Bill Gross's Warnings on Gold and the Budget Deficit

Despite warnings on the U.S. budget deficit and a potential economic slowdown from 'Bond King' Bill Gross, co-founder of Pacific Investment Management Co. (Pimco), he is urging investors to be cautious about the recent surge in gold prices. In a recent post on X, Gross referenced lingering Wall Street concerns about potential hidden risks in bank lending. This followed disclosures of troubled borrower-related issues by Zions Bancorporation and Western Alliance Bancorp. Earlier, JPMorgan Chase CEO Jamie Dimon likened the collapse of auto lender Tricolor to a 'cockroach,' suggesting more risks may be hidden elsewhere.

Regional Bank 'Cockroach Risks'

'Regional banking 'cockroach risks' likely continue to affect both stock and bond markets,' Gross predicted. While analysts argue that regional bank issues don't represent systemic risk, memories of Silicon Valley Bank's collapse two years prior led to a stock market sell-off last week, with 10-year U.S. Treasury yields briefly dipping below 4%.

Gross's View on Treasury Yields

However, Gross believes this bond market reaction was overdone. He argues that, considering the U.S. federal government will need to issue significant amounts of new debt to make up for budget shortfalls, and with economic growth expected to slow substantially from its current 3%+ level, 10-year U.S. Treasury yields should be significantly higher than Friday's closing price of around 4.01%. '10-year Treasuries shouldn't be below 4%, 4.5% makes more sense. Even though economic growth is soon coming to 1%, debt supply and deficit size are just too big.'

Rising Debt and Inflation Hedges

The sharp rise in debt in major developed economies, including the U.S., has made investors uneasy about global currencies – even the U.S. dollar, traditionally seen as a safe haven. This has fueled the so-called 'debasement trade,' where investors bet on precious metals and Bitcoin, arguing that governments will allow inflation to remain elevated to ease debt pressures. As a result, gold prices have surged over 60% this year, doubling since the start of 2024. Silver, platinum, and palladium have seen even larger gains year-to-date.

Diverging Views on Gold

While some predict gold prices reaching $10,000, others warn of FOMO Ed Yardeni, president of Yardeni Research and a seasoned market veteran, recently stated that if gold maintains its current upward trajectory, it could surge to $10,000 per ounce by the end of this decade (2030). But Gross suggests the current gold rally is overextended. Last Friday, after hitting a record high of $4,380 per ounce, gold prices fell more than 2%, their biggest single-day drop this year. 'Gold has become a trend-driven 'meme asset.' If looking to get in, might want to wait,' he wrote.

Concerns About FOMO in the Gold Market

Earlier this month, Capital Economics expressed a similar view on gold's continued rally in a report. Hamad Hussain, climate and commodities economist at the firm, stated that 'fear of missing out' (FOMO) is creeping into gold trading, making the metal difficult to value objectively. Hussain points out that bullish arguments for gold include interest rate cuts by the Federal Reserve, geopolitical uncertainty, and fiscal sustainability concerns. On the other hand, during the recent gold rally, the dollar exchange rate has remained stable and inflation-protected bond yields have risen – clear signs of an overheating market. 'Overall, we think that nominal gold prices are likely to trend gradually higher in the coming years,' he said in his October 8 report.