The governments of Mexico, Thailand, and Russia bought $6 billion worth of gold in February and March, just in time to see a rapid sell-off  in the precious metal. Gold reached a record $1,577.57 an ounce on May 2. It has moved as low as $1,516 since then, to some extent because veteran hedge fund manager and multi-billionaire George Soros has become a seller.

The countries that are adding to their stockpiles have
either made a mistake, or they have made a smart bet that gold prices will continue to rise for several quarters if not several years. These governments may have decided that a long-term investment in a precious metal which is largely tied to inflation is important. Their theories may be right. And, the benefit could be in the hundreds of millions of dollars if gold resumes its rally.

But, Soros may have made a shrewd move and the big national buyers of gold could find their investment in gold permanently impaired. Soros has spoken about an asset bubble for months. His views seem to be right if agricultural commodities are any sign. The value of corn, wheat, and soybeans have dropped rapidly. Soros’ opinion of the world may be confirmed. Certainly global GDP growth rates have been stymied. China’s PMI has leveled off. US GDP improvement has slackened.

Many wonder whether  governments which are speculating on gold have been proved wrong in the short-term. An alternative explanation is that a certain level of gold reserves is essential to their philosophies about how their assets should be distributed. If their plans were to make a quick profit, the market has not turned out well for them.

Douglas A. McIntyre