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Peter Schiff: Gold Climbs Wall of Worry

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Gold surged above the $1,550 mark in the wake of a US airstrike that killed a prominent Iranian general and has hit levels not seen since 2010. Monday morning, gold was trading above $1,575. As Peter Schiff put it in his podcast Friday, the yellow metal is climbing a “wall of worry.”

Clearly what we did heightens the risk in the Middle East and in particular with Iran … The question is is the world a safer place? Is America in particular safer now that we took this guy out? And nobody knows the answer to that for sure, but the odds are probably not.”

Peter said that these things have a tendency to blow back with unintended consequences, just like everything the government does.

My initial feeling is because we took out this guy, the world is a little bit less safe than it was the other day. And the risk premiums have to go up, because the odds of some type of hot war in the Middle East go up.”

As with any conflict in the Middle East, this raises the possibility of a disruption to the oil supply. This is not good news for the US economy.

Sure, the US economy isn’t as vulnerable as it once was because we’re not importing as much as we used to. But consumers still have to buy oil. They still have to pay for things. Prices are already going up, and this is going to add upward pressure on already increasing prices, which is going to be a negative for people who have to buy energy, or buy things that are transported using energy, or things that are manufactured with energy. I mean, costs are going to be going up and this is a negative.”

Peter said this will also be a negative for the bond market. That raises the possibility that the Fed will try to offset those negative impacts by continuing quantitative easing to keep the inflation premium from pushing up long-term interest rates.

And of course, there is also a bigger safe-haven risk premium on the price of gold.

Gold isn’t just an inflation hedge. It is predominantly that. The main reason gold is going up is because of the Fed. But obviously, in a world where you have heightened geopolitical risk, which could adversely affect bond markets and stock markets, you would expect to see greater demand for gold as a hedge in your portfolio. And that’s why the price of gold was up better than $20 an ounce today (Friday).”

A Goldman Sachs note helped buoy gold saying bullion offers a more effective hedge than oil in this crisis.

History shows that under most outcomes gold will likely rally to well beyond current levels. That’s consistent with our previous research, which shows that being long gold is a better hedge to such geopolitical risks.”

A senior resource analyst at MineLife Pty in Sydney also talked up gold in an email to Bloomberg, saying, “gold has entered 2020 with strong momentum.”

When you factor in ongoing uncertainty with respect to US-China trade talks and heightened security issues with Iran, gold really is a no-brainer.”

Peter pointed out that gold was the number-one performing asset through the first two days into 2020. But interestingly, gold stocks were down Friday – even with a nearly $30 increase in the price of bullion.

We’ve had nothing but bullish news for gold stocks. We have a $30 move up in the price of gold. We have heightened geopolitical risk associated with gold. Yet the gold stocks have gone down. Why is that? Again, I think you’ve got a lot of fearful traders. There’s a wall of worry in this bull market. There’s a lot of skepticism in the gold rally, which I regard as being healthy. You don’t have a devil-may-care, throw caution to the wind type of attitude the way you have it in the S&P 500. People are nervous in the gold stock market.”

The last time we got to $1,550, gold had a pretty steep correction. Now we’re knocking on that door again and a lot of investors apparently think we’re not going to go all the way through. They anticipate a pull-back. Peter said, in effect, gold stocks are discounting the next pullback.

They’re assuming that the price of gold is going to sell off and so they are selling their gold stocks now in advance.”

Peter said that may well happen. There has always been strong resistance at $1,550. But he said even if we do, he doesn’t think it will be that drastic. And here’s something else you need to think about.

What if the gold speculators are wrong? What if we go through $1,550? What if there isn’t a pullback. What if the next pullback is from $1,600 or $1,650 back down to $1,550 or $1,575? What if there’s more to this gold rally than the gold traders believe? Well, if that is the case. If we end up with an up-move in gold next week, then we have a huge move for the gold stocks.”

And of course, the biggest factor pushing gold upward is the Fed. The central bank was the impetus behind the biggest increase in the price of gold since 2010 last year.

Peter wrapped up the podcast talking about the Federal Reserve and the minutes from the December FOMC meeting that came out Friday.

You can’t even understand the markets unless you understand the Fed.”

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