By ALEX PRESTON [New Statesman] – There is a science to investing in bubbles. George Soros has built a career and an extraordinary fortune on the back of his “theory of reflexivity”, which identifies bubbles before they inflate and which, crucially, tells him when to get out. As early as the Davos conference in January 2010, Soros had dubbed gold the “ultimate bubble”. Over the course of 2010, he continued to buy gold, both physically and through ETFs such as the iShares and SPDR gold trusts. He rode the price up from below $1,100 per ounce to $1,400 per ounce in the first quarter of 2011. Then he began to sell.

Exactly how much and when he sold is unclear (his fund isn’t required to make its portfolio public), but reports suggest that Soros dumped the vast bulk of his gold holdings earlier this year. This means he missed out on the rise in price of $450 per ounce between April and August. That would not have worried him unduly. Central to his theory of investing in bubbles is the need to get out while they’re still inflating – you don’t want to be one of those rushing for the exit as the bubble bursts.

John Paulson, the hedge-fund manager who correctly predicted the real-estate bubble and who now holds most of his personal wealth in bullion, believes that gold prices will reach $2,000 per ounce imminently and may rise as high as $4,000 per ounce over the next few years. The market is torn between two of its great sages – Soros of the gold bears and Paulson of the gold bulls.

In the long term, I’m with Soros. The gold bubble will burst, and when it does – as with all bubbles – we will look back on these days of $1,850 per ounce as a kind of collective madness.

Continued at the New Statesman | More Chronicle & Notices.