Bond King Bill Gross Likes Gold

In his February newsletter, Bill Gross of PIMCO surmises that from now on central bankers will target nominal GDP growth in their fight to prevent a systemic financial collapse.  Sign-up for my 100% FREE Alerts

Nothing new there, but Gross believes the threat of stagflation could be with us for a lot longer than investors expect.

The Bond King stated he believes that the “Fed provides assurances that short and intermediate yields will not change,” which therefore invites investors fearful of a total loss into an arrangement with the U.S. Treasury whereby the return of investors’ capital is “assured” but at the cost of declining purchasing power of their capital.

And for how long will this arrangement between investor and the Fed be extended?  “We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time,” Gross wrote, as he expects 30-50 years of leveraged capital to continue to unwind for many years to come.

So the Fed’s plan is to trap fearful investors into a real loss for as long as they can tolerate it.  Then, at some point, the pain of rising living expenses and no end to sluggishness economic conditions reaches a point of investors taking action.  Austrian economist Ludwig von Mises (1881 – 1973) explains the reaction of investors to the “liquidity trap” the Fed has faced since Lehman and for an additional “long, long time.”

“Inflation can be pursued only so long as the public still does not believe it will continue,” wrote von Mises. “Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes.”

The endgame is a declining dollar and higher living costs, according to von mises.

Gross believes that the Fed has no options that include economic growth rates exceeding interest rates, which explains targeting ‘nominal’ GDP.

Therefore, the two options the Fed have are between allowing the financial system to painfully collapse to the point whereby capital comes out of hiding once again, while on the other hand the Fed could prop up the deleveraging process at the expense of a return on capital.

What makes matters worse is that Gross believes the Fed (and other central banks) is inadvertently promoting a liquidity trap, further hasting the process out of Treasuries by investors and more Fed monetization of those absent buyers of its debt, creating a virtuous process of no growth, higher Fed balance sheets, higher debt-to-GDP and so forth.

“When all yields approach the zero-bound, however, as in Japan for the past 10 years, and now in the U.S. and selected ‘clean dirty shirt’ sovereigns, then the dynamics may change,” he stated.  “Money can become less liquid and frozen by ‘price’ in addition to the classic liquidity trap explained by ‘risk.’”

Gross goes on to state that institutional money won’t let go of its balance sheet while an economy deleverges.  Therefore, the slack in demand will come from government spending, a Keynesian prescription that is expected to lead to higher and higher deficits and lower and lower currency rates against other currencies as well as the ‘things’ consumed on a day-to-day basis.

“Where else can one go, however? We can’t put $100 trillion of credit in a system-wide mattress, can we?” Gross asked rhetorically.  “Of course not, but we can move in that direction by delevering and refusing to extend maturities and duration … It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.”

The way out has always been to secure gold.  Sign-up for my 100% FREE Alerts

James Turk on Gold: Getting Close to the Endgame

James Turk increasingly sees the tell-tale signs of the endgame for the U.S. dollar rapidly emerging right before his eyes.  Ergo, a move in gold that will “light people’s hair on fire,” as the Nostradamus of the gold market, Jim Sinclair, has predicted, moves ever closer to reality.

“What we are seeing today is just like we saw in the 1970s when hot money was flying around the world from place to place,” Turk told King World News on Monday.  “Despite the fact that the Federal Reserve is buying long-term paper, interest rates are still rising.”

And rising rates on the long end of the curve, not only have demonstrated the dangers of levering up the Fed’s balance sheet but extending its average maturity (one of the many problems with Greek sovereign debt), it’s extraordinarily costly to the Fed and those who’ve made a living front-running the Fed, a la PIMCO’s Bill Gross, who, by the way, just released his crocodile tears mea culpa address to investors on Friday.  It appears the insiders at Gross and Co. have had a bad year.

“So the high in government [Treasuries] prices is probably behind us,” Turk speculated.  “This will eventually [lead] to questions about the Federal Reserve’s solvency.  The Fed has a lot of low-yielding paper and as interest rates rise, the price of that paper will fall.”

It appears that while Turk’s legion of tin-foil hat wearers have so far weathered this year the most vicious turmoil in currencies, sovereign debt and stocks since the 2008-2009 meltdown, Bill Gross has been busy taking a bullet for the Fed (Buffett, too, from his purchase of BofA ahead of the most dreadful earnings releases for the banks in recent memory) at the expense of his shareholders.

What?  Bill Gross?  Sounds like another tin-foil conspiracy theory.

Consider the real threat of a military invasion of any OPEC nation that threatens to bypass the U.S. dollar in oil transactions.  Collectively, OPEC holds approximately 30 percent less Treasuries than the potential holdings of PIMCO’s $1 trillion.  It’s a far-reaching conclusion to support a case that Gross has not been touched by someone at the NY Fed—and at a most critical time when ‘Operation Twist’ needed a little help beyond the initial reaction to the news of its deployment.

That’s a sign of desperation, or fear, at the Fed.  As the founder of bullion storage company Goldmoney reviews his proprietary model, called the ‘Fear Index,’ Turk has not backed off from his earlier prediction of $2,000 by November 1.  But from the looks of things, gold may not reach Turk’s $2,000 target with only 10 trading days left for October, but given his widely-followed track record, reaching as far back to the year 2000, Turk can only be faulted for his intermittent flubs in the precise timing of his calls.

That precision, of course, only proves that Turk is not included in the loop of cc’ed memos following ad hoc conference call pow-wows held by Bernanke, Geithner, JP Morgan and CFTC cabal.

Besides, a review of Turk’s record for timing major moves reveals miscalculations of only mere weeks, for the most part, but more importantly and typical of Turk, it shows his willingness to stick his neck out for investors time and time again—unlike the endless lame calls made by big Wall Street firms that issue target prices 5% from present levels and on a time horizon that nearly assures a correct call.

Turk continued, “It won’t take a big jump in interest rates to cause people to question the Federal Reserve solvency, especially given the poor quality of the assets on the Fed’s books from the bailouts it has engineered.  This is all part of the the overall trend of increasing fear as part of my ‘Fear Index.’”

And that’s where the dollar dominoes are mostly likely to fall first.  In line with Turk’s belief that a dollar collapse will show up first in the U.S. Treasury market, Donald Coxe, former Global Portfolio Strategist for BMO Capital Markets (the firm of the iconic CEO Jeremy Grantham) told listeners of Financial Sense Newshour that the dollar’s Achilles heal can be gleaned from the stresses on the Fed’s balance sheet and from the participation (or lack, thereof) at Treasury market auctions.

Keeping a careful eye on the amount of direct bid take-downs by the Fed’s primary dealers in relation to the indirects (mostly central banks and the likes of PIMCO) may provide investors a heads up to the stress the Bernanke Fed feels. does a good job keeping investors apprised of the capital flows at the Fed’s custodial accounts.

As the Fed stresses, gold moves higher.

“What we are seeing in the metals right now is the quiet before the storm, Eric,” said Turk. “These are excellent times to be accumulating gold and silver on the dips because longer-term you are going to see price levels for the metals that today would be considered unimaginable.  This is how secular bull markets work and this one won’t be any different.  It will end in a mania that will, ‘Light people’s hair on fire,’ as Jim Sinclair is fond of saying.”

Richard Russell says Dollar must be backed by $5,000 Gold

The legendary financial newsletter writer Richard Russell stated in his Wednesday edition that the U.S. will eventually have to back the dollar by gold to halt its decline.

As the dollar has climbed against the euro in the wake of renewed concerns in Greece, and to a lesser extent, concerns in Portugal, both the euro and dollar have dropped in terms of gold.

The dollar: what was once the ultimate safe haven has taken a backseat to the truly ultimate safe haven asset, gold.  “Is this a preview of the future?” Russell asks.

“To compete, I believe that somewhere head the U.S. will have to back its current irredeemable fiat currency with gold” he stated.  “In order to do that, the U.S. will have to boost the price of its huge gold hoard to a level where the dollar may be backed anywhere from 50% to 100% with gold. That could mean unilaterally raising the price of gold to maybe $5000 and ounce or more. ..I  thought that gold, closing higher, in the face of the stronger dollar, was significant.”

As most of the components of the the Conference Board’s Leading Economic Indicators (LEI) roll over, portending a downturn in the U.S. economy in the next three to six months, the Fed’s decision to halt its purchases of newly minted Treasuries in June comes at a time when the Fed’s liquidity may be needed most (many theorize).

Russell believes the numerous pundits of the Fed’s quantitative easing policies (including two Fed governors) need quelling before announcing further money printing.  And a way to do that is to allow a significant market decline, or crash, as some predict, leaving little hope for employment, retail sales, production and housing gains.

“With inflation heating up as far as American consumers are concerned, the pressure is on the Bernanke Fed to ‘cool it’ on its quantitative easing,” Russell noted.  “I think the stock market (now slumping) and the dollar (now rising) are reflecting this. Thus the Fed might be setting off a temporary slump in the summer economy.”

“If so, Bernanke could announce, ‘See, if we ease up, the economy eases up as well.’ All of which strengthens the case for QE3. Of course, President Obama would love a late pick-up in the U.S. economy as the nation moves into the 2012 election period.”

So what’s the game plan for investors?  Russell suggests holding gold during the roller-coaster ride and to be happy you did following an anticipated Fed announcement of some form of a continuation of its quantitative easing some time in the second half of 2011.

As Bill Gross stated in March, without the Fed buying newly issued Treasuries, who will buy them?  And the Fed’s plan to re-liquify the banks and to debase the dollar won’t be feasible if the 10-year Treasury yields north of 5%.

Therefore, Russell stated, “Prepare for the summer doldrums (maybe even a slump), and then be ready for an economic revival in the fall and into 2012.  Also get ready for all-out inflation as the Fed steps on the QE3 accelerator in late 2011.”

He added, “I think the gold action goes along with the above scenario. Why take profits or sell your gold, when the real move in gold is slated for 2012 and beyond?”

The most ominous point Russell made was regarding gold’s record advance against sterling and the euro this past week.  Investors fleeing currencies have bought dollars and gold during the recent unwind out of the anything-but-dollars trade, while gold advanced against all major currencies.  If this is, indeed, a preview of things to come, more investors could wake up in horror with the realization that there is no place to hide from sovereign debt crises other than gold.

And Russell’s thoughts on stocks?  That asset class doesn’t look appealing either based on his technical work.  As the Fed, presumably, ends QE2, it’s also assumed that the Fed’s POMO operations to boost stock prices will also go.  There’s nothing like getting the attention of the Fed’s nay-sayers with a quick drop in the Dow to turn some hearts around.

“Warning — I have applied the ‘fan-line principle’ to the NYSE Composite Index. Here we see three consecutive trendlines violated,” Russel wrote.  “According to the fan-line principle, three trendlines are drawn from the same base. When the third fan-line is violated the trend has reversed and turned down. Based on this chart (above), I would not be holding stocks at this point.”