Gold Doesn’t Need Blind Faith, but the Dollar Does (Video)

In his podcast released yesterday evening, Peter Schiff explains why the price of gold plunged on Sunday night. More importantly, he reminds investors why gold is not a faith-based asset, like fiat money. He also reviews China’s relationship to gold, and compares the current market to the last time a bear market in gold ended.

I am convinced, when his market turns, it’s going to be vicious. When the people who have been selling their gold try to buy it back, it isn’t going to be there. Because the people who have been buying into the selling… they’re not going to turn around and sell it. When the speculative sellers are gone, there are no sellers left… I think the market is going to go up even faster than it has come down…

Highlights from the podcast:

“In just a few minutes, gold went from down a dollar to down 50 dollars. Somebody came into the market in a very short period of time with a major sell order. I don’t know if it’s one individual or a group of individuals, but all these orders hit the market at the same time, and gold immediately went down 50 dollars, below $1100. A minute or two later, it was only down 25 dollars. Then it kind of traded between down 25 and down 32, 33. The highest I saw it get after that was down about 18, 17 dollars…

“Why did someone come and dump all that gold in early Asian trading last night? Clearly, whoever sold all that gold, their goal was not to get a good price. Their goal was to knock the price down. Maybe that served their interests. Maybe they had a lot of puts. Maybe they had shorted a lot of gold stocks. Maybe they knew that if they could break key support overnight, they could do a lot of damage…

“If you now look at this bear market in gold stocks, this is now bigger than the bear market that went from 1996 to 2000. This one is much bigger, even though that bear market capped a 20-year bear market, because gold peaked out in 1980 at $800. So by the time it bottomed out around ’99, 2000, it was down around $260. At the end of that bear market, during all the euphoria of the dot-com bubble, we had this final drop in gold stocks that went on for four years. This drop, in the last four years, is bigger than that drop, even though the price of gold is still about $1100. It’s not $260. We’ve had a much worse bear market in gold mining stocks. And the relative valuations of gold stocks, relative to the stock market – forget about the NASDAQ, because that was crazy – but if you look at it relative to the S&P 500, gold stocks are much cheaper today than they were at the peak of the dot-com bubble. If this is a measure of trust in central bankers, or fear that a they’re going to screw up, obviously the gold stock market is telling you that people have more confidence now in the Federal Reserve and Janet Yellen than they did in the Federal Reserve and Alan Greenspan in 1999, 2000. And we know how badly that confidence bubble ended for the markets…

“I think what really sent it downhill faster was the announcement on Friday by China, coming out late Friday, China finally announced after six years of pretending that they hadn’t bought any gold at all, they finally came out and said, ‘Oh, by the way, we just added to our reserves. So we have 50% more gold than we’ve been saying.’ This was actually bearish, because people like myself who have been speculating that China was lying, that they had in fact been buying gold, but just not being honest about it – the people who were speculating, we believe that China has a lot more gold, that they had increased their official reserves by a lot more than 50%. So when this number came out, it actually surprised the market, because China basically said, ‘Yes, we’ve been lying, but what we’ve been lying about has not been as big as you thought. You thought we’d been lying about owning a lot more gold than we in fact were lying about.’ This was negative for the markets.

“The odd thing about that was if China was lying about how much gold they had in the past six years, why does anybody believe they’re being honest about how much gold they have now? I think they’re still lying. I think they’re just being strategic. I think they took advantage of the weakness of the price of gold to deliberately come out with news that disappointed people who thought that China had a lot more gold than they in fact do have. Why does China want to get the price of gold down? Because they still want to buy. I think they want to buy a lot more, and the lower they can get the price, the easier it is going to be to do that.

“Even if this is true, even if China only increased its gold reserves 50%, to me, that’s not bearish for gold. Because you know what that means if that’s true? That means that China has to buy even more gold in the future than I thought…. If that’s all the progress they made, they desperately need to buy more gold…

“We had an article from the Wall Street Journal on gold. A very negative article, basically comparing gold to a pet rock… Basically, the guy’s point is that gold is really a fancy pet rock. It’s just a rock, painted gold, and people have been dumb enough to buy it for the same reason they were dumb enough to buy the actual pet rocks… This is the same kind of nonsense that they were saying in the late 1990s about gold. In fact, one of the most ridiculous parts about this Wall Street Journal article is the writer concludes that people buying gold are basically making a leap of faith, and he doesn’t understand why people would be dumb enough to have faith in gold… Instead of just putting their blind faith in gold, they should just buy dollars or buy stocks…

“He wants to compare buying gold to buying stocks, which is not a good comparison. It’s an apples to oranges comparison. I don’t tell people to buy gold and don’t buy stocks. I tell people to buy stocks and buy gold… I recognize that gold is not a stock. A stock represents ownership in a company. A stock is an income producing asset… Some of these ridiculous companies that people are buying are not incoming producing companies… That requires a leap of faith to buy those stocks… You don’t want to compare gold to stocks…

“What you want to compare gold to is other forms of money, fiat money. You compare gold to the US dollar, to the Japanese yen, to the euro. That’s the comparison that the Wall Street Journal should be making. So when do you take a leap of faith? When you own gold, or when you own dollars? It’s the dollar, that’s where you need faith. What stands behind the dollar, what backs the dollar? Nothing. When gold backed the dollar, you could trust that. It wasn’t an exercise in faith. But the minute you removed gold, the only thing backing our dollar was faith. It was trust and hope. Alan Greenspan has said this many times… If you ask them what’s backing up the dollar, they say faith…What is Alan Greenspan saying today? He’s saying buy gold! … Why? Because he wrote the playbook that [the current Fed] is expanding. He knows it’s not going to work. In fact, what they are doing – what they are doing, what Yellen is doing, and what Bernanke did – is so far beyond what Alan Greenspan contemplated would happen…”

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