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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.


Schiff: Buy Gold, Commodity Stocks and China
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