-- Posted Sunday, 19 June 2011 | | Disqus

The retreat from the gold market by George Soros this spring is a highly talked about event in the precious metals market. But reading a recently published history of hedge funds it was interesting to be reminded how Soros got the crash of 1987 badly wrong.

Soros was extremely confident about the stock market outlook in the fall of 1987 and was so long when the market crashed in October he could not get out quickly on the worst day for stocks in history. He was absolutely sure a crash would come in Tokyo first and not New York, while in fact Tokyo took another three years.

Misreading the crash

Even his hedging went wrong in the October 87 crash and he was forced to dump all his US stocks a few days later because he could not afford to risk another fall. Only some brilliant currency trading stemmed big losses for that year.

However, Soros remains arguably the greatest hedge fund manager of all time, and still at 80 years old the master of this universe. So when he largely pulled out of gold earlier this year heads turned as Soros has become a multi-billionaire out of his ability to correctly judge the macro picture.

It would seem he reckons the beast of inflation will soon be tamed by a double dip recession, perhaps with a crisis in China as a big depressant for commodity price inflation. The logic would be that with inflation worries falling so will the gold price, a reverse loup of Soros’ reflexivity theory.

The US dollar and bonds would then be the normal safe haven. But would inflation really be crushed out of the system? Stagflation, or high inflation with low or zero growth, is just as possible given the huge expansion of the money supply since the global financial crisis, and the propensity of central banks to issue money at the slightest whiff of trouble.

Money printing

You can for example match the money printing of QE2 since last August to the recent surge in the price of gold and silver. Soros might argue that OK and this is almost over. But there is still an awful lot of new money sat on bank balance sheets that has yet to find its way into the global economy.

And we hardly seem to be near to a Volcker moment when high interest rates are used to purge the system of high inflation. We appear to be at the start of a run-up in global inflation levels, not the final act of disinflation when gold and silver prices plunge.

Perhaps Geroge Soros has got gold right – and he certainly turned a profit on gold and silver – and on his reflexivity principle it could be that inflationary expectations have become exaggerated and are self-fuelling. But if there is just simply too much money pursuing too few resources then precious metals still look one of the few good investments in very uncertain financial markets.

The next issue of the ArabianMoney newsletter will examine how best to lever up in precious metals on the assumption that Soros is wrong, or will be forced to reverse his position very soon (click here). He is also well know for changing his mind if circumstances change or if he is proven wrong. Humility before markets is also a mark of a great investor.

-- Posted Sunday, 19 June 2011 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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