The latest round of quantitative easing made gold “even more attractive” and owning the metal should be considered as part of a diversified portfolio, analysts at bond giant Pacific Investment Management Co. said in a white paper posted Tuesday on company’s website.
Pimco founder and co-chief investment officer Bill Gross, in his separate monthly investment outlook also posted Tuesday, said only gold and real assets would thrive in a “ring of fire” of U.S. fiscal problems.
Gold GG GCZ2 +0.27% elicits black and white responses, the Pimco analysts said. Some investors “have a deep, almost religious conviction that gold is a useless, barbaric relic with no yield,” while others “love it” and see it as “the only asset that can offer protection from the coming financial catastrophe” always just around the corner, they said.
“Our views are more nuanced … 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,” the analysts said. ”We believe investors should consider allocating gold and other precious metals to a diversified investment portfolio.”
Other investments, such as Treasury Inflation-Protected Securities, offer an inflation hedge. TIPS are also less volatile than gold. History shows, however, gold’s high correlation to inflation and gold’s unique supply-and-demand characteristics may lead to attractive valuations, the analysts said.
In his piece, Gross warned the U.S. would no longer be “the first destination of global capital” seeking safe returns if it doesn’t address its fiscal gap. The U.S. “will begin to resemble Greece before the turn of the next decade” if it continues to close its eyes to deficits, Gross said.
“Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow and the dollar would inevitably decline. Bonds would be burned to a crisp and stocks would certainly be singed; only gold and real assets would thrive within the ‘ring of fire,’” Gross said.
A financial Armageddon is not around the corner, Gross said. “I don’t believe in the imminent demise of the U.S. economy and its financial markets. But I’m afraid for them,” he said.
Gross runs the world’s biggest bond fund, Pimco Total Return Fund PPTAX +0.18% . The fund in August took in $1.3 billion in new cash, bumping total inflows for the year to $9.3 billion.
-Claudia Assis – Marketwatch – October 2, 2012