Peter Schiff on Gold, the Dollar and Asian Markets

Dec. 04, 2008 9:30 PM ETGLD, GCC12 Comments
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Mike Norman, HardAssetsInvestor.com (Norman): Hello everybody, and welcome back for another installment of HardAssetsInvestor.com’s interview series. I’m Mike Norman, your host. 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:I know you've been of this point of view that … just let everything go down, and somehow that's beneficial.

Schiff: It's called capitalism

Norman: No, it's not called capitalism. Capitalism has a political structure over it; there are laws, there are regulations.

Schiff: It's all that regulation, all that interference that's the source of our problems. It's the government that interfered with the market; that's why we had a housing bubble, that's why we have this phony economy ― because politicians meddle in the market, and they tried to direct capital in politically favored ways. That's what causes these problems.

Norman: Some people say, basically, Wall Street was given the keys and the government walked away, that it was a totally unregulated environment, and the cutting of regulations to the bone is what precipitated the whole bubble.

Schiff: They gave Wall Street the keys. But the problem is Alan Greenspan, the Fed ― they supplied the alcohol, Wall Street got drunk. It's the government that is responsible, it's the government that supplied the alcohol. If we had sound money and if we didn't have Freddie and Fannie …

Norman: We're going to get to the gold standard in a second, but I have to disagree with you on this, and this is just a fact. The one thing the Fed has control over is the monetary base, and if you look at the last six years ― which, by the way, includes the period when Alan Greenspan was in there supposedly creating all this money ― the monetary base shrunk. In fact, it got down to almost zero growth. We have never seen that, with the exception being periods of recession, but they've [the Fed] been very, very tight.

Schiff: It was showing up in other places. Look at the asset bubbles that they blew up, look how low interest rates were. Maybe they should have been looking at M3 [money supply statistics], but I guess that was growing so much they stopped covering it.

Norman: All right. You say that we'd be better off on a gold standard. I've heard you say that, but yet the trade-off with a gold standard, while yes you can maintain stable prices, the cost is less money. Gold standards are inherently deflationary. How can you not…? Even extreme economists [don't] buy into this idea now.

Schiff: Look, we were on a gold standard until 1971, right? We didn't leave it until then. What gold does …

Norman: FDR made it illegal for Americans to own gold in 1933.

Schiff: But international trade … the dollar was redeemable in gold up until 1971 … so all the currencies were backed by the dollar, which was convertible into gold. What gold does is it puts discipline on central bankers and governments: they can't simply spend money that they don't have, they can't run deficits, so it keeps a limit on the size of government.

Norman: The total value of gold ever mined since the beginning of time is $4.3 trillion. The global economy is $60 trillion. Are you suggesting that we should cut the global economy by what, $56 trillion?

Schiff: Mike, prices adjust downward to reflect the supply of gold; that's fine, and we want prices to fall. As consumer prices fall, that's how standards of living grow. You want money to be scarce. The problem is now it's abundant; there's an infinite amount of it.

Norman: If scarce money creates a deflation, a depression, a collapse of business profits, a collapse in employment, how could you argue that that's a better system?

Schiff: No, Mike, it doesn't do all that; it keeps monetary discipline and it allows a free market to function better when you have sound money. It keeps a better supply of savings and debt, and it allows for economies to grow. Because real wealth is not a function of money creation, it's a function of savings and productivity and capital investment, but you get more of that when you have sound money.

Norman: Well, economics savings equal investment, it's an identity, so if you invest it reduces savings. You save in a forced way; there's that old thing called the paradox of thrift.

Schiff: It isn't a paradox, that's a Keynesian myth.

Norman: Well, he knew what he was talking about. OK, look, let's quickly talk about what's in your book, "Bull Moves in Bear Markets." It's certainly been a bear market; what are the bull moves?

Schiff: Well, they haven't materialized yet but they're going to. I think the bull moves are commodities; I think we're still in a bull market in commodities, particularly precious metals, but I think you buy in to this dip.

Norman: Now, I kind of agree with you, because we've had such a tremendous … and I'm a contrarian, so …

Schiff: I also like … a big part of my book is to play the Asian theme … to play the growth of the Asian consumer, the death of the American consumer.

Norman: Even with the dollar going up, doesn't that restore purchasing power to the U.S. now?

Schiff: For now, but it's going to go away. We're buying a lot of dividend-paying stocks around the world, particularly in Asia. A lot of the stocks are now trading at very low PEs, double-digit dividend yields.

Norman: There you have it. Sorry, Peter; ran out of time. There you have it, folks. We're going to have Peter back; he's always a great guest.

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