Bill Gross, the Ring of Fire, and Gold Prices

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 U.S. and investors.

Gross said that U.S. 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 U.S. 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.

"Whenit comes to debt and to the prospects for future debt, the U.S. is no "clean dirty shirt,'" said Gross. "The U.S., 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 U.S. in a "Ring of Fire" among other countries with similar fiscal gap sizes, like Japan, Spain, Greece, France and the U.K.

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 U.S. needs to gradually reduce its deficits and reduce theFed'sstranglehold 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."

Meanwhile, investors can profit from this fiscal mess by investing in gold.

"Ring of Fire" and Investing in Gold

Gross said unless something is done to stop the ballooning deficit, the "Ring of Fire" will scorch returns for unsuspecting retail investors.

"Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow and the dollar would inevitably decline," said Gross. "Bonds would be burned to a crisp and stocks would certainly be singed; only gold and real assets would thrive within the "ring of fire."

Gross' PIMCO colleagues Nicholas J. Johnson andMihir P. Worah, in their own research this week, further explained how this economic outlook supports investing in gold.

"Our bottom line: given current valuations and central bank policies, we see gold as a compelling inflation hedge and store of value that is potentially superior to fiat currencies," the pair wrote in GOLD - The Simple Facts. "We believe investors should consider allocating gold and other precious metals to a diversified investment portfolio."

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With inflation as a long-term risk, Gross added his company is still purchasing Treasuries because "they represent value and safety in this period of stress." Gross also believes that investors should make investments in mortgage-backed securities and Italian government debt.

After Gross's bullish gold words, gold prices teetered on a seven-month high today (Thursday) as December gold hit $1,791 an ounce.

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