Peter Schiff: Fed Stimulus Overdose Will Propel Gold to New Highs
After the worst week since 2008, the stock market rallied on Monday on the hope of central bank stimulus. In his March 2 podcast, Peter Schiff said he doesn’t think the Fed’s easy money can keep the air in the stock market bubble. But the stimulus overdose will likely propel gold to new highs.
With the “Powell Put” in play, the Dow Jones was up 1293.26 points. Other indexes had similarly good days. On Friday afternoon, the Federal Reserve chair made the rather unusual move of issuing a statement saying, “We will use our tools and act as appropriate to support the economy.” Most market watchers now think a March rate cut is a certainty.
The last time we saw the stock market move up like this was in March 2009, right after the Federal Reserve announced QE1.
But in his most recent podcast, Peter said he doesn’t think the stock market lows are in.
Bear markets are notorious for having big rallies, and I think that’s what this is as this new bear market is likely sliding a slope of hope.”
Even with the big rally in stocks, bond yields stayed at record lows, with the yield on the 1o-year Treasury ending the day at 1.088.
Even the mainstream agrees that the big rally in stocks was primarily a function of the promise of central bank intervention. As Seeking Alpha summed it up, the market was “boosted by expectations of central bank firepower to battle the economic impacts of the coronavirus.” Traders now seeing a 100% chance of a 50 basis point rate cut at the Fed’s March meeting.
Peter said he thinks the Fed almost has to cut rates now because the market expects it.
The market is betting that’s what the Fed is going to do and the Federal Reserve has a history of giving the markets what they want. And they don’t want to disappoint the markets becuase if they do, well, then they’re going to tank.”
Regardless, this is not the move the Fed should make.
The last thing that the Fed should be doing now is creating more money. I mean, that’s how we got into this problem. We created so much money in the past, we kept interest rates so artificially low, that we created a bubble economy that is so susceptible to any kind of downturn like the coronavirus. And instead of learning from our past mistakes, we’re repeating them.”
And it’s not just the Fed. The Bank of Japan, the ECB and even the IMF have all pledged to do something.
What can they do? All these entities can do is create inflation. They can expand the money supply. But that doesn’t produce any more goods and it doesn’t cure the coronavirus. It doesn’t change any of the fundamentals.”
Regardless, the markets assume that no matter what happens with the economy, the central banks will manage a repeat performance and prop up asset prices. But Peter said he thinks the central banks’ ability to target inflation to financial assets could be coming to an end.
So, what ends up happening this time around is all this new money printing, all this new easing, ends up going into commodities. It ends up going into consumer prices. It doesn’t make a stock market bubble bigger. The stock market bubble deflates anyway and the monetary policy starts inflating the cost of living rather than the assets.”
Gold bounced back Monday a bit after a shellacking Friday that saw the yellow metal dip significantly below $1,600. There was a 4% move down in the price of gold in a single day. There were a number of factors pushing gold lower. Significantly, a lot of traders were selling gold to raise cash to cover margins. And as Peter said during an interview on Fox Business last week, gold is in the most “unloved bull market ever.” But it’s important to keep your focus on the underlying fundamentals.
The thing that has driven the market, this recovery is 100 percent driven by central banks and monetary policy, which means it’s all based on inflation. It’s based on money-printing and cheap money, and that policy is far better for gold and gold stocks than it is for an economy and the general stock markets.”
Gold is hovering around $1,600. We’re nearly $100 off the highs we saw over the last couple of weeks.
But the bull market is alive and well.”
Peter pointed out that you have to expect volatility, even during a bull market. There’s no such thing as a safe-haven on a day-to-day basis. Owning a safe haven doesn’t mean it goes up every day. It’s a safe haven over time.
But if central banks are debasing their money, which they’re going to do, and if the rate of that debasement is going to accelerate over time, well, then gold is going to keep you whole. It’s going to help you preserve your purchasing power. So, since we know the trajectory central banks are on, we know the trajectory gold is going to be on.”
When the price does go down in a bull market, it’s a good time to buy gold.