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Gold Price Firm, Bill Gross Rips the Fed

Release Date: 
Thursday, February 3, 2011

GOLD PRICE NEWS – The gold price bounced back Thursday morning, rising $1.00 to $1,336.30 per ounce. Strength in the U.S dollar is providing a headwind for the gold price this morning. The dollar, which is trading higher against the euro, pound, and yen is helping keep a lid on not only the price of gold, but the entire commodity complex. Copper advanced to fresh record highs at $4.58 per pound before retreating back near $4.53.

The gold price has remained within the $1,320 - $1,345 range for the past two weeks with the widely anticipated nonfarm payrolls report scheduled to be released on Friday. Investors, as well as the Federal Reserve, will be closely eyeing the employment data for clues on the strength of the economic recovery. Thus far Chairman Bernanke and the Fed have reiterated the need for record low interest rates and further quantitative easing due (QE) in light of the continued challenges in the U.S. jobs market.

Bill Gross, manager of the world’s largest bond fund at PIMCO, in his latest monthly Investment Outlook, entitled “Devil’s Bargain,” presented harsh criticisms of the policies of the U.S. central bank and its Chairman. With QE helping to push real interest rates into negative territory, Gross noted that “perhaps the most deceptive policy tool to lessen debt loads is the ‘negative’ or exceedingly low real interest rate that central banks impose on savers and debt holders.”

Gross went on to say that “to rebalance debt loads and re-equitize financial institutions that should have known better, central banks and policymakers are taking money from one class of asset holders and giving it to another. A low or negative real interest rate for an “extended period of time” is the most devilish of all policy tools…To put it bluntly, they (central banks) are robbing savers and taking money surreptitiously from longer-term asset holders who are incorrectly measuring future inflation.”

While Gross focused on the impact of the Fed’s policies on bonds, the implications for gold prices are quite favorable. The PIMCO fund manager did not provide a specific time frame, but his commentary suggests that he expects negative real interest rates to remain for the foreseeable future.

As discussed many times in these pages, negative real rates significantly reduce the opportunity cost of holding investments tied to the price of gold - a sterile asset that pays no interest. Accordingly, the gold price has performed particularly well during periods of negative real rates. If Mr. Gross is correct and real interest rates are destined to stay negative for the foreseeable future, then the outlook for gold and investments tied to the gold price continues to be bright.

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This article is independently provided by and does not represent the views or opinions of Goldline International, Inc. Although the information in this article has been obtained from sources believed to be reliable, Goldline does not guar­antee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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