It is well known by military experts that every battle involves conflicting reports and unknowns, a situation known as the Fog of War. However, it is becoming increasingly the reality that economists, analysts and traders are operating in a “Fog of Indicators.”
Soros Fund Management Updates Financial Allocations
Soros Fund Management, the asset management firm owned by George Soros, recently reported in SEC filings that it had increased its holdings in S&P 500 stock index puts by more than a million to 2.1 million shares, a greater-than-100-percent increase since the fourth quarter of 2015. 1
This is just one indicator that has market analysts scratching their heads. A put gives the purchaser the right to sell an asset at a point in the future at a specified price. This can indicate a conviction that the price is at a top and is about to retreat, or it is a strategy that can also be used to cover a long position. Trying to determine which is the case with market-mover Soros is just one of the many complications in the world financial markets.
Interestingly, the Soros fund also bought 19.4 million shares of Barrick Gold, 1 million new shares in Silver Wheaton, and 1.1 million shares with a call option on the SPDR Gold Trust—significant investments in large precious metals companies. This may lead us to the conclusion that the put options on the S&P 500 were bought with the expectation that the S&P is going to decline and gold prices are going to rise as a result.
Up, Down, Sideways – Or All of the Above?
The difficulty many gold investors and other financial traders are encountering today is sorting through traditional indicators, ratios and trends that are sending highly mixed and often contradictory signals about local, regional and world economies.
Adding to the challenge is the traditional differentiation between short and longer-term indicators. Many who invest in gold are convinced there is clarity in a longer-term economic downturn, and gold is a safe bet against future economic pitfalls. For example, there is ongoing disappointment in the reports coming from China, second only to the U.S. as a global economic engine. While it is not in immediate danger, there is a clear indication of slowdowns in retail sales, industrial production, and other important measures of economic health. This is even more concerning in the face of government efforts to stimulate the economy.
Economic data from China, the world’s second-biggest economy, has continued to disappoint. Industrial production, retail sales and investment data came in below expectations over the weekend, despite official stimulus measures. In fact, Soros put his view on record and raised eyebrows last month, noting a troubling resemblance between the current situation in China and that seen in the West when unsustainable debt levels led to the crash of 2008.
Worldwide Economic Problems
However, the U.S. and Eurozone economies are also under close scrutiny. U.S. jobs reports seem to be positive enough for the Fed to again discuss rate increases, but other indicators are raising concerns, such as the latest housing and consumer confidence numbers. 2
In Europe, most analysts have seen a 2016 slowdown as a given, and the late-May numbers seem to be supporting this pessimism. Aside from the potentially transformative Brexit vote in late June, financial numbers are showing a broad slowdown, particularly in the closely watched purchasing manager’s index. According to the firm Markit, that indicator just fell to a 16-month low. 3 This conflicts with the earlier boost given to European exporters due to the fall in the euro’s value, and the good start to activity early in 2016.
The bottom line for analysts and traders is there is no real bottom line – it is relatively easy to argue for both sides of the issue for economic slowdown or modest increases over the short-term. However, there continues to be a consistent view that the longer-term concerns make physical gold an appealing safe haven to protect against potentially negative economic scenarios—this becomes especially poignant when we see how huge fund managers like Soros confirm the validity of this position.