The Coin Analyst: Soros, Paulson, and Buffet: How Three Billionaires View Gold
by Louis Golino for CoinWeek
Recent news accounts have revealed some interesting information about the precious metals investment perspectives of three of the world’s richest men.
Two of them, George Soros and John Paulson, are very bullish on gold, and have put their money where their mouths are, while a third billionaire, Warren Buffet, remains as skeptical as ever about gold.
Hungarian-born investor, philanthropist, and hedge fund manager, George Soros, is probably most famous for having bet against the British pound in 1992. His actions allegedly netted him about $1 billion in one trading day.
Mr. Soros’ views on the wisdom of investing in precious metals have evolved since last year when he was skeptical about gold’s future.
Last year we read that he had reduced his holdings of gold and argued that it is a bubble. But this year he believes that global economic and financial uncertainty will keep prices high. He recently increased his investments in the SPDR gold-backed ETF, or exchange-traded fund.
Mr. Soros told CNN on February 12 that the European financial crisis has the potential to be far worse than the collapse of Lehman Brothers, and that it could precipitate a global financial meltdown, if not handled right.
The European Union used to be an idea that inspired him and many others, but he now has serious concerns about its future, especially because European authorities still don’t have the tools needed to resolve the crisis.
In an interview in the German magazine, Der Spiegel, he said that German Chancellor Angela Merkel is leading Europe in the wrong direction by focusing too much on austerity and not enough on growth. He also pointed out that Germany was one of the first countries in the euro zone to break the very rules that have gotten Greece in so much trouble.
John Paulson is a billionaire hedge fund manager, who is probably most known for having bet big against the U.S. housing market. He is said to have made billions by doing that, and he has since invested a lot of money in bullion, metal company stocks, and other investments.
Last year his hedge fund performed very poorly because of investments in areas other than metals, and it was reported that he lost a lot of money. But he remained bullish on gold.
Mr. Paulson told French newspapers last year that he believed gold’s price would continue to rise as long as the Federal Reserve continued printing dollars. At the time, though, he said he did not expect another round of QE.
Last year many articles appeared that contrasted the bullish gold position of Mr. Paulson with Mr. Soros’ decision to start selling his gold, but this year they seem to be on the same wavelength.
According to recent news accounts, Mr. Paulson has reduced his stake in the SPDR gold ETF, which is backed by gold bullion. The SPDR owns as much gold as many large countries, although some analysts of a more conspiratorial bent question whether the fund has all the gold it says it does.
Mr. Paulson is still the largest single investor in this fund, and he remains very bullish on gold. He has reduced his stake in the fund several quarters in a row, but mainly to cover losses in other areas of his fund.
He recently told his hedge fund investors that gold’s price will be driven by inflation. He also said that he believes Greece may default on its debts in late March, and that the euro currency will fail because of the Greek default and structural flaws.
Warren Buffet, often called the world’s most successful stock investor, and head of Berkshire Hathaway investment company, is known best for buying and selling companies, and for being very bullish on America’s economic future.
He is also a well established gold critic.
Years ago he invested billions in silver when it was inexpensive, and he later sold his silver for a hefty profit, although he would have made a lot more if he had sold it years later.
Given Mr. Buffet’s more mainstream economic views, it does not come as a large surprise that he is not bullish on gold.
Mr. Buffett famously said “Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
More recently Mr. Buffett compared a cube with all of the gold in the world (170,000 tons with a current value of about $9.6 trillion) with purchasing all the crop land in the U.S. and 16 Exxon-Mobils (with $1 trillion left over) in another attempt to dismiss gold as useless.
But gold analysts quickly point out that gold should not be compared to crop land or oil companies. It is actually a medium or means of exchange, a currency really, so the apt comparison would be to the dollar.
As a result of such comments from Mr. Buffett, gold investors tend to view his statments against gold as bullish signs, and as another confirmation of how anti-gold the mainstream U..S. financial establishment remains.
Lessons from the billionaires
What can the average investor learn from the experience of these three men?
First, the fact that Soros and Paulson are both bullish at the same time on gold is significant.
It is, of course, possible that they and others who are bullish on metals will be proven wrong, especially if serious inflation does not materialize in the coming years.
The Fed is divided on the issue of doing more quantitative monetary easing, or QE, through asset purchases and/or extension of bond maturities and other measures. According to the minutes released on February 15, only a few of the members of the Federal Open Market Committee argued in favor of more QE.
But all that could easily change if economic conditions deteriorate. Moreover, unlike the previous rounds of QE, the next steps are not likely to be labeled and announced as QE. They are expected to be done more quietly and subtly.
The U.S. economy has been showing signs of improvement, as have consumer confidence levels.
But these are fast-moving targets. The economy remains sluggish despite the improvement in recent months, and the U.S. is still vulnerable to the situation in Europe. U.S. banks have substantial investments in Europe, and at a minimum a collapse of Greece and a major recession in Europe, not to mention a possible Euro-wide debt crisis, could put the U.S. back in recession or worse.
Mr. Buffett’s growing skepticism about gold also does seem like a bullish sign, in a contrarian way. It is also probably further evidence that the Oracle of Omaha just does not understand the yellow metal.
Finally, the fact that Mr. Soros and Mr. Paulson share many views on the gravity of the European crisis is also significant, and I suspect that has a lot to do with their converging views on gold.
Louis Golino is a coin collector and numismatic writer, whose articles on coins have appeared in Coin World, Numismatic News, and a number of different coin web sites. His column for CoinWeek, “The Coin Analyst,” covers U.S. and world coins and precious metals. He collects U.S. and European coins and is a member of the ANA, PCGS, NGC, and CAC. He has also worked for the U.S. Library of Congress and has been a syndicated columnist and news analyst on international affairs for a wide variety of newspapers and web sites.