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Peter Schiff: Investors Are Playing Checkers Instead of Chess

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Last week, we got data on the producer price index. It came in at o.6%, a much hotter number than expected. It was the biggest jump in the PPI in six years. Year-over-year, producer prices are up 2.8%.

Analysts expected the monthly increase to come in at half that – 0.3%. While the Fed typically looks at consumer prices to gauge inflation, producer prices are also significant. After all, the cost of production is ultimately passed on to the consumer.

As soon as that PPI number came out, the price of gold dropped about $10. As Peter Schiff pointed out in a recent podcast, this is because the markets still don’t get it. They are playing checkers instead of chess.

The irony of it is you get these numbers that show much more than expected inflation and what do investors do? They sell gold and they buy US Treasuries. Now, that is the worst thing to do if there is more inflation. I mean, gold is an inflation hedge. So, if inflation is picking up, you would want to own gold to protect yourself from inflation. On the other hand, the one asset that suffers the most, where the most value is eroded away because of inflation, is a bond.”

A bond is nothing more than a future payment of cash. The more inflation there is, the less value that future cash has. Investors should sell bonds. Instead, they did the exact opposite.

Peter said the problem is all of these people are playing checkers instead of chess. They are not anticipating future moves. They expect the Federal Reserve to keep raising rates because of the inflationary pressure. The conventional wisdom is that’s good for the dollar and bad for gold. But investors need to look at the impact of rising interest rates on an economy built on credit and debt.

The economy goes into recession. Right? There’s no other result that’s possible. Real estate prices go down. Stock market goes down. Wealth evaporates. And what is the Federal Reserve going to do in response to recession? It is going to cut rates. So, regardless of the rate hikes the Fed does initially, they are simply the overture to the rate cuts. The rate hikes sow the seeds of future cuts. And investors should be looking beyond the mountain to the valley of rate cuts that are coming.”

Peter said that while the rate hikes have happened very slowly, the move back to zero will happen in one-fell-swoop. They’ll go back to zero without passing go.

The mainstream also assumes that if we do go into recession, inflation will quickly cool off. Peter said that’s not going to happen this time. He thinks inflation will keep going up.

In fact, when the Fed has to cut rates and launch QE4 to stimulate the economy that is in recession as a result of their prior hikes, that is going to throw fuel on the inflation fire. Inflation is going to get worse even as the economy gets weaker and that is the most bullish environment for gold. That is the stagflation environment that traders are ignoring.”

Peter noted the most significant thing about the recent Fed minutes wasn’t what they said, but what they didn’t say. There was no mention of the stock market bloodbath in October. There was no mention of the problems in the housing market. There was no indication that the Fed is the least bit concerned.

Peter went on to talk about what’s going on the oil market. Oil traders are also playing checkers, according to Peter. He also talked some politics.

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