President of Euro Pacific Capital on Gold and the Dollar

Mike Norman, HardAssetsInvestor.com (Norman): Well, he's back. Mr. Doom and Gloom is here ... Peter Schiff, president of Euro Pacific Capital and author of the new book just out, "Bull Moves in Bear Markets." Peter Schiff, president of Euro Pacific Capital (Schiff): "The Little Book ..." Norman: "The Little Book ..."; it's in The Little Book Series. Well look ... the last time you were here, things were kind of going your way, but it looks like things have turned upside down.

All kidding aside, I know your big thing over the last seven or eight years has been gold. We're very supportive of gold on this show; we think that probably people should have some gold as part of their overall portfolio mix. But let's just look at what happened. Several weeks ago, the U.S. stock market had its worst week in history ... even going back to the 1930s ... worst week in history. I saw a breakdown of various assets - all assets really - stocks, bonds, gold, commodities, oil. Gold was at the bottom of the list. The top-performing asset, and something that you hate, was the U.S dollar. So how do you explain that? If we are going through the worst economic and financial crisis in history - precisely what gold is supposed to protect against - why would it perform so bad? Schiff: Well, I think it will perform very well; you got to give it a little bit more time. Norman: More time or more decimation? Schiff: No, what's happening right now, Mike, is just de-leveraging, and so gold is going down for the same reason a lot of stocks are going down, a lot of commodities are going down. There's a lot of leverage in this system, there's a lot of margin calls, a lot of liquidation; a lot of people are having to sell whatever they own to pay off their debts. Norman: But look at where the money is going ... the money is going into U.S. sovereigns, Treasuries ... it's going into the U.S. dollar. Schiff: For now. Norman: Why for now? Schiff: Right now there's some perception of safety there, but it's the opposite of the leveraging. If you're selling your assets, you're accumulating dollars; but ultimately right now, it's like there's been this gigantic nuclear explosion in the United States, and everybody is running toward the blast. Pretty soon they're going to figure out they're going in the wrong direction. Norman: You always talk about gold as a currency, and we have seen currencies appreciate - the yen, for example, the dollar tremendously, for example, but gold has not held up. Schiff: Well, if you actually look at gold versus other currencies, in the last couple of weeks gold has made new record highs in terms of the South African rand, the Canadian and Australian dollars ... so gold was not doing as poorly as many of the currencies, and I think this is all short term. I think you're going to see a lot of money moving into gold, and if you look at how much gold has gone down from the peak, the peak was about a thousand ... it's off about 25%. Stocks are off 40%. Gold is still up during this year against the Dow.

Norman: Let's see the performance from this point forward; we'll look back at this again and we'll revisit this issue.

Let's talk about something else, something that you have also ... and I just mentioned it ... the U.S. dollar. You were very, very negative. In the last month, we have seen unprecedented actions by the U.S. Fed in terms of expansion of the monetary basis; in other words, printing money ... what you call printing money ... and despite that, the dollar has remained incredibly strong.

How do you explain that according to your logic?

Schiff: Everything the government is doing is inherently negative for the dollar, and all of this...

Norman: It's not playing out that way.

Schiff: It will; you've got to give it time.

I remember when I was on television talking about the subprime and people were telling me it's no big deal, and I said, just wait a while; give it time.

Look, everything that we're doing - all the bailouts, all the stimulus packages - this is all being financed by inflation. It's inherently terrible for the dollar.

Norman: But you just said yourself that everything is deflating.

Schiff: But right now, Mike, you're getting this de-leveraging, and this is benefitting the dollar, so despite the horrific fundamentals for the dollar, it's going up anyway.

But ultimately, when this phony rally runs out of steam, the dollar is going to collapse, and that's when we're going to have a much greater crisis because now you're going to have a collapsing dollar, which is going to push long-term interest rates up, commodity prices up.

Norman: I still don't understand why the dollar is going to collapse. So you're saying that the Fed is just going to allow ... or leave this enormous amount of liquidity in there, that at some point down the road, if we recover, they're not going Scto take it out?

Schiff: Look, they have no control over it. The Fed is trying to artificially reflate our phony economy, right?

We had this economy that was based on Americans borrowing money and then spending it on products. We have this huge debt finance bubble which is collapsing, and it's being supported by foreigners.

But when this artificial demand for Treasuries goes away, the Fed is going to try to print a lot of money and the dollar is going to get killed.

Norman: All right; I'm going to ask you to hold on. Folks, check back because we're going to do the second part of my interview with Peter Schiff, so check back to this site. This is Mike Norman; bye for now.

Comments

[NOWHEREMAN:]

Wow, the great mr. schiff thinks that the timing is NOT right for Gold. Must be something in the air, someone is smoking something and Schiff is downwind.

2008 Dec 30 07:47 AM

[waldipup:]

The previous comment , no. 1385 by the commenter , offers nothing.

First off , I believe this article is an old interview , yet dated Dec. 30 .

Why not clarify the time frame of the actual interview?

Second , since it is old , the dollar is now quite lower , making the first comment look silly , even though it was anyway ,

And the article itself , though always nice to read Schiff , not timely.

2008 Dec 30 08:29 AM

[GD:]

Schiff is primarily an author, always pitching his books. I read his last two from 2007 and 2008[not woth the price]. These books are primarily a sales effort to invest with his company, and otherwise don't contain much value. Much of his predicions are no better that the blab on the street at the time.

2008 Dec 30 08:55 AM

[Gone Broke:]

I've been following Peter Schiff for some time now and while he has been ever so right about how things are going to fall apart, he has not been so right about how it will all play out. Anyone following his advice before things fell apart is in a lot of pain. For those that do not know, Peter's advice was to get out of dollar assets and invest in foreign stocks. Somehow, Peter missed the pattern that when USA stocks go down, so do all other stocks. So ... you would take a hit on the currency (because the dollar went up, not down) and then also a hit on the stocks going down, so you take a double hit (like 70%). I just wish Schiff would admit that he missed something and move on instead of insisting he was right (when he was not and it hurt people) and that all he needs is more time. Perhaps with time things will turn around, but if and when they do, those that followed Peter will at best get back to where they were before things fell apart. And at the moment, even that seems unlikely. I know, as I followed his advice. Happy New Year Everyone!

2008 Dec 30 09:02 AM

[Kelly Liebe...:]

I agree that this interview does seem outdated given recent news. I also agree that many "experts" have called this market every way but right - and following any of them probably cost you money.
It seems that the day traders are making the money, playing the headlines, not the charts. It can be frustrating for anyone. This has been a year of many contradictions. This is when I turn to my gut instinct to make decisions, and rely on myself. My gut tells me that despite some rallys that alot of analysts missed, the dollar will drop, oil, precious metals and other comodities will rise.
I see states shutting down services, business failures, shortages on shelves, more unemployment, a war in the Middle East and a domino effect for years. I am getting my "house" in order for "emergency preparedness".
My past comments show where I have stood for months on this economic situation. If I am wrong, and 2009 turns into a stock rally, and all of a sudden every one who is out of work gets a job, and every business that has had to close can now reopen etc.....than I will just spend some time driving to the food bank to make drop offs.
Problem is that I just can't see this all going away...

2008 Dec 30 10:10 AM

[BrunoT:]

Gold is up quite a bit recently, this is an old interview most likely. And since when is "investing" done over a time horizon of less than a year? To say Schiff was "wrong" you'd have to assume that only what happened in the last 4 months or so counts.

Only if one bought gold in March or late summer of '08 and then sold it did one "lose" anything, and even then one lost far less than if he'd owned US stocks.

Foreign stocks are way down along with the world economies, but if you actually READ Schiff's book he says to buy DIVIDEND PAYING stocks that are fundamentally sound so that you keep collecting the dividend during the downturn. Yes, he was surprised like most of us that the dollar rose in value as the world fled to it. But that has already reversed and the outlook is gloomy for it.

If Peter Schiff is wrong everything will be ok and you still have a job. If Mike Norman is wrong you're unemployed and down another 40% on your investments. You choose.

2008 Dec 30 11:13 AM

[De Graaf:]

The first thing that catches me reading this interview with Peter Schiff, is the tone of the interviewer, Norman. Its absolutely negative. Total disbelief in Mr. Schiff.

Its obvious that Norman does not have a clue how this crisis evolved, considering his questions. He can't even place the asset deflation in the private sector in the same equation of the inflationary policies of the Federal Reserve. A little sad to see that Norman does not have its facts mind lined up the right way the market moves.

Let me explain this to you Norman, though I'm not always fond of the way Peter explains all of his doom and gloom, he is right.

The asset deflation we saw this year, especially since August, is caused by deleveraging. Banks, institutations, hedgefunds and investments funds/banks use 10 to 1 and even 35 to 1 leverage for investing and lending. This money was active in the private sector.

Ok, now when you have a credit crisis, with the relating lack of confidence in the financial markets. Banks tend to stop lending to eachother not knowing who has the toxic assets on their balance sheets. The result is a stop on interbank lending. Money flow halts and the money supply and velocity rapidly contracts.

The toxic mortgage related assets on investment bank balance sheets, take their tole, requiring money to keep the reserve levels intact. The risk taken was to large and so good assets are being sold to cover the losses on the balance sheets. This triggers customers (other banks and vehicles) to start selling their good assets, resulting in a firesale considering the huge amount of money being spent in the economy per dollar on balance. (leverage). This phenomenon is also known as asset deflation. (not monetary deflation)

Now, the FED policies are based on supplying credit to the markets, like they did under Greenspan after the dot.com bubble to stimulate house ownership. The results today are overpriced houses.
The current policy is again supplying excess credit to the markets, to stimulate the US economy that already has an overspent consumer based on debt. The economy runs on consumer demand for 70 percent of US GDP. Thats bad Norman like Peter points out, despite the monotone prayer.

So to finalize this for you Norman, for once and for all;
FED policy = inflationary
Financial system deleveraging cycle(s) = (asset) deflationary

Inflation + deflation = 0
($3 trillion) + (- $7 trillion) = - $5 trillion and thus deflationary.

Does the equation ring a bell Norman?

brgds.

2008 Dec 30 12:16 PM

[Mark123:]

It was from a Dec 3rd interview located here
www.hardassetsinvestor...

2008 Dec 30 12:32 PM

[scotty1560:]

Where does the board think the dollar will be in a year or two?
Lately, I lean toward a higher dollar in a deflationary environment
for say 12-18 months? Weaker Euro? Opinions welcome?
Stronger dollar = lower asset values?

2008 Dec 30 01:41 PM

[nmelendez:]

The issue with Gold is that after all the de-leveraging is over, they will buy it back since it provided such safety during the crash. Gold is still 4X higher than in 2000, the market is back at 2000 levels, just losses. Don't believe the de-leveraging is over story one bit. If you look at a 30:1 hedge level we still got 3 to 4 years to go. In the meantime gold will go up in cycles.

2008 Dec 30 07:46 PM

[chux08:]

The dollar in a year or two....

I'd say if it's still around it'll be worth about HALF of what it's worth today, which isn't much, since they're fond of mentioning that the dollar has lost what, 95% of it's value since 1913?? I don't know how you could have control of the printing press and expect anything else. And how are the fools that got us into this mess with easy credit and all of that, how are they going to be the ones that get us out of this mess?? And how is more of the same, easy credit and the like, going to fix anything??
The dollar in a year or two.....HA! We'll be lucky if it makes it a month or two!!!!!
Hope you own some gold and silver....

2008 Dec 30 10:20 PM