Peter Schiff: Inflation Is Good for Gold; High Inflation Is Better for Gold

The bond market is getting clobbered. Long-term interest rates are rising and that is putting significant pressure on gold. Peter Schiff talked about rising rates and the gold market in a recent podcast. He said the rise in long-term yields is a function of inflation and people seem to forget that inflation is good for gold.

On Tuesday, the yield on the 10-year Treasury was just under 1.3%. It was just last month that the yield hit 1% for the first time since COVID. In other words, the 10-year yield is up 30% in just one month. That is a huge move in the world of bonds. Meanwhile, the yield on the 30-year Treasury hit 2.09%. It just eclipsed 2% on Friday.

But even with this big rise in interest rates, the only markets that seem to be feeling the effects are gold and silver. On Tuesday, gold sold off and fell back below $1,800 an ounce.

The knee-jerk response to rising interest rates was to sell gold and silver, which is what happens every time. It’s kind of like a reflex. It’s kind of like Pavlov and the dog. You see a big drop in the bond market, you see a spike in interest rates, oh, you sell gold.”

This is playing into the narrative that a stronger than expected economic recovery will force the Federal Reserve to raise rates prematurely.

Meaning even though they aren’t thinking about thinking about thinking about raising rates, they’re going to raise them because the economy is just so strong because of all this stimulus that we’re going to get surprise tightening, and for some reason, no other markets are being affected.”

Peter raised an interesting question. If we’re really going to get premature tightening from the Fed, why isn’t the stock market tanking?  High growth stocks, particularly in the NASDAQ, would be the most sensitive, especially if it is inflation that is pushing rates up in the bond market.

Peter thinks that’s the case and there are plenty of inflationary signs. For instance, the price of oil rose above $60 a barrel. And Peter said many of his commodity-based stocks were up big on Tuesday.

Everything that I own that is sensitive to inflation had a big day today, with the exception of the mining stocks – gold and silver – which should have had the biggest day of all. Because inflation is actually good for gold. It’s better for gold and gold mining companies and silver than a lot of these other stocks that are rising. Because people are not worried that rate hikes are going to hurt the copper market, or the corn market, or the oil market. For some reason, they only think rate hikes are going to hurt the gold market. And they don’t think it’s going to hurt the stock market where it actually might hurt the most.”

Peter said all of this talk about a strong economy forcing the Fed’s hand is ridiculous because we don’t have a strong economy. It’s a weak economy. But Peter conceded we may well see GDP growth. After all, if you print enough money and let Americans spend it, you can juice GDP.

But that isn’t economic growth. That’s just a bubble. And in order to maintain that bubble, the Fed has to keep interest rates at zero. If the Fed does what Wall Street now thinks they’re going to surprise the market and do, they’re going to undo the recovery.”

Peter said he thinks people are mistaking the rise in interest rates as the result of economic growth, and they believe the strong growth will pump up corporate earnings and that will trump higher interest rates. Peter called this wishful thinking.

This whole market is built on a foundation of cheap money. The earnings, in fact, are a consequence of the cheap money. So, I think Wall Street is not going to get the unexpected tightening that they think they’re going to have. But what they are going to have is an even bigger increase in long-term interest rates than what they expect.”

Instead of fighting inflation by raising short-term rates, the Fed will surrender to inflation. In fact, it will create even more inflation by trying to stem the rise in interest rates by buying even more bonds and printing even more money. Nothing is going to stop long-term yields from rising other than the Fed.

But how does the Fed stop it? Well, it’s got to print a bunch of money and buy these bonds that nobody else will buy. Because people can see that inflation is picking up and they don’t want to ride the market down by watching their wealth dissipate in bonds.”

Even with the rise in nominal interest rates, real yields are still negative.

The point is even if the Federal Reserve does surprise the markets and prematurely raises rates, even though they’re not even thinking about thinking about thinking about doing it, they’re not going to raise rates enough to bring yields positive. They are always going to be behind the curve. And this is extremely bullish for gold. That is what the markets don’t get. Rising bond yields are bullish for gold because it reflects inflation. Inflation is good for gold. High inflation is better for gold.”

And more inflation is coming down the pike. The economy can’t survive higher interest rates. There is too much debt. The Fed will have to step in and buy more bonds to hold rates down. And that means more money printing — more inflation. And if rising rates start to spook the stock market that will really spell trouble for the central bank. Eventually, the market will roll over. And how will the Fed respond? It will print even more money.

At some point — I don’t know when – but at some point, and I think it’s not too far off, the market is going to react to a falling bond market by buying gold, not dumping it.”