You know what? Gold prices have been rising since July 1999, after hitting the 20-year low of $252.80 an ounce. Today, it stands at $1,783.60, recording over 600 percent growth in the last 13 years. If you’d exited your holdings in Silicon Valley firms (remember the dot com bubble?) and put that money in gold, just imagine where you would have been today! But one shrewd investor named George Soros actually did that (on an annualized basis).
Many detractors argue that gold is a worthless investment because it has a price, but no value. Apart from making wedding rings from it, gold is useless. Bonds bring you income, even copper can be used to make pipes. But what about gold? Well, I agree that gold is just a psychological asset, it is worth a price because people think it is. In fact, you have no reliable yardstick to measure its value. Today, Ray Dalio attacked Warren Buffett. Warren Buffett has argued that gold is not an asset.
But hey, there is a reason gold prices are rising steadily. Gold, just like any other asset, will someday move to the bubble territory, or it could be there already.
Now, after the announcement of QE3 by Ben S. Bernanke, investors expect the prices to rise further. The Federal Reserve will purchase $40 billion worth of mortgage-backed securities every month. Within minutes of this announcement, gold prices jumped to a 7-month high of $1,775 an ounce. This week alone it is expected to gain 3 percent.
Let’s look a little further back. The Fed has launched two rounds of quantitative easing between December 2008 and June 2011, purchasing $2.3 billion of debts. In the same period, gold prices have almost doubled.
Soros and Paulson Could Speculate It
George Soros, the billionaire hedge fund manager, who dumped $800 million of worth of gold in January 2011, has again turned bullish on gold, sometime during the second quarter this year, the timing could not have been better. According to an SEC filing last month, he has increased his position in SPDR Gold Trust (NYSE:GLD) from 319,550 shares worth $52 million, to 884,400 shares or $137.3 million, during the second quarter this year. One of the most successful investors is shrewd enough to speculate the prices of gold.
Looking at the data above, he purchased 56,450 shares of SPDR Gold Trust (NYSE:GLD) for $85.3 million during the second quarter. That is, an average price of $151.01. Let’s calculate his profits assuming that he hasn’t sold this position yet. Currently, GLD is trading at $171.99, so he earned a profit of $20.98 per share. For 56,450 shares, it’s $1.18 million return on investment of $85.3 million within less than three months (approximately)! That is a 14% return or a 56% annualized return. We are assuming that Soros did not sell his shares of SPDR Gold Trust (NYSE:GLD), or sold near the height of the price.
George Soros is not alone. John Paulson is also making a big bet on gold. Paulson acquired 4.53 million shares of GLD, increasing his stake by 26 percent to 21.8 million shares. He has also increased his holding of NovaGold Resources Inc. (NYSE:NG) (TSE:NG), and he already has a position in Barrick Gold Corporation (NYSE:ABX) (TSE:ABX). Believe it or not, about 44 percent of all Paulson asset are in gold funds. It could make or break his investments.
Both the billionaires believe that the overall market won’t perform well, and gold, a safe haven, will perform well during economic struggles.
Will gold continue to rise forever? No, every bubble bursts… The prices may hit $2,000 or $3,000 an ounce, or more. But once it reaches the final buying frenzy, it will collapse. Just like Nikkei collapsed after hitting 38,000!