Why Soros Is Probably Buying Gold Now

| About: SPDR Gold (GLD)

Given the moves by rival hedge fund managers like John Paulson into the yellow metal, it would be surprising if that living trading legend George Soros is not buying gold at the moment.

Indeed, you should always buy when this man hints he might be selling. His comments at the World Economic Forum in Davos this week seem classic trader double-speak. What does Soros mean when he says gold is the ‘ultimate bubble’ asset class?

False prophets

Newspapers like the normally sensible Daily Telegraph fell for his ruse, immediately jumping the gun to a prediction about a massive tumble for the yellow metal. Yet Soros said no such thing.

He merely pointed out what even the most ardent gold bug would concede, namely, that if you study the history of financial crises, then the credit-induced asset price inflation causes them moves from one asset class to another until it reaches gold as the ‘ultimate bubble’ or the last of the bubbles.

Soros did not say that we are nearing that position with gold around $1,080, having last month touched $1,226 an ounce. What he did create was a buying opportunity, presumably for funds controlled by himself.

For why should gold be running out of steam at this point? Even if credit growth slows, the gold market is still so small that only the tiniest fraction of this money is required to send the price much higher.

Trader talk

Soros knows that. He also knows that gold prices show no sign of the parabolic spike that we saw in oil prices in July 2008. Surely the next most obvious spike will be in bond prices – when the current stock market sell-off really gets moving.

Only after the bond bubble has blown up will gold become a candidate for the next bubble, and given the relative sizes of the bond market and the gold market that could be one humdinger of an ‘ultimate bubble’.

Soros is playing his own book in Davos. Gold investors should not be alarmed but take some delight in what he is saying.

Disclosure: long gold and silver