Bill Gross and the price of gold

http://dealbook.nytimes.com/2014/09...on&region=bottom-well&WT.nav=bottom-well&_r=0

Those of us who follow interest rates and the bond market note the recent departure of Bill Gross from Pimco.

What has this got to do with the price of gold?

Two things:

1. For a number of years promoters of gold investments have predicted sharp rises in US interest rates. It was expected that these rate rises would make the cost of funding US government debt unsustainable, causing a crisis of confidence in the US dollar and a flight to "save haven" investments, like gold. This never happened.

Bill Gross bought this story too, and bet the $2 trillion Pimco book accordingly. He got it wrong, and it looks like he has been sacked.

Gross made a surprisingly stupid mistake for someone of his experience. He assumed that when QE ended, rates would rise. He forgot that yield curves are tethered to the Fed Fund's rate, and the Fed Fund's rate only rises when the FOMC says so. This simple mistake has been shared by many internet gold promoters, who probably should be sacked too.

2. I am not given to making big calls on markets, but I am quiet comfortable in predicting that the Fed Funds Rate is not going to rise until at least early 2017 (and maybe not then). My timing is based on the US electoral cycle, and the likelihood of doves continuing to control Fed policy until the end of Obama's term, and the assumption that Republicans will continue to control Congress and use austerity programs to stifle economic growth.

This will provide a positive for the price of gold as low interest rates reduce the opportunity cost of holding gold as an investment. Gold won't skyrocket to the moon, but in their analysis, professional investors will tick one box and be a step closer to moving on gold if other factors are positive.

Cheers