Soros buys gold after calling it 'ultimate bubble'

“Gold is the ultimate bubble. It is certainly not safe,” George Soros, billionaire investor and legendary currency speculator, said at the beginning of this year and then reiterated his opinion in September this year.

But in stark contrast to his 'bubble' comments, his fund announced yesterday (November 15) that it increased gold positions during the third quarter. 

According to Marketwatch, Soros held 4,697,008 shares of the SPDR Gold Trust and 705,000 call options on the gold ETF at the end of September, its regulatory filing showed. Soros also owned 5,000,000 shares of the iShares Gold Trust at the end of the third quarter, according to the filing. Three months earlier, Soros held 5,244,697 shares of the SPDR Gold Trust, a portion of which was a shared position. The firm held no shares of the iShares Gold Trust at the end of June, according to the filing.

Soros had said in September he expects a repeat of the historical pattern of bull runs in assets like gold ultimately hitting records, and then suddenly reversing. Gold is currently the only bull market, Soros said, adding that it may continue to rise but “it’s not going to last for ever.” He said it will be interesting to see if gold declines in the coming weeks.

Last week, his concerns were made conspicuous by a sudden and dramatic decline in gold prices. A bevy of worries spread through volatile markets and gold, which was on a record-breaking spree of making lifetime highs almost on a daily basis, dropped $38 an ounce, leading once again to heated debates about whether or not gold is in a bubble.

While the weekly decline amounted to just 2.7 per cent on the over $1,400/oz that the yellow metal had clocked in the week before, analysts who argue that it isn’t prudent to pay more than $1,000/oz seem to be gradually coming out of the woodworks now. 
 
Analyst Alex Dumortier, using data from the World Gold Council and precious metal dealer Kitco, argues that if we look at inflation-adjusted gold prices going back to 1851, the yellow metal has generated a historical average return of 0.7 per cent per annum.

“However, even that small positive real return is a bit of a mirage resulting from the powerful gold rally we’ve witnessed. Indeed, as recently as 2005, gold’s average real return over 154 years was zero,” he says arguing that gold is an inert asset and over the very long term, it is unsuitable as a store of value and could be heading for a big devaluation.

How severe could the reversal be is the million-dollar question.

Experts we spoke to differ on whether gold is heading for a downward spiral or will it just witness interim corrections. We asked our panel if there was anything that could push the metal down to $500/oz levels.

MR Raghu, Senior Vice-President-Research at Kuwait Financial Centre (Markaz), is a firm believer in gold. “Gold was never volatile, nor is it expected to be so. Gold going down to $500 would mean a crystal clear robustly growing global economy with no clouds hanging around whatsoever. Looks more like a dream to me,” he told 'Emirates 24|7'. “With respect to gold, aim for more not less though there may be interim corrections,” he advised.

Zeki Muderrisoglu, Fund Manager and Senior Technical Analyst, Asset Management Group at National Bank of Abu Dhabi, also believes that time is not ripe to even start talking about gold at $500 an ounce levels. “Gold [has] recorded a new all time high and I see no reason at the moment to talk about a huge drop in gold prices,” he told this website when the precious metal touched it’s all time high recently.

Walter de Wet, commodity analyst at Standard bank in Johannesburg, says, as per the bank’s Gold Physical Flow index (GPFI), gold physical market is now providing support rather than resistance.

“Overall we believe that [firstly] the physical market should provide support for gold on pull-backs until the end of January. Secondly, however, post-Diwali, this support may be situated at a lower price level – possibly below $1,300 [and thirdly] we believe that resistance in the physical market may grow stronger post-China New Year and run well into 2011.

“Gold support is at $1,344 and $1,330. Resistance is at $1,367 and $1,375,” he explains. However, analysts like Dumortier believe that gold could fall by two-thirds and if we go by his calculations – the price of gold would need to fall by almost two-thirds to get back to its long-term average of $456/oz, not to mention that markets typically overshoot. Dumortier says that if economic recovery stabilises and high inflation doesn't materialise, gold could decline significantly from its current level. But again the question surfaces – how long is the road to recovery and will the clouds hanging over the US economy clear? “As we step into 2011, the macro picture is still not clear if US will experience subpar growth or will slip into a double-dip recession,” says Raghu. As economic uncertainty continues, gold will continue to appreciate for the hedge and the safe haven it is.

But Dumortier argues that at current price levels gold is no safe haven. “Super-investor John Paulson owns gold because he believes the US will experience double-digit inflation, but if that doesn’t pan out, the bet could prove costly,” he writes in his opinion piece. While typically used as a safe haven to store wealth, gold is not the current choice of the Chinese, who are hoarding oil instead, Soros says. He sums up his overall assessment of the US economy in one word: “blah” and says he’s concerned about the misguided “fiscal rectitude” emerging in the US and Europe.

Should we be listening to him more closely?

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