Peter Schiff: Make No Mistake the Fundamentals Are Still Bullish for Gold
Gold and silver got pummeled on Tuesday. The price of gold dropped more than 5%, falling far below the $2,000 level. It was the worst single-day rout in seven years. Gold continued to fall in Asian trading Wednesday morning and briefly dropped below $1,900 before clawing back later in the session. Silver also had a precipitous fall, diving some 13%.
Peter Schiff talked about the sell-off during his podcast. He said we shouldn’t lose sight of the fundamentals and they’re still bullish for gold. The Fed isn’t about to stop printing money and inflation is going to win.
The selloff was the result of a one-two punch that started with the announcement that Russia has developed a successful coronavirus vaccine and accelerated when US producer price data (PPI) came out hotter than expected, charting the biggest increase in over a year-and-a-half.
Peter pointed out that typically in a bull market, the biggest daily moves tend to be down.
What the market is doing is trying to flush out the weaker players. When it comes to a bear market, it’s trying to create some hope and sucker people back into the market by having a really big rally. Well, in a bull market it’s the opposite. The market is trying to instill fear in the weaker hands, so you get these spectacular one-day moves in the opposite direction of the primary trend to shake people out, to get the weaker players out of the market so you can clear away the excess baggage and then continue the trend.”
It’s important to keep your eyes on the fundamentals. Given the actions of the Federal Reserve, the unprecedented money printing, the government borrowing and resulting deficits, and the macroeconomic dynamics currently in play, we have what Peter called the most bullish fundamentals for gold in history.
But the mainstream still doesn’t seem to get the dynamics in play. Paul Krugman insists there is no inflation. He sent out a tweet saying investors are buying gold because bond yields are low, not because they are worried about inflation. But Peter said that ignores the reason why bond yields are low to begin with.
Is it because we have a glut of savings because Americans are just saving all this money and there’s not a lot of debt; nobody wants to borrow and so we have a natural low rate of interest? No! The reason that bond yields are so low is because the Federal Reserve is inflating the money supply, printing all this money to buy up all these bonds. So, inflation is the reason that bond yields are low.”
Inflation is the driving factor for both the rising price of precious metals and falling bond yields.
And it’s going to continue to drive the price of gold higher despite the reaction we got in the market today to the PPI number.”
A lot of people have attributed the rise of gold and silver to coronavirus. They believe gold will crash once a vaccine or an effective treatment comes out. Peter called this “a bunch of nonsense.”
Gold and silver are not up because of COVID. Now, COVID is part of the reason, but it’s not the actual cause. You see, what happened is governments, and in particular central banks, they have responded to COVID by printing a lot of money. Governments are running big deficits and central banks are printing the money to monetize those deficits, especially the Federal Reserve. And so, it is the money printing. It is the inflation that central banks are creating in order to monetize government debt that is a response to COVID — that is helping to drive the gold price higher. So, it is not COVID itself that is bullish for gold. It is the government’s response. It is central bank and Federal Reserve policy in response to COVID that is very bullish for gold.”
The question becomes: can the Federal Reserve normalize policy if COVID is cured. Peter said it’s impossible. The cure for COVID doesn’t cure the debt that’s been run up in response to it.
The Federal Reserve and the government are levering the economy to the hilt before we get the cure. And if we get it, that doesn’t change anything about that debt. So, our financial position has been permanently weakened as a result of our initial response to COVID-19. It doesn’t matter if we get a vaccine or a cure because we can’t undo that damage. We can’t get rid of that debt. That debt is going to exist even if we eradicate COVID.”
There is simply no way the Fed can let interest rates rise or shrink its balance sheet with all of that debt.
Peter said it’s also important to remember we were heading for a recession before the pandemic.
Even when we cure COVID-19, we’re simply going to go back to the recession that we were going to have anyway, only with a lot more debt. … So, the markets should not be selling off gold and silver every time somebody thinks they have a vaccine for COVID, because at the end of the day, it doesn’t matter. Monetary policy is going to continue to be easy. The Fed is going to keep printing money. They’re going to keep interest rates artificially low. Inflation is going to run out of control and the price of gold is going to go way up.”
Peter also talked about the producer price index coming in hot. He said he’s expecting to see these numbers rise. But people sold off gold and silver because bond yields ticked up in response. Peter said the real numbers to watch aren’t bond yields but real interest rates. And if anything they fell. If you believe the PPI number signals inflation, it means inflation is rising faster than the nominal yield on Treasuries.
And short term rates didn’t rise at all.
In fact, short-term rates went down substantially in real terms by an increase in the measured level of price increases – let’s call it inflation knowing that’s not the actual definition. But if inflation is rising then real short rates are falling. So today’s news that PPI, producer prices, rose twice as much as expected is actually bullish for gold. Rising inflation is why people are buying gold – as an inflation hedge.”
And the Fed has already told everybody they aren’t concerned about inflation. In fact, the central bank is committed to “ramping up inflation.”
It doesn’t matter what these numbers do. They’re not raising rates. They’re not even thinking about, thinking about, thinking about raising interest rates. So why are traders worried that a higher than expected PPI number is going to cause the Fed to raise rates? It’s not! And it’s not going to cause the Fed to shrink its balance sheet. It’s never going to happen. So, hotter than expected inflation numbers are always bullish for gold. They’re not bearish because the Fed is not going to fight; the Fed is going to surrender. Inflation is going to win.”