I recently wrote an article titled "Peter Schiff Has It Totally Backwards; Gold Isn't Going To The Moon." At the time, gold was trading around $1,384, and promptly collapsed shortly after Peter made his prediction. Even today, after a $30 point fear driven rally and a collapsing stock market, gold is still below the $1,380 mark. It appears Peter's moon-shot resulted in a failure to launch.
The failed moon-shot however did not deter Ron Paul who is back again in the press, this time claiming "gold is going to explode higher." Ron Paul and his followers couldn't be more wrong. This video highlights just how misguided and ill-informed Ron Paul truly is.
The first problem is that Ron Paul isn't an expert in economics, he is a self proclaimed expert in Austrian economics. I know of no one with a background in economics who views Ron Paul as an expert in economics. Austrian economics is an anti-quantitative form of economics, so none of their theories are quantifiable, so believers in Austrian economics are just that, believers. I'm a believer in supply side economics, but I can produce charts and data to prove why I'm a believer. I seriously doubt Ron Paul has many Wall Street firms offering him a job to run their economics departments.
The second problem is that higher interest rates are is in no way, shape or form evidence that the Fed is losing control. That very comment demonstrates an ignorance of epic proportions with regard to modern monetary policy. The Federal Reserve has the power to put in a price floor, they have no power to put in a price ceiling. The Fed can prevent interest rates on the short end of the spectrum from going below a certain level, but they have no power to prevent the rates from going higher. The whole goal is to have the markets drive rates higher because of confidence and the restoration of growth, and that is exactly what is happening.
The long-term average on the 10-year treasury is around 5 to 5 1/2%, the current rate is below 3%. The Fed has been trying to stimulate the economy, lower unemployment and slightly increase inflation. The fact that interest rates are increasing is evidence that the Fed is succeeding, not losing control. Claiming that the Fed is losing control when long-term rates are below 3%, unemployment is over 7%, economic growth is moderate to slow and inflation is below 2.5% is absolutely absurd. Ron Paul and Peter Schiff complain about the Fed's low rate policy out of one side of their mouths, and now at least Ron Paul is complaining about the rates going higher. I have more confidence in the climate scientists that claim CO2 can cause warming, stable temperatures and cooling temperatures.
The third problem is Ron Paul lists that we have a wealthy country, strong economy, the world's reserve currency and that the 30-year bond bull market is ending as if those are somehow negative. A wealthy country, strong economy and being the world's reserve currency proves that as far as monetary policy goes, the entire world trusts our Federal Reserve. The reason the 30-year bond bull market is ending is because of simple mathematics - interest rates can't go below 0%. The reason rates are so low is because the Fed has eliminated inflation fears from the market that is a huge success, not a failure.
The fourth problem is Ron Paul believes that if rates go higher in spite of what the Fed does that it spells big trouble. Earth to Ron Paul! That is the entire goal of the Federal Reserve right now. Once again, the Fed puts in a price floor, they do not put in a price ceiling, that means the Fed can prevent rates from going lower, they can't prevent them from going higher. If rates are going higher, it will be due to natural market forces attempting to reach a market equilibrium. Those natural forces would be a stronger growing economy and an increase in demand for capital. That is exactly what we want to see, and yet Ron Paul somehow turns a victory by the Fed into a failure. Trust me, we want to see interest rates going higher in spite of the Fed setting rates low. That would demonstrate that the economy is returning to normal and can stand on its own two feet. What would Ron Paul prefer? That the economy remain on the ropes?
The fifth problem is Ron Paul criticizes the candidates to be Fed Chairman because they are "Keynesians" and they "believe" in a central bank. Ron Paul wants to "End the Fed" but he will never say what with. If the choice is to have a Federal Reserve or "End the Fed" without stating what would replace it, I'm pretty sure sticking with the Fed is the infinitely better choice. Ron Paul's ideology reminds me of being in elementary school where we used to come up with theories like having no school and endless summers, or classes with no teachers. They were popular ideas with all my classmates, but then again we were only 6 years old and eating bugs was a favorite birthday party dare.
The sixth problem is that Ron Paul asks the question "does anyone know what interest rates should be, does anyone know what money supply should be?" The answer is yes, the markets do, and that is the best we can hope for. Once again, the Fed puts in a price floor in the short end of the market, that means all rates beyond the overnight rates are set by the market. If the Fed influences them it is by forcing them higher than the market would prefer, not lower. With the short term rates set at 0%, the entire yield curve is mostly defined by the free market. I say mostly because the Fed has been taking the unusual step of buying bonds at the long end of the curve, but those are the rates Ron Paul is saying are going higher proving that the Fed doesn't control the long end of the yield curve, but that is a good thing, not a bad thing. Higher rates are the expected result of a recovering economy, Ron Paul just doesn't seem capable of grasping that concept.
The seventh problem is that Ron Paul believes that "an individual or a small secret group of individual knows what is best for the economy" is essentially the current model of the Fed. Ron Paul lives in the paranoid "Creature from Jeckyll Island" world where a secret shadowy group of private "banksters" own and run the Federal Reserve. Ron Paul's famous "Audit the Fed" demand seems completely removed from reality considering the Federal Reserve posts its audit and FOMC meeting minutes on the internet. Trust me, if a small secret group of private "banksters" owned and ran the Federal Reserve each and every one of them would top the world's richest list.
In reality, no one will ever make the Forbes Wealthy 100 list because they are owners of the Federal Reserve. In reality the Federal Reserve is run by an appropriately transparent Federal Open Market Committee (FOMC) whose members often give public addresses, testify to Congress, disagree in public and publish their meeting minutes on the internet for all to see...with a lag. The lag isn't because the FOMC is doing something nefarious, it is necessary to prevent the markets from gaming the system. The FOMC doesn't claim to know what the proper interest rate is, nor do they claim to know what the proper money supply is, what they do is implement the Federal Reserve's "dual mandate" of maintaining unemployment and inflation within the appropriate range. The FOMC doesn't get to choose that "dual mandate" it is mandated by Congress to follow it.
The eighth problem is Ron Paul claims to be an expert in Austrian Economics. Fredrich Hayek is considered a father of Austrian Economics and he never wrote about "Ending the Fed." Neither did Joseph Schumpeter or Ludwig von Mises. Ironically the Austrian Business Cycle was inspired by the 19th Century business cycle, a cycle that was defined by a gold standard, laissez faire free markets and a minimal role of the government. The Federal Reserve didn't exist during the time that inspired the Austrian Business Cycle. The world was on a gold standard.
Ending the Fed would send us back to the extreme boom and bust economic hell that inspired the Austrian Business Cycle. In fact, what 1987 and 2008 has proven is that strict adherence to the gold standard both during the 19th century and Great Depression was most likely a major contributing factor to the depth, length and severity of those depressions. Also applying a business cycle theory based upon the 19th Century economy to today is like trying to fit a square peg in a round hole. The two economies are apples and oranges, and simply are not comparable. Milton Friedman is considered the monetary expert of the 20th Century, based his research on the 20th Century business cycle when the Fed did exist, and is the father of Monetarism, so if people want to understand modern monetary policy they should study Milton Friedman, not listen to Ron Paul.
The ninth problem is that Ron Paul claims that Ben Bernanke's legacy will be that he gave us a lot of "chaos." That is absolute nonsense, and I'm 100% confident that text books written in the future will describe how Ben Bernanke handled the 2008 crisis as nothing short of miraculous. One only needs to compare and contrast post-2008 with post-1929 to understand just how ginormously misguided Ron Paul and his followers are. Had the Fed not rushed to provide ample liquidity in both the 1987 and 2008 crisis, the global economy would have almost certainly fallen into a depression. Post-2008 not a single US Dollar was lost in an FDIC insured bank, there were zero bank runs, there were zero cascading or domino effect banking system failures and the US and Global Economy didn't collapse into a depression. That is something all people of all nations should celebrate, not denigrate. I don't know of anyone who would choose to repeat the 1930s, and that is likely what the Fed prevented.
The tenth problem is Ron Paul believes that the Federal Reserve is responsible for destroying 98% of the value of the US Dollar, all the "ups and downs" and the suffering of the middle class over the last 100 years. That is completely absurd. Standards of living are infinitely higher than they were 100 years ago, especially for the middle class. The last 100 years have lifted more people out of poverty than any century before it. The chaotic boom and bust business cycle of the 19th Century that inspired the Austrian Business Cycle was tamed in the 20th Century. The nonsensical claim that the Fed destroyed 98% of the value of the US Dollar only holds for a US Dollar earned in 1913 and buried in a jar in the back yard and spent 100 years later. It totally ignores that dollars are usually spent shortly after they are earned and thus not impacted by inflation at all, and dollars that aren't spent shortly after they are earned are usually placed in a bank savings account that pays a rate of interest that compensates for inflation. One hour of work today will buy far more Cokes at $0.60 per bottle, then it did back in 1913 when Cokes only cost $0.05. In 1913 manufacturing paid an average of $0.21/hour, or the equivalent of 4 Cokes, today the lowest skill minimum wage can buy more than 10 Cokes at $0.60 for one hour of work. Ron Paul's comment simply demonstrates an astronomical ignorance as to how inflation impacts an economy and how the standard of living has improved over the last 100 years. The US has also emerged as the world's greatest economic and military superpower during the reign of the Fed, something that isn't a coincidence.
The eleventh problem is Ron Paul believes the Federal Reserve is a "Central Planner." The Federal Reserve "centrally plans" one interest rate on the entire yield curve, the overnight Discount Rate, that is it. The "central planning" goal is to simply moderate the economy so that it remains consistent with its dual mandate of low inflation and high employment. Compare the post-WWII economy with the 19th Century Business Cycle, and it is extremely apparent how successful the Federal Reserve has been.
The twelfth problem is Peter Schiff, the other self proclaimed Austrian expert, must not have gotten the memo Ron Paul sent out. In this recent video Peter Schiff is contradicting Ron Paul claiming that what the economy needs now are higher interest rates. That isn't a joke, here is the video. Peter also highlights another fatal flaw in the Austrian thinking. He believes that higher interest rates will stop more government spending. Most of the government's spending is on entitlements, or is unfunded. I seriously doubt Peter Schiff can find a time in history when interest rates were the main concern of Congress and significantly impacted its spending behavior. Also, what Peter is implying is that he believes it is the Fed's responsibility to control Congress and stop it from spending so much money. I seriously doubt that having an organization run by unelected people empowered to control the US Congress could ever be considered a good idea unless fascism is what Peter and Ron would prefer.
The thirteenth problem is Peter believes that the Fed's low interest rates are preventing people from saving and investing in capital, plant and equipment for growth. Maybe Peter went to the moon, instead of gold, but the stock markets are reaching record highs, industry is refinancing and retooling because of the low interest rates, even housing is recovering. Businesses expand when the return on capital is greater than the cost of capital, so with low interest rates, more projects become profitable. Peter's proposal of higher interest rates may encourage more people to buy Government Bonds, but it will discourage business from borrowing and expanding. Peter's proposal is the death sentence for the economy, not its salvation. Even Ron Paul seems to disagree with Peter on this one.
The fourteenth problem is Peter seems to believe that somehow the Fed can control who benefits from low interest rates. The low interest rates in Peter's eyes only benefit the Government and Wall Street, not Main Street. That is simply a bizarre theory with no basis in fact. The economy is doing poorly because of the uncertainty created by fiscal policy. Monetary policy has nothing to do with the slow growth, and mandated higher interest rates certainly won't speed up growth. Peter and Ron's diagnosis of the economic problems inflicting the US are simply wrong, and because their diagnosis is way wrong, their treatment plan is catastrophically wrong. Ron and Peter focus on monetary policy when it should be on fiscal policy. There was no fiscal policy to speak of back in the 19th Century, so it is no surprise that the Austrian Business Cycle focused on monetary policy. Ron Paul and Peter just seem oblivious to this fact. They are relying on a business cycle theory that has very little relevance to today's economy, and even when applied to the 19th Century the Austrian Business Cycle misdiagnosed the cause of the business cycle as a primarily monetary phenomenon.
The fifteenth problem is the "smart money" is exiting gold. Some of the highest profile gold bulls are abandoning gold. Troy Gayeski, Senior Portfolio Manager at SkyBridge Capital, explains claims that the "great bull market in gold is over." The reasons he gives are consistent with what I've been writing about for months. People bought gold for all the wrong reasons, i.e. inflation and currency debasement fears, and those fears simply weren't justified. The reality is now setting in just how wrong Peter and Ron have been, how unjust their criticisms of the Federal Reserve and Ben Bernanke have been, and as more and more people realize that the Austrian Economics Monetary Theory is catastrophically flawed, the gold selling will continue and most likely accelerate. If I was going to pick a bottom in gold it would be when Ron Paul and Peter Schiff turn bearish on gold. They are certain to be the last two people to recognize the great bull market in gold is over.
In conclusion, I'm not an expert in gold, I don't own gold, I wouldn't recommend gold, I don't know how to value gold but I have taught, practiced and studied finance and economics for over 30 years. The problem I have with gold is that the reasons "experts" like Ron Paul and Peter Schiff are using to justify higher gold prices are simply nonsense, based upon outdated and deeply flawed theories. The facts are gold appears to be on the back-side of a bubble, and the main pillars that have been supporting gold are proving themselves to have been made of sand. Peter and Ron share an anti-government philosophy which I totally understand and agree with on many points, but their anti-government philosophy blinds them from seeing the truth about monetary policy and the value of gold. Instead of objectively analyzing the facts, they simply twist any movement in gold into support of their theory, and endless claiming that gold is going higher, regardless of the reality. Bottom line is, investors who have invested in gold based upon the theories promoted by Ron Paul and Peter Schiff are almost certain to be disappointed going forward. Gold may eventually go higher, but it won't because of the reasons given by Ron and Peter. Gold is the ultimate "Emperor has no clothes" trade where misguided beliefs are the only thing supporting it, and by the time the Emperor discovers the reality, the fabric weavers will be well out of town...with the Emperor's gold.
Stocks and ETFs that may be applicable to this article:
SPDR Gold Trust (NYSEARCA:GLD)
iShares Silver Trust (NYSEARCA:SLV)
AngloGold Ashanti (NYSE:AU)
IAMGOLD Corp (NYSE:IAG)
Asanko Gold Inc (NYSEMKT:AKG)
Golden Star Resourses (NYSEMKT:GSS)
Gold Fields Limit (NYSE:GFI)
Randgold Resource (NASDAQ:GOLD)
Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.