When legendary investor George Soros owned gold, he was a reluctant investor, calling it the "ultimate asset bubble" even while he actively was investing in bullion and miners. Two years later, Soros sold almost all of his bullion, signaling to many that he believes that we're on the verge of a bear market in gold (GLD), and, consequently, silver (SLV).
Gold is an emotional asset, for some reason -- I've been called a "gold bug" and in another article I was informed that I must have voted for Obama because I didn't sound bullish enough about gold. Gold has a lot to do with politics and monetary beliefs, leading plenty of people to check their objectivity at the door while they base their analysis on emotion -- and that rarely ends well.
Either way, let's look at the gold market to see what's been driving it the last few years, and whether those forces are likely to increase or drop over the next few years.
Why Gold Prices are High
Gold prices have skyrocketed over the last decade for a variety of reasons, starting with the first causes of the price boost:
Central banks sold off. In the '90s and early 2000s, central banks around the world sold off a considerable amount of their gold -- Switzerland being a prime example. This continued to push prices down until the price was essentially an overreaction and began to pick back up because of a lot of the following other catalysts. This drove the price down too far, and as gold began to increase it was one of many catalysts to keep pushing the price up higher. In the context of the other causes listed below, we launched into a full-scale gold bull market.
Wars breed fear. A good hunk of gold's price is based on fear. I'm a cowardly investor, and try to sock some gold away every month. I'll do this as long as times are good. It's a type of insurance. The more fearful people are about inflation and/or economic collapse, the higher the price of gold is likely to go -- with some immediate deflationary pressures, like during massive delivering where people just literally don't have the money to buy gold and push it up. And fear started to pick up between 01-02, and really started to escalate from there on.
Fears of popped bubbles. This is probably the best speculative argument for owning gold, and billions upon billions are riding on it, as they should be. The duct-tape theory of economics (monetary rednecks who believe that taping over economic problems will fix anything -- I know, I feel clever for using this metaphor) will only work for so long, and the "gold bugs" know it. Those who were buying gold while everyone else was dumping money into the real estate bubble have the last laugh, at least the last laugh so far. We'll see.
Fear of runaway debt. I don't think runaway inflation is likely to happen until our debt is suddenly unmanageable in an imminent fashion. This is likely several presidential terms away from us at best, unless we see some bond vigilante action. Since it's not immediately imminent, our president has made it rudely clear that he couldn't care less about the debt.
Fear of the dollar's demise. I've made it clear I think we'll see the dollars reserve status dissipate over the next few decades at least, and possibly much, much earlier. This will put an inflationary pressure on the dollar and could itself trigger bond vigilantism which is essentially the laws of economics saying "checkmate" to our monetary policies.
A Quick Note About "Fear"
I've said before that gold is a fear-based asset, and this seemed to make some people suggest it's "money." But that just begs the question -- why use gold as money right now? Because we're afraid of inflation/paper currency. So yes, it's still about fear. This isn't a bad thing. If you're not afraid of Bernanke tinkering with the economy, you probably should be.
This isn't a bad thing -- it's just true. Fear can be a healthy response toward insane men who have access to printing presses.
So Is George Soros Right?
In the short run, we'll likely see a correction over the next few years as the imminence of collapse is likely to fade. People go to sleep easily, and any good economic news tends to make people become optimistic a little too much.
But over the long haul, George Soros is dead wrong.
The fundamentals of gold will be just as strong in 10 years as they are now -- if not much stronger. Remember, gold didn't just explode because of the 2008 crisis. It began it's ascent about 6 or so years before that.
Nothing that's listed above will have changed except for the worse over time. The government will keep inflation, keep deficits, keep warring, and keep being -- well -- the government. The only question is when the price of gold temporarily goes too high too fast, like in mid-2011.
The above list will continue to be putting an upward pressure on gold, at least overall -- though large price drops (and huge ones) are likely along the way. It's just part of how prices and reflexivity work together.
The 25-year superbubble that Soros talks about in his books wasn't a 25-year bubble -- it was a 40 year bubble and began when we debased the currency, allowing our inflationary policies to continue. We'll be putting out fires with gasoline for another decade, dearly paying for our debt-prosperity. Apparently, there's no such thing as a free lunch, in the end.
For now, the best long-term way to invest in gold is just passively setting aside a portion of investment money into gold and ignoring what happens for a while (for security, not necessarily profits) or trying something like the permanent portfolio to see at least some more long-term growth.
At some point in the next 20 years, I'm sure there's a chance that gold will be doing "poorly," and I'll get snickered at as I continue to buy it. But that's fine -- it'll just be a buyer's market, as I've been saying for several years now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I own and will be regularly buying more physical gold and silver.