Pimco director says U.S. bonds must be repudiated; so why does Pimco own them?

Section:

By Laura Humble
Bloomberg News Service
Monday, December 27, 2005

http://www.bloomberg.com/apps/news?
pid=10000087&sid=aO9aCmMLJgZE&refer=top_world_news

LONDON -- Gold prices, already near a 16-year high, may be
headed for the longest rally since Richard Nixon was U.S.
president as a falling dollar and renewed concern about
inflation boost bullion's appeal as an investment.

The precious metal has climbed since 2001 to about $442
an ounce as U.S. budget and trade deficits widened to
records under President George W. Bush. Gold last rose
five straight years from 1970 to 1974, when inflation peaked
at an annual rate of 12 percent, five times the current pace.

"The cycle now is just like the 1970s," Frank Holmes, chief
executive of U.S. Global Investors Inc. in San Antonio, said
in a telephone interview. The firm manages $1.8 billion,
including gold-mining stocks and bullion. "Inflation isn't as
high, but that may take some time to emerge."

Gold for immediate delivery will sell for an average price of
$435 an ounce next year, about 6 percent more than this
year, based on the median estimate of 37 traders,
investors, and analysts from Sydney to New York surveyed
by Bloomberg this month. Forecasts ranged from $395 to
$550.

"With growing demand and less supply, prices are bound
to rise," said Graham Birch, who helps manage about $6.5
billion in mining assets for Merrill Lynch & Co. in London.
Gold reached $456.89 on Dec. 2, the highest since June
1988.

Gold fell to a 20-year low of $251.95 on Aug. 25, 1999,
about eight months after the euro's introduction. The dollar
has slid 60 percent against the 12-nation currency since
July 2001, touching a record low of $1.35 on Dec. 23.

The slide prompted some investors to buy
dollar-denominated metals as a hedge against declines in
U.S. securities. Stocks are down for the period, even after
gains the past two years. The Dow Jones Industrial
Average has dropped 5 percent and the Standard & Poor's
500 is 12 percent lower.

"The situation is extremely analogous to what happened
after Nixon was elected," said John Embry, chief investment
strategist at Toronto-based Sprott Asset Management Inc.,
in a telephone interview. "Stocks got swiped and gold jumped
up."

Embry co-manages the C$296 million ($241 million) Sprott
Gold and Precious Minerals Fund, which holds about 10
percent bullion and 90 percent precious-metals mining stocks.
The fund has more than tripled since it started in November
2001. It's down 20 percent this year.

The Merrill Lynch Gold & General Fund, which had beaten
the Dow and S&P 500 since 2000, has fallen 15 percent.
The dollar's slump has driven up costs for companies that
mine in South Africa, Australia, and Canada and cut profits
from sales of metal in dollars.

This decade's gold rally hasn't been as pronounced as the
Nixon-era one. Gold's gains accelerated in the five years
through 1974, with annual increases building from 6.5
percent to 72 percent. This year prices have risen about 6
percent, slowing from 19 percent last year and 25 percent
in 2002.

"Gold will be a horribly boring instrument next year," said
Dennis Gartman, editor of the Gartman Letter newsletter in
Suffolk, Virginia.

The Dow fell 40 percent during the last two years of the
1970s gold rally, after higher spending on the Vietnam War
and social programs turned the federal budget surplus into
a deficit and fueled inflation. A growing trade gap forced the
United States to stop redeeming dollars for gold in 1971.
The metal, fixed at $35 an ounce since 1946, ended 1974
at $140.25.

Inflation erodes returns from fixed-income securities, driving
some U.S. investors to put their cash into
dollar-denominated metals. The Federal Reserve increased
its benchmark overnight lending rate five times this year to
2.25 percent to keep inflation in check. Consumer prices
excluding food and energy rose at a 2.2 percent annual rate
in the year's first 10 months.

U.S. deficits, meanwhile, are bigger than ever in dollar terms,
forcing Americans to borrow more from abroad and
contributing to the dollar's drop. The budget gap was $412.6
billion in the year ended Sept. 30 after Bush cut taxes and
the U.S. spent more on Iraq and domestic security.

The current account deficit, the broadest measure of trade
and investment, widened to $164.7 billion in the three
months through September.

"The dollar will remain weak as long as Bush is in office,"
said Ko Young-Sang, manager at Shinhan Bank's
currencies and derivatives department in Seoul. "He has to
solve the twin deficits and he's not going to take his hands
off Iraq."

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----------------------------------------------------

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