Special Report December 19, 2010, 8:30PM EST

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

Here's the story of the SPDR Gold Trust—an ETF that holds more bullion than the Swiss central bank—and the role mining companies played in the precious metal's long bull run

By Cam Simpson

(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.