Last year, billionaire financier George Soros said he thought gold was “the ultimate bubble”. So those worried that gold could be nearing the end of its ten-year bull market have noted that he has sold most of his holdings in gold exchange-traded funds (ETFs). But does his exit – and gold’s latest record above €1,080 – really mean that the party is over?
Don’t count on it. For starters, note that Soros still has exposure to gold through gold mining shares and a gold mining ETF, says Julian DW Phillips on Goldforecaster.com. The global macroeconomic backdrop hardly suggests that investors no longer need a safe haven and store of value. While the end of the Fed’s latest money-printing programme (QE2) is due in June, the recent weakness in the US economy means another round of QE can hardly be ruled out. Even if it doesn’t happen, however, interest rates remain negative, which is fertile groundfor gold.
Indeed, most big economies, fearful of choking off fragile growth, “are letting interest rates fall even further behind inflation”, says James Mackintosh in the FT. Inflation fears have also emerged in China, with growing demand for bullion there bolstering gold. According to the World Gold Council, sales of physical gold jumped by more than 100% year-on-year in the first quarter. Emerging-market central banks continue to diversify into gold, with Mexico, Bolivia, Russia and Thailand topping up their holdings in the first three months of the year.
Fears of a banking meltdown following a debt default in Europe won’t recede soon, especially now that political uncertainty is mounting. Finally, with just 0.6% of global financial assets in gold, compared to 3% in 1980 when it last peaked, gold still looks far from bubbly, says Sebastian Lyon of Troy Asset management. Deutsche Bank expects the price to reach $2,000.