Soros: “Financial system remains extremely vulnerable ... We are on the verge of an economic collapse”

Published in Market Updates  Precious Metals Update  on 27 June 2011

By Mark O’Byrne


Gold is trading at $1,502.40/oz, €1,055.87/oz and £939.18/oz.

Gold is mixed today after last week’s 2.4% fall. The short term trend remains negative but medium and long fundamentals remain supportive as do the very challenging and risky macro, sovereign debt and currency environment. Physical buying remains strong at the $1500 level with premiums for gold bullion bars higher in Singapore and Hong Kong.

The risk of contagion in the Eurozone and indeed a global financial contagion remains real. Peripheral European bond markets are under pressure again today with 10 year bond yields in Ireland rising to over 12.1% and to over 11.65% in Portugal. 

Cross Currency Rates

European leaders are preparing for a default by Greece. The German finance minister, Wolfgang Schaeuble, said yesterday that Europe is preparing "for the worst".

George Soros, Chairman of Soros Fund Management and famous for breaking the Bank of England in 1992, has warned that "we are on the verge of an economic collapse which starts, let's say, in Greece but it could easily spread."

Gold in Euros – 1 Year (Daily)

The 80-year-old investor said that the “financial system remains extremely vulnerable."

Soros added that "there are fundamental flaws that need to be corrected."  The core flaw, says Soros, is that the euro is not backed by a political union or joint treasury, so when something goes wrong with a participating country, there is "no provision for correction." 

Soros said that it is "probably inevitable" that highly indebted countries will be given a way to quit the euro. 

Gold has been the strongest currency in the world in recent years and all major fiat currencies, including the Swiss franc, have fallen against it. Should Greece revert to drachmas, Ireland to punts, Spain to pesetas, Italy to lira and Portugal to escudos, these countries would suffer massive inflation and the price of gold would surge in terms of these local currencies.

PORTUGUESE GOVERNMENT BONDS 10YR NOTE – 1 Year (Daily)

The assertion that gold is a bubble may soon be seen as silly as gold increasingly reasserts itself as a safe haven asset and currency.

Gold’s primary advantage is that it protects against currency devaluation – this will be realized again in the coming weeks and months. 

The very strong demand for gold seen in Greece in recent days will likely soon be experienced in other peripheral Eurozone countries. It will likely be replicated internationally as concerns mount about currency debasement and currencies in general including the euro, the British pound and the U.S. dollar.

Soros Gold ETF Sale - Well Publicized but Poorly Analyzed 

Soros’ recent sale of his gold ETF holdings made headline news internationally with much commentary claiming that Soros sale of his gold ETF holdings means that gold has “peaked” and the “bubble” may soon burst.

However, what was less reported was the fact that Soros maintained very significant positions in gold mining companies. 

It is highly unlikely that Soros Fund Management would maintain significant allocation to gold mining companies if there was a belief that gold was a bubble that was soon to burst. 

Indeed, if his hedge fund truly believed that gold was a bubble and significantly overvalued, it would seem sensible of them to have shorted the gold ETF and not have added to gold mining positions.

More plausible is that Soros, given his political activism, may have decided that he did not want continuing publicity regarding his large ETF gold holding. ETF gold holdings like all securities must be declared in SEC filings. 

Given Soros view that “we are on the verge of an economic collapse” and his oft repeated deep concerns about the U.S. dollar, it is very possible that he is accumulating gold in allocated accounts away from the spotlight of the media and the public.

London Good Delivery gold bars (400 oz) can be bought in volume at much the same prices as the gold ETF. They can be stored at a cheaper cost but have the added advantage of not having to be declared.

Importantly,  London Good Delivery gold bars are highly liquid and would be more liquid than ETFs in the event of a systemic crash and or currency crisis. This is one of the reasons that increasingly respected hedge fund manager, David Einhorn, has opted for gold bars in allocated accounts in specialist depositories.

Counter party risk is also one of the reasons that the University of Texas Investment Management Co., the second-largest U.S. academic endowment, said April 14 that it has taken delivery of about $1 billion worth of gold bullion bars. 

SILVER 
Silver is trading at $34.07oz,€23.94/oz and £21.30/oz. 

PLATINUM GROUP METALS 
Platinum is trading at $1,686.00/oz, palladium at $729/oz and rhodium at $1,925/oz. 

NEWS
(Reuters)
Gold steady on Asian physical buying; dollar weighs

(Bloomberg) 
Gold May Drop as Greek Rescue Plan, Crude-Oil Decline Erodes Haven Demand

(Bloomberg)
BIS Says Gold Held in Swap Contracts Rose 18% as of March 31

(The Telegraph)
European leaders prepare for a Greek default

COMMENTARY
(The Daily Mail)  
Lord Rees Mogg: The Greeks are buying gold - so should you

(Financial Times) 
The UK can learn from Greece’s tragic loss of faith

(ZeroHedge)
What If Greece Says No?

(CommodityOnline)
US Middle Class nears extinction, Looks for gold,silver to rescue

(The Telegraph)
Where Greece goes now, we will soon follow

(King World News)
Rickards: Fiat system's abuse will force world back to gold standard

 

 


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