Investment expert Bill Gross warns that gold helps guard against a looming credit supernova
Investing in gold other commodities is the best way for investors to protect themselves from rapidly diminishing returns, Bill Gross told CNBC.
The head of the Pacific Investment Management (Pimco) bond giant, Gross began discussing the supernova in the February issue of his monthly investment newsletter. In it, he states that the global central bank-induced credit bubble "is running out of energy and time." As the model slows, investors can expect that they’ll see diminishing returns and on stocks and more portfolios that rely on commodities such as gold, platinum, silver and other precious metals. Less tangible paper stocks will fall out of favor as they fail to perform as well in the face of currency devaluation.
Under Gross, Pimco manages $1.92 trillion in investments on behalf of its clients.
"Our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic," Gross wrote in his February newsletter.
"When does money run out of time?” he asked. “The countdown begins when investable assets pose too much risk for too little return; or when lenders desert credit markets for other alternatives such as cash or real assets.”
Because of the continuing economic abuse that central banks are unleashing on the world, Gross pushed for investors to set their sights on gold, precious metals, and other commodities in order to protect against rampant inflation. He also suggested that it would be safer to move cash and assets to countries whose central banks are not as active and are not carrying such massive debt loads. Even Mexico and Brazil are safer financial havens than the U.S., United Kingdom, Germany or Japan, said Gross. Australia and Canada were also offered as safer countries with less active central banks.
Supporting this shocking advice from one of Wall Street’s most respected investors is the fact that the U.S. Federal Reserve has already issued almost $3 trillion in new money to buy more than $1.7 trillion in treasuries and $968 billion in mortgage-backed securities, according to the most recent Fed balance sheet. It also intends to buy $85 billion per month in order to continue stimulating the current slow-growth economy. The economy contracted 0.1 percent in the fourth quarter of 2012.
"Unless central banks and credit-extending private banks can generate real or at second best, nominal growth with their trillions of dollars, euros, and yen, then the risk of credit market entropy will increase," Gross said.
A supernova requires perpetual expansion to maintain itself and its size in relation to an expanding physical universe. Gross’ warning severely questioned the ability of the investment assets to continue expanding at the rate that currencies are flooding the market.
"The end of the global monetary system is not nigh. But the entropic characterization is most illustrative," Gross said. "Appreciate the supernova characterization of our current credit system. At some point, it will transition to something else."