fool has a disclosure policy.