Bill Gross just called out Janet Yellen as the
penultimate market manipulator.
Gross, former head of PIMCO and current
manager of Janus funds, recently echoed Rick Rule, assigning blame to the Fed
for deferring short-term pain at the expense of long time gain. Mr. Gross’s comments
are timed as the Fed continues to debate whether to raise interest rates
after years of keeping them anchored in an effort to stimulate the economy
and generate inflation. Instead, Gross said, the Fed has merely inflated
asset prices while actually harming the economy.
His solution for investors? Avoid stock and
bonds, move toward gold and tangible assets.
We’re glad Mr. Gross has finally caught up.
But as this has been an ongoing narrative for
gold investors since 2011, we asked Rick Rule what has changed in the gold
story.
Rick explains: “In 2011, there was an entire
narrative around the gold market, when gold was at $1,900, and that narrative
was partly about U.S. markets; that is, higher incomes in places like India
and China that had historic cultural affinity to gold. But, the other part of
the discussion was really about the ability of U.S. Treasury securities and
the U.S. dollar to retain the degree of hegemony as savings instruments that
they had always enjoyed. The narrative in 2011 was that U.S. Federal
Government on-balance sheet liabilities, at $16 trillion, were unsustainable,
and worse, the off-balance sheet liabilities of $55 trillion were similarly
unsustainable (and those numbers didn’t include state and local debt or
pension obligations or stressed individual corporate balance sheets).”
Today, on-balance sheet liabilities are no
longer $16 trillion. They are estimated at $19 trillion.
And investors somehow seem more sanguine at that
higher level. Off-balance sheet liabilities, similarly, have moved from $55
trillion to $90 trillion.
The perception of sustainability is partly
explained by the ongoing strength of the US dollar, which was all too
uncertain in 2011. Rick explains, “I would suggest to you that is not a
consequence of the strength of the U.S. economy or our collective balance
sheet, but rather the weakness of the competition. I don’t think I have to
recount the difficulties that emerging and frontier markets have faced, or
the difficulties that Japan and Euro-zone face.”
In terms of the macro case for gold, its market
dominance has eroded. In the 1980s, at the peak of that manic bull market,
gold and gold related equities enjoyed an 8% market share of investable
assets among U.S. savers and investors. The median and mean converge over the
last three decades at about 1.5%. The current percentage is 0.33%.
And with national mouth-pieces like Bill
Gross suddenly remembering the benefits of gold and other tangible
investments, will we see a reversion to the mean? According
to Rick, “I’m not suggesting that it will immediately get back to 1.5%, but
even if we got back to half of mean, that would double demand for gold and
gold related equities in a market where the U.S. still counts for 24% of the
world’s investable assets.”
