Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Does Soros’ Bet on Gold make Goldcorp a Good Investment?

News reports indicate that George Soros’ has suddenly gotten real bullish on gold. The legendary investor bought $264 million worth of Barrick Gold Corp (NYSE: ABX); and 1.05 million shares in the SPDR Gold Shares ETF (NYSE: GLD).

This action will undoubtedly get many investors wondering about Barrick’s biggest; competitor Goldcorp (NYSE: GG). Goldcorp does have a lot in common with Barrick; it is a large publicly-traded Canadian gold miner that is cheap right now. Its shares were trading at $16.90 a piece on June 2, 2016.

Goldcorp has something else in common with Barrick; a dismal financial report. The latest earnings report reveals a company with some serious problems. Some of the gruesome highlights include:

  • A diluted earnings per share number of -4.83 for first quarter 2016.


  • A net income of -$3.99 billion.


  • A free cash flow of -114 million.


  • A return on equity of -25.84% that means Goldcorp shareholders lost one fourth of their investment.

There were some bright signs in Goldcorp’s earnings report in spite of these figures. The good numbers include:

  • Revenues of $4.302 billion


  • A profit margin of 8.47%


  • A dividend yield of 2.17%


  • $1.431 billion in cash from operations.


  • $458 million in cash and short-term investments.


  • Assets of $21.51 billion.

Unlike Barrick, Goldcorp has experienced a serious revenue increase over the past year. Goldcorp reported revenues of $3.575 billion in March 2015 and $4.302 billion March 2016. That means revenues in first quarter 2016 were $727 million more than a year earlier. Cash from operations also increased by $632 million during that period; rising from $799 million in March 2015 to $1.431 billion in March 2016.

This means that Goldcorp is a growing company that makes money but is it a good investment? My answer would be no because of the inherent volatility of the gold market.

Is Soros Trying to Short Gold?

Soros’ interest in gold; should be a tip off that the precious metal is a dangerous and volatile investment. Soros’ made his fortune by making short bets against volatile currencies, stocks and commodities.

It looks like he’s about to do the same thing with gold and gold-based stocks. My guess is that Soros thinks gold prices are about to spike, then drop dramatically and take gold miners along for a ride.

What’s truly interesting is that George himself has told us why; he thinks that gold is about to go on a roller coaster ride. In January; Soros made headlines by saying that China’s currency the Yuan was about to collapse. He scared a lot of people including the Chinese government; which accused him of declaring war on the People’s Republic.

Soros probably thinks that a fall in the Yuan will drive many investors; including a lot of Chinese, to move their money into gold. That will drive up the price; and he’ll make money by unloading his gold investments as it goes up. He could then make even more money; by using the cash generated by the gold sales to buy up stocks and other investments, sold by the newly minted gold bugs.


Soros is not a Gold Bug

What this means is that Soros is not a gold bug; instead he’s a trader making a big bet against a commodity he thinks is about to spike in price. That is not very good news for miners like Goldcorp, because it indicates that Soros’ thinks gold prices will fall dramatically at some point in the next year.

The most likely scenario is that many people will try to take advantage of high gold prices by selling. That will drive down the price, and the situation could be made worse if China goes into recession. Many Chinese will dump their gold simply to get cash.

That will be bad news for miners; because it means we could see gold at a price of under $1,000 an ounce at some point in the next year. If that happens, we could see major gold miners like Goldcorp collapse completely.

Soros interest shows us that gold and gold miners are just too volatile to be long term investments. If you are looking for something to short gold; and Goldcorp, might be great trades right now. Those looking for a long term investment should stay far away from gold; because Soros’ interest indicates it could collapse real soon.

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