Gold, the Ultimate Bubble Says George Soros

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It seems all you have to do is make a couple of billion and the world hangs on your every word. Well maybe more than a couple and it helps if you have been proved right over many years. But the adage certainly holds true for George Soros, said by the Telegraph to be arguably the most successful hedge fund manager in history. Mr. Soros is one of the great and good at Davos this week, and as usual he makes a lunch time speech to his guests that is fervently followed by most of the financial community.

His topic of conversation this year was appropriately bubbles and how, rather than avoid them, he actively seeks out bubbles to jump on board. Of course he dressed it up more prosaically, suggesting that although the world knows him as a hedge fund manager and philanthropist his real profession is philosopher according to Jacob Weisberg writing in slate.com. The trick of piling into a bubble is when to get out and that rather than steer clear of them the investor should strive to understand them and use them as a money making opportunity.

Apparently, Mr. Soros was suitably reticent as to what new bubbles he was looking at but his observation that gold is the ultimate bubble has been widely reported. Huge amounts of money have flowed into gold over the last 18 months originally as a safe haven when the world was falling apart and more recently as a perceived hedge against dollar weakness and the potential for inflation. Soros is clearly of the opinion governments should be more worried about a double dip than inflation. Rather than worry about inflation taking off this year he suggests governments should maintain lax lending rules to allow the economy to recover; a premature tightening of credit and budgets when banks still have massive levels of refinancing and the probability of increased reserve requirements under new Basle rules could set off another round of failures and contraction. Dominique Strauss-Kahn, Managing Director of the IMF said something similar this week when addressing a different group at Davos warning that banks have a massive round of refinancing in 2011-13 and should not be taxed too heavily now but should be given the chance to rebuild their balance sheets in preparation for what could be likened to the other side of the hurricane. So far the Fed is indicating the low interest rates will continue but the fragility of the recovery is clear from the reaction on equity and commodity markets to President Obama’s speech on what he intends for banks and the Chinese tightening of reserve requirements, all the markets have come off and in most cases quiet significantly.

No doubt Mr. Soros is as actively watched as Alan Greenspan once was by those trying to second guess his next move; they were nearly always unsuccessful with Mr. Greenspan and will likely be equally behind the curve with Mr. Soros. If the wily investor has shown one thing over the years it is that he is not going to share his gift for investment decisions with the world until after the event.

–Stuart Burns

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