Speaking with Eric King of King World News yesterday, Euro Pacific Capital CEO Peter Schiff suggested that central bankers and policymakers remain resolute in keeping the financial system from collapsing by printing more money. Contrary to the growing chorus of lemmings paraded on CNBC who chant the Fed is “out of bullets,” Schiff insists that the group-think conclusion drawn among analysts is utter nonsense.
“The Fed is not out of bullets in the sense that it is not out of ink, they can keep printing,” Schiff told KWN. “They can’t lower interest rates, but they can print more money and buy more stuff. That’s what the Fed is going to do, it’s not going to help the economy, but it’s going to help the price of gold.”
Unlike the deflationists, who claim that irrespective of monetary policy, all asset classes except best-quality sovereign debt (cash) preserve wealth during periods of debt destruction, Schiff’s street-smarts as well as his firm grasp of economic history lead him to advise his clients against holding cash. instead, Schiff tells his clients to hold precious metals during times of debt destruction and to ignore the media-driven propaganda leveled against investing in gold and silver.
On France’s 222nd anniversary of the storming of the Bastille (La Fete Nationale), July 14, Schiff, in an essay, exposed Fed Chairman Bernanke for his incorrectly drawn conclusion (self-serving, maybe) for the reason behind the relentless highs reached in the gold price throughout the past decade. Bernanke told Congress gold’s inexplicable rise was probably due to investors hedging “tail risks.”
“If it were true that people bought gold to protect themselves from market uncertainty, as the chairman claims, then the metal should have spiked in the midst of the ’08 credit crunch,” Schiff explained in his July 14 piece. “Instead, it fell along with most other assets.”
And, since the 2008 crash (in all asset prices, except U.S. Treasuries) and two QEs from the Fed in response to the meltdown, spot gold nearly trebled in price to $1,930 in September of 2011 from its October-2008 crash-low of $680.
A more complete picture of the crash aftermath can be gleaned on a relative basis between hard money and paper assets. In purchasing power of gold against the dollar (Schiff’s point all along), it took 12 ounces of gold to buy one share of the DJIA in October-2008; today, the Dow can be purchased for 6.78 ounces—a 77% increase in purchasing power in dollar terms in three years—and that purchasing power muscle includes the steep decline from the September high of $1,930 in the gold price to today’s 13.5% discounted price of $1,670.
Just as the global markets in 2008 rushed from one side of the boat to the other in another convulsing liquidity crunch, the history of knee-jerk reactions back into the dollar repeats.
Schiff stated in his July piece, “[In 2008] people instinctively fled into U.S. dollars and Treasuries because of their long record of stability. What Bernanke doesn’t understand is that his irresponsible monetary policy is undermining that faith in U.S. assets, built up over generations. that is what’s driving gold: easy money, negative interest rates, and quantitative easing.”
Schiff agrees with famed commodities investor Jim Rogers on that point. Both agree the Fed will continue debasing the U.S. dollar (the underlying catalyst for the bull market in gold), but in the meantime liquidity concerns outweigh that strong underlying fundamental of the gold market.
Rogers said in an Oct. 4 interview with Russia Today, “The standard reaction is in times of confusion is to run to the U.S. dollar. It’s the wrong thing to do in my view, but I know they’re all going to do it, so I’ve done it [before the run].”
So what does Schiff (and Rogers) think, today, is in store for the dollar and gold market?
“QE3 is coming, if it is not here already,” Schiff told KWN yesterday. Rogers echoed Schiff’s observation (conclusion) in the October 4 interview with RT.
“Gold prices are going a lot higher,” Schiff said. “There is a lot of upside left in the gold market and I think we are years and years away from making a top [as a result of QE3 and subsequent QEs].”
Schiff continued, “We’ve had a large selloff and so it would be a big move for gold to make new highs and get above $2,000 before the end of this calender year, but it’s certainly not impossible. If it doesn’t happen in 2011, it will happen in 2012, we could end up a lot higher.”
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