Schiff: Buy Gold, Commodity Stocks and China By Olivier Ludwig
| October 13, 2010
Peter Schiff,
president and chief global strategist of Euro Pacific Capital,
hardly needs an introduction. He is king of the dollar
bears and a fierce critic of the Federal Reserve's loose monetary
policy. All the recent talk about the Fed buying more Treasury
as part of its so-called quantitative easing program aimed
at keeping borrowing costs low has him more convinced than
ever that the U.S. is on a clear path to inflation, possibly
hyperinflation. He made clear to IndexUniverse.com Managing
Editor Olivier Ludwig that the more the Fed loosens monetary
policy, the less it will work and the more the dollar will
lose value. It all sounds dire and disturbing. But Schiff
has a clear investment plan to protect investment portfolios:
gold and lots of precious metals stocks, supplemented by agricultural
and energy stocks and exposure to China.
Ludwig: Before this rally in gold is over,
would you venture to guess how high it can go?
Schiff: I like to quote it in terms of the
Dow, because you just don’t know how much inflation
there’s going to be. So my target is for a relationship
that’s close to 1-to-1 between gold and the Dow. I’ve
had that target since the Dow was worth more than 40 ounces
of gold. Right now it’s worth 8 or 8-1/2 ounces, so
I think it’ll get down to 1-to-1. But you don’t
know where that’s going to be. It could be Dow 5,000-gold
$5,000, it could be Dow 10,000-gold $10,000; it could be Dow
20,000-gold $20,000; it could be Dow 2,000-gold $2,000. I
don’t know where it’s going to be, but I think
it’s going to happen.
Ludwig: Why 1-to-1?
Schiff: That was the low of the bear market
of the 1930 and that was the low of the bear market of the
1970s. The Dow was worth one ounce of gold in 1932 and the
Dow was worth one ounce of gold in 1980. So it seems that
historically, one ounce of gold is about where the Dow goes
when it’s really cheap.
But if we have hyperinflation I don’t know how much
value the dollar could lose. It could lose half its value,
it could lose 90 percent of its value, it could lose 99 percent
of its value.
Ludwig: So how much gold should somebody
own without being out of their mind at this point?
Schiff: Well I think you’d be out
of your mind not to own gold. If someone told me the only
thing they had was gold, I wouldn’t think they were
crazy. I don’t only have gold. About 50 percent of my
portfolio is in gold and silver mining stocks. That’s
pretty aggressive. About 5 to 10 percent of my liquid net
worth is in physical metals. So I’m a lot heavier in
the actual mining companies than I am in gold because I think
that they are very undervalued.
And then I have a lot of agricultural stocks and energy stocks
and I have a lot of Chinese stocks. I don’t want to
give up China. I think China is going to outperform gold over
the long term.
I think for most Americans, gold is going to do better than
stocks, and it’s certainly going to do better than bonds.
And right now the agricultural commodities are doing really
well. I mean look what’s happening to corn in that last
couple of days – soybeans, sugar, look what cotton’s
been doing.
Ludwig: Regarding China, where do you see
all the currency jostling heading to?
Schiff: Well it’s heading to stronger
gold and commodity prices, which is inflation. When countries
foolishly decide to debase their currencies, the winner is
gold and the winners are the countries that aren’t involved
in this war, because the more you debase your currency, the
more succeed in impoverishing your own citizens. The goal
of any society should be toward a stronger currency because
that means you have greater purchasing power.
Remember, it’s not just Chinese imports that get more
expensive when the Chinese renminbi rises, but Chinese citizens
will buy more of our crops: more corn, more wheat, more soybeans,
more cotton, which means the price is going to go up and for
Americans too. So, the worst thing that could happen to a
U.S. citizen is a stronger Chinese renminbi.
Ludwig: Looking at the here and now, looking
at the earnings season that’s getting under way, do
you see any good buying opportunities in U.S. stocks?
Schiff: No. I’m not buying U.S. stocks.
I think U.S. stocks will go up, but I think they will go up
more slowly than foreign stocks, and I don’t think yields
are there. I don’t think they’ll do as good as
gold or silver or other commodities. Now there are some U.S.
stocks you could buy, like a gold stock, like Newmont Mining,
and there are some other ones you could buy, like in energy.
But in general, I think you’re better off investing
outside the United States.
Ludwig: In your latest “Hail Mary”
newsletter, you seemed quite certain that the next round of
quantitative easing was going to occur and that it was going
to be a train wreck.
Schiff: Well it adds to the supply of dollars,
so it weakens the dollar. And that causes prices to rise immediately
for gold, for agricultural products and for energy. And when
the Fed buys Treasuries, it enables the Fed to go deeper into
debt. By the Fed going out and buying bonds, it gives the
government the ability to keep spending money. But if the
Fed were not buying bonds and doing the right thing and raising
interest rates, then we would have a real cut in government
spending.
But none of our politicians have to make those choices because
the Fed enables them to continue deficit spending. So they’re
basically giving Congress the shovel they need to dig us into
a deeper hole. But we don’t want to make the hole any
deeper; it’s already very, very deep.
And the problem is that as they go down this path, it is
never going to create real economic growth. You’re not
going to create economic growth by printing money to buy government
bonds. All you’re going to succeed in is in growing
the government, shrinking the economy, and creating inflation.
And you’re going to make the economy less productive,
less efficient, which means it’s going to keep getting
worse. More people are going to lose jobs.
Ludwig: So what would the best-case scenario
be, as you see it and as painful as it might be?
Schiff: The Congress and the President would
level with the American public and let them know that the
Federal Reserve really screwed up in the last decade, and
that we’re in a lot of trouble as a country: We haven’t
saved enough, we haven’t produced enough; we’ve
all consumed too much; the government got too big; the state
governments got too big, the federal government got too big;
everybody bought things they couldn’t afford, and this
is going to have to change.
And the Fed would need to raise interest rates, and we’d
need to have the government get out of the housing market,
close down Fannie and Freddie, just let housing prices fall.
Let the market determine who buys houses and what the prices
are, and not Washington.
And some banks are going to fail. And the government’s
going to have to let them fail and not bail people out. You
cannot bail out bankrupt companies. Let the market cleanse
them. Respect the rule of law. Don’t screw the creditors.
You can’t have politicians hand over companies to labor
unions or whatever they’re doing.
Ludwig: But you’re also saying the
government is not going to do the right thing, the way you
see it, right?
Schiff: Yes, right now there’s no
chance they’ll do the right thing. As long as the Fed
is easing, they will never do the right thing.
Ludwig: Well, in the absence of doing the
right thing, walk me through how the train wreck unfolds?
Schiff: They’re going to keep quantitative
easing, so eventually what’s going to happen is the
dollar is going to keep falling, commodity prices are going
to keep rising, and eventually the CPI is going to be rising
despite the government’s best efforts to hide how much
inflation is there. First they’ll say it’s OK
if it’s just the core – it’s OK if just
food and energy prices are rising 10 or 15 or 20 percent a
year. But at some point the inflation rate will be obviously
high, the Fed will not be tightening to try to fight the inflation
because there will still be 9, 10 11 percent unemployment,
so they’ll keep on with QE2, QE3, QE4 and so on, and
they’ll buy more and more bonds.
And then eventually, the bottom will drop out and the dollar
will start to fall faster and interest rates will start to
rise sharply on all the bonds that the Fed is not buying.
So Treasury yields could be held in check by the Fed, but
municipal bond yields will be soaring, corporate bond yields
will be soaring. Then the Fed will have wonder whether it
should buy those bonds too. And if they do that then we just
get a complete collapse of the currency. It would all just
implode.
Ludwig: Is that a real possibility in your
mind?
Schiff: Oh, yeah. We are on a path to Weimar
Republic Germany. That’s where we are. Does that mean
we are going to end up like the Weimar Republic? No, because
we still have time to do the right thing. But that window
is shutting.
Ludwig: How much time is there?
Schiff: I don’t know. I’m not
a clairvoyant genius. I don’t think it’s generations.
I think it’s years, and it’s not a lot of years.
But I do know that the longer we wait to do the right thing,
the more it’s going to hurt. So if we did the right
thing today, it would be painful. If we did the right thing
tomorrow, it’d be that much more painful. The longer
we wait the deeper into debt we go.