Apparently investment guru George Soros has been on a spending spree recently expanding his positions in various gold investments including mining companies and gold shares. Announcing his opinion at the World Economic Forum in Davos that gold has become the “ultimate bubble” however, what this is supposed to mean to the average man on the street is really open to interpretation.
Gold is a fickle thing. You can’t make it, and there is only a limited amount of it. The Central Bank of England had a car boot sale with about 125 tonnes of it a few years ago at its lowest ever relative price, and everyone and their mother is now looking to buy your broken and unwanted jewellery by sending you a prepaid envelope. With this very much Steptoe and Son type attitude one has to ask what this all has to do with the price of eggs or anything else for that matter?
There are a few simple facts one has to bear in mind with the gold market to see how panic driven it can be, and how speculative also.
There is only enough physical gold in existence to make a cube the size of a football pitch. Admittedly that’s pretty big, but when you consider the number of people in the world, and the size of the world itself, its not all that much after you have removed all the trinkets, gold teeth and electronics.
Gold also has a handy little “brake” attached to it. Because the physical volume in circulation is so low, the mining companies have the upper hand. In 1999 the Bank of England announced that it would “auction” about 125 tonnes of gold, this instantly wiped off an estimated $150 million from the Sub Saharan Exporters earnings, forcing the market price close to $250 an ounce. As a result, the reaction from the Saharan mining companies was simply to shut the mines and halt production, forcing demand. At the time they had no choice, and being the primary suppliers they were not going to continue digging out the commodity and selling it for less than it actually costs to get it out of the ground.
With gold now at $1100 - $1200 an ounce though, one has got to question what is going to happen next? Can this golden frenzy continue? Well for the short term quite possibly, but if you look at the charts, it all looks remarkably like a house price chart pre-crash from almost any developed nation, granted not quite the multipliers in some cases, but nevertheless, a significant similarity.
George Soros, whilst yes he is a ridiculously wealthy man, is not daft. His opinions have the power to move markets, whether that opinion is valid or not. As a result he is able to take advantage of this fact. Very simply if he says “Gold is Great” there is a very large number of people who will take it as read that buying gold is the way forward. Unfortunately, what many of these people (including Central Bank Staff) fail to realise is that he has more leverage and power than them, (and in many cases money too). He makes a statement after loading up on stock, the market spikes, and he then yanks away the table cloth by selling everything he has and shorting on top as well. Nice work if you can get it, and it is a similar ploy that got him to where he is today with currency trading.
The moral of all of this is pretty simple. There has always been a negative correlation between gold and the stock market. Stocks go up, gold comes down and vice versa. Noisy people with huge wallets move markets. The average or even above average investor can’t really do a lot about it, apart from join the ride for a short period of time, and hope to get out early enough before the market is driven at high speed into a brick wall. For any real chance of a sustained recovery from the recession wherever it may be, the price of gold really does need to come down. Only then can we begin to see property values begin to rise, this will of course bring a little inflation to the table but if controlled there is a possibility of at least a return to some stability.
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- Thursday 04 March 2010