Will Gold Be The Next Bubble?

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If you believe the heavy hitters of the investment world, gold could be the next bubble as “Soros Signals Gold Bubble:”

George Soros is helping drive up gold prices by doubling his bet in a market even he considers a “bubble” as Goldman Sachs Group Inc., Barclays Capital and HSBC Holdings Plc predict more gains before it bursts.

Soros Fund Management LLC, which manages about $25 billion, increased its investment in SPDR Gold Trust, the world’s largest exchange-traded fund for the metal, by 152 percent in the fourth quarter, a Feb. 16 Securities and Exchange Commission filing shows. While prices have fallen 9.2 percent since reaching a record on Dec. 3, 15 of 22 analysts in a Bloomberg survey say gold will reach a new high, with the median forecast predicting a 17 percent advance to as much as $1,300 an ounce this year.

“When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment,” Soros said at the World Economic Forum’s annual meeting in Davos, Switzerland, in January. “The ultimate asset bubble is gold,” he said.

In a Jan. 28 Bloomberg Television interview, the 79-year- old billionaire recalled that former Federal Reserve Chairman Alan Greenspan warned of “irrational exuberance” in financial markets three years before the technology bubble burst in 2000. The Standard & Poor’s 500 Index rose 89 percent in the period. Buying at the start of a bubble is “rational,” Soros said.

What is rational to George Soros with his deep pockets may or may not be rational to you. While a bubble may indeed form in the future, the path to bubble level will not be a smooth one and very likely be interrupted by violent price swings in both directions.

So don’t be lured by his assumptions, which may very well come true but could bankrupt you if you plowed a large portion of your assets into gold. Treat gold like any other investment by using a trailing sell stop to limit downside risk.

Getting stopped out does not mean you can’t reenter again, just be aware that gold can be extremely volatile and caution is advised despite its long term potential.

Disclosure: We currently have limited positions in GLD.

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Comments 4

  1. Ulli,

    When everyone wants gold it might be time to be cautious and if one doesn't still own it from a few years ago that it might be too late this time around, just a thought. I see signs everywhere that say "We buy Gold, top price paid etc. and some are even renting hotel rooms for people to come and sell them their gold items. That same thing happened in the early 1980s and people were left holding the bag as the gold price dropped so fast that their heads are still spinning yet today.

  2. Chuck,

    Back in the early 1980s gold crash the buyers were still in full force at the time of the begining of the crash and held on just long enough to lose their butts so to speak, I saw it happen with my own eyes, so in that case the buyers didn't know much of anything and maybe this is the case now. I believe the buyers again right now are just caught up in the mania of the buying frenzy as usual.

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