Bill Gross Says Gold Will Thrive In The Global "Ring Of Fire"

Posted by Bigtrends on October 11, 2012 6:27 AM


Bill Gross Says Gold (GLD) Will Thrive in 'Ring of Fire'

Bill Gross is one of the most recognizable names in the investment world.  He is the founder and co-chief investment officer at bond fund giant PIMCO.  His long-term track record regarding bonds is among the best and he still runs the world's biggest bond fund, the PIMCO Total Return Fund (PTTRX).

Gross is also known for speaking quite bluntly about the United States' growing debt problem.  His latest monthly market commentary came with a warning for the U.S. and investors alike . Gross stated that a number of recent studies have concluded that "The U.S. balance sheet, its deficit and its 'fiscal gap' is in flames and that its fire department is apparently asleep at the station house."

The recent studies Gross pointed to came from the Congressional Budget Office, the International Monetary Fund and the Bank of International Settlements.  The studies calculated that the United States needs to cut spending or raise taxes by 11% of GDP over the next 5-10 years.  This translates to $1.6 trillion per year.  That compares to the country's 8% of GDP deficit in 2011.  Those numbers put the U.S. in the 'ring of fire' with other countries with similar fiscal gap sizes.  These countries include Greece, Spain, Japan, France and the U.K.  

Gross warned that the U.S. debt problems have put the country in this "ring of fire" that will burn most investors.  The only investors who will not get "burned"?  He says the lucky few will be those that are protected by gold and other real assets, protected from a severe U.S. dollar depreciation caused by the Federal Reserve's money printing.

In a white paper titled "GOLD - The Simple Facts" posted on PIMCO's website, PIMCO analysts Nicholas J. Johnson and Mihir P. Worah also said some interesting things.  Here is an excerpt, "Our bottom line: given current valuations and central bank policies, we see gold as a compelling inflation hedge and store of value that is potentially superior to fiat currencies."  They pointed out the positive supply/demand characteristics of gold as a big plus in their scenario.  The PIMCO analysts went on to say,  "We believe investors should consider allocating gold and other precious metals to a diversified investment portfolio."

That is quite a statement coming from a "mainstream" investment firm. Wall Street's usual reaction to gold is that it is a barbarous relic whose only use is in jewelry and that no sane investor should put any money into it, even paper gold instruments such as gold ETFs like the SPDR Gold Shares (NYSE: GLD) and others.

[ - Here are a couple of relative value charts of Gold from the Pimco Report that show both the relative lack of gains compared to 1981 (not inflation-adjusted) and how Gold/GDP is also relatively low in faster-growing economies like China.]

Real Gold Price Chart

Gold/GDP in China & US

After Bill Gross' bullish words, gold prices were trading a 7-month high last week before falling back in recent days, to finish last week at about $1776.00 an ounce.

From a technical analysis point of view Gold, Silver (SLV) and Gold Miners (GDX) have been holding value at key resistance levels.  While we could see a 3-5% pullback before they breakout and start the next rally overall the outlook for precious metals remains very strong and I put a $2400 per ounce target on gold for 2013.

GLD Daily Chart

Courtesy of Chris Vermeulen,