Two of the world's most successful investors have gone head to head over the price of gold, with the man who broke the Bank of England baling out of the precious metal and the man who made a fortune by betting against the American housing market talking it up.
At the end of a week when plunging commodity prices fuelled speculation that the boom might be over, it emerged that George Soros– who made $1.1bn from betting against the pound in 1992 – has sold much of the gold and silver holdings he has built up in the past three years, realising an estimated return of 65% on his investment.
By contrast, meanwhile, John Paulson, who made his hedge fund more than $20bn from betting against the US housing market by “shorting” sub-prime mortgages, this week told investors that he still has most of his personal money invested in gold.
The billionaires' differing stances emerged as the gold price fell by a further 1.6% and silver rounded off its worst week in at least 35 years, dropping another 9.6% to take its losses over the week to a startling 29%.
The week's declines in precious metals probably came as little surprise to Soros, who implied he thought gold was in danger of dropping as far back down as January last year's price, telling the Davos Economic Forum: “When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold.”
Paulson takes quite a different view on price, telling investors that gold could increase from its present, near-record, level of about $1,487 an ounce to as much as $4,000 over the next three to five years.
He believes the gold price will keep rising – after increasing by nearly half in the past three years – in large part, he says, by providing an effective store of value against rising inflation.
That two such successful investors should take such wildly differing views on the price of gold underlines how much uncertainty surrounds the prices of precious metals and other commodities, at least in the short term.
Like many other commodities, the price of gold has surged in recent months as high inflation and low interest rates prompt speculators to move away from US treasuries and other low-yielding assets in search of higher returns.
In addition to the negative real interest rate, investors have been piling into commodities such as gold and silver because the struggling US dollar – in which many of them are priced – has made them cheaper and increased their attractiveness as an alternative currency and investment of value.
Furthermore, demand from manufacturers for the raw materials they need to make their products has been increasing, as the Chinese economy powers ahead and the European and American economies pick up.
As a result, prices of commodities such as gold, silver, cocoa and coffee have hit record, or near-record, highs in recent weeks, prompting speculation that the rally may have been overdone.
Traders and economists are divided about whether last week's rout marks the top of the commodities market, or represents a temporary blip before prices continue to surge.
However, most distinguish between the long term and the short term. At some point in the short term, commodity prices will flatten, or quite possibly fall, but in the longer term, the upward trend must continue. Derek Holt, vice-president Economics at Scotia Capital, in Toronto, said: “In the longer run, we are only in the early days of the commodities boom. Only 15% of households in India have a fridge and while China may now be the biggest car market in the world, it has only a fraction of the penetration of the US or UK. Emerging market growth has a long way to go and will put huge pressure on commodity prices.”
Holt believes that commodities have hit the top of the market since they have “run too far ahead of other fundamentals”. However, he also thinks that prices will start to rise again at some point in the second half of the year and, subject to the odd fluctuation, predicts that commodity prices from oil to coffee, and copper to cocoa and gold could at least double in the next 20 years or less as increasingly wealthy populations of China, India and other emerging economies demand more consumer goods.
The price rises would put huge pressure on the lifestyles of people in the west, whose slower-growth economies would be less able to weather their impact than those of the fast-growing emerging nations, where breakneck growth would far outstrip rising commodity costs, he said.
After diving by as much as 12% on Thursday – and by nearly another 5% this morning – oil rebounded following the release of strong employment data in the US that strengthened its economic outlook.
Oil was up $0.41, at $111.21 a barrel, late this afternoon, after hitting $126 last week.