Peter Schiff: QE Addiction is Fueling the Fire that Sends Gold Higher

Palisade Radio August 16, 2016

There are several reasons the world economy is unsustainable within the current systems. Peter Schiff believes the biggest factor is countries like the US which have huge deficits. They have low production rates requiring mass imports of goods in exchange for pieces of paper that are losing their value. This forms imbalances which destabilize the global economy. There are also enormous amounts of bonds and unfunded liabilities which creates vulnerability to a backup in interest rates. If rates go up, they can’t afford to pay.

Another key factor is the US dollar being rooted as the reserve currency. Emerging markets are sitting on stockpiles of US Treasuries, bought to prevent the dollar from crashing. Many developing countries peg their currencies, or want to limit the value of their own currency relative to the dollar for fear of jeopardizing their export economy. This makes distortions in economies resulting in all sorts of malinvestments from the trade imbalances.

He predicts that the Fed will cut interest rates and go through another period of quantitative easing that’s larger in scope than the previous one. QE is a detrimental addiction of the monetary system. To turn things around the Fed would need to quit cold turkey resulting in stock and bond markets crashing, and banks failing- which the Fed doesn’t have the stomach for. Instead of a crash, the Fed will do what they can to prevent it with more cheap money.

Peter owns many individual gold stocks and manages a Euro Pacific gold fund (EPGFX) which is up 130% so far this year. He recommends diversifying outside of gold, and not keeping money in the US or other countries that are having significant problems. It’s unlikely, but if the Fed becomes aggressive in their tightening, it could send gold prices down- but stocks, bonds, and real estate would be brought down even faster. He proposes that if we go back to QE and 0% interest- the price of gold might go ballistic.

Palisade Radio Host, Collin Kettell: Welcome back to another episode of Palisade Radio. This is your host, Collin Kettell. Aaron out of Prince George, BC is this week’s winner for our silver giveaway. If you have not signed up yet just go to www.palisaderadio.com for your chance to win a free ounce of silver.

With us today is returning guest, New York Times bestselling author and economist, Peter Schiff. Peter, welcome back to the program.

CEO, Euro Pacific Capital, Peter Schiff: Thanks, Collin, for having me on again.

CK: Yes. First of all I want to congratulate you on the sale of SchiffGold and your new partnership with Gold Money.

PS: Thank you.

CK: Gold has been the place to be in 2016. The movement in the gold stocks is remarkably reminiscent of 2002, which was, of course, the beginning of a 6-year bull market in the sector. I have not had you on since the bull market commenced, but I have noticed that TV pundits are being a little less harsh on you on TV. With the new trend being established here, do you think gold is unstoppable at this point?

PS: I think there are things that could be done to temporarily derail gold. I just do not expect them to happen. I expect the Federal Reserve to lower interest rates, not raise them. I expect them to do another round of quantitative easing. I expect that they may even bring interest rates negative. All of that is just going to fuel the fire that is sending gold prices higher.

My expectation is for a substantial move upward. If I am wrong, if the Federal Reserve surprises me and become aggressive in their tightening, then I think that could send gold prices down. But I think it would send stock prices and real estate prices and bond prices down even faster.

On a relative perspective, I think you will lose less in gold if the Fed tightens. If the Fed does not tighten, if they ease, then I think you will make more in gold than you will in the overall stock market. Of course if that happens, you will probably make more in gold stocks than you will in the metal itself. But it depends on how speculative you want to be.

CK: Last week we spoke to Don Coxe, a person I know you are familiar with. I believe he shares many of the same sentiments as you do. He is exceedingly bullish on gold and gold stocks. He is also bearish on the stock market. But he pointed out a serious dilemma and that is that in an era of negative yields gold beats bonds; it pays 0% instead of negative. But gold does not beat the 2.5% yield currently paid by the Dow.

Don did caution against participating in the Dow at these valuations because it can crash at any time. But I think his point was that it is impossible to pinpoint when or what will take down the house of cards. Peter, do you think that a stock market crash is imminent?

PS: I do not think one is imminent because I believe the Federal Reserve will do what it can to prevent that with cheap money. Rather than the market crashing, I think the dollar crashes instead.

But you talk about a 2% yield on US stocks. The average investor does not get that because the average investor might buy his stocks through a mutual fund to the extent that it is a managed fund. The management fees are going to eat up most of that yield. I guess you could buy an index fund where the management fees are lower. But if you are indexing, you are just going to be buying into a broadly overvalued market. Even though you might get a yield of 1.5% after you pay your fee, you could see your principal erode if the value of the stocks that you bought went down. You have to look at the risk-adjusted returns, and I think you are taking a lot of risk for a very meager dividend yield relative to just playing it safer in gold.

But that said, I think there are a lot of stocks around the world that offer compelling alternatives to just a portfolio of gold. We buy stocks for clients in New Zealand or Singapore or Hong Kong or Norway and maybe we get yields of 6, 7, 8, 9% which are decent yields, and we are buying stocks that are not overvalued; they are fairly valued or undervalued based on any kind of objective measure of stock valuation. More importantly, they are paying us dividend yields in New Zealand dollars or Swiss francs or Norwegian crone or Singapore dollars; currencies that I think are going to go up against the sinking dollar.

CK: Speaking of the dollar, you have been very harsh on the dollar. But in the context of other reserve currencies in the world: the euro, the pound, the yen, and the yuan, one could argue that the dollar will remain in a position of strength even in a gold bull market just because the other options are so pathetic. What do you say to this? Why do you think the US dollar is going to come down?

PS: You could argue that, but I do not think it is the correct position. The dollar has kind of won because of the perception that it is the cleanest dirty shirt. If actually take a good look or maybe a good smell of that shirt I think you will find out that we are far from the cleanest; we may in fact be the dirtiest. But it is the idea that we are not as bad as everybody else that has helped with the dollar flows. But that is all because of the widespread expectation that the US economy is in better shape than the rest of the world and that the Fed is going to be able to shrink its balance sheet and normalize interest rates. It is all these expectations that had been working in the dollar’s favor. But when those expectations prove false; when the Fed ultimately has to resort to more quantitative easing and grow its balance sheet even further; when the Fed is backing at zero and maybe even negative, then I think that is going to weigh very, very heavily on the dollar.

In the meantime, the other problems that we have that Japan does not have to that degree, Europe does not have, is our massive trade deficits. We keep exporting huge quantities of dollars to import goods. We are a massive debtor nation. That is not the case with the other countries that you mentioned, and so we have a unique problem. Also, the sheer enormity of the money that we owe, not just the bonds, but all the unfunded liabilities, I mean we are more deeply in debt than any of these other countries, and we are more vulnerable to a back up in interest rates. If the interest rates go up we cannot afford to pay.

CK: Let us stick on currencies for a minute. Nothing gets me more excited than listening to you troll the bitcoin adherence of the world. Peter, bitcoin crashed this week on reports of yet another exchange getting hacked. This time hackers made off with some $70M of loot. This whole bitcoin era has put the bank robbers of the past to shame. I just want to preface this response by stating I am not anti-bitcoin, but I do not own any at this time. Talk to our listeners a bit about bitcoin these days.

PS: Yes, that is part of the problem with those who advocate bitcoin as the new gold standard. If somebody robbed a vault of gold the price of gold wouldn’t drop by 20% just because some gold was stolen. The fact that you could see the crypto-currency crash by that amount and in fact the price of bitcoin went up to over $700 in early July, around Brexit time, and I think yesterday’s low was $465, so you are talking about a better than 30% drop inside of a month. That kind of volatility just does not work when you are talking about money. When you try to talk about a medium of exchange and a store of value, it is too volatile to be money. At best, it is just an asset. It is a speculative asset. It does have liquidity similar to money. You can exchange it, but I can exchange other assets for goods and services. It does not make those assets money.

Ultimately though, the value of bitcoin may prove to be zero because it does not have any value if people do not want to use it as a medium of exchange or a store of value because there is no real value there to store unlike gold that has significant uses beyond money. That is why gold became money in the first place.

The people who were worried about the pound, if you were in Britain and you were worried about Brexit and you put money into bitcoin; if you still have your bitcoins you would have been better off keeping your pound. Even though the pound went down at this point bitcoin has gone down even more. But if people in Britain bought gold; if they just would open up a gold money account, which they could have easily done, and just converted their pounds into gold, they are way better off because the price of gold in terms of British pounds has gone up dramatically since the Brexit vote and gold has held on to its gains.

Yes, initially, bitcoin went up more than gold, but then it collapsed and surrendered all the gains, whereas gold went up on Brexit and then continued to go up until I think it has pulled back a little bit today, but as of yesterday we were at the highest.

CK: Brexit was certainly good for gold. If you look back a few years ago when gold hit $1,900 an ounce that was on the back of Greece’ issues in Europe and Brexit potentially has much more significance to the European Union and the world than the issue, the debt issue, did in Greece at the time. Do you think that Brexit was a prudent vote for the voters of Britain and what do you think the implications might be?

PS: Yes, if I was in Britain I would have voted to Brexit. I mean if I was in any country in the European Union I would vote to get the hell out. I think it was a mistake they created it in the fist place, and the Germans should want out. It is not just the British. The British do not even share the euro currency. I would want out even more if I was a part of that. But I think the real driver of the price of gold is not going to be which countries decide to get out of the European Union; it is going to be what happens over here on our side of the Atlantic. I think what is really driving the price of gold is the idea now that is gaining some traction that the Fed is not going to be tightening interest rates any time soon.

I think as people start to evolve their positions, the Fed, not only is it not going to raise rates, it is actually going to cut them that we are back to quantitative easing and 0% interest rates, and that we are about to embark on a whole new easing campaign that is probably going to be even larger in scope than the last one. Then the price of gold is going to just go ballistic. I think then people will connect the dots and realize that this can never end. That once you go down to the zero amount; once you do all these quantitative easing, that you can never stop. It is like once you committed yourself to a drug habit you are hooked for life. The only the way you could kick the habit is to go through withdrawal, go through cold turkey, and right now the Fed does not have the stomach for that. Because in order to get off this habit it means the stock market has to crash; the bond market has to crash. We have to come down off this high. It means banks are going to fail. It means the government is going to have to default on its debt. I am talking about the treasury. It is going to have to default on its bonds. That is all the bad stuff that is going to happen in order to come down off this high. But if the central bankers are not going to allow that then they are going to have to keep the drugs flowing. That means a lot more money printing and interest rates staying at zero, and the gold has got no place to go but up when people finally figure that out.

CK: Historically speaking, we do not really have a precedent for where we are today with negative rates and the Keynesian economics being used by all the central banks of the world. If we do have a situation where the bonds spike, the stock market crashes, basically everything kind of goes to hell and gold is obviously going to go up in that situation, you would imagine so much money is going to rush in to gold that it could be just a price unfathomable at this point. Can you kind of fast forward a couple years in time and paint a picture of the global economy?

PS: There are bright sparks in the global economy, but obviously the problem is the monetary system does not work with the dollar at the center of it and you have all these central banks all around the world that are endeavoring to keep their currencies weak and are worshipping at the altar of inflation. You have the Bank of Australia, Reserve Bank of Australia, two days ago I think, they reduced interest rates to an all time record low. They did that despite a housing bubble, despite the fact they do not have a high unemployment problem or economic growth.

The sole purpose of the rate hike, at least what they claim publicly, was to raise the inflation rate that the cost of living, the way that they measure it, is rising annually at about 1%. According to the Bank of Australia that is not enough. The cost of living has to go up by 2 to 3% and it is their job to make sure, which to me is the complete opposite of what people actually want. They want their cost of living to go down, and the fact that it is going up does not mean that the central bank should try to make it go up even faster.

People should be striving for a reduction in their cost of living because that is how you get an increase in your standard of living. But all these policies are detrimental to the global economy, but it is all rooted to this monetary system that we have where the dollar is the center of it. It is really corrupting the monetary policies of all the countries that hold dollar reserves or try to peg their currency in some way to the dollar or try to not have their currency be too strong relative to the dollar for some fear that somehow it is going to hurt their economies because it is going to jeopardize their exports.

But the big problem with the global economy is that you have countries like the United States that run huge deficits because we do not produce enough ourselves and we force the rest of the world to do the hard work for us. They ship us what they produce and all we do is give them little pieces of paper which will never have any value. These huge imbalances are really destabilizing global economy. You have these emerging markets that are sitting on stock piles of US treasuries that they had bought to prevent the dollar from crashing, but those monetary policies create distortions in their economies. You have all sorts of mal-investments that result from these huge trade imbalances that result from the dollar being a reserve currency. This cycle has to end and I think the only way to end is that it is no longer the reserve currency.

CK: Trump vs. Hillary is a topic that has been beaten to death. I have heard several people ask you questions about it, but listeners just cannot get enough. It is so interesting this time around with the US elections. I know that you personally support Gary Johnson, as would I if I were to vote. He is going to garner a lot more support than an independent or libertarian normally would because voters are uneasy about the other options. But realistically speaking, Trump or Hillary has the better chance of making it to the presidency. Hillary would almost certainly continue on the path of Bush and Obama: wars, more money printing; kind of the same old. Trump maybe could usher in a new era. Does that excite you?

PS: Well, I do not know. He is a wild card. But I think what is interesting is that you have got so many people in the mainstream Republican Party that seem to feel that they dislike Trump so much that they are going to go for Clinton, but they could easily support Gary Johnson. The interesting thing is if enough big Republicans came out in favor of a libertarian ticket which includes two former Republican governors, one from Massachusetts and who is friendly with Mitt Romney. But if some of these big Republicans came out in favor of Gary Johnson, Gary Johnson would get enough pull to be included in the debates.

If that were the case, I am sure the libertarian ticket, with the support of a lot of establishment Republicans, would get enough votes in enough states to prevent either Hillary Clinton or Donald Trump from gaining a majority of electoral votes. That is not that hard to do. That would throw the election to the House of Representatives where the Republican-controlled House could pick the next president and they could pick Gary Johnson.

If they do not like Donald Trump they have a path to carry Johnson which is actually very realistic. The fact that they would not take it, they actually prefer, the Republicans actually prefer Hillary Clinton to Gary Johnson. They are actually closer in line with a far liberal Democrat than they are to a real free market advocate, which really shows you to the extent to which we really have a one party system because the establishment of the Republican Party would prefer an establishment Democrat to an outsider like Trump running as a Republican or to a Republican running as a libertarian.

CK: All right, Peter, we started with gold and gold stocks you mentioned a bit. At the end here I would like you, because you do it so much better than me, to kind of plug your various different products and things that you are working on, but I want to end with gold stocks. They have a lot of leverage to the price of gold and this year they performed incredibly well. The HUI is up I think well over 100% which represents the Gold Miners Index. How do you invest personally? I know you have some products there that people can look at, but what are you looking for in the gold stocks?

PS: Yes, I own a lot of individual gold stocks and, of course, I even manage a fund which I think is the best way for people who do not actually want to do their own research. We are doing really well with the Euro Pacific Gold Fund. EPGFX is the symbol. I think it is up about 130% or so so far this year and it is only seven months into it. I think we are just getting started because so far we have done the gold stocks has recovered around that we never should have lost in the first place. We still have a long way to go. I think it is still very, very early in this cycle from the metals especially if I am correct at what I believe the Federal Reserve is going to do.

Yes, I like that fund but I also have other funds that I manage outside the gold sphere. I do not think people should have all their money in gold or gold stocks. They should be diversified, but I do not think you should keep much money in dollars of the United States. I think the key to your diversification is to diversify outside the United States, but also avoid some of the other countries that are having problems.

We are not the only country that is having problems. I think we have the biggest problems, but I am not going to overlook problems that other countries have. I want to be very selective in where I invest my money, where I invest my client’s money, so people could get a hold of me at my brokerage firm Euro Pacific Capital. It is www.europac.com to talk with one of my brokers about the managed accounts that we have or my funds or how setting up a brokerage account with us.

If you want to buy some physical precious metals, you can do that through my company SchiffGold at www.schiffgold.com or through Gold Money. You can sign up and have a gold money account at www.goldmoney.com and just begin saving in gold and have gold that you can use as money, that you can spend, or you can receive payments if you happen to provide services, or you sell products, you want to be paid in gold. There is a vehicle for doing that, so you can avoid the fiat system as much as you can because ultimately there is a currency crisis coming.

As far as following me on the internet, I do a video blog podcast. My podcast is usually two or three a week at www.schiffradio.com or I upload into my YouTube channel at the Schiff Report. You can follow me there. Also at www.europac.com you can sign up for my newsletter. You can sign for my weekly digest. There are a lot of ways that you can stay in touch with me. Of course you can friend me on Facebook or follow me on Twitter. I am on all these traditional social media outlets.

CK: Peter, thank you so much. I always appreciate your contribution to the show and thank you for plugging your various different products. I bought several of your books. I am most interested in learning how to properly plug my products. I always take a keen interest in listening to yourself. Anyway, thank you so much for coming back on the program. We will get you back on very soon.

PS: All right. Take care.

Share this on: Facebooktwittergoogle_pluslinkedin

Leave a comment

Palisade-Research

Research & Contributing Content

Company Profiles