GEORGE Soros, often known as the man who broke the Bank of England, could find his title is about to change to the man who tried to break the gold vault. The billionaire investor spent last week at the World Economic Forum in Davos, Switzerland, where he said that gold was the “ultimate asset bubble”.
It might seem counter-intuitive to ignore Soros’s advice. He is one of the world’s most successful fund managers and the first rule of investing is to sell high and buy low. This logic would suggest that after gold’s stellar run in the last 10 years – rising from $300 per ounce in 2000 to a high of $1,200 last year – investors should be looking to sell at these levels.
But he could be wrong this time. Soros appeared to contradict himself at the Alpine resort when, in the same breath as saying that the gold price is a bubble, he also said that if governments impose an “imminent” end to stimulus measures that have propped up the financial markets (and the gold price) for the last 18 months, then we are at risk of a double dip recession. If governments continue to flood the system with money, surely this will fuel the gold price’s rise even further.
Adrian Ash head of research for BullionVault.com, says that people wrongly think of gold as an inflation hedge: “The gold price actually rises when interest rates don’t rise in line with inflation,” he says. This means that when interest rates are low but are still unable to stem inflationary pressures, then the price of gold is likely to rise. When this happens, the inherent value of cash declines – rising prices mean that you can buy less with the money you have. This leaves gold to fill the gap as a more reliable store of value .
Ash also thinks that low interest rates will stay with us for the foreseeable future. “Whenever there are signs of a problem, flooding the financial system with cash is always the knee jerk reaction of central bankers.”
The fundamentals propping up the gold price remain strong, according to Rozanna Wozniak, investment research manager at the World Gold Council. She says that demand for gold is unlikely to abate this year: “Central banks continue to buy gold and industrial demand remains strong. People are not willing to recycle gold because their perception has changed – they no longer think that if they sell it now they can buy it back at a cheaper price in the future.” Consequently this means there is less physical gold available on the market.
On top of that, the gold price, on an inflation adjusted basis, still has not reached the highs of 1981 (see chart, right). Bullion Vault’s Ash says that the current bull market is exceptionally strong. “December and January [09/10] are only the second time since 2001 that we have had two consecutive monthly declines in the gold price.”
For those worrying that Soros might be right, Ash says that when a bubble does exist in gold then you’ll know about it because the market will be choppier than its has been. His advice is to buy gold on the dips. The price has fallen 11 per cent since the start of this year, and this is a good opportunity for a spread better.