Who's Right on Gold: Soros or Central Bankers?

At last month's World Economic Forum in Davos, speculator George Soros opined that gold has become the "ultimate bubble." For someone who termed the run-up in credit a "super-bubble," that isn't faint praise. Meanwhile, the latest data suggest that central banks worldwide were net buyers of gold in 2009 for the first time in over 20 years. Should central bankers be listening to the warning from the master speculator?

The speculator who cried "bubble"
The story is a bit more complicated than that. It turns out that Soros' investment fund, Soros Fund Management, was also a heavy buyer of gold in 2009. In the fourth quarter alone, the fund raised its holding of the SPDR Gold Shares ETF (NYSE: GLD  ) from 2.5 million to 6.2 million shares (value at quarter's end: $663 million). The fund also acquired 11,000 call options on the ETF, which gives it the right to buy an additional 1.1 million shares. The SPDR Gold Shares ETF, which is backed by physical bullion, has become very popular with individual and institutional investors alike.

The fund also added to positions in gold miners Kinross Gold (NYSE: KGC  ) , Yamana Gold (NYSE: AUY  ) , Barrick Gold (NYSE: ABX  ) , and Freeport-McMoRan (NYSE: FCX  ) .

What's going on here? Has Soros closed out his gold position since the end of last year after realizing he was buying into a bubble? That's highly improbable, in my opinion. More likely, the canny speculator has spotted what he believes is a bubble and he wants to be part of it.

Are central bankers the "greater fools"?
In fact, perhaps Soros considers that continued buying by central banks (and other investors) will make them just the sort of "greater fool" he will require to realize profits on this speculation. As a Societe Generale strategist quipped in a November 2009 research note on gold, "central banks aren't known for their investing acumen." After all, they were net sellers of gold between 2000 and 2008, during which period the price of gold better than tripled.

In my opinion, gold is not in bubble territory yet or, if so, it is in the very early stages. Perhaps that's what Soros is betting on. For investors who are looking for inflation protection, there are more straightforward options. Soros' list of holdings provides some ideas: Two of his largest holdings are pharmaceuticals giant Pfizer (NYSE: PFE  ) and Brazilian oil major Petrobras (NYSE: PBR  ) .

The Fed is creating a new set of risks for investors, but gold isn't the only way to hedge these risks. Tim Hanson explains why it's time to get out now!

If you're concerned about the threat of inflaton -- and other risks facing the economy -- focus on companies with sustainable dividend growth. The team at Motley Fool Income Investor can show you how to build -- and manage -- a portfolio of high-quality company stocks with robust dividend yield. To find out their six Buy First stocks, take advantage of a 30-day free trial today.

Fool contributor Alex Dumortier loves macro-themed investing; you can follow him on Twitter. He has no beneficial interest in any of the stocks mentioned in this article. Pfizer is a Motley Fool Inside Value pick. Petroleo Brasileiro is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletters today, free for 30 days. Motley Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (6)

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 March 08, 2010, at 4:46 PM, alandefeld wrote:

    Interestingly, Soros is calling an AU bubble, just as he tells everyone about his big spending in the metal [http://www.businessweek.com/news/2010-03-01/soros-signals-go.... I'd call this a clear signal to get into opportunities like DZZ, the PowerShares DB Gold Double Short ETN (the first ETF/ETN I've ever purchased) -- when a big name is bugling about his/her buying spree, you know (a) he/she is well hedged the other direction, and (b) that the prudent investor runs (or at least diversifies in) the opposite direction from the crowd (a la Rothschild).

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1116803, ~/Articles/ArticleHandler.aspx, 10/1/2014 8:32:56 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 11 hours ago Sponsored by:
DOW 17,042.90 -28.32 -0.17%
S&P 500 1,972.29 -5.51 -0.28%
NASD 4,493.39 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2014 4:00 PM
ABX $14.66 Down -0.34 -2.27%
Barrick Gold Corp. CAPS Rating: ***
AUY $6.00 Down -0.09 -1.48%
Yamana Gold, Inc.… CAPS Rating: ***
FCX $32.65 Up +0.25 +0.77%
Freeport-McMoRan C… CAPS Rating: ****
GLD $116.21 Down -0.82 -0.70%
SPDR Gold Trust (E… CAPS Rating: **
KGC $3.30 Down -0.07 -2.08%
Kinross Gold Corp… CAPS Rating: ***
PBR $14.19 Down -0.51 -3.47%
Petroleo Brasileir… CAPS Rating: ***
PFE $29.57 Down -0.20 -0.67%
Pfizer CAPS Rating: ****

Advertisement