Popping the Soros Gold Bubble

I have a bone to pick, and a conceptual bubble to pop.

George Soros is at it once again, sparking fear and uncertainty among the less committed holders of gold. Following up on his January declaration that gold is "the ultimate asset bubble," the billionaire investor and philanthropist Soros elaborated with the caveat that "it may go higher." With the sort of verbiage that can turn hesitant buyers into hapless sellers, he added: "But it's certainly not safe and it's not going to last forever."

The ultimate conceptual bubble
If there's one notion relating to gold that I observe most unnecessarily confounding the prospective precious metal investor, it's this useless application of the word bubble in reference to gold. By my reckoning, the only time that word becomes helpful is when an asset class soars over time in the absence of a discernable fundamental basis for the move.

For example, the primary basis for soaring U.S. home prices before 2007 was a derivative-based scheme for unchecked leverage and fictional risk assessment that effectively removed that market from its underlying fundamental drivers. Housing, then, provides a textbook example of an asset bubble that that represented true peril ... and one that I have argued will continue popping for some time yet.

There may come a time when I will become comfortable applying the term to gold, but not before the identifiable fundamental drivers for higher gold prices fail to continue accumulating. Somewhere north of my $2,000 price target for gold -- which incidentally is shared by Soros' former business partner Jim Rogers -- we may eventually witness a dramatic spike that could render new investment in gold an exercise in dangerous and untimely speculation. But until those cows come home, I will reassure gold investors that we are a very long way removed from the inception of a final blow-off phase for gold's multi-year bull market run.

Why Soros has more gold than you do
Small-fry investors like you and me are at a big-enough disadvantage to the big-money crowd as it is, so Soros Fund Management's massive increase in gold exposure (revealed shortly after the legend's initial bubble declaration earlier this year) caused understandable consternation among those whose confidence in gold had been rattled by his comments.

The fund still holds 5.24 million shares of the SPDR Gold Trust (NYSE: GLD  ) , with a present market value of $660 million. The fund also retains bullish positions in Kinross Gold (NYSE: KGC  ) and NovaGold Resources (AMEX: NG  ) of scale that seemingly goes against Soros' stated notion that gold is "certainly not safe." Uncertain investors contemplating a flight from gold on the basis of Soros' warnings may wish to ponder a pair of telling tidbits from the man who once broke the Bank of England:

  • "Gold is the only actual bull market currently. It just made a new high yesterday. In the present circumstances that may continue."
  • "When I see a bubble, I buy that bubble, because that's how I make money."

With that first statement, uttered earlier this month, I can offer only my heartfelt agreement. Bravo! As for the second, we are thrust into the conclusion that Mr. Soros views bull markets and bubbles as virtually synonymous. This is where he and I run into a brick wall of disparate definitions. When I see a bubble, I want no part of it -- because that's how I protect my money. I perceived the mother of all credit-driven bubbles developing throughout the financial system years before the collapse unfolded, and that is what led me to gold nearly six years ago.

The safest places for new money
Whether they're locking in profits from recent gains in broader equities, or fleeing wisely from the true bubble that is the market for U.S. Treasury bonds, I sense that many of my fellow Fools are at a loss to identify asset classes in which they feel confident allocating fresh capital. Aside from reminding investors that cash can be an important tool in a high-volatility environment, and with the caveat that allocation strategies must be carefully tailored to suit each individual's unique circumstances, I wish to dispel the notion proposed by Soros that gold does not represent a safe investment at this point in time.

Gold is highly unpredictable in the short-term. It is prone to sudden, gut-wrenching corrections that have burned their fair share of uncertain retail investors over recent years. In order to avoid selling into weakness in a fit of panic, successful gold investors must possess a strong and disciplined long-term outlook on the multi-year trend under way.

With the $1,000 price level offering what Marc Faber and I both consider a cement floor beneath gold prices to last for the remainder of this secular trend, I would argue downside risk in gold under the prevailing macroeconomic climate is limited. The upside potential, meanwhile, remains subject to the likely exacerbation of impairment to the world's two major reserve currencies over the years to come.

Fortunately for newcomers, the Motley Fool community is packed with investors who have accrued valuable experience assessing the pros and cons of individual gold stocks. Major producer Goldcorp (NYSE: GG  ) is conducting a high-profile raid for future production growth, but a smaller producer that facilitated a recent Goldcorp victory -- New Gold (AMEX: NGD  ) -- has yielded superior share-price appreciation over the past year. I continue to see the greatest investment potential of all in carefully vetted junior producers including Aurizon Mines (AMEX: AZK  ) and Northgate Minerals (AMEX: NXG  ) .

So don't avoid gold just because George Soros' bubble-talk leaves you feeling uncertain; simply shape your allocation accordingly. You can skip the "only actual bull market" if you wish, but I don't recommend it.

Gold is a hot topic on the blogs at Motley Fool CAPS. Join the free service today and see just how many Fools are taking the long view when it comes to investing in gold. The "Gold" tag at CAPS lists 57 potential investments, and you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns no shares in the companies mentioned. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 22, 2010, at 9:46 PM, Matt1344 wrote:

    Hi Christopher,

    I agree with you assessment of Soros. He'll shake out as many weak hands as possible. The rise in the gold price has been steady the past decade, nowhere near the parabolic move we expect to see at the end of a bubble. Its corrected along the way, building a new base before moving on.

    I believe we are headed for very difficult times thanks to many years of reckless Washington spending. Of course I may be wrong but have to act on my convictions.

    My Gold and silver holdings occupy 92% of my portfolio:

    29 positions up 101% to 950%

    21 positions up 13.8% to 92%

    4 positions 3.25% to 6.96%

    6 positions down -0.3% to -71%

    I've owned over 75 different companies, only one, Sterling Mining Co., managed to go bankrupt on me ;-) ...so far...

    Of the companies you mentioned I will soon have a position in Kinross due to their purchase of Red Back. I sold my Northgate position, my first gold miner and found thanks to Hidden Gems(not an official recommendation), for gains of 2+x, 3+x and 4+x.

    One has to be prepared for gut wrenching days to play in this field :-)

    Take care, Ken

  • Report this Comment On September 23, 2010, at 2:14 AM, slowwhizz wrote:

    Soros is a strong Obama supporter. His positions in gold are inconsistent with that support (gold and gold stock holdings are obviously anti dollar, anti government) so he uses the "bubble" talk to offset his positions of inconsistency.

    slowwhizz

  • Report this Comment On September 23, 2010, at 2:12 PM, BillyTG wrote:

    Don't trust anything out of Soros' mouth. He's a snake.

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