Moments ago, the FOMC members formalized their opinion on where inflation is heading: "Most members continued to anticipate that, with longer-term inflation expectations stable and the existing slack in resource utilization being taken up very gradually, inflation would run over the medium term at a rate at or below the Committee’s objective of 2 percent." The only conclusion one can derive from this is that since the perpetually wrong FOMC committee, which has never accurately predicted any one thing in its entire history, sees little to no inflation, inflation is most likely about to soar. A convenient independent confirmation of this assumption comes from none other than bond manager PIMCO which moments ago announce that it was adding to its gold holdings "on inflation concerns...as it bets that global inflation rates will pick up over the next three to five years." Specifically, "The Pimco Commodity Real Return Strategy Fund, which has about $20 billion in assets, has increased its gold holdings to 11.5% of total assets recently, from 10.5% two months ago, and has been adding to the position when gold prices dipped toward $1,500 a troy ounce, says Nic Johnson, the fund's co-portfolio manager." And with global asset managers allocating about 1% of their AUM to the precious metal, should the majority of them copycat PIMCO in this move, then gold would cross the psychological $2,000 barrier in minutes. The irony is that for a bond manager, which Pimco just happens to be the biggest in the world, inflation is your worst friend. So acknowledging its imminent creep, is hardly "talking one's book."
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The money manager predicts global inflation rates will run higher, on average, over the next three to five years than what the world had witnessed over the past 25 years. However, the risk won't arise for another 12 months, during which inflation should be subdued.
Pimco has aired its concerns about inflation in the past and moved to avoid longer-dated Treasury bonds in favor of inflation-protected securities. But the move toward gold is recent and reflects an escalation in the fund manager's concern.
In the face of such risks, "broadly speaking, we prefer owning real assets as opposed to financial assets," Mr. Johnson told Dow Jones Newswires in a recent interview. Three of Pimco's portfolio managers, including the head of the commodities group Mihir Worah and Mr. Johnson, have been on a 17-city U.S. tour since June to raise awareness among institutional investors and larger financial advisers.
Their message: the trifecta of loose monetary policy, persistently high levels of sovereign debt and rising commodity prices will drive inflation higher.
Pimco expects currency devaluation to remain a central theme in the market as global liquidity swells thanks to continued easy-money efforts from the world's central banks. Interest rates, meanwhile, will need to stay low as government debt runs at a high proportion to the overall economy.
"Gold is the currency without a printing press," Mr. Johnson says.
Moreover, investors should purchase gold before inflation rates rise, as "it's the process of going from 2% inflation to 4% inflation that's going to drive gold higher," he says.
To guard their wealth against the "silent tax," as inflation is often called, Pimco recommends investors stock up on store-of-value commodities like gold and platinum, and hard assets like real-estate investment trusts.
It would appear that with the implied promise from the FOMC that Bernanke will not rest until corn is in the double digits, gold has decided to finally break out above its 200 DMA, and is now headed higher as the coy foreplay of the past 6 months has finally ended.