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Peter Schiff: Rising Interest Rates Are not Negative for Gold

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In his most recent podcast, Peter Schiff made the case that the current environment of rising interest rates is actually bullish for gold.

The most recent jobs report had most of the mainstream giddy with optimism. As the New York Times put it, employers added an “impressive” 222,000 jobs in June, according to the new government report released Friday. The unemployment rate ticked up slightly to 4.4%, but analysts say that was that was due to some people who had dropped out of the labor force coming back.

With rosy jobs numbers to bolster the Federal Reserve’s confidence in the direction of the economy, most analysts became even more convinced the central bank will push aggressively forward with its interest rate normalization program. As a result, many people have turned very bearish on gold. Peter Schiff took on this notion that rising interest rates are necessarily bad for gold in his most recent podcast.

Rising interest rates are not negative for gold. I mean, the main reason that interest rates are rising around the world is because inflation is picking up around the world. Higher inflation is positive for gold. I mean, it is the most bullish thing for gold. And in fact, when inflation rates are rising, that means money is buying less, right? The purchasing power of money is going down. And that’s when you want to own gold.”

Peter also spend some time explaining how the weakness in the Japanese yen might put some downward pressure on the price of gold in the short-term, but eventually, it is also going to be good for the yellow metal.

The Japanese central bank has embarked on an aggressive money-printing campaign in order to hold interest rates low. With its massive government debt, Japan can’t afford a spike in interest rates. It appears the central planners are committed to printing an infinite amount of Japanese yen.

If the backup in yields continues, that means money-printing in Japan is going to continue. So, that could potentially put more short-term downward pressure on gold and silver prices. But ultimately, I think that this relationship is going to break, because if the Bank of Japan is going to destroy the yen, if they’re going to keep printing and printing yen indefinitely in order to keep interest rates artificially low, they will unleash an inflationary tsunami in Japan … And of course, nothing can be more bullish for the price of gold than massive inflation in Japan.”

Peter pointed out that inflation is also bad for bonds. And when bonds are losing value, that is bullish for gold, because gold is something you would own as an alternative to bonds.

A bear market in bonds is bullish for gold. But for some reason everybody just thinks, well, if interest rates are going up, that just makes gold less attractive because you’re giving up the opportunity cost. It makes bonds less attractive, because bonds are falling in value. It makes currency less attractive because interest rates are rising because currency is losing value. But gold won’t be losing value. Gold is going to be storing value.”

And of course rising interest rates hurt stock markets. Some have predicted Fed policy could pop the stock market bubble. During a recent interview on CNBC’s Power Lunch, Nobel Prize winning economist Robert Shiller called stock market valuations “concerning” and hinted that markets could be set up for a crash. Several other notable economists have recently expressed concern about surging stock markets, particularly in the US. Marc Faber has predicted “massive” asset price deflation  – possibly of drop of as much as 40% in stock market value. Billionaire investor Paul Singer recently said the financial system is not sound. And former Ronald Reagan budget director David Stockman said we should get ready of “fiscal chaos.”

Peter hit this theme during his podcast

It’s not like [the Fed] can just prick a little hole in this bubble and most of the air is going to stay in it. The minute they prick a hole in it, all the air is going to come out of it. So, it’s like – be careful what you wish for. If the Fed really is hoping to drive down the stock market, they’re going to succeed to a much bigger degree than they anticipate, and then they’re going to have to come to the rescue of the stock market.”

Peter wrapped up his podcast talking about the fact that mainstream optimism is misplaced. Once again, the recent jobs report is really a weak report portrayed as strong.

These are the same old crappy job numbers we’ve been getting all along.”

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