06 September 2012

Bill Gross: I Am Leaning to Gold over Bonds

Now that Draghi has joined with Bernanke in buying the short end of the curve, pushing rates to negative returns, gold looks quite a bit better in terms of risk and reward.

Gold thrives in an environment of negative bond returns.

And since no action is being taken to reform the unsustainable banking system and the broken real economy, we can expect this monetization, under whatever guise or names one may wish to apply, to continue until something breaks.

Barring a major outbreak of war or other draconian actions by governments, and a major liquidity selloff in the financial markets, gold seems to have upside to $3,000 or so, and perhaps more. But it may take some time to get there. There are no free markets in this period of extreme monetary experimentation.

As for silver, that is harder to predict, given the demand/destruction from its industrial character, and the long term investment deficit created by the suppression of price which discourages investment.

I don't really see the CFTC taking on JPM over their silver short manipulation, or HSBC in gold for that matter, since it is likely that the governments are involved as well. But stranger things have happened.

Some gold advocates of my acquaintance were complaining that Mr. Gross is looking at GLD rather than a straight up bullion purchase. I think that is a bit unrealistic given the size of his fund and the scope of the potential demand, not to mention his position in the 'financial establishment.' One must bear in mind, however, that when a whale like Bill Gross speaks, he is wearing a 50,000 watt megaphone compared to most. So we ought not to discount the importance of what he says.

And who knows, he may already be invested in GLD and is now talking his book.

But I share the distrust that some have of GLD and SLV except as a short term paper exercise. Any failure of those instruments due to malfeasance would provide a leg up for the metals that would be rather impressive.