With central banks keeping monetary policy loose, gold is likely to spike thousands of dollars higher, Peter Schiff says.
Peter Schiff, president and chief global strategist of Euro Pacific Capital, never deviates from his message. He thinks the Fed Reserve’s cheap-dollar policies are as corrupt as anything going on in the private sector and, more to the point, he believes the Fed will eventually run the U.S. economy into the ground.
Schiff, who will speak at IndexUniverse’s “Inside Commodities” conference on Oct. 10 in Chicago, says a breakout of responsibility by the Fed could put an end to gold’s rally and set the global economy on the difficult path of true healing. But since he doesn’t think that’s in the cards, he sees gold climbing to at least $5,000 an ounce, and considers commodity-related equities the only way of staying ahead of inflation.
Ludwig: I wanted to hear what you had to say about all the recent loosening of monetary policy. Let’s start with the Chinese. Do you think their recent rate cuts are healthy and warranted?
Schiff: I think it’s all unhealthy and it’s all inflationary. All the central banks are trying to prevent economies from restructuring along the lines that would produce lasting, healthy, sustainable growth. We’re all going to pay a price for this reckless behavior. All they’re concerned about is postponing short-term pain, even if it’s a healing type of pain. It’s the equivalent of swallowing some bad-tasting medicine that cures us. But because the cure doesn’t taste good, they don’t want us to have to take it.
Ludwig: The market doesn’t seem to fully buy into the possibility of the Fed doing another round of quantitative easing. I presume you’re not in that camp?
Schiff: No. I think they’re going to do it. The Fed always does the wrong thing, and QE3 would be the wrong thing, so they’re going to do it. If you look at what the Fed says, they say we’re going to do QE3 if the economy needs it, and the economy is going to need it, from their perspective, because without QE, the economy will lapse into a worse recession than the one we just finished. That’s because we still have a lot of problems to correct because the last recession was cut short by the stimulus.
So the stimulus interfered with the market’s attempt to correct all the imbalances that were built up over the phony boom that was a function of prior Fed mistakes. If you understand that the economy is basically floating on a sea of stimulus, then when the stimulus goes away, we’re back in recession. The Fed saying we’re only going to do QE if the economy needs it is like a heroin addict saying he’s only going to take more heroin if he needs it.
Ludwig: So what should a genuine healing trajectory look like? Can you paint the picture?
Schiff: It looks like a lot of bankruptcies in the financial sector; more downside in real estate; big cuts in government expenditures; much higher interest rates; much higher rates of personal savings; a big decline in consumption and expenditures. The government will have to spend a lot less and so will individual households. We need a lot more savings; we need a lot more legitimate investment; more production; more exports. None of that is happening right now. We’re doing all the wrong things; we’re making all the underlying conditions worse. And the Fed stimulus is making it possible.
If the Fed acted responsibly, our leaders would have to be responsible too. But the Fed gives them an escape valve—a way to run up bigger deficits and make the problems worse instead of actually dealing with the problems and helping to solve them.
Ludwig: Let’s assume the Fed gets religion—per your view of the matter—and the economy goes through this very deep correctional kind of phase. After that, how would you describe the U.S. economy in a global context? What kinds of industries would be thriving?
Schiff: We would have a very healthy economy on the other side of that. But first, you have to realize getting there means big-time problems for a lot of people, and so the political pressures on government to interfere are going to be intense, and so when you see lots of people losing money and when you see lots of people losing jobs, there’s going to be lots of pressure for more inflation and more stimulus, and so it’s going to be hard for politicians to resist that.
But assuming that central banks all around the world all did the right thing and resisted all those political pressures, America would initially see a pretty good reduction in its standard of living, because we’d have to save more and spend less, and a lot of the other economies—particularly in Asia—they would see immediate benefits. They would be able to consume a lot more, they would gain purchasing power; we would lose it.
But, a lot of it too would depend on what other regulatory and tax reform we have. If we can do the right thing there, and get the government out of things like health care and education; get more free markets and reform our labor laws; and get to the point where it’s really a free country in America again, then we can have a very bright future and we can be more prosperous than we are now.
And it would be a real prosperity built on savings and investment and not a phony one built on debt and consumption. There are a lot of “ifs” there, but in the short run, what’s more likely is that the government is going to keep doing the wrong thing and keep numbing the pain until the disease gets so bad that the Novocain doesn’t work anymore. And that will be a disaster.
Ludwig: In the context of regulatory changes you mentioned, how do you view all these recent episodes of corruption? Obviously, MF Global is the big one, but we heard about another one recently—Peregrine. Where does it all end?
Schiff: Well, the corruption on the government and central bank level is far worse and far more troubling to me.
Ludwig: The corruption of intellectual honesty?
Schiff: I’m talking about the Fed’s keeping interest rates so low and counterfeiting with all the money it’s printing; and buying up government bonds; and foreign central banks working together to artificially manipulate exchange rates and keep interest rates artificially low. All that is what’s really hurting the global economy. Whatever is being stolen in the private sector is being dwarfed by what the governments are stealing.
Ludwig: What do you make of gold in all this? It seems that dollar-denominated assets have been a bit more in favor than gold in recent months.
Schiff: That’s because people are acting foolishly; they’re making mistakes, they don’t understand the real dynamics that are at play here. And you have a lot of foolish people managing other people’s money, and making foolish decisions. They’re too focused on the “what’s working now” and not “what’s going to be working in the future.”
Ludwig: Now, if all this quantitative easing takes place with the Fed and—who knows?—the ECB and whoever else, I presume that’s going to give gold another leg up. Is that a catalyst, in your judgment?
Schiff: I’m looking for another leg up.
Ludwig: So, talk about that for a moment: How much of a leg up?
Schiff: Oh, it’s going a lot higher. It’s hard to tell where the next move is going to take it. But it’s going thousands of dollars higher than it is now.
Ludwig: What are we talking about here: $3,000, $4,000?
Schiff: Oh, at least. I think a minimum of $5,000. But it could go a lot higher than that. A lot of it depends on future actions of central banks. We’re on a trajectory right now to send gold a lot higher, but central banks could do the right thing, and that would limit gold’s gains. But the more they keep printing money and the more they keep interest rates low to artificially prop up the economy, the higher gold is going to go.
Ludwig: And what’s the time frame on all this if central banks keep doing the wrong thing, as you say?
Schiff: You can never time it. Whether gold is going to take off next week or next month or next year, I don’t know. But I think it’s coming, and I think it’s going to be a big move.
Ludwig: Any other new asset allocation views you can share? Are you shorting stocks, for example?
Schiff: I don’t think there’s tremendous downside in stocks, but I don’t think there’s a lot of upside either because economies are too weak for there to be a lot of upside. And governments are going to print too much money for there to be a lot of downside. So, I’d look for more sideways action over time, but inflation is really going to erode the value of stocks. There will be tradable swings, with sell-offs and rallies, but as inflation continues to erode away those nominal returns, people are going to find out that they’re not really making money.
You have to be more selective about the types of companies you buy; the countries in which you’re investing. There will be people who manage to make a lot of money in the stock market, but you’re going to have to buy the right stocks and the right countries.
Ludwig: So what countries and what industries are in your sights as investments that will stay ahead of inflation?
Schiff: I’m thinking of countries that have undervalued currencies that are producing a lot; a lot of the Asian countries; emerging markets; some of the natural-resource-strong countries—countries that have sounder finances fiscally; better balances of trade; better government accounts; less deficits; have freer markets; and resisting the call of the voters for more socialism, more goodies, more welfare.
Like here, we’re trying to get the government to bribe people with health care. The more a society asks its government to provide, the less that society is going to have. Because whenever the government provides goods and services, it does a much worse job than the free market. That’s unfortunate, because when societies say we want something from government, they end up getting a lot less of whatever they were getting provided, because government takes away resources from the private sector, where they would have been used efficiently and uses them inefficiently.
Ludwig: Sounds like Argentina. But I guess you’d group the United States in that category!
Ludwig: And, generally, do you get your commodities exposure using equities or futures? Or do you use both?
Schiff: We do have some exposure to commodities ETFs, but most of the exposure we have for clients is companies that are operating in those areas: companies that directly benefit from rising corn prices or rising oil prices or rising nickel prices.
Ludwig: The John Deeres of the world?
Schiff: First, it’s mostly foreign companies, and more directly. In other words, John Deere sells heavy equipment, but that’s not really a way to get a pure play on agriculture. We’re more into producers of commodities.