George Soros dumps $800 million in gold; calls gold "the ultimate bubble". Do you agree?

Deciding if gold is, or isn't a bubble is especially difficult for two reasons. First, like all commodities, the price of raw materials are inherently speculative. Why? There are no cash flows, and so there's no way to discount the current price. Two, gold is unlike virtually all other commodities in that a large portion of its demand is for storage as money rather than consumption a la corn or oil. Jewelry is another key part of gold demand. Neither is bound up with economic logic per se.

Gold is like any other commodity when demand slows so does the price. The best mental that someone should hold is a metal that is not only for luxury but for common usage such as copper and silver. The economy will slowing move forward and the lack of a bullish gold rush will not matter if the barrel of oil is high. One needs to check the IMF reserves and see how much gold is in their portfolio.

Lots of good insight here. What about the speculative play on Chinese demand for gold? I've seen recently that concerns about inflation and economic stability in China are driving "explosive" demand for gold and silver.

http://online.wsj.com/article/SB10001424052748704657704576149650272085270.html

http://www.reuters.com/article/2011/02/16/us-icbc-gold-idUSTRE71F1MO20110216

The recent slump in gold and silver signify almost nothing about the health of the economy, which is why you see so many people holding on to them. Like any other market, there are long-term fundamentals at work, overlaid with short-term speculation and profiteering (and I don't use those words in a pejorative sense).

The fundamentals are that every fiat currency is flailing right now. The US Fed is printing money like crazy right now with its QE2 program, trying to reinject liquidity into the US economy. Europe has troubles with Greece, Ireland, Portugal, and Spain. But most people have an intuitive sense that while QE2 and other programs might work in the short term, once all that money is injected, it will be difficult to remove instantaneously when inflation starts to hit, which will possibly lead to a hyper-inflation scenario. Couple that with China reducing its position in USD, a possible removal of the USD as the world's reserve currency, etc., and you have a recipe for disaster for the USD. Suddenly, you have a lot of USD circulating, and almost nobody wants them.

Time and time again, gold and silver have been chosen by cultures and civilizations around the world as "real money." They have all the properties that money requires. In times like these, the most important property is that metals cannot be created at the whim of governments seeking to deliberately cause inflation for their own ends (yes, you can mine them, but the rate of addition due to mining is slow and fairly predictable, certainly nothing like what the Fed just did with QE2).

Now, when the market starts to move because of fundamentals, it's inevitable that speculators and profiteers will notice the momentum and add to it, trying to make a short-term profit. These gains are short-lived, however, and the market will quickly correct. This is what we saw over the past two weeks.

But that correction does nothing to address the fundamentals. The reality is that QE2 still exists. And while it does, China stands to lose a lot of wealth if it holds USDs. So, China will seek to shift its position out of USD, into harder assets. This will further depress the value of USDs. In addition to China moving to metals (including things like copper, not just gold and silver), that move itself will force others out of fiat currencies and into metals. Nobody wants to be the last one holding USDs.

When thinking about gold and silver, it's important to note that they are generally stores of wealth and not wealth-producing. That is to say, when the price of gold "goes up," it really means that the price of the fiat currency in which you are pricing gold has declined. If you were to calculate the consumer price index in ounces of gold, for instance, rather than USD, you'd find that it's a lot more stable over time. In contrast, stocks are investments in (theoretically) wealth-producing enterprises. Those enterprises, through labor, produce new things that are worth more than they were before. So, while you might think you "made money" by buying gold at $1000/oz and then exchanging back into USD at $1500/oz, the reality is, you merely converted your wealth into a stable store (gold) and then converted it back after the market for USD fell. You probably can't buy much more "stuff" with that $1500 than you could with the $1000, assuming enough time for the market to fully absorb the fluctuation.

We have watched gold go up and down over the decades and I am hard pressed to see that there is any economic impact from what happens in the gold market. As gold, like many commodities, is a worldwide market, so conditions in Europe or Asia may affect the price in ways that are not visible to the US investor. I have avoided gold as an investment as it does not offer a return from an economic base, such as a stock that can represent a growing company, or a fixed income investment that offers interest as a return.

In my opinion, investment in gold is nothing more than the typical scheme where one person buys thinking that the next guy will be stupid and pay more, such as with our housing bubble. As with housing, this may or many not be true. Gold has very limited industrial and commercial uses, so the true demand is small. Copper, as an example of a more typical commodity is used throughout our economy and an investment in copper would be supported by real demand. Since that is the case, an investment in this kind of commodity would have a floor in price based on the real demand. It is hard to imagine that if gold started falling, what the real demand might be.

So in reality, I don't really care if gold has bubbled; I think a wise investor would not own much of it at any price.

Personally, I don't think it is a bubble but I also don't think you can survive on it. If all hell literally broke loose what good would it be? You can't eat it or drink it, and if it was really that bad only a fool would trade for it as they would be in the same shape. But on the other hand I wouldn't mind having a room full of it right now either...

Dustin, the only time that it won't be valuable at all is if people are completely isolated. In other words, if you're the only one left (or you and a couple of others in your tribe), then yes, you're right. You can't eat it or drink it. But if you believe there is any manner of society at all, then you'll still need money in order to make the economy work. In all but the smallest societies, direct barter doesn't work because it simply can't scale up. *Something* always end up fulfilling the role of "money." Money is simply that commodity which serves as the item of mutual exchange. That could be beads or seashells or whatnot, but time and again societies have gone back to precious metals because of their various qualities (they are stable over time, easily sub-dividable, can't be created/forged easily, etc.).

The way the article reads it sounds like Soros dumped his gold holdings and at the same time made the statement "gold is the ultimate buuble". In reality, he made the statement in Jan 2010 and his commentary had more to do with central banks around the world using ZIRP to try to keep economies afloat.

A more realistic way to frame this discussion is to focus on fiatl currency. Gold is the same as it ever was, unfortunetly central bank,governments etc are debasing currency and in truth these currency units are declining in value to gold..not the other way around.

RE: those who don't learn history are doomed to repeat it. C.F. Depressions of 1830's and 1920's and 2000's. Note how similar George W. Bush and Herbert Hoover reacted! Protect stored wealth! Protect large/influential Banks! Gold has traditionally been used as a hedge against economic crisis. Most people understand inflation, where more currency becomes available than economic growth would support therefore lowering the value of that currency. In a Depression, there are fewer entities able to borrow (@ Prime plus) than funds available (supply-demand) making the actual true interest rate NEGATIVE. As the Federal Reserve must maintain a positive interest rate (.25% at this time) the net result is the Dollar is DECREASING IN VALUE hence Commodities especially Gold prices rise. (Add to this the Bretton Woods Agreement of 1944 tying of our currency to our GNP, which has recently declined do to the poor economy and outsourcing/balance of trade.) Since the Federal Reserve cannot "give away" money as it would with a true negative interest rate, the the Federal Government must step in and EFFECTIVELY inject money into the Economy; this was done in the 1930's by FDR and the German Government. This is not one-for-one dollar-for-dollar Bank Bailout. The Bush Tax Rebates generated $6 for every dollar spent, $8 if Taxcuts for the Rich aren't included. GNP return of $16 for every dollar spent on Boeing (AirBus is France's way to lower unemployment); and a return of $22 for every dollar spent on NASA. Upgrading our infrastructure has an even higher return value as the price of upgrading in the future will only cost more. Note that Bush did not increase the currency supply to keep pace with GNP growth, presumably to prevent inflation from overtaking "stored wealth" of his family and others of his ilk. The value of this "stored wealth" has decreased with the value of the dollar. QE2 is simply catching up to the growth in GNP over the last decade; and it would seem appropriate that taxes on individuals and corporations should also increase (with the exception of higher rate of exemption for research and real infrastructure growth for American companies). Ornamental and Industrial use of Gold, Silver, Platinum, Palladium, Rhodium, et al declines during worldwide economic downturn. When referring to the "price of Gold" we should be looking at currency or "investment metals" in aggregate rather than one of them individually.

We should be so lucky. Gold is one of the "usual suspects" when one goes to round up candidates for volatile price moves. So, it is doubtful that this will be the last time we see swings in the price of gold.

It means very little about the health of the economy. But it does play a role in setting the expectations of some investors, so changes in gold prices are not irrelevant.