Why is George Soros buying gold if it’s in a bubble?

A lot of media outlets have noticed that, despite George Soros’ protestations about the rise in gold prices being excessive, Soros Fund Management have invested a lot more money in gold after he made his apparently gold-bearish calls.  What gives? 

Apparently, Soros is a market-timing momentum investor because his comments in the Australian demonstrate that he is investing in gold exactly because he believe it is a bubble.

The Australian says:

The "market fundamentalist" belief prevailing in the US that markets correct their own excesses was wrong, Mr Soros said, criticising former Federal Reserve chairman Alan Greenspan for taking that line.

Mr Soros, who said he manages around $US27 billion ($30bn), gave his own investment decisions as an example.

"When I see a bubble, I buy that bubble, because that’s how I make money," the outspoken investor said.

Mr Soros doubled his bet on gold at the end of 2009 amid rising prices, a filing showed this month, a few weeks after Mr Soros made comments calling gold the new asset bubble.

Source

China better than Barack Obama in handling the global financial crisis, says George Soros – The Australian

For those of you of a bullish mindset, also see Why You Should Dig Newmont Mining in Barron’s. Personally, I see the gold play as less compelling given the run-up we had to over $1200 an ounce late last year. However, longer-term I am a lot more bullish than Mr. Soros seems to be.

17 Comments
  1. gnk says

    I think Soros was misunderstood when he called gold “the ultimate bubble” at Davos. Soros used the word “ultimate” in the true sense – and that is something at the end of a series – i.e. the “final” bubble.

    Thus, if we look at all the bubbles of the past decade, one can conclude that after they are all exhausted, there will be a final bubble – gold.

    I think we are a few years away from that. Once the Sovereign bond market gets worse and nations begin defaulting or rapidly devaluing – then we will see what a gold bubble looks like.

    -gnk

    1. Edward Harrison says

      gnk, you’re probably right about Soros. Here is an interesting take on this:

      “If you actually hear what George Soros said – rather than taking headline writers for gospel – gold’s Hungarian friend is less of an enemy than he appears,” writes Adrian Ash in a BullionVault.com article.

      “But it’s just possible he was making rather more accurate use of the English language than [British journalists]…”

      http://www.bi-me.com/main.php?id=44770&t=1&c=62&cg=4&mset=

  2. Vangel says

    It looks to me as if gold still has a long way to go. Your argument about the big run-up could have been (and was) made many times since 2000 but those that kept their eye on the fundamentals and kept adding to positions managed to do quite well by staying with the long side. Given the huge liability issues with most sovereign states and the poor quality of their reserves (mostly USD denominated debt) the argument in favour of gold is far stronger than the argument against it.

    From what I saw, Soros did not really own any real gold but is playing games in the paper gold markets. As such, it makes no difference what he says or does because in the ultimate end game it is the physical that will prevail. I would not begin to worry much about gold until after an ounce or two could buy the Dow and by that time Soros will have wished that he bought the real thing rather than empty paper promises from failed counterparties.

    1. Edward Harrison says

      Vangel, I said I was long-term bullish on gold. It is less compelling now
      for technical reasons, but longer-term, the money supply is supportive of
      gold. Please read the post context next time.

      1. DanLee says

        Ed,

        How do u feel about gold ETFs vs buying the real thing? Can you recommend a good place (way) of buying the physical?

        Thanks

      2. Vangel says

        I did read it in context and pointed out that the same argument was made, usually for technical reasons, many times in the past decade. While it may have been right on occasion, most people who tried timing the gold market wound up doing worse than those who stayed put and rode the bull market up to the current level.

        My point is that people can’t consistently time the market well enough to do better than a ‘buy and hold’ strategy during a bull market or a ‘stay away’ strategy in a bear market. Unless we are about to see the bull market in gold end, which is not what you are claiming, the best thing to do is to be inactive and stay with the positions purchased early in the bull market. After all, one would hate to be too clever and wind up on the outside when the market has its run to the upside. Sadly, too many people take comfort with the momentum strategy and wind up missing the simple way of getting richer.

  3. Bob_in_MA says

    About the only convincing argument for gold I’ve heard is that a lot of smart, successful investors are buying a lot of it.

    But that Barron article points out that the marginal cost of mining an ounce of gold now is around $500/ounce. So a huge amount of money is going into investing in new mines and the cost is already at $500/ounce.

    To be long gold now, you are operating on the assumption you have a good measure of the likely increase in production and can see a much larger increase in demand.

    But the bulls merely offer a circuitous logic.

    It made sense when the price of gold jumped in the 1970s because it had been kept artificially low for decades. But now it has nothing to do with money, etc. If tomorrow I found a mine that would increase global production by 10%, the price would crash. But what does that new mine have to do with fiscal or monetary policy?

    On the other hand, if enough people see the Emperor’s new clothes, it works.

  4. Plan B Economics says

    It’s better to make money than be right.

    March 2009-present: bears were *right*. But the bulls made money.

    It’s a psychological game of anticipation and expectations. Fundamentals matter, but not nearly as much as everyone thinks…at least not during the short-run.

  5. Anonymous says

    I burned his book. I have as much respect for Dennis Kneale or Cramer as I now do for Soros.

    If you can’t talk simply – don’t talk (or write) at all.

  6. CrisisMaven says

    A bubble in, say, shares, stocks or commodities happens when people believe it will “go up and up” (and is, as a rule, as with housing recently and “tech” stocks at the beginning of the millenium, again mainly driven by money inflation). Gold in contrast is a hedge against inflation and against looming sovereign defaults. Inflation by definition is the increase in money supply. There’s no doubt that this has happened several fold in only two years. So there is inflation. Hence there is no gold bubble, as gold has not appreciated by a tenth even of what the monetary base has expanded!

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