There is growing sentiment that QE2 will end June 30, with more fireworks than will be set off four days hence. PIMCO's Bill Gross has rocked the financial world with his declaration that he has dumped all of his U.S. Treasury Bonds.
He has been quoted as saying Treasuries are overvalued. Is anyone surprised? Think about it. Why would the Fed buy Treasuries to begin with? I think there is one simple answer. There are not enough other buyers - at least at the prices the Fed is willing to pay. Without enough buyers, government takes in less money than it needs to pay its bills.
Now, if the Fed HAD to buy Treasuries, what happens when they stop? Just think about it rationally. Now that the Fed has basically blown our cover and admitted we did not have enough buyers in November, how does buying up excess supply for 7 or 8 months bring confidence back to the markets?
If the pool of buyers has already sunk to depths so low that we have to print money to buy our own debt, what do you think happens to Treasury prices when QE2 ends? Gross is said to believe the Treasury market is way overvalued and his actions bear this out. That means interest rates are likely to rise as Treasury prices fall.
Now the $600 billion question. When QE2 dies, and apparently PIMCO believes it will, what does this mean for gold? Something we have made point of repeatedly, is that rising interest rates may signal the beginning of the real bull market in gold.
The greatest bull market in history began in the 70s when interest rates and inflation began to rise from period lows. This bull market saw gold prices rise 1700% by the time interest rates peaked. If you want to learn more, an entire special report is available from Lear Capital on the history of rising rates and gold. The report is FREE when you request the gold investor guide.