Gold and QE3: World's largest money manager sees 'cult of inflation' lasting a 'few years even decades'

The latest investment outlook from world number one money manager Bill Gross who heads up and founded Pimco with assets that total more than $1 trillion have some stark messages for investors.

In the August newsletter – titled 'Cult Figures' – Gross writes "unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades"

The problem with all of that of course is that inflation doesn’t create real wealth and it doesn’t fairly distribute its pain and benefits to labor/government/or corporate interests.

Financial repression, QEs of all sorts and sizes, and even negative nominal interest rates now experienced in Switzerland and five other Euroland countries may dominate the timescape.

The cult of equity may be dying, but the cult of inflation may only have just begun.

Ben Bernanke, chairman of the US Federal Reserve is due to provide more clarity about plans to stimulate the US economy on Wednesday and may announce a third round of quantitative easing while the European Central Bank is expected to announce new monetary policy measures on Thursday.

Gold bulls believe QE3 and similar stimulus programs in the crisis-ridden Eurozone will restore the yellow metal's status as an inflation hedge and wealth preserver. Flooding markets with cheap money would also hurt the dollar, further boosting the metal's price.

Gross's bet on QE3 is huge – his holdings of US mortgage debt, the largest percentage of purchases under QE3, make up more than half his $250 billion Total Return fund.

The price of gold had almost doubled on the back of QE1 which kicked off in December 2008, QE2 (first mooted in August 2010) and 'Operation Twist' which was started in September last year and extended to the end of the year.

After hitting a high for the year, but failing to scale the $1,800 an ounce bar at the end of February, gold has taken a few hard knocks on the way to its current trading level of either side of $1,600.

The spikes downward have all been thanks to actions or pronouncements by the Fed and the fortunes of the precious metal seem increasingly linked to monetary policy in the US. At the same time volatility in the gold price has increased dramatically.

At the start of April for instance gold dropped some $60 an ounce in a single session when Fed minutes appeared to indicate QE3 was off the table and its policy of zero interest rates may be coming to an end sooner than previously thought.

The same thing happened on June 7 when gold dropped $50 to under $1,600 an ounce in a couple of hours after Bernanke delivered "anti-climactic" testimony to the US Congress.

That was not the first time traders got cold feet after breaking an important psychological level. A similar pattern was followed in the days after gold futures hit a record high above $1,900 an ounce in August. The yellow metal slid for two days after hitting the record, losing $105 or 5.6% in value in a single day.

In 2011 trading in gold was the most volatile since 1980 with the gap between the year’s highs and lows coming in at close to $600 an ounce or a 32% range.

In 1980 the spread was even greater at more than 40% and followed the 21 January 1980 record of $850 a ounce set after a spike in oil prices following the Iranian revolution and Russia's invasion of Afghanistan.

At the time gold also fell precipitously after setting the record – within two days it fell back to under $700 starting a bear market that lasted almost three decades.

Gold breached $850 again at the start of 2008, but in inflation adjusted terms the 1980 price is still the highest ever – gold would have to hit some $2,400 an ounce to set a record in today's money.