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Source link: http://archive.mises.org/11556/the-ultimate-asset-bubble-is-gold/

“The ultimate asset bubble is gold.”

January 28, 2010 by

This according to George Soros speaking with CNBC’s Maria Bartiromo from Davos where talking heads and the muckety-mucks of the economics world are meeting at the World Economic Forum.

{ 24 comments }

iawai January 28, 2010 at 11:16 am

When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment.

Has Soros been studying the ABCT? Certainly he draws some dubious conclusions, but this foundational statement is correct. If only he’d come to the realization that it’s not a Central Planner’s job to fix a single interest rate, we’d not have to worry about whether gold or the Commercial Real Estate market will be the next bust.

BrentR January 28, 2010 at 11:26 am

So about what percentage of the world’s gold supply is currently owned via credit (or margin)?

How does it compare that to the number of empty condominiums in any given urban area that are owned on credit?

Slim934 January 28, 2010 at 11:45 am

HAHAHA! Look at the price of gold nosedive on the precious metals chart on the right after he made this idiotic assessment.

I can’t believe people are listening to him.

Time to wait for it to bottom out until people realize: “oh wait a minute, Soros didn’t predict the housing bubble either, how the hell does he have any idea what is or is not inflated?” then buy up a little more.

Jon. O January 28, 2010 at 1:46 pm

Generally, when everyone is calling something a bubble it isn’t. During the late stages of a bubble there is also frenzied buying leading to a parabolic blow-off and capitulation of the bears; every time gold starts to get extended to the upside it puts in a nice pullback and consolidates. It’s after these pullbacks that everyone claims the run is over, creating the conditions for another leg in a healthy bull market.

When you start getting calls from distant relatives about your gold investments, and it starts to rally $50-$100 and/or locks limit-up day after day then its time to start worrying. Or if the regime lets USD appreciate – like it should – to correct the imbalances out there… but what are the odds of that?

Jonathan Finegold Catalán January 28, 2010 at 1:55 pm

iawai,

I think more and more economists are conceding that there is an inverse relationship between the rate of interest and the volume of borrowing. The next step is for them to realize the relationship between money supply growth, interest rates, relative price inflation and malinvestment.

(8?» January 28, 2010 at 2:25 pm

I’m going to assume that by using the word ‘ultimate’ in reference to gold, he is recognizing the ability of this ‘bubble’ to actually reach infinity as measured in dollars.

Ultimate, indeed!

Joe O. January 28, 2010 at 3:38 pm

You know I always wonder why people like Soros use the term “bubble” to describe the rising price of a particular good. Its as if they think people simply buy a particular good just so they can sell it for a assumed higher dollar amount later.

The term “bubble” fit the dot.com boom due to the rampant buying and selling of company stock which shot P/E ratios well beyond what a stock was actually worth. The term “bubble” also described perfectly the rampant buying and selling of homes during the real estate boom. That buying and selling shot home prices up well beyond their actual values eventhough most people had no real intention of living in those houses in the first place.

The problem with using the term “bubble” to descibe the current gold market is that many gold buyers, and I am one, simply do not sell their gold back once they buy it. True, central banks and large hedge funds will constantly trade it but many individuals never do. In fact, they buy even more gold when the prices drop to add to their supply. Gold buyers are not looking for a profit in in dollar terms. They are watching the Federal Reserve’s monetary policies and their effects on the dollar and are scared of what they see. These are not the actions of the shoot from the hip speculator like we saw during the dot.com and real estate booms. These are the actions of people who want to preserve their wealth from an ever depreciating fiat currency.

Radek January 28, 2010 at 3:51 pm

Joe,

I fully agree. I also think there are many investors who are just buying gold because they do not trust fiat money and the central bankers policy. It is just to preserve wealth and not to make quick money on speculation. If gold fells even 30% I will be happy because I can buy more next time for my monthly savings.

best,
Radek

newson January 28, 2010 at 5:19 pm

precious metal etf’s certainly have a bubble-feel. when the first failure of the paper-gold vehicles becomes apparent or comex goes to cash settlement only, the physical will become even more sought after.

i’m surprised soros didn’t identify “green” investments when talking about bubbles.

ABR January 28, 2010 at 5:36 pm

Joe O. and Radek: d’accord.

I can see myself exchanging gold for an automobile or something tangible, but not for fiat paper — unless at the point of a gun.

punter January 28, 2010 at 8:53 pm

I tend to agree that gold is not in a bubble in the Austrian sense – which stipulates that bubbles are formed in long dated capital goods. Gold’s worth is determined by the subjective valuation of the likelihood that gold will become the de facto or official currency (and hence massive increase in purchasing power (PP)) of the marginal buyer and seller. For example, if the PP of an oz of gold when gold is used as money is one twentieth of the median house price and the likelihood of gold becoming currency (according to the marginal buyer/seller) is one in ten then gold should equal one 200th the price of a house (the time factor slots in as part of the probability calculus).

However, there can be wild fluctuations in people’s expectations of the likelihood that gold will become money. In addition, in a bust, margin calls can force many to sell gold (along with everything else) to raise cash to pay back debts. Gold generally can’t be used to pay back debts but US dollars pretty much always can (at least for the time being).

I suspect that the likelihood of a return to using gold as money is quite high and therefore gold should be owned, however, over the next 3 to 5 years, it will be cash, particularly US dollars, that people will be desperate for. I find the whole massive inflation thing pretty unlikely. In our credit based system in order to have inflation you need people willing to borrow and lend. How do the inflationists imagine that during a period of economic crisis, people/banks’ desire to borrow and lend will increase? I suppose the government’s might but what if people don’t want to lend to them either? In short the bond market would make it virtually impossible for them to do so. That is not to say that hyperinflation will never happen, but not whilst there is such an incredible amount of debt in our economy (particularly non-productive debt).

David C January 28, 2010 at 10:19 pm

Soros, more than anybody else knows the fundamentals that are driving up gold and have driven it up for the last 10 years. In fact, the bank of India just bought 200 tons of gold at $1045 because of the declining US economic situation and finances. Listening to Obama last night, I don’t see any decline in debt and spending for a long long time. So I can’t imagine that anyone will want to under-sell that price for long long time either.

Perhaps if the euro falls apart that might cause some panic liquidation that would bring gold down short term, or push the dollar up short term. But that is also extremely bullish for gold overall because one of the things driving the euro was a distrust of the dollar.

When people can’t trust the euro or the dollar, I can’t imagine anything more bullish for gold. Something just stinks about his prediction.

ABR January 28, 2010 at 10:22 pm

What do you think the odds are that Obama or his successor will follow in FDR’s footsteps and confiscate gold?

edison January 28, 2010 at 11:18 pm

outside of golds limited industrial use most is jewelry and coin/bullion? is coin/bullion mostly purchased based on currency changes? where coin/bullion trades are done with existing gold rather than with newly mined (and all the engagement of infrastructure that that involves) gold?

i dont know about jewelry markets…i didnt think gold jewelry was typically purchased as an asset…but more of a luxury good.

so does heavy trading of existing gold bullion/coin maka a bubble at all?

newson January 29, 2010 at 12:18 am

to confiscate is to confirm gold as a serious threat to paper. ridicule is the only feasible strategy…the trick is not to fool everyone, just the majority.

anway, who’s to say soros isn’t talking his own book and buying gold on dips, he can move markets short-term, after all.

roy January 29, 2010 at 8:42 am

Soros Fund Management 4th largest holding? GLD

…so it looks like he IS betting on a gold bubble.

Learn to distinguish from what he says and what the journalist uses as headline… never the same thing.

bigfoot567 January 29, 2010 at 8:42 am

Two things: 1) Soros complaining about a bubble – this from the ultimate market manipulator himself? Sounds like he is trying to play the short side of the gold market. and
2) Re: confiscation – Consider this – what is the more likely scenario – The government announcing the required conversion of 401K’s and IRA’s into Treasury Bonds – or – Showing up at everybody’s house to search for gold and silver, when there are 80 million gun owners in this country? Treasury paper is THE ultimate bubble at this point.

Bruce Koerber January 29, 2010 at 11:51 am

Obviously George Soros has a grasp of financial markets and obviously he is involved in the world markets. It is his ideology which makes him a blemish instead of a gem.

What has been his connection to the political world that enabled him to amass great wealth and to protect it? This is a good example of Lord Acton’s axiom, where ‘power corrupts’ holds true.

So what is corrupt about George Soros? I do not know the details of how he acquired and how he protects his wealth so I cannot comment on that. But corruption does make itself evident in his ideology. There appears to be a belief in interventionism which is a variant of socialism and a variant of fascism. And he can accept socialism because it creates a two-class system: of parasites and of hosts. He has enough corrupt connections that he feels certain that he can maintain his parasitic status.

Craig January 30, 2010 at 6:07 pm

“What do you think the odds are that Obama or his successor will follow in FDR’s footsteps and confiscate gold?”

Though I wouldn’t put anything past him, I’d doubt Obama would do so because there’s no longer any formal link between gold and the dollar.

mikey January 31, 2010 at 1:06 pm

FWIW- when I finished high school in 1971, I got a good paying job in the construction trades and was making 1 oz of gold per day.
By January 1980 this same job would have paid me
one sixth of an oz.(using the mo. avg, not the panicky spike of $850).
Low price in the early 2000s was once again at the
one oz of gold per day wage. When the price gets to 1800 dollars, this would give me the previous ratio
(unless wages rise noticably).
Of course the price in 1971 was fudged down from years of selling at below market price by the Treasury.It will be interesting to see if my highly sophisticated, IP protected method works.

Barkeater February 6, 2010 at 2:03 pm

Barkeater

I have only recently started to educate myself in matters of politics and economics and I have some questions.

I am still trying to formulate my opinion on the wisdom of using a gold standard for an American currency. The Mises Institute seems to advocate it but I have some questions and concerns, and I would like to be directed to any specific articles or discussions that might help clarify this for me. Remember, use small words, I’m not an economist. Also, I get a lot of my info from the movie, “The Money Masters”. Can anyone tell me if it is largely wrong or right and why?

My questions are:
1. If we (the United States) were to have a gold-backed currency, how would we continue to acquire the necessary gold reserves on which to base our currency? Suppose that our GDP were to greatly exceed the gold we have stored as the basis of the currency? Wouldn’t that cause a severe restriction of the money supply and strangle commerce?

2. What if the currency were taken out of the country and used for exchange overseas? (This assumes that all the money supply is in ‘actual’ paper money.) Wouldn’t that restrict our domestic money supply and put the U.S. at a great disadvantage, while the rest of the world benefited from our methods?

3. Wouldn’t it be relatively easy for gold producers, commodity traders and illegal gold traders to secretly manipulate our currency?

It would seem that unless we can think of a way to solve these problems, a gold based currency would offer more problems than a fiat currency that was indexed to our GDP. Our current fiat currency stinks because it is managed in secret by for-profit profiteers instead of a responsible group controlled by the people, or am I wrong about that? I know this is basic stuff, but it is pretty obvious that people on this forum enjoy discussing it. I would appreciate any reading sources or comments (even mean ones) to help me straighten this out.

Thanks

newson February 6, 2010 at 5:14 pm

to barkeater:
the answers to your questions -
http://mises.org/books/moneyproduction.pdf

Barkeater February 7, 2010 at 9:46 am

Newson,
Thanks! I’m halfway through it and it is like econ boot camp. Just what I needed to get my hands on. Great book!

David Dzidzikashvili May 25, 2010 at 2:50 pm

The Dow being up 61.2 percent during the past year tells us how effective the Federal Reserve has been at supporting markets, not how successful the recovery has been. The patient (economy) is still on life support. Take that away and we are completely screwed. When interest rates start to go up the true health of the economy will be uncovered. We need to develop better indicators not the same old formulas that are subject to government manipulation. But this won’t be happen until the government will have no other choice. This can lead to Economic Collapse Phase 3 (we are already in Phase 2).

What are the logical outcomes? Unfortunately the outcomes, even the best case scenario looks pretty bad. Take just all facts, hard statistical and economic data, and start looking at the trends, formulas and factors such as unemployment rates, foreclosures, US economic productivity & output, etc…

From what I can see right now, and just relying on data – the first 6 months of 2010 (January through June 2010), Americans continue to live in the “unreality”…the period between July and October is when the financial fireworks will begin. It will become impossible for he government to hide unpleasant economic data & news and the reality check will cause economic tsunami. The Fed will act unilaterally for its own survival irrespective of any political implications… Great Depression will start to look like a church picnic. Whoever has a stable job now, at this moment, might not enjoy the stability in the 3rd and 4th quarters of 2010. In this case, it’s logical to say that the FDIC will collapse during the second half of 2010. Additionally, to make things even worse, I think there is a more than 75% probability that bond market will crash, especially municipal, sometime towards the final months of 2010. These events should have taken already place in the last months of 2009, but they were delayed, only due to the government’s cash injection and bailouts. The bailouts did not address the root of the problem and in general the systemic issues have been overlooked at, because the government does not want to talk about negative events, in the world of politics, the politicians tend stress their attention on positive developments for PR needs and purposes. But ignorance will have extremely negative consequences… Add to that more than $10 Trillion US debt and record deficits… Logical question – what will happen after this?

After this, the US government will ONLY have TWO options, bad option and even worse one. You judge which is bad and which is even worse.

Option one: Inflate Dollar, devalue it. This is a pretty bad option, since inflation has never proven to be a viable solution. What will happen to the savings of millions of middle class Americans, who’ve worked all their lives to save money and retire, what will happen to 401Ks, social security? All gone…and done.

Option two: Default! Yes, the US government basically filing national Chapter 7 bankruptcy for USA and telling Chinese and other creditors – Sorry, we’re SOL, we’re bankrupt, the debt is unrealistically high and we’re defaulting on all our financial obligations. This will send irrecoverable shockwave through world markets and this will be the end of Capitalism as we know it (technically we’ve already done it). But this will give a fresh start to the United States, a new currency system will be created and new social/economic/political system will be in place, a mix of socialism-more regulations-some free market (under many regulations)-and raise of Mercantilist economic policies. We need to rebuild manufacturing and re-start whole American polit-economic system (after we hit Reset button). This is not a good option either, but in these scenarios there will never be a truly viable solution.

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