Billionaire investor sells gold, buys gold mining stocks...
SO GEORGE SOROS, the billionaire founder of Soros Fund
Management LLC , sold most of his holdings in the bullion-backed SPDR Gold
Trust and iShares Gold Trust funds in the first quarter, while buying shares of
Gold Mining companies Goldcorp Inc. and Freeport-McMoRan Copper & Gold Inc.,
writes Julian Phillips at GoldForecaster.com.
Soros's fund held 49,400 shares of SPDR Gold Trust as of
March 31, compared with 4.721 million at the end of the fourth quarter. The New
York-based fund sold all 5 million shares it held in iShares Gold Trust. This
amounted to roughly 30 tonnes worth of physical gold held through the
custodians, Barclays and HSBC.
Does this mean that he has disposed of the gold holdings he
has? Does it mean he is now bearish on gold? After all, it was reported that he
bought gold because of his fear of deflation. Does he think that this
possibility has now receded?
None of the above, for it turns out that he continues to
have large allocations to gold investments through owning more Gold Mining
shares and a Gold Mining ETF. Soros' fund added Eldorado Gold, Freeport-McMoran
Cooper & Gold and Goldcorp to their investments during Q1 2011. Soros
bought 301,300 shares of Freeport-McMoRan and 7,600 of Goldcorp.
These shares will benefit directly from any long-term
appreciation of the Gold Price through their cash flow from ongoing gold sales.
Shareholders will then enjoy the rising capital value of the shares alongside
the dividend stream flowing from the sales of gold.
Consider for one moment that the US government was
contemplating confiscating physical gold from US citizens and even the flow of
gold from Gold Mining. It would be an easy, one-off exercise to instruct all
gold custodians in the US to hand over their gold to the government, including
the custodians of the SPDR Gold ETF and the Gold Trust.
With gold shares, all the government could do, would be to
instruct gold miners to sell their newly mined gold directly to them. George
Soros would then benefit from the continuing operations of these gold companies
and their cash flows.
We don't know if this was why the switch is being made, but
it would certainly make sense if it were.
What of the other leading investment lights who are in gold
or who have mentioned it in the last few weeks? John Paulson is holding onto
his massive holding of shares in the SPDR Gold Trust and has added to stakes in
Gold Mining companies including Johannesburg-based AngloGold Ashanti Ltd.
Paulson's fund bought 97,540 American depositary receipts in
South Africa's biggest gold producer last quarter, as well as 2 million ADRs in
Gold Fields Ltd., its second-largest producer.
Paulson did not invest for fear of deflation but for fear of
inflation that should attend a global economic recovery. Paulson's investors
can choose to have their stakes denominated in gold rather than Dollars,
meaning the value of their investment rises and falls with the price of the
bullion. This really is confidence in gold.
The head of PIMCO, whose, fund is shorting US Treasuries at
the moment, respects gold's wealth preserving properties while he has little
confidence in US government debt. This opinion is very close to our own.
George Soros reportedly bought gold because he feared
deflation Paulson has it because he fears inflation. PIMCO respects it because
they have no confidence in US Treasuries – plus other reasons.
We expect that the future holds the currency-cheapening
inflation, the socially-destructive 'stagflation', the economy-destructive
deflation plus we see the irresistible tendency in banking and politics to
over-issue paper currencies. One or more of these potential, probable, future
scenes lie ahead and the entire investing world is aware of these dangers. Even
central banks are recognizing the benefits of gold in their reserves. Has this
changed? No, not at all!
Should we include silver alongside gold after a drop from
$50 to $34? We are of the opinion that silver will continue to be more volatile
than gold, but will move in tandem with it, but with more exaggerated
movements. The silver market is nowhere near a reserve asset in the eyes of the
world's central banks and has a long road to travel before it is. However, it
has moved with gold for years now and should eventually complete that journey.
In the mind of the poorer investor it does stand as financial
security for him, which is the very essence of gold's qualities. A look back on
the road it has come so far shows that it has proven to be a wealth preserver,
despite its volatility and lack of liquidity for the large investors. It took
only 1,000 tones of silver to be sold over two weeks to drop the price from $50
Until that liquidity improves – it will at higher prices and
broader demand – silver will remain volatile and less dependable than gold in
its price performance. We believe it is and will be a wealth-preserving,
precious metal in the future, sought after by global investors, particularly
Gold markets need no further confirmation of the need for
them to be a support, if tacit, to global monetary systems. In extreme times
gold is money and a far more effective value preserver than paper currencies. Since
1971 the world has experimented with paper currencies. These experiments have
not led to the success they should have as money.
The issues we mention above as well as the dangers of
linking money to one nation in a global world are visible for all to see. We
believe these dangers will force central banks and governments to accept
precious metals as part of the monetary system again but in full – not simply
as an important reserve asset.
Gold will serve to a level far beyond its price, as
collateral in inter-governmental transactions – if they are not already doing
so through the Bank of International Settlements – in the future.
In the future, this leaves first, the gold market,
eventually returning to the control of global governments – first through the
control of supplies – and wealthy institutions and individuals, likely at
prices beyond the reach of the average investor. Secondly, silver will, we
feel, step into the breach left by gold for the individual but still at a more
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