Is selling gold Soros’ biggest mistake since the 87 crash?
Posted on 18 June 2011 with 7 comments from readers
The retreat from the gold market by George Soros this spring is a highly talked about event in the precious metals market. But reading a recently published history of hedge funds it was interesting to be reminded how Soros got the crash of 1987 badly wrong.
Soros was extremely confident about the stock market outlook in the fall of 1987 and was so long when the market crashed in October he could not get out quickly on the worst day for stocks in history. He was absolutely sure a crash would come in Tokyo first and not New York, while in fact Tokyo took another three years.
Misreading the crash
Even his hedging went wrong in the October 87 crash and he was forced to dump all his US stocks a few days later because he could not afford to risk another fall. Only some brilliant currency trading stemmed big losses for that year.
However, Soros remains arguably the greatest hedge fund manager of all time, and still at 80 years old the master of this universe. So when he largely pulled out of gold earlier this year heads turned as Soros has become a multi-billionaire out of his ability to correctly judge the macro picture.
It would seem he reckons the beast of inflation will soon be tamed by a double dip recession, perhaps with a crisis in China as a big depressant for commodity price inflation. The logic would be that with inflation worries falling so will the gold price, a reverse loup of Soros’ reflexivity theory.
The US dollar and bonds would then be the normal safe haven. But would inflation really be crushed out of the system? Stagflation, or high inflation with low or zero growth, is just as possible given the huge expansion of the money supply since the global financial crisis, and the propensity of central banks to issue money at the slightest whiff of trouble.
Money printing
You can for example match the money printing of QE2 since last August to the recent surge in the price of gold and silver. Soros might argue that OK and this is almost over. But there is still an awful lot of new money sat on bank balance sheets that has yet to find its way into the global economy.
And we hardly seem to be near to a Volcker moment when high interest rates are used to purge the system of high inflation. We appear to be at the start of a run-up in global inflation levels, not the final act of disinflation when gold and silver prices plunge.
Perhaps Geroge Soros has got gold right – and he certainly turned a profit on gold and silver – and on his reflexivity principle it could be that inflationary expectations have become exaggerated and are self-fuelling. But if there is just simply too much money pursuing too few resources then precious metals still look one of the few good investments in very uncertain financial markets.
The next issue of the ArabianMoney newsletter will examine how best to lever up in precious metals on the assumption that Soros is wrong, or will be forced to reverse his position very soon (click here). He is also well know for changing his mind if circumstances change or if he is proven wrong. Humility before markets is also a mark of a great investor.
7 Comments posted by readers:
Moody just put Italy’s AA2 rating on review for downgrade, saying that a possible rise in euro zone interest rates may derail Italy’s very fragile economic recovery.
Goldman just revised its’ estimate for quarter 2, US GDP downward to 2%. Q1 came in at 1.8%, if I recall correctly. That won’t be good for the Federal deficit.
The National Labor Relations Board is trying to tell Boeing where to build their plants inside the USA! Someone should show them a map of the fault off Washington and Oregon that will one day generate a magnitude 9 earthquake and tsunami, like the one that just hit Japan. The geology is virtually identical, with one plate being forced under the other. It is a known FACT, that is well documented in the geologic record of the area. If the government can start telling private companies where to build their plants, the future of the USA, is indeed bleak.
I don’t expect gold to go up a LOT unless QE 3 starts, probably around the end of this year, or early next. Ben won’t crank up the printing press unless he sees the US economy threatening to go into another recession. I can’t see him knowing that until we get into the fourth quarter. He will not allow deflation to take hold. He said that in a speech that he gave back in 2004.
Our little Louisiana Governor, Bobby Jindal, a Republican with dreams of the Vice Presidency, just vetoed a bill extending an EXISTING cigarette tax, thus costing the taxpayers of Louisiana about $50,000,000. (Federal money will be lost, in addition to the direct tax revenue). The State legislature failed to override his veto because not enough Republicans voted to override. It is good to know that our Governor is looking out for the public health by making smoking cheaper, especially for young people just starting out on their nicotine addiction.
I wonder if he got any campaign contributions from their lobbyists, for when he runs for reelection next year? Kind of like blood money when you think about it because some people will die sooner from cheaper smoking, than would otherwise be the case. Who says politicians don’t look out for our welfare. Well, after their own, that is.
well, he did buy the miners when he sold n they are pretty beat-up(but more to come)
not that i’m sticking up for the creepiest man in the world.
miners be best day before QE3 hint.
@ boatman:
Gotta agree with you on all points!
The creepiest man in the world? Well, I’ve never heard that phrase, but for a billionaire low-life, I’d have to agree.
Also, while the mining firms are a good buy before the QE3 event, it’s hard to know when that day will be. But we know for sure that QE3 (and QE4, and QE5, etc.) are coming, and we also know that QE3 will be coming soon. Perhaps by October 2011
@obewon:
while i’m not jewish, soro’s creepy was him a jew helping the nazi’s liquidate jewish posessions….at 13 he was evil.
first hint of qe3-> miners….they won’t go all the way up in 1 day….it’ll just be the start.
i like your october, always THE pivotal month in investing.
that first real cold wind blows down wall st., everyone’s outlook changes.
@ boatman:
Soros Evil Past:
I was totally unaware of Soros’ evil past; I’ve never read about his prior history, perhaps because over the last 30 years his actions have been “proof enough” for me that the man was and is despicable. For a jewish man to do something so reprehensible, that’s unbelievable.
Yeah, beware the ides of October! Even though Ben’s QE3 in all likelihood won’t get cranked up ’til then, certainly from June through September, there will still be “stealthy QE” as I’ve often commented on this blog. The FED’s balance sheet is so gigantic that they’ve got a “spare” $600 billion in roll-overs this year . . . fiat money that they can use for their stealth moves until the fall.
P.S. I enjoy your remarks posted in many of the Ed.’s commentaries!
Ed Note: The envy of success tends to create evil pasts.
boatman,
” But we know for sure that QE3 (and QE4, and QE5, etc.) are coming, ”
Can you tell me how you know for sure about the aove ? What does mean for gold and silver?
The People’s Bank of China (PBOC), the central bank, announced today that it will issue more gold and silver commemorative coins featuring the giant pandas to meet soaring demands for precious metals!