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June 6, 2011, 12:00 a.m. EDT
Soros is selling his gold — should you too?
Commentary: He thinks he timed the bubble, but real bugs know better
Reuters
LONDON (MarketWatch) — It could be brains. Or it might be intuition. Or it could just be luck. But whatever it is, it has allowed George Soros to read the market right over a long period of time. So when an investor of such legendary ability calls the top of the greatest bull market of our times, it is no great surprise that the world sits up to listen to what the man has to say.
In the first quarter of this year, Soros dumped around $800 million of gold. Should you follow his lead?
Not this time.
Gold is getting close to bubble territory. The price has rocketed upwards, and any asset that has been on a 12-year bull run has to be getting close to its top. The peak will come one day.
Every bubble has a blow-out phase — a moment when the price goes through the roof. Gold hasn’t gotten there yet.
And yet every bubble has a blow-out phase — a moment when the price goes through the roof. Gold hasn’t gotten there yet. The core function of the metal in the financial markets is to offer protection against inflation. And while plenty of people think spiralling prices are right ahead of us, that isn’t the consensus view yet. That means the price still has some way to go.
Gold has, of course, been the trade of the decade.
Back in July 1999, it hit a 20-year low of $252.80 an ounce. The International Monetary Fund was a seller, and so were central banks in Australia and Britain. It looked as if time was finally being called on its role as the ultimate repository of value.
Ever since, it has steadily recovered. Last month, gold hit a record high of $1,575.79 an ounce. That’s an incredible 12-year run. If you’d dumped your holdings of equities in the summer of 1999 — just as they were reaching the top of the dot-com mania — and switched into gold instead, you’d be reading this article from the terrace of a 30-room mansion on your own private Caribbean island. Short of founding Facebook, there would have been no better way to make yourself a fortune.
So there’s certainly a case to be made for getting out now. Smart investors always sell too soon — it’s the only way to avoid the carnage when the bull market collapses. In January, Soros called the gold bubble. “When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment,” he told his audience at the Davos conference. “The ultimate asset bubble is gold.”
Well, maybe. The problem with gold, for any cool-headed, realistic investor, is that as soon as you start to discuss it, you are entering the land of extremists.
Reuters
On the one hand, there are the gold bugs, for whom the metal is the one true currency. It’s been used as money for a few thousand years now, and against that kind of history a couple of months of rising or falling values don’t make any difference. To them, no price is ever really high enough. If every other asset is being trashed by wicked central bankers printing paper money, why not just keep on buying? After all, it’s bound to be worth more than those brightly colored pieces of paper.
On the other hand, gold’s detractors are just as adamant that it isn’t worth anything. Like John Maynard Keynes, they regard it as a “barbarous relic.” Sure, you can make wedding rings from it, but apart from that it’s useless. At least with copper you can make pipes, and bonds generate an income. But gold is mainly a psychological asset. It’s worth something because other people think it is. There are no reliable yardsticks against which we can measure its value.
The truth is somewhere in the middle. Gold can certainly move into bubble territory, just like any other asset. But its core function is as a safe alternative to cash during periods of prolonged and destructive inflation.
And here’s the important point. While plenty of analysts — including this writer as it happens — think we are heading for a period of steadily rising prices, that certainly isn’t the consensus yet. Just take a look at the government bond markets. The yield on US Treasury bonds is still at record lows. The same is true of most European government bonds, apart from those countries that are already bust. That wouldn’t be true if the markets were expecting huge price rises.
In reality, the markets are still priced for low inflation, even deflation. At some point, that consensus is going to crack. Central banks will be forced to raise interest rates — and potentially quite sharply as they wake up to the fact that inflationary expectations are getting out of hand.
And what will happen then? Bond markets will collapse — that’s certain. Equity markets will wobble. The historical record shows that equities are a poor hedge against rising prices, and they usually do poorly when interest rates are rising.
Where is everyone going to flee for safety? To gold, of course.
As rates start to rise, and fighting inflation becomes the main task of central bankers rather than warding off another great depression, the price of the precious metal will soar.
That will be the blow-out phase of the 12-year bull market.
It might happen next year, or it might be 2013. And gold might hit $2,500 an ounce or $3,000. Or even more. No one really knows. Once a market reaches its final buying frenzy, the price can go anywhere, as anyone who remembers the Nikkei hitting 38,000 will attest.
That will be the time to get out. And for that reason, Soros has got his timing wrong this time. There will be a moment to sell gold — but it is still at least a year away.
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