Rich people are suffering. They had always counted with higher interest rates to earn a living off their capital.
Capital was scarce and not evenly distributed. They could make a comfortable living lending their capital at very high rates to those that did not have.
And they did not have it because capital was hogged in a few places.
As capital started being distribued more venly, those places that paid to their ears for access the capital were no longer fleeced.
Tus rich people lost a source of income.
They seek to make money buying somehting cheap in the expectation that its prices raises and they sell higher to live off the incrmental prices of the assets they hold.
Gold is one of them.
Troy Asset Management, which manages the family money of the late Lord Weinstock and several public funds ,has close to 20 per cent of some funds in gold and gold shares. “The key thing is where real interest rates are moving,” says Sebastian Lyon, chief executive. “We are quite a long way still from having an honest money policy where real interest rates actually protect the value of money.”
Soros sharpens gold bubble debate
By Jack Farchy and James Mackintosh
Published: May 20 2011 19:20 | Last updated: May 20 2011 19:20
The ultimate asset bubble is gold?.?.?.?
It may go higher but it’s certainly not safe and it’s not going to last forever?.?.?.?
Gold has shown tendencies to go parabolic and usually bubbles tend to end in that parabolic rise before the collapse.
George Soros – who made the statements above at various points last year – has been one of gold’s most strident critics and also one of its largest investors.
But now the billionaire financier has dumped a large portion of his gold investments, according to regulatory filings released this week and people with knowledge of the fund’s activities.
Mr Soros is not alone in cutting his exposure to the yellow metal. Investors sold 2.5m ounces of gold through exchange traded funds in January and February as prices slid 8 per cent, and bankers say several hedge funds were also selling gold on the physical market.
“There was a fairly major exodus at the beginning of the year,” says Philip Klapwijk, executive chairman of GFMS, a precious metals consultancy. “There may have been a bit of an echo of that following the recent peak.”
On Friday, gold was trading at $1,511 a troy ounce, down from a nominal record of $1,575.79 at the start of May.
If one of the world’s most prominent investors is getting out, does that mean the gold bubble is about to burst?
Martyn Whitehead, head of metals at Barclays Capital, says the market is “entering a phase where there’s a more neutral bias” of sentiment towards gold.
The main reason for some investors’ caution is the impending end of the second round of quantitative easing in the US.
Ben Bernanke, chairman of the Federal Reserve, has said the programme of injecting cash into the US economy will probably end in June, and minutes of the latest meeting of the US central bank’s rate setting committee showed this week that a detailed discussion on how to end QE2 is under way.
The fact that the Fed is set to turn off the liquidity pumps is seen as a negative signal for gold. First, it suggests increased confidence in the economic outlook – typically a bearish indicator for the yellow metal.
Most importantly, the end of QE2 opens the door to rate hikes. Investment demand for gold – and so its price – shows a strong inverse correlation with inflation-adjusted interest rates, which are deeply negative in most parts of the world. As rates start to rise, inflation-adjusted returns on other assets, such as bonds, become more attractive and so divert investor money from gold.
However, the majority of longer-term investors in gold, such as the macro hedge funds that went long during the financial crisis, are sticking with their positions, bankers and traders say. Most prominent among them is John Paulson, the hedge fund manager who shot to fame with his bets against the subprime housing market, whose position in the SPDR Gold Shares exchange-traded funds alone is $4.4bn, according to the latest regulatory filings.
Even the normally bullish World Gold Council, a mining industry-backed group, concedes that the end of QE2 poses a threat to gold. “If and when central banks stop QE and then start raising interest rates, that is obviously a challenging environment for all asset classes – including gold,” says Marcus Grubb, managing director for investment.
Tom Kendall, precious metals analyst at Credit Suisse, says investors such as Soros who have exited gold positions “are still the exception”.
Gayle Schumacher, co-chief investment officer of Coutts, says wealthy clients are very interested in gold, which makes up 8 per cent of Coutts’ standard sterling-denominated portfolio. “It’s not just the goldbugs,” she says. “Everyone wants to talk about gold.”
One factor supporting prices – and confidence – is a surge in consumption in Asia, especially China and India, the two largest consumers of gold. In the first quarter of this year, demand for jewellery, bars and coins rose 47 per cent in China and 11 per cent in India from a year earlier, according to the WGC.
Bankers and analysts say they expect the physical gold market to prevent prices falling far below $1,400 in the coming months.
That support could provide a platform for prices to rally if, as many expect, the global economy has more shocks in store. GFMS predicts gold will surpass $1,600 this year, while some bullish traders suggest the next leg of the rally could see it hit $1,800.
Even as gold’s naysayers herald the end of QE2 as a death knell for the bull market, its supporters are looking ahead to the next round of crises and stimulus. Indeed, many gold investors see another round of QE as almost inevitable.
Troy Asset Management, which manages the family money of the late Lord Weinstock and several public funds ,has close to 20 per cent of some funds in gold and gold shares. “The key thing is where real interest rates are moving,” says Sebastian Lyon, chief executive. “We are quite a long way still from having an honest money policy where real interest rates actually protect the value of money.”
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