Bill Gross Warns on Gold: A Cautionary Tale Amid Surging Prices

Legendary bond investor Bill Gross has expressed caution regarding the recent surge in gold prices, which have seen significant gains in 2023. In a post on X, Gross, the co-founder of Pimco, highlighted concerns over budget deficits and a slowing economy while addressing Wall Street’s anxiety about potential issues within regional banks’ loan portfolios.

Gross’s remarks came after disclosures from Zions Bancorporation and Western Alliance Bancorp indicated problems with borrowers. This news followed comments from JPMorgan CEO Jamie Dimon, who referred to the collapse of auto lender Tricolor as a “cockroach,” suggesting it may represent deeper issues lurking within the banking sector. Gross predicted that these “regional bank cockroaches” could continue to impact both stock and bond markets.

While analysts do not consider the challenges facing these regional lenders to signify systemic risks, memories of the Silicon Valley Bank collapse in March 2023 weighed heavily on market sentiment. Following these developments, stock prices fell sharply, and the yield on the 10-year Treasury briefly dipped below 4%. Gross, however, believes this decline is exaggerated. He anticipates that yields will rise significantly, surpassing Friday’s close of around 4.01%, due to the federal government’s need to issue substantial new debt to manage budget shortfalls amidst a cooling economy.

“The 10-year Treasury has no business below 4%, though 4.5% is more like it,” Gross noted, emphasizing the impact of increasing supply and deficits despite an anticipated slowdown in growth, projected to drop to nearly 1% from current estimates above 3%.

The rising debt levels among developed economies, particularly in the United States, have heightened investor unease regarding global currencies, even traditional safe havens like the dollar. This unease has triggered a so-called debasement trade, where investors bet on precious metals and cryptocurrencies, operating under the assumption that governments will allow inflation to rise to alleviate debt burdens. As a result, gold prices have soared over 50% this year and have doubled since early 2024, with other precious metals like silver, platinum, and palladium also experiencing significant gains.

Market veteran Ed Yardeni, president of Yardeni Research, recently forecasted that gold could reach $10,000 per ounce by the end of the decade if the current trend continues. Nevertheless, Gross cautioned that gold’s recent rise seems overextended, as prices fell more than 2% on Friday after reaching a record high above $4,300.

“Gold has become a momentum/meme asset. If you want to own it, wait awhile,” Gross advised.

In a note earlier this month, the economic research firm Capital Economics echoed Gross’s sentiment regarding gold’s relentless ascent. Economist Hamad Hussain noted that “FOMO” (fear of missing out) is influencing the gold trade, complicating the objective valuation of the asset. On the bullish side, Hussain highlighted factors such as potential rate cuts by the Federal Reserve, geopolitical uncertainties, and concerns over fiscal sustainability. Conversely, he pointed out that the recent rally in gold coincided with a stable dollar and increased inflation-protected bond yields, which are often signs of market exuberance.

“On balance, we think that gold prices will probably grind higher in nominal terms over the next couple of years,” Hussain stated on October 8, 2023.

With these mixed signals, investors are left to navigate an unpredictable landscape as they consider their positions in gold and other precious metals.