Gold Will Take Off as Fed Loses Credibility (Video)

Peter Schiff shared his perspective on the gold market with Kitco News yesterday. Other guests on Kitco have insisted that the Federal Reserve has no choice but to raise interest rates in September, or else the Fed won’t be able to deal with a looming recession. Peter counters this by pointing out how a small rate hike immediately followed by quantitative easing and an rate cut would completely undermine the Fed’s credibility. What about the price of gold? It will rise when the markets wake up to the fact that the Fed’s biggest easy money days are yet to come.

It’s the strength of the dollar and the anticipation of future strength of the dollar [that is driving gold right now]. So many people misunderstand the true strength of the US economy. They don’t understand that it’s a bubble, not a recovery. They’ve misinterpreted what they believe the Fed is going to do. They think the Fed is going to be raising rates, shrinking its balance sheet. That is not what it’s going to be doing. It’s going to be expanding its balance sheet faster than ever before. It’s going to be holding interest rates at zero as long as it can…”

Highlights from the interview:

“I don’t think the Fed ever really seriously considered raising rates in the first place. I think they wanted to create that impression. They wanted markets to believe that rate hikes were under consideration, because they want the markets to believe that the economic recovery is legitimate and the economy can withstand the higher rates that they’re pretending that they’re ready to deliver. I think it has all been part of a show to mask the fact that the Fed understands that all we have is a gigantic bubble, not a real recovery, and if they were to raise rates they would prick that bubble. That’s the last thing they want to do. Which is why all they do is talk about raising rates, but they haven’t actually followed through on any of that talk…

“I think the launchpad metaphor is a good one, because a lot of people have been using that metaphor to describe lift-off of monetary policy. When is the Fed going to finally raise interest rates? Of course, it was always thought it was going to happen when the economy had reached escape velocity, meaning the economy was now so strong, it no longer needed the support of the Fed, and so the Fed could withdraw that support. That can’t happen. The only thing supporting the phony economy and the markets is the Fed. If you take away those supports, we don’t have escape velocity. The rocket comes crashing back down to the launch pad. I think when people realize that we’re never going to reach escape velocity, that there is no lift-off from the Fed, that’s when the gold rocket ship will really take off. Traders will realize that we’re not going to get higher rates, that the Fed is not finished printing money, that they’re only getting started. QE4 is going to come, and it’s going to be bigger than QE3, 2, and 1. That’s going to provide all the fuel that the gold rocket ship needs to lift off, and I think it’s going to be pretty spectacular. If you’re not onboard when it happens, I think you’re going to miss it…

“It’s the strength of the dollar and the anticipation of future strength of the dollar [that is driving gold right now]. So many people misunderstand the true strength of the US economy. They don’t understand that it’s a bubble, not a recovery. They’ve misinterpreted what they believe the Fed is going to do. They think the Fed is going to be raising rates, shrinking its balance sheet. That is not what it’s going to be doing. It’s going to be expanding its balance sheet faster than ever before. It’s going to be holding interest rates at zero as long as it can…

“I don’t think they [the Fed] are really considering [raising rates]. I think that’s part of the bluff. I think they know that if they raise rates, everything is going to collapse. Then they’ll have to cut rates back to zero and look like complete fools. I guess they can look like less of a fool if they just leave rates at zero the entire time. I think even if they do that – even if they leave rates at zero – the US economy is going back to recession, and they’re going to have to launch QE4. That’s what they’re going to do. At least then they can claim that they were correct to be cautious. They didn’t want to jump too quickly. If they actually raise rates, and then the economy goes into recession, they could be blamed for that recession. If they have to quickly reverse course, they really look inept in their policy, and they lose whatever credibility they have left. Which is why I think it would be very risky from the Fed’s perspective to actually deliver on the promised rate hike. Instead, they can hide behind the fact that they never actually committed to raising rates. They always said that they were dependent on the data, but they never really defined what that data was. So it cold really mean whatever they want. They can make any excuses not to raise rates, because they have never actually committed to doing so. It’s just the markets that have made that assumption. The Fed has not gone out of its way to correct that assumption, but I think that’s by design…

“The best thing for the economy is for the Fed to raise interest rates substantially, call an end to QE, and allow the bubble to collapse; all the financial crisis that they interrupted to finish. Unfortunately, the problems are much bigger today than they were in 2008 thanks to the Fed. So we have a much greater financial crisis in our future if the Fed does the right thing than the one everybody thinks they saved us from in the past…”

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