George Soros, who’s had a love/hate relationship with gold over the past several years, is back in a loving mood again … if his recently modified portfolio is any indication.
During the first quarter of 2016, he purchased 1.05 million shares of the SPDR Gold Trust (ETF) (GLD) and picked up 19.42 million shares of gold miner Barrick Gold Corporation (USA) (ABX).
All told, Soros spent $387.2 million between the two gold positions in Q1. It’s a relative drop in the bucket for the $6 billion fund, but telling all the same — Soros doesn’t do much of anything that’s not a well-calculated risk with strong odds of realizing at least some sort of upside.
In conjunction with the bet on GLD and ABX (and gold in general), George Soros also made a big bet against U.S. stocks via the purchase of put options on the SPDR S&P 500 ETF Trust (SPY). His option trade now gives him control of the potential sale of 2.1 million shares of SPY at a pre-determined price, up from the 1 million share bet against SPY he was holding as of the fourth quarter.
If he’s right on either count, stock investors have something to worry about, while gold fans have something to celebrate.
And he’s probably right.
Why Soros Bet on GLD
While the quarterly disclosure reports required by the SEC tell the market exactly what Soros’ fund owns, there’s is no requirement for George Soros to explain why he owns it. That’s up to Soros, who has thus far said little about the new trades, leaving the “why” aspect largely up to observers.
The most likely reason isn’t exactly elusive though. The bet on gold is most likely a bet against the U.S. dollar, and a falling dollar could also work against stocks in the near-term. It’s also unusual (though not unheard of) for gold and stocks to move higher in tandem regardless of the circumstances, as traders often view the two in an either/or light.
The chart below comparing gold prices to the U.S. Dollar Index speaks for itself. Between 2008 and 2011, gold prices soared in anticipation of cheap, money-driven inflation that never materialized. By 2010, Soros recognized the unmerited ascension of gold, and had the guts to call it the “ultimate bubble.”
He was right too. Gold spent the next four years losing roughly 40% of its value. The last leg of that — weakened from gold, GLD and gold miners — was helped along by a jaw-dropping 25% gain in the value of the U.S. dollar, and a strong dollar kept gold prices suppressed for the bulk of last year.
A closer look at the U.S. Dollar Index, however, reveals it’s looking for a way to come back to earth.
The floor at 93.1 has been repeatedly tested since early last year, and last month, it was dealt what may have been a backbreaking blow. Odds are good the U.S. Dollar Index’s next drive into that support will be the one lets the index slip under 93.1 for good, and will be followed by a precipitous selloff.
Tepid U.S. interest rates (currency and interest rates tend to move in tandem) can simply no longer prop the greenback up.
As for stocks, in some regards, a weaker U.S. dollar could help corporate profits.
One of the recent chief complaints from U.S. companies that rely on sales to foreign customers is a lack of affordability of their goods when their customers have to surmount an adverse exchange rate.
A weaker dollar could restore a great deal of business some North American companies have lost for pricing reasons. The transition from here to there, however, can be a turbulent one, and the initial shock — a weaker U.S. dollar still hurts some U.S. companies — could send already overvalued stocks over the proverbial edge.
To what extent such a headwind could hurt stocks remains to be seen. While some have called Soros’ put options on SPY as an expectation of an outright crash, the term “crash” is a relatively ambiguous one in terms of size and duration.
A normal and temporary pullback could still become a big win for Soros’ put option trade. Put options are also the right to sell an instrument at a set price in the future, but not the requirement to do so. Soros may simply be hedging a bigger bet.
Regardless, he’s most likely generally right about some sort of market-wide weakness in the foreseeable future, even if it’s just a rotation out of stocks to free up capital to buy gold.
Bottom Line for GLD
As for where GLD may end up, that’s as difficult for Soros to say as it is for anyone else.
We do know, however, there are key Fibonacci retracement lines at $133 and $153, and both of those levels coincide with major highs and lows the ETF has made in the not-so-recent past.
Being realistic though, Soros is likely looking more for the right scenario for the dollar and gold prices than he’s looking for a specific price target. Traders following his lead may want to look at things in the same light.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
