Why Investors Should Follow George Soros into Gold

Soros may have sold his investment in Barrick Gold Corp. (TSX:ABX)(NYSE:ABX), but there are still indications that now is the time to have some exposure to gold.

Matt Smith ❯

Former investment manager and market junkie, Matt has 20 years of experience. He hails from Sydney Australia where he earned a Master of Business Law from the University of Sydney and Master of Arts in International Relations from the University of New South Wales. He has been helping investors achieve their goals for over a decade. When not studying the markets, he can be found relaxing with his dogs and practising Spanish.

Published August 31, 2016 10:27 am EDT

The outlook for the controversial asset, gold, remains murky at best; it has pulled back sharply because of the Fed’s recent hawkishness on interest rates, a stronger U.S. dollar, and the U.S. stock market surging to new heights. This, along with George Soros’s decision last quarter to dump his 58 million shares of gold miner Barrick Gold Corp. (TSX:ABX)(NYSE:ABX), has triggered consternation among investors as to whether or not gold is an appropriate investment.

Nonetheless, there are signs that every investor should have exposure to gold at this time.

Now what?

The global economy remains riven with economic and political cleavages that have the potential to trigger another economic crisis.

The Eurozone is caught in a deep economic slump that shows no signs of improving. Its banks are being hit hard by the ECB’s negative interest rate policy, while mounting bad debts across the banking sector are raising the spectre of yet another banking bailout.

Meanwhile, there is the very real risk that the world’s largest transnational economy will collapse with the Brexit emphasizing the political discord that exists in many member states.

In addition, China, the world’s third-largest economy and largest consumer of basic materials, is experiencing an economic slowdown; some investors, such as Soros, are predicting that a hard landing is imminent. For July 2016 both industrial activity and real estate development slumped for the third straight month, indicating that Beijing’s investment-led stimulus is failing to gain traction.

There are also growing concerns over a trillion dollar asset bubble that–according to Soros–means conditions in China are reminiscent of those that existed in the U.S. in the run up to the global financial crisis of 2008.

Finally, there are signs that quantitative easing has spawned a massive asset bubble that has caused U.S. equity valuations to disconnect from economic reality, leaving them massively overvalued.

You see, despite deteriorating corporate earnings and lower than expected U.S. economic growth, all three U.S. market indexes recently closed at new all-time highs simultaneously.

Then you have the Buffett indicator, made famous by one of the world’s all-time greatest investors, Warren Buffett. It is calculated by dividing the market cap of the S&P 500 by U.S. GDP to give an indication as to the overall value of the stock market and if it is a good time to invest in stocks. With this metric now at over 126%, almost double its historical average, it indicates that U.S. equities are tremendously overvalued.

This increases their vulnerability to external economic shocks and the likelihood of a sharp market correction. If this were to occur, it would inevitably spill over into Canada because of the interconnected nature of global financial markets.

So what?

One of the best hedges against the risk of a market correction is gold. Not only is it recognized as one of the best safe-haven assets to hold during times of crisis, but its value is negatively correlated to stocks. Even Soros remains convinced that now is one of the best times to invest in gold, despite unloading his investment in Barrick.

During the second quarter Soros loaded up on gold, making a US$29 million bet on the SPDR Gold Trust ETF (NYSE:GLD). This can only reflect one thing: Soros is expecting another economic calamity and market correction that will cause the price of gold to soar.