Gold is the ultimate bubble, says Soros

Billionaire financier this month repeated his warning is locked in the “ultimate bubble”, and told investors bluntly it was “certainly not safe” in troubled times. Mr Soros was simply repeating a warning he issued at the World Economic Forum (WEF) back in February. At the time gold was trading at less than $1,150 per ounce. It has since risen to touch $1,300 this week, and is up more than 400% from its low of $252 in 1999. There is no end in sight for the bull run. Anyone who shorted gold back in February would be sitting on huge losses.

But while Mr Soros himself warned gold was in a bubble, his hedge fund, Soros Fund Management was one of the biggest gold bulls of the year, doubling its holding of shares in the SPDR Gold Trust at about the same time he was issuing his warning at the WEF in Davos. Mr Soros is no longer involved in the management of the fund. But the apparent disconnect between the warning and the bullishness of his fund will strike many observers as strange. In reality, it illustrates the fascinating investment philosophy of one of the most successful financiers of the last 50 years and is the best way to understand what is really going on in the precious metal market.

In this world, gold is the ultimate bubble because apart from the cost of actually digging it out of the ground it has almost no real fundamentals other than price itself. Investors have been buying it precisely because the price has been going up and is expected to carry on rising. Rising prices have created their own demand. It is the ultimately reflexive investment. Rising gold prices have encouraged investors to add gold to their portfolios and central banks to reverse a long-standing drift towards eliminating the low-yielding asset from their reserves and start adding it instead.

In a research note, Deutsche Bank argues that “the gold market is still some way from displaying the characteristics of a bubble”. But using the Soros idea of a bubble as a process, rather than simply a frothy end-state, gold has been a bubble for some time as an ever larger group of investors has climbed aboard, propelling prices higher. In an implicit acknowledgement of the role self-validating forces have played driving gold prices higher, one gold analyst recently pointed out that gold still has the most compelling “narrative” of any investment. Mr Soros was right to identify it back in February as the ultimate bubble.