Peter Schiff: Don’t Hold Breath For Fed To Taper

Olly Ludwig
September 10, 2013

Peter Schiff, president and chief global strategist of Euro Pacific Capital, is most definitely not in the camp that believes the U.S. economy is steadily, if slowly, recovering from the market crash five years after the collapse of Lehman Brothers in September 2008. To the contrary, he thinks a far deeper crisis is on its way.

Schiff, who will be a panelist at IndexUniverse’s “Inside Commodities” conference in New York on Sept. 23, told IU Managing Editor Olly Ludwig gold is likely to head to $5,000 or higher. He also cautions investors to be prepared for the Federal Reserve not to begin unwinding quantitative easing soon and to brace for the day when the central bank will have to brusquely tighten credit exactly at the time the wheels are really coming off. Do you view the debt ceiling as a potential new crisis, and how do you see it playing out?

Schiff: I don’t see the debt ceiling as the crisis, that’s part of the solution. The crisis is the debt, and the crisis is that we’re going to raise the debt ceiling. We’re going to keep raising the ceiling so we’re going to keep piling more debt on top of the debt that we have.

And, eventually, the crisis comes not because we don’t raise the debt ceiling, but because lenders don’t raise the lending ceiling because they recognize that we’re broke. They won’t want to throw good money after bad, they don’t want to keep lending money to a country that can’t pay back what has already been loaned to it.

That’s when we have a real crisis—interest rates go up; the dollar collapses. The debt ceiling is just politics. We’d be better off if the debt ceiling couldn’t be raised, because then we’d actually have to deal with the problem instead of kicking the can down the road. Let’s talk about gold. It’s been moving downward for most of this year. There have been a lot of redemptions in GLD, but $1,180 an ounce seems to have been a bottom recently. Is the current rebound sustainable?

Schiff: There’s a strong probability that we have in fact made a bottom, and whether we’re going to retest that bottom before going higher is anybody’s guess. But I think we’re going a lot higher. I think we’re going to take out the high of $1,800 or $1,900 set back in 2011. We might not do that in calendar year 2013, but I think we got a good shot of doing it in 2014, and actually adding quite a bit of distance above $1,900 to the upside.

The fundamentals are as strong as ever for gold. A lot of the players that exited the market in the summer of 2013 are going to be getting back in at higher prices. And a lot of the shorts are going to be in a lot of trouble, because they’re going to find it very difficult to buy back these positions that they’ve sold, because a lot of the gold that was sold by speculators on the way down was bought up by long-term holders.

People who bought gold at $1,300 aren’t going to turn around and sell it at $1,500 or $1,600—they’re just not. But meanwhile, the shorts are going to need to buy, and I don’t know where they’re going to get the physical. So I think we’re going to see a huge short squeeze in addition to the regular rally we’re going to get from new longs entering the market. It could be a huge rally for gold. So how high is high? What seems realistic to you if you were to put a dollar value on that rally?

Schiff: It’s hard to put a dollar value on it, because I have no idea what a dollar will be worth, if anything. There’s no limit as to how high the price of gold can go. I think, at a minimum, you’re going to see gold prices at $5,000 before the bull market ends. But it could be a lot higher than $5,000, there’s just no way to know now.

I don’t know how many dollars are going to be created, how far the Fed is going to try to push this envelope when it comes to QE. So who knows where the price might end up. At this point, it’s really irrelevant. You don’t really need to know how high it’s going to go, you just need to know it’s going to go a lot higher and just buy it. Should what’s going on in Syria and in the Middle East be a major consideration for investors?

Schiff: I don’t think it’s that major in the scheme of all the other considerations. It’s a factor; it’s another negative factor should we get involved in Syria for the U.S. economy. It’s a positive factor for gold prices, for commodity prices.

But really, the unknown, and one of the many, many reasons we should have nothing to do with the Syrian civil war, is that once you move in that direction and set off a chain of events, you have no idea what’s going to happen next.

We know from prior experience that they could be there for years, and it could cost a lot of money. So I think it’s a mistake to get involved and hopefully it doesn’t become an even bigger mistake. Is gold a viable hedge for the Syria situation?

Schiff: Gold is predominantly a hedge against inflation, or against debasement of fiat currencies. You have a choice. If you don’t want to buy an asset like stocks or real estate, if you just want to store your purchasing power so that you can buy assets in the future or consumer goods, are you going to hold dollars; are you going to hold euros; Swiss francs; or are you going to hold gold?

I think more and more people will choose gold when they look at the supply of these fiat currencies that are hitting the market or are going to hit the market. And they’ll look at the supply of gold, which is growing very slowly—a lot of the miners are having a lot of problems; production costs are rising. So you’re not getting a lot of new gold being mined and demand is growing all around the world. I think it’s a better store of value.

Meanwhile, the yield on gold is pretty much the same as on dollars or euros or yen or Swiss francs—the yield is zero. It used to be that if you owned gold, you were missing out on 5, 6, 7 percent. But you’re not missing out on anything now. There’s no opportunity cost for owning gold because you don’t get interest owning another currency. So you might as well own real money, as opposed to these fiat currencies. That’s going to drive demand.


Schiff (cont'd.): Soon, we’re going to find out if the Fed’s going to taper in the fall. If they don’t taper—which I think is even more likely—well then, the market is really going to rise, because the market will have discounted a tightening that’s not going to happen. And if the Fed tapers in the fall, probably by winter they’re going to be un-tapering. They’re going to have to reverse it, because of the carnage in the bond market and the stock market, because they’re going to be pulling the rug right out from under the recovery they think they’ve created.

So they’re going to have to come right back to the markets with more heroin to give the drug addicts what they want. And that’s going to expose the phony nature of the recovery that they’ve been bragging about. So you’re saying the Fed’s not going to wind down the QE or the zero-interest-rate policy, and that the end’s not in sight?

Schiff: They’re not going to wind it down. The market is going to wind it down for them. The Fed is not going to voluntarily taper. It’s going to keep on expanding the balance sheet at an ever-increasing pace until the market puts an end to this party. So, eventually the bottom will drop out of the bond market and out of the dollar, there’s going to be currency crisis; a sovereign debt crisis that will dwarf what was going on in Europe.

And then, when it’s a real catastrophe, the Fed will be forced to tighten. And it’s going to be much more violent then they’re anticipating; it’s not going to be a gradual tapping on the brake. They’re going to have to slam on the brake and push the pedal through the floor. You’re describing a violent scenario involving the sudden end of QE and quick increases to the federal funds rate.

Schiff: Yes. They’re going to have to let interest rates rise, sharply, let short-term rates go up. That’s when we’re all going to have to admit that we’re broke; particularly, the government is going to have to admit that it’s overpromised, that it can’t meet the commitments that it made to Social Security recipients, to retired employees who were promised pension benefits. In fact, it’s going to have to admit that it can’t even meet the commitments it’s made to its bondholders.

Forget about the debt ceiling, we’re not even going to be able to pay the interest on the money we’ve borrowed, let alone repay the principal. We’re going to have to have a restructuring, just like they restructured Greek debt—we’re going to have to restructure Treasury debt. We’ve talked a lot about gold, but what about other commodities that are important to you as hedges against this inflation scenario you foresee?

Schiff: Commodity prices are going to go up, oil in particular. I have a lot of oil investments in the United States and around the world. Oil looks very good to me; technically, too. Now we’re around $110 a barrel, and I think we’re headed up to $115 or $125 or so before the end of the year. And then, next year, we have a shot at trying to take out the $150 high from 2008. What about other commodities?

Schiff: The industrial metals and agriculture. I’ve been bullish on agriculture for a long time, and I remain bullish on agriculture. Do you favor equities focused on the commodities space?

Schiff: Yes. We invest in commodity-related equities. We’ve got a hard asset fund that invests in a lot of the commodity-type equities, but even my noncommodity-focused funds have companies in the commodities space.


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