Peter Schiff Has It Totally Backwards - Gold Is Not Going 'To The Moon'

| About: SPDR Gold (GLD)

I recently wrote an article titled "Gold: It's OK to be wrong, it's not OK to stay wrong." Clearly Mr. Schiff didn't read it. In this video Peter Schiff, CEO of EuroPacifc Capital, outlines an outdated and disproven theory on monetary policy and its impact on gold. Mr. Schiff's theory is that because interest rates are going higher, the economy will slow and therefore the Fed will have to print even more money to keep the economy afloat. Ignoring the obvious problem this theory has in that gold and SPDR Gold Trust (NYSEARCA:GLD) peaked over 2 years ago, and QEfinity continues, Mr. Schiff seems to believe that continuation of a program that hasn't propped up the price of gold will for some reason reverse its course and suddenly start supporting the price of gold. I wouldn't count on it.

The problem Mr. Schiff has is that he blindly adheres to a false and outdated misunderstanding of modern monetary policy. Mr. Schiff follows the classic theory that printing money is inflationary, and that theory simply doesn't hold in all cases, and the current economic environment is one of those cases. Even if inflation does develop, gold isn't likely to go much higher. Gold has gone from about $250 to $1,800 when there was no real inflation, so clearly there is a whole lot of inflation expectation discounted in the price of gold. Because of this, I would expect a "buy the rumor sell the news" reaction in gold where signs of inflation would actually trigger gold selling, not more buying. Every conservative cable news channel has been crying the inflation wolf for years, so when and if it does appear, it shouldn't be news to anyone, especially those who have listened to Mr. Schiff telling people to buy gold because inflation was coming for years.

The current logic Mr. Schiff is using it truly backwards. He is now claiming that when the Fed "tapers" i.e. quits printing money, interest rates will increase. The increasing interest rates will stall the economy, forcing the Fed to return to QE to re-stimulate the economy. By not printing money, the Fed will be forced to print even more money is his theory. Ignoring the facts that that seems to be an implicit validation of the Fed's actions by Mr. Schiff, actions which have resulted in a stabilized economy, moderate growth, no inflation and lower gold prices, Mr. Schiff has it backwards and wrong for many reasons.

1) Rising interest rates won't necessarily stall the economy. Interest rates are recovering from historic lows, and the economy is struggling to get back just to normal. Interest rates were over twice the level they are today in the 1990s, and that certainly didn't hold back the economy, nor did the rising rates in the 1950s.

2) If rates do increase from here due to the "unwind," they will simply be seeking a market determined rate. That is something I would think Mr. Schiff would be supporting, not opposing. Right now QEfinity is distorting the longer end of the yield curve. Once the "taper" starts, the markets will gravitate towards truly market determined rates. It is unlikely that the market will set the rate at a level that chokes off the recovery. If it did, rates would drop on their own with or without the resumption on QE.

3) Higher rates, especially if they are market driven as a result of renewed economic strength, would provide an attractive alternative to holding gold. In that case, higher interest rates would result in lower gold prices, not them being sent to the "moon."

4) QEfinity and the past Black Swans didn't drive gold "to the moon," why would they in the future? QE is winding down, not gearing up, Mr. Schiff is simply on the backside of history. His theory may have made sense back in 2008, but now in 2013, with 5 year of history, he only looks like a man that simply refuses to accept that his belief system and model is wrong.

In conclusion, Mr. Schiff's theory is completely backwards. Higher interest rates won't drive gold "to the moon," they will likely send gold tumbling. QEfinity hasn't driven gold higher, nor has it generated inflation, and it is unlikely to do so in the future. Fear of inflation has been a major driver in the gold bull market, but QEfinity is nearing an end, not a beginning. Markets don't look back, they look forward, and if QE didn't generate inflation at its peak, it is unlikely to generate inflation with its ending. Mr. Schiff simply appears to be a man living in denial, clinging to the past and refusing to change his model when conflicting information is presented.

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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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