Renowned bond investor Bill Gross, the manager of PIMCO‘s Total Return Fund, the world’s largest bond fund, just shared his top investment picks with Barron’s. Leading the savvy investor’s short and selective list was gold.
Why is a bond bull keen on investing in gold?
It’s because Gross sees gold as a stellar inflationary hedge as global central banks attempt to reflate their economies.
Gross explained that while it looks like loose monetary policies and the deluge of dollars will continue for a while, at some point both will have to stop and “when all this money printing by central banks ends, it won’t be pretty.”
Gross sees trouble brewing in the artificially-priced U.S. Treasury market.
“The Fed is buying 80% of the Treasury market today. It is remarkable to think that when the Treasury issues debt in the trillion-dollar-plus category, the Fed ends up buying most of it. The Treasury sells it to banks and primary dealers, who sell it back to the Fed at a higher bid,” Gross explained.
“This is very different from the free-market capitalism we’ve come to know. And it will continue until inflation exceeds the upper end of the central bank’s target of 2.5% or, by some miracle, we get real economic growth,” Gross continued.
The artificially priced bonds leave investors to question if investing in them is worth the slender reward, given the paltry yields from a bevy of bonds except high-risk junk bonds.
Why are Global Banks Buying Gold?
Should the two big holders of bonds – central banks and sovereign excess reserve countries -
become concerned about inflation, the dollar’s buying power or the easy monetary policies in the United States, they could decide to put their money elsewhere.
The likely place is gold, Gross said.
And many appear to be doing just that.
Russia‘s central bank continues to buy gold in efforts to diversify its foreign reserves away from paper assets it judges dicey.
To date, the Bank of Russia has amassed a gold store worth $530 billion, making it the world’s fourth-largest holder of the yellow metal.
“We are buying the metal and will continue to pursue this course,” First Deputy Chairman Alexi Ulyukayev told reporters at the World Economic Forum in Davos in late January.
Germany has just started to repatriate its gold with plans to store most of its 4,000 tons in Frankfurt. The move suggests the stalwart Eurozone country wants to have the precious metal not just safely on home turf, but at hand when and if needed.
While Gross doesn’t expect gold prices to move much from current levels unless real interest rates rise or inflation fears heat up, investing in gold will still provide a “decent hedge” – something you can’t get from bonds.
Investing in Gold with ETFs
For those interested in investing in gold, Gross likes the exchange-traded fund SPDR Gold Trust (NYSE: GLD).
Fellow Barron’s Roundtable contributor Fred Hickey of The High Tech Strategist likes the iShares Gold Trust (NYSE: IAU), citing its lower fee.
Other fund managers are also investing in gold, with interest seriously stoked by the absence of low-risk investments offering decent yields, thus forcing investors to look elsewhere.
Philip Klapwijk, global head of metals analytics at London consulting firm GFMS, recently told The Wall Street Journal he “strongly” expects gold prices to log heftier gains this year than last. Klapwijk says rock-bottom, near-zero interest rates make gold a “competitive alternative to holding money in a bank account.”
David Donora, head of commodities at money manager Threadneedle Investments, which has $1 billion in its commodities funds, has no plans to reduce the fund’s current 11% gold exposure.
“We’re feeling pretty bullish on gold and consider those long-term fundamental drivers that have been supporting the market very much intact,” Donora told The Wall Street Journal.
Just after noon Monday, gold was trading at $1,676.20 an ounce in New York.