Soros Calls Gold the ‘Ultimate Bubble’
Sep 15, 2010
Billionaire George Soros, whose hedge fund, Soros Fund Management LLC, has been heavily invested in gold and gold-mining companies, told Reuters on Wednesday that gold prices might continue to rise after printing record highs this week, but warned that the precious metal is the “ultimate bubble.”AntiSpin: Soros joins a long line of “experts” on gold who did not identify the bottom of the gold market and buy at $270 in 2001 when we did but entered the market recently after gold had already increased more than three fold in price. Gold cannot have been a bubble for the past nine years. The idea is patently absurd. Gold did not suddenly turn into a bubble just because Soros or anyone else happened to start to notice in 2008 what we noticed and acted on nine years ago, that the gold price was due to rise. Our price target of $2500 to $5000 made then when gold traded at slightly more than 1/10 to 1/20 of that price sounded insane at the time. Now that it sounds likely it's parroted by a small army of gold market tourists.
Reuters: “Gold is the only actual bull market currently. It just made a new high yesterday. In the present circumstances that may continue,” he said at a Thomson Reuters Newsmaker event.
“I called gold the ultimate bubble, which means it may go higher. But it’s certainly not safe and it’s not going to last forever,” he said.
According to Reuters, Soros also said that “after asset classes set new highs there are almost always immediate reversals that disappoint investors.”
Spot gold on Tuesday set a new all-time high of $1,270 per ounce, well above the previous all time high of $1266.50 per ounce.
The gold price Wednesday has traded as high as $1,273.50 and as low as $1,266.80.
Background: A $1 million gold position taken in September 2001 when we did is, as of today, worth $4,544,802.86, reflecting a 12.5% annual inflation-adjusted return. A $1,000,000 position in the S&P500 at the same time is now worth $758,258.01 including reinvested dividends, representing a 3.4% annual loss. That’s why we have owned no stocks since March 2000. We also own long Treasury bonds that we bought at 6.3% in the fall of 2000, but that’s a topic for another day.
Gold ended every one of those nine years higher than it began.
Why: We took a 15% portfolio allocation in gold in 2001 primarily for three reasons.
- It was cheap, trading at 13% if its inflation adjusted peak price.
- All of the major global central banks owned gold, even though gold had not been officially part of the monetary system for decades. Why were they holding onto it if it had no value as they professed? To hedge the risk that a bold experiment, a monetary system based on a single nation’s debt-backed currency, might fail. They keep gold is a fallback. So we did, too.
- With the collapse of the technology stock bubble, fiscal stimulus and dollar depreciation were likely policy moves to get the dollar depreciation ball rolling.
We upped that allocation to 30% in early 2009 for an additional six reasons:
- We were certain that the housing bust recession was going to produce the worst economy since The Great Depression to be responded to with fiscal stimulus to match WWII levels. Big deficits equal a weak currency.
- A weak dollar was again expected to be a critical part of the reflation strategy, so the market's response to the fiscal weakness would be welcomed by policy makers.
- The fundamental structural weaknesses of the US economy was cemented in the global investor consciousness: dependence on asset price inflation for economic growth. Without asset price inflation (aka bubbles) government credit must substitute for private credit to maintain money supply growth until the economy is restructured to not require cheap credit and asset price inflation.
- With the realization by investors that this dependence was not going to be corrected within America's solvency timeout window, while at the same time other economies in Asia and Latin America were coming into their own, the dollar entered a secular downtrend that will not end until the outmoded, US-centric monetary system is replaced with a new system that accommodates the fact that the US will play in increasingly smaller role in the global economy.
- The transition from the current system to the new one is unlikely to go smoothly.
- Peak Cheap Oil is here to stay and is inflationary.
These are not your standard goldbug arguments for owning gold.
Policy Implications: The transition from the current monetary system to a new one lacks the one negotiating ingredient that made the previous system work: America’s dominant economic leadership. In the early 1970s the US was so dominant that it could still call the shots in the new regime, as it had after WWII when it was the only power left standing. That's no longer the case. Multilateralism is the primary liability in the smooth transition to a new system. Multilateralism produces instability. This is why the US owns by far the most gold in the world and why central banks are this year net buyers. This risk of a disorderly breakup of the currency regime has grown more likely. They are now net buyers of insurance. The crisis will most likely be triggered by some as-yet unforeseen geopolitical event, but most likely one related to diminishing global oil resources.
Investor Implications: For iTulip readers, the same hold position as we have had since September 2001.
For those new to iTulip? If we didn't already have gold would we buy it today at these prices?
Yes, but we would not be happy about it. Despite the fact that the value of the gold we bought in 2001 has increased more than four times since then, its role in our portfolio remains the same, not capital gains but insurance against a disorderly breakup of the current international monetary regime, resulting in a sudden currency value dislocation and inflation. The gold price rise represents an increase in the FIRE Economy insurance premium. The fact that we paid a low premium is great, but the rising price means that the chances of a fire are increasing.
Evidence: Central banks are as of this year for the first time in 20 years net gold buyers. This indicates a serious breakdown in trust and confidence in the system among members of the central banking establishment. There is discord and no leadership.
Central banks turn net gold buyers in 2009-CPM GrpSee also:
Tue Apr 27, 2010 4:30pm EDT
By Frank Tang
NEW YORK, April 27 (Reuters) - Central banks turned to buyers from sellers of gold for the first time in 20 years in 2009, driven by Chinese stockpiling and worries over global currencies, metals research and consultant CPM Group said on Tuesday.
Lessons of the American Lost Decade – Part I: The gold bugs were right
iTulip Select: The Investment Thesis for the Next Cycle™
For a concise, readable summary of iTulip concepts read Eric Janszen's September 2010 book The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble.
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