MoneyNews.com – Legendary financier George Soros returned to buying gold in late 2011 after selling it earlier, and is due to reap the benefits later this year when Fed policies will likely weaken the dollar and send the precious metal climbing, Emerging Money reports. In the first quarter of 2011, Soros Fund Management sold almost all its shares in the SPDR Gold Trust and the iShares Gold Trust exchange-traded funds, Bloomberg reports, citing SEC data.
Gold later fell in 2011 as the dollar resumed its safe-haven status on sentiment that the U.S. economy was set to improve and somewhat decouple itself from Europe’s woes. But the U.S. economy might not improve enough to make Federal Reserve officials fully comfortable, as the European situation could take a turn to the worse and threaten still-fragile economic output at home and keep unemployment rates elevated.
High unemployment rates and tame inflation numbers are fueling market talk that the Fed may roll out a third round of extraordinary monetary policy measures known as quantitative easing, which are asset purchases from banks.
Should that occur, the dollar would weaken and gold would soar anew later this year, making Soros’ move back into gold profitable.
“Even though gold closed the year at a six-month low, Soros and other gold bulls such as Steve Cohen of SAC Capital will be rewarded if Federal Reserve Chairman Ben Bernanke launches into a third round of quantitative easing,” Emerging Money reports.
“When this happens, all dollar-denominated commodities, including oil, United States Oil ( USO), and silver, iShares Silver Trust ( SLV) will rise with gold, just as happened with the last quantitative easing campaign in 2010.”
The Fed has already launched two rounds of quantitative easing, known widely as QE1 and QE2, with the aim of lowering unemployment rates and steering the economy away from what it saw were deflationary threats.
QE1 saw the Fed buy $1.7 trillion in assets from banks, mainly mortgage-backed securities, while QE2 saw the U.S. central bank snap up $600 billion in Treasury securities from banks.
Unemployment rates, which came in at 8.5 percent in December, still remain above pre-recession levels and inflation rates low despite higher prices at the pump and in the grocery store.
When setting benchmark borrowing rates, the Fed tends to focus on core inflation figures, which are stripped of volatile food and energy prices because such items swing up and down not due to fundamental changes in demand.
A CNNMoney Survey shows that despite improving economic indicators, the economy is still weaker than what Federal Reserve officials like and therefore, QE3 could be on the way.
About 75 percent of investment experts surveyed say QE3 may be coming in 2012 due to damage the European debt crisis is set to inflict on the U.S. economy.
“Despite an improving tone to recent U.S. economic reports, we are concerned that global developments may weigh more heavily on the U.S. growth outlook as 2012 unfolds,” says Dan Pierce, portfolio manager at State Street Global Advisors, according to CNNMoney.
Some gold bulls, including Jim Rogers, have pointed out that rising food and energy prices are the result of QE1 and QE2, as a big chunk of all the liquidity that stems from the Fed’s loose policies tends to end up in commodities markets.
“Anybody who buys, who goes shopping knows that prices are going up. Buy food, education, insurance, just about everything that we buy, prices are going higher and the government tells us there’s no inflation,” Rogers told Moneynews/Newsmax.TV recently.
The U.S. consumer price index was unchanged in November from October and up 3.4 percent on year.
“Some independent measures say it’s over 6 percent already … it’s going to go much higher because they keep printing money, and as long as they keep printing money, it’s going to get worse. So prepare yourself for much higher inflation,” Rogers adds.
And higher inflation means higher gold prices.
“Although investors are currently not focused on an inflationary environment, longer term we believe with the amount of stimulus injected globally and higher inflation expectations will continue to support investment demand in gold,” says Tanya Jakusconek, an analyst for the unit of Canada’s Scotiabank Group, according to the Christian Science Monitor.
Scotia Capital expects it to hit $1,750 an ounce.
The metal peaked at around $1,900 an ounce in September but has since fallen and is currently trading around $1,620 an ounce.
Early in 2011, Soros sold his positions in gold exchange-traded funds SPDR Gold Trust and the iShares Gold Trust on concerns the metal had become an asset bubble, according to Bloomberg.
Other high-profile investors shorted gold as well, including hedge fund managers John Paulson, Paul Touradji and Eric Mindich, according to Bloomberg.
Other experts agree that while gold corrected at the end of 2011, it’s not out.
“Gold became very overbought,” says Charles Morris, who oversees about US$2.2-billion of assets at HSBC Global Asset Management in London and cut his bullion holdings to 6 percent at the end of November from 15 percent six months ago, according to Bloomberg.
“It will at least consolidate following this almighty rally. When the new bull market arrives, maybe a year or so away from now, then gold will once again prove to be a leading asset.”