Gold will Thrive as Dollar Depreciates

Bill Gross Recommends Gold

by Chris Vermeulen

Lately we’ve heard a lot about the PIIGS in the “Ring of Fire”. Usually the ring of fire is used to describe a horseshoe shaped area of of volcanoes in the Pacific Rim. But in this case it is referring to the PIIGS i.e. Portugal, Ireland, Italy, Greece and Spain. But in a recent monthly commentary Bill Gross of PIMCO, added the United States to that list. Perhaps we will have to change the term to US-PIIGS. But we are not alone he also added Japan, France and the U.K. to the list of countries with a significant “Fiscal Gap” meaning that expenses are far outpacing income.  Obviously, we can’t get away with that in our personal or family budgets and as a country we can’t get away with it forever either. The surprising thing is that he is now recommending gold as a solution to the problem.

Gold Will Thrive in ‘Ring of Fire’

Hawaii Volcanoes National Park. 1972-1974 eruption of Kilauea Volcano at Mauna Ulu. February - March 1974

Credit: National Park Service, Photo by D.W. Peterson

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.

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. government 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.

After Bill Gross’ bullish words, gold prices were trading a 7-month high on Thursday before falling Friday to finish the week at about $1776.00 an ounce.


From a technical analysis point of view gold, silver and gold miners 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 on gold for 2013. My daily analysis and trade ideas are available at  The Gold and Oil Guy.

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