Gold: “The Ultimate Bubble”

A lot of economic analysts and asset managers have been talking of gold being the next bubble. George Soros came out and said it in front of a lot of highly regarded economists at the Davos World Economic Forum in 2010. Bubbles occur when speculators push certain investment prices up beyond its real intrinsic value. The most memorable bubbles that happened in recent history are: the housing bubble in 2005, the oil bubble in 2008 and stocks in 2013. Gold is different in that unlike real estate or shares, does not have a fundamental value you can put a realistic price on.

Investments like housing or oil are somehow linked to their contribution to society. People need houses to live in, oil is needed to get make the automobiles that we need on the road. Gold has mainly been viewed as a luxury item, only valuable to produce jewelry or gold coins and bars that alarmists or act as a storage of wealth. Currently only 52% of the gold that is mined every year goes to the jewellery industry, 12 percent goes to Industry whilst the remaining 34% ends up in government holdings.

Soros, was not taken very seriously and being ignored but being the maverick he is, he started making bold bearish investments in gold, even going as far as buying a $264million stake in Barrick Gold which has become the largest gold producer in the world. Gold was riding the crest of the bubble, it reached the record price of $1,895 on the September 5, 2011. Many wondered if this so-called bubble had reached its peak and was about to burst. Suddenly, there was an increase in the number of gold buyers wanting to buy gold.

Soros believed that the price of gold or the demand for more is just based on its susceptible to crowd mentality. If a lot of people start believing they need to buy more gold they will do so and thus push prices up. This observation is based on the theory of reflexivity that says the price of any asset can be pushed up or down by the general crowd perception. As the price of gold rises, the fundamentals of supply and demand also change. In an ideal situation, there should be a feedback loop that is self-sustaining. However, with gold being the kind of commodity it is and only available in finite amounts, things get a little different. This is one of the reasons why gold buyers became so important and so popular because they could make up for shortages in the industry by recycling gold. The awareness that there is only so much gold in the world can send some people in a panic and the bubble gets bigger and bigger as prices continue to spiral for longer than what most people thought it could go.

Three years after gold hit its $1,895 peak, it fell by more than $800 to $1,050.50 on December 17 2015. It only rose to $1,300/oz at the end of 2017 mainly because of the weakening dollar. Those who look at inflation to get a read on where the price might be going would have been confused by this sudden rise from $1,050.50 to $1,300 because there was no inflation and the stock market was doing great. So, was it a case of perception and speculation gone wrong? Clearly there are more factors that gold investors need to consider other than inflation or troubles in the stock market.

It can be confusing for the ordinary investor to know when the best time to sell or buy is. Those who had gold to sell on that incredible 5thof September 2011, made a pretty penny but then there are those who thought the price could peak at $2,000 but it never did. Three years after peaking, instead of bursting or crashing, the price actually went down and seems to be holding steady above $1,200. Soros is making a ton of money in the gold investment space and ensuring that his investments are secured by gold which is an excellent hedge.  So, next time people will be less inclined to treat him as an old fool with way too much money. Many Gold buyers outside of the US are seeing sellers returning to the market to offload their gold jewellery. This is due to the gold price is rising globally apart from the US as the US currently has a high dollar unlike other currencies, it’s only a matter of time before gold has its luster globally including the US.