Archive for the ‘George Soros’ Category
All eyes will be on the Federal Reserve interest rate statement tonight, and whether or not the rate actually rises there can be no doubt that ultra-low interest rates are not going to last forever, even if financial markets sometime seem to behave as though this was the case.
So what will happen to the gold price as interest rates go up? The most superficial analysis is to say that gold does not pay interest so investors will take their money out of gold and put it into cash.
But this is a complete nonsense. Investors will also look at why interest rates are going up. Is it because money printing by the Fed now threatens a deluge of inflation? Is it because the bond market looks unstable and investors are demanding a higher risk premium?
Indeed, you have to consider the underlying security of cash as an asset in such circumstances. Will the dollar devalue as inflation erodes its buying power? And how do you hedge against that?
George Soros got it right recently when he said that gold was the ‘ultimate bubble’, that is to say the last asset class in the chain to become a bubble before the whole cycle starts again. For in past financial crises the clear pattern has been bank failures then a bond market crash and a rush into precious metals.
Government intervention on a historic scale has mitigated the bank failures but led to an even greater issuance of government paper, and merely delayed the inevitable bond market crash that will come as – wait for it – interest rates go up.
Gold then becomes the final safe haven asset and the limited supply of gold means that its value will surge to unheard of levels. Dr Marc Faber recently suggested that $1,000 gold might be seen as similar to the Dow crossing 1,000 in 1982.
Arabianmoney.net editor and publisher Peter Cooper explains in far more detail how gold price could pass $5,000 and head even higher over the next few years in his latest book published on Amazon.com this week. (click on this link to buy a copy)
The International Monetary Fund announced that it will be selling another 191.3 tons of gold yesterday, a repeat of the action that failed to delay the gold bull market in the 1970s and indeed actually achieved the reverse effect.
‘This is a duplicate of the IMF action in the 1970s,’ commented veteran gold trader Jim Sinclair on his website. ‘It turned out to be the most positive event as each time the IMF held an auction of their gold they facilitated entry for large investors at singular prices.
‘It will be no different this time around. Gold will rise because of IMF selling as it did in the 1970s. I assure you that history will repeat itself on the same circumstances.’
Bigger gold deals
Indeed, the IMF sale may be just an opportunity for India or China to snap another large amount of gold for their central bank reserves. ArabianMoney hears talk all the time of very much bigger bilateral gold deals being put together in the Middle East.
Mr. Sinclair’s comments therefore ring particularly true. The IMF sale will be a headline deal but then these deal announcements are growing in size by the day.
George Soros managed to buy his $663 million stash behind closed doors before the end of the year but this market is going to get increasingly transparent. And as investors see the best and brightest going for gold then it would be surprising if this did not catch on.
The IMF announcement should just facilitate a lowering of prices so that whoever buys its gold gets a good deal, a strange way to behave with public funds but then dampening the gold price for a short while is a policy objective in itself.
The time is surely coming for gold to become the ‘ultimate bubble’ as George Soros said at the World Economic Forum in Davos. For investments in equities, bonds, real estate and even commodities will surely suffer further declines as the recession turns into a double-dipper and currency systems come under strain.
The man who broke the Bank of England in 1992 is playing for bigger stakes this time with gold as a hedge against the US dollar. IMF gold sales will help and not hinder this market position.
Far from selling gold as some misunderstood from his comments at the World Economic Forum, George Soros has been buying gold as ArabianMoney suspected. In a filing with the US Securities and Exchange Commission, Soros Fund Management owned 6.2 million shares of SPDR Gold Trust, the popular GLD exchange traded fund.
At the Davos World Economic Forum the famous hedge fund manager reckoned to have made a billion from the devaluation of sterling in late 1992 refused to say whether he was buying gold. But he did describe gold as the ‘ultimate asset bubble’ leaving some headlines concluding Mr. Soros a seller of the yellow metal.
Instead he emerges as a born-again gold bug with a hoard valued at $663 million at the end of 2009. Mr. Soros therefore joins John Paulson among the hedge fund managers to undergo a conversion to gold.
As ArabianMoney thought at the time Mr. Soros might well hold that gold was the ‘ultimate bubble’ but not necessarily consider it to be one just yet. He is therefore buying in advance of this bubble and putting his money where his logic takes him.
Under the principle of reflexivity that Mr. Soros has long propounded the actions of players in a market place are self-fulfilling to some extent and compound. That will certainly need to happen if gold is to truly become a bubble asset class.
At present the gold trend line is a neat upward slope and shows none of the parabolic behaviour that would normally indicate a price spike. The one gorilla in the front room right now is an overdue stock market correction that would surely also take gold prices down as it did in late 2008 by 30 per cent.
To second-guess Mr. Soros again, and with a little more confidence having gotten his Davos statement right, then he ought to be a buyer on weakness. Building up a sizeable position in any commodity at reasonable prices is never easy, and two-thirds of a billion dollars is already no small holding.
Mr. Soros remains among the biggest market speculators in the world and where he goes others will surely follow.
The $300 billion Greek debt crisis has thrown the spotlight on government debt as an investment class. Greece cheated Brussels into thinking its debt was lower than now proves to be the case, hence the nasty surprise.
But actually a huge question mark hangs over the viability of long-term investment in almost any government bond at the moment. Put simply it is a matter of pricing: are bonds priced too low for the inflation outlook?
Inflation as we normally understand it means upward price revisions for goods and services. But inflation is always a matter of the money supply. Too much money chasing too few goods equals inflation.
And where does the money supply come from? Well, actually the bond markets that allow commercial banks to create credit.
And what do we know that governments all over the world have been doing to counter the global financial crisis? They have been issuing more and more bonds, and even buying their own debt in a bizarre process called quantitative easing. So the money supply is rising, even if commercial credit is still actually shrinking.
Eventually that new money will find its way into global financial markets and cause inflation. How long will that take?
There is presently no immediate fear. Indeed, the most immediate prospect is a downturn in global equity markets that will rally the dollar and boost bond purchases, at least for a short time. Some think central banks are about to cause a stock market crash for that very reason.
But look at a 10-year British Gilt paying four per cent interest, or for that matter Greek bonds paying not much more. You have to be a bit of a loony to think that will represent a good buy over a decade.
In the 1970s bonds were dubbed ‘certificates of confiscation’ because inflation eroded their real value and gave them a negative yield after inflation. This time will not be different.
Bond yields are presently very low and bond prices therefore exceptionally high. What has gone up in price will go back down, not up further, or not for very long.
Deflation versus inflation
The confusing mixture is first deflation as house prices and equities fall, then inflation as governments overdo their rescues and finally something bordering on hyperinflation to eliminate debts. Timing this is very difficult.
If you are a bond holder then you hold debt, and that is not a position you want to have when inflation really roars and destroys debt.
In previous major financial crises this has always been the penultimate phase, and when the bond market implodes then comes the final, or ‘ultimate’ bubble as George Soros calls it, in gold and silver.
Thus while owning short-term bonds and cash makes sense in a stock market crash, a swift move into precious metals thereafter should be contemplated.
You do not have to go back far in history to find government bond defaults. Think Russia 1998, Argentina 2001. The wonder is surely that investors continue to believe governments have some kind of magic as creditors.
Federal Reserve chairman Ben Bernanke yesterday made the statement that financial markets have long been dreading and said the US central bank will soon have to raise interest rates and remove cash from the system as a start to unwinding the unprecedented stimulus given to the US economy to stem the recent global financial crisis. Stocks immediately fell.
Indeed, the implications for all asset classes are enormous. Current valuations mirror the very low or zero returns on bank deposits. As interest rates rise then the yields on other asset classes also have to rise to stay competitive, and that is achieved by lower valuations.
For example, if the rent on a house produces a three per cent return and a bank deposit pays five per cent then in order for the rental yield to match the return from a passive bank deposit the value of the house has to fall 40 per cent.
The same crude calculation can be applied to equities and their yields, currently at a very dangerous historic low. But this is an inevitable and necessary process.
To keep interest rates artificially low indefinitely would eventually result in runaway inflation of asset prices and with them general price levels. For with money costing nothing the urge to speculate on rising asset prices would be irresistible.
It is always then going to be a question of when and not if interest rates go back up. Bernanke’s statement ought to be a warning to investors in many asset classes that the writing is on the wall: interest rates are too low to fall any further, and the only way is up. And when interest rates go up asset prices fall.
‘Although at present the US economy continues to require the support of highly accommodative monetary policies, at some point the Federal Reserve will need to tighten financial conditions,’ said the Fed chairman, not wanting to scare the socks of investors.
Rising rates, falling assets
But every reader of ArabianMoney needs to think what rising interest rates will mean for their investments. It will be very bad news for stocks, property and bonds.
That will only leave cash, particularly the US dollar as the global reserve currency, short-dated treasury bonds and precious metals. The performance of gold and silver will be especially interesting if a bond market crash sends trillions of dollars into precious metals.
This is certainly going to be a nasty wake-up call for readers whose faith in Mr. Bernanke’s ability to solve all their problems is frankly ridiculous. His Fed is the same institution that caused the credit explosion that caused the global financial crisis in the first place. These are not good credentials to tackle the problems that lie ahead.
Indeed, you should always buy when this man hints he might be selling. His comments at the World Economic Forum in Davos this week seem classic trader double-speak. What does Soros mean when he says gold is the ‘ultimate bubble’ asset class?
Newspapers like the normally sensible Daily Telegraph fell for his ruse, immediately jumping the gun to a prediction about a massive tumble for the yellow metal. Yet Soros said no such thing.
He merely pointed out what even the most ardent gold bug would concede. Namely that if you study the history of financial crises then the credit-induced asset price inflation that causes them moves from one asset class to another until it reaches gold as the ‘ultimate bubble’ or the last of the bubbles.
Soros did not say that we are nearing that position with gold around $1,080, having last month touched $1,226 an ounce. What he did create was a buying opportunity, presumably for funds controlled by himself.
For why should gold be running out of steam at this point? Even if credit growth slows the gold market is still so small that only the tiniest fraction of this money is required to send the price much higher.
Soros knows that. He also knows that gold prices show no sign of the parabolic spike that we saw in oil prices in July 2008. Surely the next most obvious spike will be in bond prices – when the current stock market sell off really gets moving.
Only after the bond bubble has blown up will gold become a candidate for the next bubble, and given the relative sizes of the bond market and the gold market that could be one humdinger of an ‘ultimate bubble’.
Soros is playing his own book in Davos. Gold investors should not be alarmed but take some delight in what he is saying.