Why George Soros is Short the S&P – and Long Gold

George Soros, the billionaire investor and philanthropist, is betting against the Standard and Poor 500 index due to his fear of another global financial crisis. During the first quarter of 2016, Soros sold 37 percent of his S&P stocks. Market Watch reported that he transferred these funds to gold and stocks for gold producers. Soros’ flight to gold is due to his belief that the prices of certain stocks do not match their fundamental values.

Since George Soros is a well-known investor, his skepticism of the stock market may cause other people to mimic his decisions. This will certainly have a short-run effect on the demand for stocks.

Soros Bets Long on Gold

In an effort to protect his assets, Soros bought 1.05 million shares in SPDR Gold Trust during the first quarter of 2016. SPDR Gold Trust’s total value is $123.5 million, so it is now obvious that Soros’ concerns about the world economy are serious.

Many Investors Will Follow Soros’ Lead

Due to fear of losing money in an unstable stock market, many investors will likely remove some of their assets from index funds that track the S&P 500. Some of these investors will invest their savings in gold, but others may choose to purchase corporate bonds and government securities. US government securities have zero risk, and corporate bonds are safer than stocks. All of these alternative assets are ideal choices for investors who wish to keep their assets secure during a financial crisis.

If enough investors decide to transfer their funds from the stock market to alternative assets, the demand for stocks will decrease. If all other variables remain constant, this decreased demand will result in lower stock prices. In turn, these low prices will attract new buyers, and the demand for stocks will increase. This process usually ensures that stock prices fluctuate around at a fairly stable equilibrium point. If a bubble exists, and a certain industry’s stock prices do not match fundamental values, price fluctuations can be volatile. This creates uncertainty and financial crises.

Investors like George Soros and Warren Buffet are currently skeptical of tech stocks. They believe that the prices of tech stocks are far above their fundamental values. Because of the high tech stock prices, Soros believes that a crisis similar to the Global Financial Crisis is possible. While it is possible that a crisis may be the result of these high stock prices, it is unlikely that the Great Recession will strike again. The Global Financial Crisis was caused by a credit-driven bubble in the housing industry. If a bubble currently exists in the technology industry, it is a result of Alan Greenspan’s theory of irrational exuberance.

Bubbles that are driven by irrational exuberance are caused by overconfidence and social fads. Due to numerous breakthroughs in the Silicon Valley, it is possible that overconfidence and excitement have driven tech stock prices above their fundamental values. This means that a resulting financial crisis would be similar to the Dotcom Crash 2000.

Betting Against the S&P 500 May Not Be a Great Idea for Long-Run Investors

Unless an investor has a surplus of funds to short the stock market, he may be better off by holding on to his stock assets. Instead of transferring stocks to alternative assets, investors should hold onto assets, and diversify by purchasing bonds, gold, and stocks from various industries. Since many economists and smart investors expect a bubble to pop in the near future, people may wish to refrain from purchasing many tech stocks. Once a recession strikes, savings can be used to purchase cheap stocks. Since rogue investment decisions do not regularly outperform indexes, most investors can benefit from a ‘buy and hold’ strategy.

International Markets Will Impact the S&P 500

According to Forbes, George Soros has indicated that he is wary of China’s problems because the Chinese economy can impact the companies in the S&P 500. These issues cannot be avoided, but investors can protect their assets by diversifying. Investors can also spread their assets across several currencies.

Is Soros Correct about the Economy?

The answer to this question is irrelevant. Since Soros is an influential investor, his actions change stock demand patterns in the short-run. Despite this fact, Soros’ decisions are based solely on his instincts about the stock market.

Current economic data does not suggest that a recession is imminent, but bubbles are difficult to detect. Only time will tell if Soros’ skepticism of the S&P 500 is warranted. Fortunately, investors can diversify and be cautious to protect their assets until the market is more predictable. For more tips about the investing in the stock market, go to Personal Money Store.

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