PIMCO’s Bill Gross is Gloomy But Finds Gold Shiny

bill gross on goldPIMCO released three market commentaries recently:

1. Bill Gross – “Damages

Key Point –  The United States has both a deficit problem and a fiscal gap problem. What’s the difference between the two? Deficit refers to the difference in spending and revenue for a given year. The fiscal gap also includes future payments which have accrued during the year. This includes Social Security, Medicare and Medicaid. By both these measures, the US is in trouble. In 2011, the deficit at 8% was higher than Greece or Spain. However, the US had a much worse fiscal gap than Greece or Spain at 11%.

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While right now the US is considered the safest place in the world to invest, the country will lose this status if the deficit and fiscal gap situation continues. Ironically, the budget cutting and tax increases collectively known as the “fiscal cliff” are not nearly enough to make a difference in this process according to Bill Gross.

Mohamed El-Erian – “What The Fed’s Historic Bet Means For You”

Key Point – In a previous media appearance, El-Erian had made the comparison  between the FED and NFL replacement referees. To paraphrase his comments, “We know they are not the best people to do the job but of reviving economic growth (that belongs to the Congress and The President), however, they are are the one’s showing up on the field.”

Without explicitly mentioning the NFL, he extends the metaphor in this recent article. Does having replacement refs harm the integrity of football? Does having the FED taking the central role in providing economic growth undermine its credibility? While he does not directly say yes, he does use the following language to describe their recent actions, “It is only a matter of time before the costs of its activism overwhelm the benefits.”

Mihir Worah & Nicolas Johnson “Gold – The Simple Facts

The most interesting article was not by Bill Gross or El-Erian, but by Mihir Worah,  the very successful manager of PIMCO Real Returns Commodity Strategy Fund. The article builds on the positive statements that Bill Gross has made about gold.

He makes the case for investing in Gold which is nicely summed up in the last paragraph:

Central banks globally are seeking to depreciate their currencies in a beggar-thy-neighbor attempt to stimulate their domestic economies (the Swiss National Bank is a prime example). Therefore, we believe investors should consider owning gold, precious metals and other assets that store value as long as central banks continue to print and maintain negative real interest rates.

In the past, Learn Bond’s has argued that gold is not a great inflation hedge. Instead, we argue that gold is a great hedge against economic uncertainty. If inflation is very high, that might cause a great deal of economic uncertainty and push gold prices higher. If you buy this argument that gold should rise in value due to  inflation or economic uncertainty, we recommend that you use the  SPDR Gold Shares – GLD. We recommend against buying a leveraged gold etf. Leveraged ETFs tend to produce very strange investment returns.

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