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The
hubbub started when hedge fund guru George Soros proclaimed gold to be in a
bubble, and it is still roiling nearly six months later. Gold advocates
jumped to its defense, while critics took the offensive. As it turns out
though, Soros was not really issuing a warning so much as he was explaining
why he was making a considerable investment in gold bullion. Only days after
calling gold the “ultimate asset bubble,” the financial press
reported Soros had doubled his holdings of physical metal. Both the advocates
and the critics had misinterpreted what Soros was trying to say.
Over
the years, I have seen gold called among other things the asset of last
resort, the ulimate safe haven, the fiduciary asset par excellence, and the
investment of kings and the king of assets. I have never before heard it
called the “ultimate asset bubble.” Let’s explore what
might be behind Soros’ unusual description and his newly-found interest
in the yellow metal.
In
that same speech (delivered at the January, 2010 Davos conference), Soros
stated that buying at the beginning of a bubble was “rational.”
Considering the fact that mania, i.e. bubbles, are most often defined by
their level of irrationality, Soros’ choice of words seemed a bit out
of kilter -- especially since, as it turns out, he was attempting to apply
some postive spin. The most rational reading of Soros’ comments came
from gold analyst Jeffrey Nichols: “Perhaps Soros thinks gold is going
to bubble, but the bubble is going to last for a while and he wants to profit
from it. we could have a bubble but gold can reach $2,000 or $3,000 before
it’s over.”
Long
term cycles accrue to gold’s benefit
Nick
Laird at sharelynx.com developed a chart for USAGOLD supporting the theory
that if gold is in a “bubble,’ it is, as Soros suggests, in the
beginning stages. As you can see, gold would need to reach nearly $3500 per
ounce -- about 14 times its $260/ounce starting point -- to match the stock
market mania that ended in 2000. For those who understand the longer term
nature of market trends, like Mr. Soros and his colleagues in the hedge fund
business, gold probably looks very attractive as it enters into the second
leg of the current bull market.
Soros
built his reputation and his fortune on making the big bet (his infamous
assault on the British pound in the early 1990s comes to mind). In the case
of gold, his approach to the market reveals another, more conservative aspect
to his thinking. Tellingly, instead of leveraging his investment in gold, he
opted to purchase in physical form through an exchange traded fund. In both
form and substance, Soros’ gold ownership appears more like a classic
hedge than it does the big bet -- an approach that speaks volumes about what
might be on this famous speculator’s mind. His acquisitions, according
to press reports, thus far constitutes about 10% of his overall portfolio --
a position not too different from many first-time investors entering the gold
market for hedging purposes.
Since
the beginning of the fiat money era in 1971, gold and stocks have experienced
bull markets alternately as the pendulum has swung from good times to bad.
- First, gold
experienced a bull market from 1971 to 1980. If you take into account
that gold had been under accumulation from 1965, another six years could
be added to that ten-year bull market. Since the price of gold was fixed
prior to 1965, the increased demand from both private investors and
nation states was not reflected in the price. However, at times,
premiums rose significantly on commonly traded gold coins.
- Stocks then
took a turn in the driver’s seat from 1982 to 2000 (using the
wider S&P index as a measuring stick) -- an eighteen year bull
market.
- Now gold is
taking its second turn under circumstances very similar to the crisis
ridden 1960s-1970s. most analysts peg 2001 as the first year of the
current bull market, making 2010 the tenth year of the uptrend.
Though
short-term thinking seems to plague the markets in any era, the dominant
cycle from bottom to top during the current fiat money era for both gold and
stocks appears to extend over a roughly 15 to 18 year period. If the cyclical
characteristics holds true, gold theoretically would not see a top in this
cycle until sometime in 2019 -- 18 years from the trend’s starting
point. Keep in mind though that markets, if anything, are unpredictable.
Circumstances could come into play which could either shorten or lengthen
this time period. If you read (or watch) the financial press, you already
know that a good many analysts see the current economic environment as
particularly dangerous for investors.
When
you take into account that we are at roughly the midway point in the cycle
with more surprises perhaps waiting in the wings, a 10% diversification into
gold probably makes a lot of sense, and that could be why George Soros has
gone with a physical gold hedge as part of his holdings.
For a
free subscription to our newsletters, please go to the USAGOLD NewsGroup page.
Michael J. Kosares
USAGold
- Centennial Precious Metals, Inc.
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