Bill Gross, the Ring of Fire & Gold Prices

By Deborah Baratz

October 8, 2012 • Reprints

Thank Bill Gross for adding some muscle this week to the already strong rally for gold prices.

That's because Gross, the Pacific Investment Management Co. (PIMCO) founder and co-chief investment officer, released his October 2012 investment outlook Tuesday that came with a warning for the US and investors.

Gross said that US fiscal problems have put the country in a "Ring of Fire" that'll burn investors if they aren't protected by gold and real assets.

Gross warned that recent studies have concluded that "[T]he US balance sheet, its deficit and its "fiscal gap' is in flames and that its fire department is apparently asleep at the station house."

Bill Gross and the ‘Ring of Fire’

In his outlook, Gross wrote that recent annual reports from the International Monetary Fund (IMF), the Congressional Budget Office (CBO) and the Bank of International Settlements (BIS) show that the United States has a severe addiction to debt.

"When it comes to debt and to the prospects for future debt, the US is no "clean dirty shirt,'" said Gross. "The US, in fact, is a serial offender, an addict whose habit extends beyond weed or cocaine and who frequently pleasures itself with budgetary crystal meth. Uncle Sam's habit, say these respected agencies, will be a hard (and dangerous) one to break."

Gross noted that the three entities all tried to compute the "fiscal gap" which needs to be closed to keep the country's debt/GDP ratio controllable. The fiscal gap, according to Gross, differs from the "deficit" in that it includes future estimated entitlements such as Social Security, Medicare and Medicaid which may not show up in current expenditures.

Gross said the studies concluded that the United States needs to cut spending or raise taxes by 11% of GDP over the next five to 10 years – meaning $1.6 trillion per year.

That compares to the country's 8% of GDP deficit in 2011. Those numbers put the US in a "Ring of Fire" among other countries with similar fiscal gap sizes, like Japan, Spain, Greece, France and the United Kingdom.

If the United States continues to ignore its debt addiction, the country will lose its safe haven status and global capital will shift to another market. The country's deficit could swell closer to the size of dangerously debt-ridden nations like Greece.

Gross took to the airwaves Thursday and said on CNBC that the cure for these U.S. debt woes is structural reform.

"The US needs to gradually reduce its deficits and reduce the Fed's stranglehold on financial markets, and raise interest rates over time," said Gross. "In addition, focus from a fiscal standpoint on the structural financing and structural investing this country sorely lacks."