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Follow the Yellow Bullion Road
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Is it wise to follow George Soros, John Paulson, and other major hedge fund players who are buying gold again? That’s right; Soros, the same cat who said that gold was the biggest bubble in 2010, is sucking up shares in the SPDRS Gold Trust like there’s no tomorrow.
So is Paulson. Paulson’s gold position now constitutes 44% of his $224 billion Paulson $ Co. Hedge Fund. That’s a pretty big bet on the shiny stuff, don’t you think? But then, Paulson is known for making big bets…and winning big on them. He bet heavily on the housing market between 2007 and 2009 and gained a $20 billion profit, according to The Wall Street Journal. That’s 20 billion very good reasons to watch what he does.
The question is, “What do they know—or think they know—about current economic conditions that will make gold go up in value?”
Good reasons for gold’s rise
Are they worried about currency collapse? They should be, especially with the way the Fed is creating dollars as if they were going out of style…
Maybe that’s what Soros et al have finally concluded…that dollars are or soon will be going out of style. It’s no secret that Mr. Soros knows a thing or two about currency markets. He made a big chunk of his fortune betting against the pound and against the Bank of England.
It’s also no secret that Soros is a big fan of establishing a global authority—a transnational world government, if you will—and it’s no surprise that the US dollar would not be a part of that big fun.
Or, maybe the rising tensions between Israel and Iran is the reason they’re buying more gold. That’s not a difficult equation, either…
War between those two may well lead to Iran attempting to close the Straits of Hormuz, pushing oil prices to God-knows how high. When oil prices rise, gold prices tend to tag along with them.
Or, it could be that they see the fate of the Eurozone just up ahead and it’s not a happy ending. If that is the case—and there are certainly several arguments for Greece and other weak countries leaving the Eurozone—then gold may benefit from that outcome.
Gold is the choice for small investors around the world
But it isn’t just the big players that are feeling the need to bolster their supply of the yellow metal. Individual investors and “regular” people are buying it, too, in places all over the world. As you would expect, there are some very good reasons for them to do so as well.
For example, in the US, it’s no secret that the individual investor has just about given up on the stock market. Too many of them feel—and who can blame them?—that the stock market is fixed game for the big fish, who do what big fish do, which is feed on the little fish. The individual American investor’s aversion to the market is reflected in the very low volume that has now become a fact of life for the market today. (See yesterday’s Gorrie Details for low stock market volume dangers.) The reality is that retail investors have left Wall Street behind. Over $3 billion left mutual funds in the past quarter alone.
In Europe, gold is also the people’s choice. It is a way to scratch the no-confidence itch that they feel towards the euro as a viable currency. This is not so much of a phenomenon in the Northern Eurozone, but it’s certainly true that no European wants to hold euros issued in Greece, Italy, Spain, or Portugal for the fear that those euros will be converted back into those countries’ currency once they leave the euro.
But the people’s hunger for gold is not just in the US and Europe; in fact, the personal demand for gold in both India and China is much greater than both the US and Europe combined.
In India, gold is not only in constant demand for gifts, ceremonies, and the jewelry trade, but it is, and has always been for the vast majority of Indians, the way wealth is passed down from one generation to the next. Demand in India has only grown given the persistence of the global financial slowdown, since it has diminished confidence that India’s economy will continue to be able to weather the financial storm.
Also worth noting is the Indian rupee’s recent plunge in value. It is at record lows against the US dollar. This loss of buying power has fueled the Indian government’s arrangement with Iran to exchange gold for oil as a way of avoiding the higher cost of oil in petro dollars. Thus, the Indian demand for gold shows no signs of weakening any time soon.
And then there’s China. Not only is the People’s Bank of China making veiled purchases of gold in record amounts for reasons they will not disclose, but also even more interesting is the level of gold purchases by Chinese individuals. Why would the Chinese people be buying gold when the yuan is becoming a very powerful and tradable currency? The optimists say that since some of the people in China are becoming richer, they want to express their wealth in gold and jewelry. This is no doubt true.
But cynics are saying that the Chinese people know the real story behind the Chinese economy, how much a fraud it is, and that they, like the regular folks in India, Europe, and the US, are just trying to find a way to hold onto some of their hard-earned money and wealth. In either case, or both, demand for gold in China, and around the world, whether it’s from the big boys or the mom and pop investors, is on the rise.
One other behavioral footnote about gold buyers is that the big players have no choice but to hold most of their gold via certificates and other financial instruments on electronic brokerage accounts. Is this smart? Maybe. But from most individual investors’ perspectives, whether in the US, Europe, India or China, no one in their right mind would keep their gold in banks.
And those are…The Gorrie Details.
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Surfer dude
August 17, 2012 at 9:57 pm
Aloha James been away surfing,Nice to see your China expert agrees with some of the Points I made awhile back.I'm just a So cali Surfer,but I do read alot. People~~Worldwide; in general try to be good,however when their Governments become Too BAD! Watch OUT! aloha friend
James R. Gorrie
August 20, 2012 at 4:27 pm
Aloha Steve....from Austin. Hope the waves were good and plenty! JRG