Skip to content

Soros Gold Bubble at $1,375 as Miners Push Each Button to Tears

Here's the story of the SPDR Gold Trustan ETF that holds more bullion than the Swiss central bankand the role mining companies played in the precious metal's long bull run

Soros Gold Bubble at $1,375 as Miners Push Each Button to Tears

Here's the story of the SPDR Gold Trustan ETF that holds more bullion than the Swiss central bankand the role mining companies played in the precious metal's long bull run

(Bloomberg) — James Burton didn't have a penny invested in gold of the $142.8 billion he managed as chief executive officer of the California Public Employees' Retirement System in 2002. Why would he? The metal had been in a bear market for two decades.

Yet shortly after announcing his retirement from the largest public pension fund in the U.S., Burton agreed to fly to London to entertain a job offer from a mining companies trade group he had never heard of. Squishing across a rain-soaked British golf course in rented shoes in early June 2002, he listened to what sounded like a far-fetched idea: Selling gold as an investment to the masses.

It was time to get investors to buy a precious metal they'd shunned for a generation, Christopher Thompson, the World Gold Council's new chairman, told him that day. The key was dividing bars of gold into securities tradable on the New York Stock Exchange. He wanted Burton to lead the effort, in no small part because of his connections with institutional investors. Gold was then trading at about $328 an ounce in London.

"I was convinced that there was a market for the man on the street who would buy a lot of gold if he could find an easy way," says Thompson, 62, who at the time was also chairman of Johannesburg-based Gold Fields Ltd.

$1,431.25 an Ounce

Thompson bested Burton in match play on the 17th hole, convincing him to take the job as the World Gold Council's CEO. What the two did next shows the role mining companies played in gold's longest bull run in at least 90 years, reaching a record $1,431.25 an ounce on Dec. 7.

Under the men's leadership, a trust set up by the World Gold Council, which includes producers such as Barrick Gold Corp. and Newmont Mining Corp., won approval from the U.S. Securities and Exchange Commission for an exchange-traded product backed by bullion. It gave investors access to gold without the cost and hassle of taking physical delivery.

The fund, SPDR Gold Trust (pronounced Spider), now holds 1,299 metric tons of gold valued at about $57 billion, more than the Swiss central bank. Investors include the University of Notre Dame, the Texas teachers' pension fund and a who's who of hedge fund titans and money managers such as John Paulson's Paulson & Co., Laurence Fink's BlackRock Inc. and George Soros's Soros Fund Management LLC.

Biggest Funds

Globally, the 10 biggest such funds now hold a combined 2,113 metric tons of gold, more than the official reserves accumulated by every country in the world save four: the U.S., Germany, Italy and France.

Their popularity has helped drive unprecedented gains for the precious metal, and some people, including analysts at Goldman Sachs Group Inc., say gold can go higher.

Soros, who made $1 billion betting against the British pound in 1992, called gold the "ultimate asset bubble" at the World Economic Forum's January meeting in Davos, Switzerland, when the price of gold was at $1,087.10 an ounce. His fund held $664.8 million in gold-backed exchange-traded funds as of Sept. 30.

Gold's rise resembles moves reached before the three big crashes of the last decade: the Nasdaq tech-stock bubble of 2000, the U.S. housing market bubble of 2005-2006, and the crude oil-price spike of 2008, according to data compiled by Bloomberg.

In a Dec. 14 interview, Jason Toussaint, the World Gold Council's managing director for the U.S. and investment, pointed to a September report by the group arguing that the pace and increase of gold's price isn't comparable to the characteristics of recent bubbles. The metal's rise is consistent with its long- run average when compared with other assets, including equity indexes and oil, the report said.

Parabolic Rise

History shows that when the price of an asset takes a parabolic climb like gold's has, it's eventually bound to crash, according to Mark Williams, an executive-in-residence and master lecturer at Boston University's finance and economics department. And when it does it's almost always the smaller, individual investors that get out too late, he said.

As much as half of the gold in exchange-traded funds may be held by individual investors, according to BlackRock, the world's largest money manager.

"Your little guy is going to get hit by the doorknob on the way out," Williams said.

Driving Social Change

Already gold's record prices are driving wide-ranging social change around the world. In the remotest parts of Africa, villagers scrambling for ever more valuable flecks of gold risk death at the hands of mine security and parents squeezing gold wealth from ore have inadvertently poisoned their own children in the process. In India, where gold has cultural significance, parents are crushed they can't buy their daughters as much gold jewelry as they wanted for their weddings.

The council declined to comment on the painful dividends.

When it worked to create the fund, one concern was that the exchange-traded product might contribute to a bubble. Burton and his investment team worried that too much success would shoot gold prices up too fast, resulting in a crash like the one that occurred in January 1980, he said. Back then the bubble burst in one day and took two decades to recover.

Pushing Every Button

Ultimately those engineering what would become SPDR Gold decided it wasn't their job to worry about it.

"Our primary mission was to find every button we could push to stimulate demand," Burton, 59, said in an interview in London. "We also knew that we had launched something that we could not control."

Their timing was impeccable. They opened investment in a reputed safe asset to potentially millions of new investors just before the financial crisis of 2007 and 2008 and the ensuing global economic slowdown. Until then, bullion was viewed by many as a fringe holding for the rich with Swiss bank vaults or gold bugs who hoarded the metal beside canned food to hedge against Apocalypse.

"They were very patient and they tapped a real deep need in the ordinary investor to be able to buy and sell gold like a stock," says Jeremy Siegel, a finance professor at the University of Pennsylvania's Wharton School in Philadelphia.

'Pivotal Moment'

The creation of the fund was a "pivotal moment," said Scott Malpass, chief investment officer for Notre Dame in South Bend, Indiana. It provided a vehicle for investors that made gold readily available and cheap and easy to trade, he said.

He managed about $5.5 billion, as of the end of fiscal year 2009, in endowments and other funds for the school.

A gold skeptic, he began buying into SPDR Gold after Lehman Brothers Holdings Inc.'s collapse in 2008, acquiring about $111 million by July 1, 2009. The school held about $65.8 million in the fund as of Sept. 30, according to SEC records.

While the World Gold Council was not first in the world to develop an exchange-traded product backed by gold, bringing it to the U.S. market was crucial, Burton and Thompson say.

The fund, now called SPDR Gold, started trading in 2004 and led the way for exchange-traded products backed by commodities in the U.S. Of the $1.4 trillion in exchange-traded products worldwide at the end of November, $171.7 billion were backed by or linked to commodities, according to BlackRock.

Atomic number 79 on the periodic table, gold has captivated humans for at least 6,000 years, since goldsmiths fashioned it into decorative objects and jewelry on the coast of the Black Sea in what is today Bulgaria.

Malleable Metal

A malleable metal, gold isn't really consumed. Virtually every ounce of gold that's ever been mined is still around: an estimated 165,000 metric tons. Peter Bernstein, the late economic historian, cited a calculation that all of the world's gold could be melted to fit into a single oil tanker in his 2000 best-selling history of the precious metal, The Power of Gold.

King Croesus first minted gold coins as money in the 6th century B.C. in what is now Turkey. By the 20th century, the U.S. and most nations had formally adopted a gold standard.

The price was effectively set at $35 an ounce until U.S. President Richard Nixon dropped the gold standard in August 1971, paving the way for a price explosion. Investors flocked to gold in the ensuing decade of financial and political turmoil. By January 21, 1980, they drove the price to a then-record $850 per ounce, equal to an inflation-adjusted $2,266 today. Gold crashed the next day.

By 2000, the mining industry faced the prospect of entering a third straight decade of a bear market for gold. SPDR Gold was born of that crisis.

Turkish Game Show

From its inception in 1987, the World Gold Council had concentrated on promoting gold jewelry, the industry's traditional anchor. Very little was done to push gold as an investment, according to Kelvin Williams, executive director of marketing for AngloGold Ashanti Ltd. until 2006.

One of the council's highest-profile investment campaigns involved a Turkish television game show aired in 2000. Contestants competed to win their weight in gold as two women paraded in skirts and bikini tops covered in coins.

Other promotions encouraged Muslims to use gold as a way to save for their once-in-a-lifetime pilgrimage to Mecca. The council also lobbied India and Italy to sell gold over the counter at post offices and banks.

The World Gold Council hired consulting firm Bain & Co. to review its operations. The mission grew by early 2002 to include a plan that would be dubbed "Project Sun" to study how to create an ETF, according to Thompson.

Wildest Dreams

The council would achieve its wildest dreams if a tradable security created demand for 900 tons of gold or $20 billion, Burton and Thompson say Bain told them. Bain declined to comment for this article.

Separately, Jeffrey M. Christian, the managing director of New York-based researcher CPM Group and adviser to several gold producers, wrote an open letter in January 2001 to the industry's executives urging them to realize that "increases in investment demand for physical gold can have immediate and dramatic effects on gold prices."

His research showed gold prices rose significantly only when investors purchased more than 529 metric tons in a year. He says mining executives were frustrated that their companies were wasting time and money on promoting jewelry sales.

"Mining companies were starving," Christian says now. The major gold mining indexes, FTSE Gold Mines Index in London and the Philadelphia Gold & Silver Index, reached all-time lows in late 2000 and early 2001.

Christopher Thompson was already a believer in the need to open up gold to investors when he joined the World Gold Council.

Unlike most of his mining counterparts, Thompson, who was born in Johannesburg, had a background in finance: in the U.S. he managed three closely-held funds that invested in gold-mining ventures.

In 1998 during dinner with his wife and children at a Chinese restaurant in Denver he cracked open a fortune cookie. The small slip of paper inside read: "You'll go to Africa and take over the greatest gold mine there."

A few months later he accepted a job as chairman and CEO of the newly created Gold Fields mining company, gaining a seat on the World Gold Council's executive committee. Thompson framed the fortune and propped it on his desk in Johannesburg. He arrived with firm ideas about how to jump-start gold prices.

Bars and Coins

For starters, he says he understood that markets are made in the margin and the marginal players in the gold market were always investors. Getting them to buy gold was the challenge.

Two ways U.S. investors bought gold were inconvenient, Thompson says. Buying bullion bars meant paying commissions, storage costs and insurance, as well as exit fees to sell. Although less expensive, gold coins had higher fees for buying and selling, Thompson says.

Thompson says he resolved to get the World Gold Council to find a way to make buying gold easy.

Yet the council still clasped to gold jewelry after more than a decade of marketing campaigns inspired by the ubiquitous "A Diamond is Forever" advertisements from De Beers, the world's biggest producer of the gems. In May 2001, the World Gold Council embarked on a new, $55 million effort called "Glow with Gold." The council aimed to boost jewelry sales and rebrand the precious metal through advertisements, arguing gold's brand had been muddied by the likes of golden credit cards and breakfast cereals.

It didn't break the slump. The expense pushed the council into a deficit, according to Thompson and Burton. It also fueled debate about the group's very existence.


"The future of the council was very much in jeopardy," said Katherine Pulvermacher, who joined the council's investment team in 2001.

The following April, the World Gold Council had a turbulent annual meeting in Melbourne, Australia, according to Thompson and Kelvin Williams.

Neither man will detail what happened, but it ended with Bobby Godsell, then chairman and CEO of what was then called AngloGold Ltd., stepping down as chairman of the World Gold Council and Thompson taking his place. Godsell, 58, did not return calls seeking comment.

Thompson wasted little time moving forward. He didn't renew the contract of the then World Gold Council CEO with whom Godsell had led the "Glow with Gold" campaign.


During his rainy day golf match with Burton, he laid out his idea: Create a trust that would offer gold through shares sold on the New York Stock Exchange. The trust would divide ownership of a single, 400-ounce bar of gold into about 4,000 shares, which would rise or fall with gold's spot price.

At the time, when millions of Americans had become comfortable investing through their 401ks, gold could be elevated to the same status as other assets, Thompson argued.

Nothing like it had been approved by the SEC.

"If you can't get that done, you'll be fired,'" Burton recalls Thompson saying. He accepted the challenge.

With the World Gold Council staff, Burton tracked and tested similar products in other markets first. The group offered its backing and some marketing support to Graham Tuckwell, an Australian natural resources consultant who on his own created the world's first bullion-backed, exchange-traded fund and got it listed on the Australian Stock Exchange in 2003.


Tuckwell, founder of London-based ETF Securities Ltd., struck on the idea after an acquaintance mentioned an oddball product in 2002: wine securities. They were "funny little things" that allowed shares of a particular vintage to be traded on a stock exchange, he says.

The World Gold Council and Tuckwell then got a similar product listed on the London Stock Exchange. And the World Gold Council supported a parallel South African project with Vladimir Nedeljkovic at Absa Capital.

Each success brought momentum and confidence, says Burton. The NYSE was the Holy Grail. It was the only market big enough to have a real impact, Thompson and Burton say.

It took two years and as much as $15 million on preparations and lawyers for Burton and his team to win approval, according to Burton, who is now a partner at California Strategies LLC, a public affairs consulting firm.

As they worked in 2003 and 2004 to shape an NYSE product that could pass muster with the SEC, Burton and the investment staff started gaming out what he called "threat scenarios."

'Perfect Storm Scenario'

What if the funds were so successful that gold went into a bubble?

"There was a potential perfect storm scenario where suddenly gold would fall into the clutches of hedge funds and momentum traders in very, very aggressive, leveraged plays, which could spike the price and then drop the floor out from underneath it," Burton recalls of the talks.

"Our biggest concern was it would burn another generation of investors and you'd start the whole goddamned tale of tears over again," he says.

At the SEC in Washington, the core concern was trying to understand an unregulated asset they knew very little about, says Robert Colby, then the agency's deputy director of the Division of Trading and Markets.

They were conscious that approving the first commodities- based exchange-traded fund would open the floodgates to a wide range of similar investment vehicles, Colby says.

Chocolate Bars

The SEC would not approve new forms of securities until it was convinced they were not readily subject to manipulation, Colby says. Even though no one regulated trading in gold, the fact that many nations still held a significant portion of their reserves in gold helped the council win this point, he says.

On Nov. 18, 2004, Burton strode across the NYSE floor and tossed brokers chocolate bars wrapped in gold foil to resemble bullion. He and Thompson rang the opening bell together as the World Gold Council launched its exchange-traded fund under the name StreetTracks Gold Trust and the ticker symbol GLD. Bank of New York Co. acted as the trustee, while a unit of State Street Corp. marketed the fund.

When the trading stopped, the champagne flowed. The frenzy for gold among investors was instant.

In the eight days it traded that November, the new ETF attracted more investment for the month than all but two other funds offered on the NYSE, including mutual funds, according to data compiled at the time by the Financial Research Corp.

Fastest-Growing ETF

By the 30-day mark, the fund's $1.29 billion made it the fastest growing exchange-traded fund in history, according to data published at the time by TrimTabs Investment Research of Santa Rosa, California, an independent research firm.

That was more than double the $610 million raised by the previous record holder, iShares Lehman bond fund, TrimTabs said.

"We were jubilant," Pulvermacher says.

Thompson retired the next year. His successor, Pierre Lassonde, then president of Greenwood Village, Colorado-based Newmont, declared ETFs "our biggest success in 25 years, the biggest since the South African Krugerrand in the 1970s."

The coins containing one troy ounce of gold gave millions of individual investors access to the gold market during its last significant run. The world anti-apartheid movement and the global gold slump combined to quash their sales in the 1980s.

Speaking at a private investment conference Sept. 27, 2005, at the Westin Hotel in Denver, Lassonde linked the rising investment demand from the fund to the rising price of gold and looked to a future in which his group used such funds to spur demand all over the world.

'Enormous' Impact

SPDR Gold is now listed in Japan, Hong Kong, Singapore and Mexico City. Gold prices took off, especially as more funds joined in the fray. Gold rose more than 58 percent in the 18 months after SPDR Gold started trading to more than $700 in May 2006, reaching a 25-year high, without adjusting for inflation.

"Big, enormous, large and ongoing" is how Dennis Gartman, an economist and editor of the Gartman Letter in Suffolk, Virginia, characterized the exchange-traded products' impact on gold prices. Widespread concerns about the dollar, other currencies and monetary policy will continue channeling investor demand to gold for the foreseeable future, Gartman said.

Gold's popularity shows how investors are snapping up hard assets as governments and central banks led by the Federal Reserve pump more than $2 trillion into the world financial system.

Goldman Forecast

Goldman Sachs analysts including Allison Nathan and Jeffrey Currie forecast in a Dec. 13 report that gold will rise to $1,690 in 12 months. Last year, investment overtook jewelry as the biggest source of demand for the first time in three decades and will retain the top spot this year, according to GFMS Ltd., a London-based research firm.

To meet the demand, mining companies pushed global gold production to a seven-year high in the first half of the year, according to GFMS. The industry's total average cash cost to produce an ounce of gold rose 17 percent in that period as companies pushed to extract ore that would otherwise not make economic sense, GFMS said in a September report.

New York-based BlackRock runs one of the fastest growing bullion funds today. It carves roughly 100 shares from every ounce of gold, versus the 10 shares per ounce created by the World Gold Council ETF.

In so doing, iShares Gold Trust makes it possible for day traders or college students to play the gold market for about $13.44. That's less than the cost of a 16-inch pepperoni pizza delivered to a dormitory in Chicago.

Day Trader

One such day trader is James "Pat" King, a 25-year-old Boston University finance graduate who started working out of the basement in his parents' home in Lincroft, New Jersey, after he lost his job on Wall Street in August 2009.

King had invested in the SPDR Gold fund in April of that year on the advice of his father who was "very leery of the federal government and their ability to make money appear out of thin air," he says. He's holding that investment while he trades shares in BlackRock's iShares Gold Trust more often, hoping to capitalize on the metal's news-driven price swings.

He's unsure how he'll know when to sell his main gold holdings.

"There's so much uncertainty in the underlying state of the macro economy," he said. That translates into "a massive pouring into gold of money from the sidelines, even moms-and- pops and high net-worth individuals want a piece of it."

'Yellow Elephant'

World Bank President Robert Zoellick has suggested that Group of 20 nations should consider using gold as an international reference point of market expectations about inflation, deflation and future currency values as they reform the global monetary system.

"Gold is the yellow elephant in the room," Zoellick said on Nov. 10. "Markets are already using gold as an alternative monetary asset because confidence is low."

Byron Wien, vice chairman of Blackstone Advisory Partners LP, says he's recommending institutional portfolios put 5 percent of assets in gold. That's come as a shock to some clients. He says he's been run out of conference rooms.

"People think it's just another bubble or it isn't real," he said.

Wien says he sees gold reaching $1,500 within two years, although any potential price gain is less important than having a safety net. "I'm recommending gold as a kind of insurance policy against calamity in financial assets," Wien, 77, said.

While Soros has called gold a bubble, he hasn't gotten out of the market.

SPDR Gold was the Soros Fund's largest single holding as of Sept. 30, according to a filing with the SEC. The fund acquired 5 million shares in the iShares Gold Trust, the filing shows.

'Where Are You'

"It's all a question of where are you in that bubble," Soros, 80, said in a speech at a meeting organized by the Canadian International Council in Toronto on Nov. 15. "The current conditions of actual deflationary pressures and fear of inflation is pretty ideal for gold to rise."

"The big negative is that too many people know this and a lot of hedge funds are very heavily exposed," Soros continued. He declined an interview request for this article.

Siegel, the Wharton finance professor, says he's skeptical about the metal over the long term, especially for retail investors. He believes they will have a harder time judging when to buy and sell.

His research shows gold has underperformed stocks, bonds, bills and even real estate over the long run. It has total real returns of just 0.6 percent per year since 1802, compared with 6.6 percent for stocks, 3.6 percent for bonds and 2.8 percent for bills. One of the only things gold has beaten is the dollar, said Siegel.

Unlike assets such as oil or wheat that are consumed based on economic factors, gold's true value is difficult for ordinary investors to judge, Siegel said. Its worth is often determined by fears of inflation or financial collapse, he said.

"If you can judge how these investors will evaluate those fears, you will do well," he said.

With assistance from Asjylyn Loder in New York and Nicholas Larkin in London. Editors: Marcia Myers, Melissa Pozsgay