Bill Gross shorting US debt

2011-APR-11

From the GoldMoney News Desk --

The gold price surged on Friday as investors piled into inflation-hedges. Gold settled for the week at over $1,475 per ounce, a new record price. As so often happens, crude oil futures rose in tandem with the gold price. Brent crude gained 3.2% on Friday and finished the session at $126.65 per barrel, while, WTI climbed 2.3% to settle at $112.79.

Rising gold and oil prices are a consequence of weakness in the dollar. In the coming weeks and months much pressure will no doubt be exerted on the Organization of Petroleum Exporting Countries (OPEC) to raise its production quotas in order to curtail oil price rises. But as these rising oil prices are in very large part down to money printing by the US Federal Reserve (Fed), why shouldn’t oil prices rise in order to compensate OPEC members for the Fed’s inflationary policies?

It shouldn’t be surprising that items priced in dollars that are furthest up the production chain (commodities) should be rising. Sustained rises in commodity prices are now percolating down the production chain, and causing rising producer and consumer prices in many nations – particularly in those developing countries that peg their currencies to the dollar (notably China).

These countries are in effect importing the Fed’s ultra-loose monetary policy. And as in contrast to the dollar, there is no international market for their currencies, this means that the money they print to buy dollars in order to keep their currencies level with the dollar must be spent domestically. This results in surging inflation and misery for many.

The Dollar Index (USDX) closed last week at 74.86, a new low for the year, and a significant break below last year’s low of 75.6. As commentators such as GoldMoney’s James Turk have pointed out, the Dollar Index chart is looking very ugly. A move to test the record low of around 71 set in March 2008 now looks highly likely, a move that would surely see the gold price move above $1,500.

Though the US Congress and President Obama managed to reach a last-minute agreement on Friday over the federal budget, the resulting spending cuts are insignificant. Total spending is $3.82 trillion. The deficit is $1.65 trillion. But these cuts were just $38.5 billion.

Perhaps this is why Bill Gross – joint head of PIMCO, the world’s largest bond fund – is now shorting US government bonds. PIMCO’s Total Return Fund is now carrying more cash than it is US Treasuries and mortgage securities combined. This does not auger well for the US government.