about that “Soros is shorting gold” rumor

Before I relay this, let me first make sure you understand that I am simply discussing a rumor here – I have no way of knowing whether or not it is true and have no opinion as to whether anyone should or should not act on it. Thank you for being an adult 🙂

OK.

So hedge fund guys are like washwomen, every bit as susceptible to gossiping and rumor-mongering, every bit as inclined toward the salacious and the juicy. Especially as it pertains to the portfolios, victories and defeats of their contemporaries. This is why we have things like “Hedge Fund Hotel” stocks such as Apple last summer and AIG right now. This is why so many hedge funds – especially of the value or the activist variety – sometimes seem as though they are merely variations of each other.

Oftentimes, the servicers to the hedge fund industry act as conduits for this gossip. I know an institutional sales guy who sometimes feels as though a majority of his conversations with hedge fund clients are about which analyst is moving to which firm and what the other guys he deals with are excited about or fearful of in a given niche.

Even within the fund administration layer there is a grapevine of sorts. For example, you are probably unaware of this fact – 75% of all Wall Street professionals involved with prime brokerage were former college lacrosse players. It’s true, based on my estimates. Three out of four guys who work prime brokerage for JPMorgan, Goldman etc were Brothers of the Stick. They all get each other jobs upon graduation, year after year, and before you know it, here we are! The entire trade execution and settlement complex would collapse in on itself if not for the predominantly east coast and mid-Atlantic fraternity of Lacrosse Bros who keep the machinery in motion.

Anyway, my point is, everybody talks.

And over the last week or so, the one rumor I keep hearing from different hedge fund people is that George Soros is currently massively short gold and that he’s making an absolute killing.

Once again, I have no way of knowing if this is true or false.

But enough people are saying it that I thought it worthwhile to at least mention.

And to me, it would make perfect sense:

1. Soros is a macro investor, this is THE macro trade of the year so far (okay, maybe Japan 1, short gold 2)

2. Soros is well-known for numerous market aphorisms and neologisms, one of my faves being “When I see a bubble, I invest.”  He was heavily long gold for a time and had done well while simultaneously referring to it publicly as a speculative bubble.

3. He recently reported that he had pretty much exited the trade in gold back in February. In his Q4 filing a few weeks ago, we found out that he had sold down his GLD position by about 55% as of the end of 2012 and had just 600,000 shares remaining. That was the “smartest guy in the room” locking in a profit after a 12 year bull market.

4. Soros also hired away one of the most talented technical analysts out there, John Roque, upon the collapse of Roque’s previous employer, broker-dealer WJB Capital. No one has heard from the formerly media-available Roque since but we can only assume that – as a technician – the very obvious breakdown of gold’s long-term trend was at least discussed. And how else does one trade gold if not by using technicals (supply/demand) – what else is there? Cash flow? Book value?

5. Lastly, the last public interview given by George Soros was to the South China Morning Post on April 4th. He does not mention any trading he’s doing in gold but he does reveal his thoughts on it having been “destroyed as a safe haven”:

Q: What is your view on gold?

A: That’s a complicated question. It has disappointed the public, because it is meant to be the ultimate safe haven. But when the euro was close to collapsing in the last year, actually gold went down, because if people needed to sell something, they could sell gold. Therefore they sold gold. So gold went down together with everything else.

Gold was destroyed as a safe haven, proved to be unsafe. Because of the disappointment, most people are reducing their holdings of gold. But the central banks will continue to buy them, so I don’t expect gold to go down. If you have the prospect of a crisis, you will have occasional flurries or jumps. So gold is very volatile on a day-to-day basis, no trend on a longer-term basis.

He says he doesn’t expect it to go down but within a day or so it began to…

Taken in concert, these details indicate that it is very possible that Soros has a big short on against the precious metal, but by no means are these facts conclusive of anything.

The real question here is whether or not this should or would matter to the markets and to other large pools of wealth who are now holding gold. Would Soros betting against it rattle their convictions even further? Would it induce other hedge funds to come in on the short side, given the Soros track record on these types of trades?

This is all speculation but, even still, it sets up a marvelous example of George Soros’s “reflexivity” concept – in which he explains how the participants in the market acting upon the market can actually make drastic changes occur within the market.

It will be interesting to see if the rumor mill is wrong here (as it usually is) or if there’s something to it after all.