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Monday, June 20, 2011

Trade GLD, Buy GOLD

Much has been made in recent weeks of George Soros sale of his GLD. What most commentators are missing is that George Soros did not sell an ounce of Gold. He sold a tracking stock the tracks the price of gold. He is not so stupid as to confuse the two. Nobody knows how much Gold he is holding. He's not likely to divulge that information. He is not obliged to do so.

The only reason he admitted to selling the GLD is that his trade can be tracked and would have come out anyway. And it's to his advantage to have others panic and sell too. That way he can buy it back cheaper. After all, it's a trading vehicle. It should be traded often, as eventually it may become worthless.

So what then is the difference between physical gold and a tracking stock that tracks the price of gold? Don't the prices move in tandem?

The answer is that they move in tandem as long as the markets remain orderly. That is to say: as long as the markets command the confidence of global investors. Which is to say: as long as the currencies in which the markets are priced retain the confidence of global investors.

If you happen to feel like that should be the case for the foreseeable future then GLD is the trading vehicle for you.

The moment the markets - or the underlying currencies lose the confidence of investors - for any reason at all - invent your own - then the price of Physical Gold will decouple from the price of the tracking stock GLD.

We have already seen that Gold stocks have ceased to track the price of gold. This has been the case for much of the bull market in physical gold. Why? Because stocks are another form of paper gold. And I should point out that there is an ongoing crisis of confidence in paper - in case you've missed it. (Some analysts point out the during the Great Depression gold stocks performed well. But that was because bullion was outlawed. This will not be possible this time around.)

This crisis of confidence may be temporary. Or it may intensify. And eventually it may become a full fledged panic out of paper.

At that point if you do not own physical gold it will be too late to buy it in any meaningful quantity.

If you're not at all worried that that point will ever arrive then there's no reason on earth to buy physical gold.

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