Gold Bug Schiff Counters Goldman on First Drop Since 2000 … Peter Schiff lays an iPod-sized bar valued at about $40,000 on the sun room floor of his Connecticut mansion, and calculates it would cost about $250,000 for each floor tile to pave the room with gold. He shows off $50 gold chips, to be used when paper money becomes worthless, a prediction repeated on his daily two-hour radio show broadcast from his basement studio to 68 stations in 30 states and 50,000 listeners online. The unabashed gold bug's Euro Pacific Capital Inc. manages a $20 million mutual fund that invests in stocks related to the metal and lost 6.4 percent since it began in July. The Philadelphia Stock Exchange Gold and Silver Index slid 1.5 percent in the same period … Schiff, chief executive officer and chief global strategist of Euro Pacific Capital Inc., predicts bullion will reverse its 21 percent year-to-date decline and probably surge 52 percent to reach a record $2,000 an ounce within a year. – Bloomberg
Dominant Social Theme: Gold is down for the count.
Free-Market Analysis: Every week or month, Bloomberg editors attack gold and this article, striking out at chief gold bug Peter Schiff, is more of the same.
The bias is subtle but apparent. The article manages to point out that Schiff's father is in jail for tax evasion and that Peter Schiff has made a personal fortune even while his precious metals recommendations have soured, from a mainstream media perspective.
As editors and writers of an alternative 'Net publication, we have to admire the way Schiff confronts naysayers and fear mongers when it comes to the economy. As he responded once when we were speaking about free-market economics, "What other kind is there?"
Indeed. Here at The Daily Bell, we chronicle on a regular basis the insanity of modern finance, which is built around Keynesian theories. But it is increasingly clear to us that John Maynard Keynes, a Fabian socialist, participated in a kind of hoax. His much-touted General Theory begins with the idea that a downturn has occurred and then suggests that government print money and spend taxpayer funds to "create" jobs.
On almost every level this is illogical, as Schiff often points out. Why does government need to spend taxpayer money to create jobs? Why doesn't it leave the money in taxpayer hands? And why does government have to print more money via central banking? How does printing money – a debasement process – make an economy stronger?
People intrinsically know that current economics policies are sophistry. Without monetary competition and without the free circulation of gold and silver, economies are doomed to inflate while producing fewer and fewer things of real value. This is happening throughout the West.
Probably all that saves the West from toppling over into paralysis and full-on dysfunction is a thriving underground market for jobs and services that is neither reported nor tracked by mainstream numbers. Peter Schiff understands these sorts of realities and is not afraid to voice them to the mainstream media.
For this he is attacked and held up to ridicule, and when his money management numbers take a beating for one reason or another, that is pointed out endlessly, as if he is the only manager who ever had a bad season. To us, this Bloomberg article strikes just this sort of tone. Here's more:
Peter Schiff, 50, isn't fazed that gold is heading for its first annual price drop in 13 years, or that Goldman Sachs Group Inc. has called it a "slam-dunk sell." He predicts bullion will reverse its 21 percent year-to-date decline and probably surge 52 percent to reach a record $2,000 an ounce within a year.
That's just the beginning: Schiff said he would "be amazed" if the U.S. dollar didn't collapse and gold failed to skyrocket before President Barack Obama leaves office in 2017. "I'm waiting for the dollar crash, I'm waiting for the real crisis to hit that I know will benefit gold,"
… With inflation at or below the Fed's 2 percent target for the past 11 months, the Standard & Poor's 500 stock index reaching record levels and the dollar strengthening against major currencies in the past year, Schiff knows his forecasts make some people laugh. He's used to it. They also scoffed in 2006 when he predicted on television that housing prices would plunge, lenders would go bankrupt and stocks would plummet, as they did two years later.
Schiff's predictions don't persuade Austan Goolsbee, an economics professor at the Booth School of Business at the University of Chicago and former chairman of the Council of Economic Advisers under Obama. Gold bugs, investors who buy the metal as protection against a collapse in financial assets, fail to understand that the Fed's pumping money into the economy only offsets banks' tighter lending and stockpiling cash, Goolsbee said.
Until credit conditions return to "normal," there's no danger of inflation, he said. "They have been saying that for literally four-plus years, and they have been egregiously wrong," Goolsbee said. "As a matter of mathematics, they're just adding up the numbers incorrectly to say that they think there's going to be 200 percent inflation."
This rebuttal from Goolsbee is an example of how the mainstream media continually misinforms people about economics facts. Goolsbee starts by confusing inflation with price inflation. He says that until credit conditions return to normal there's no danger of inflation but, of course, as the money has already been printed the inflation of the money stock has already taken place. What's so hard to understand about that?
What Goolsbee is saying is that PRICE inflation has not taken place because banks are not lending money. But the reason that banks are not lending has as much to do with the West's central banking regime and regulatory approaches as it does with the banks themselves.
There are three reasons why banks are not lending. The first one is that central banks did not let firms and businesses collapse as they should have in 2008. Instead, they showered money on bankrupt institutions and as a result even today banks and bankers cannot sort solvent from insolvent facilities.
Second, central bankers met with top political men and determined that banks would have to hold much higher ratios of cash to lending commitments. This actually made sense when banks lent fractional assets against gold and silver, but today all it means is that central bankers press a button and credit banks with some electronic digits. But the process impedes lending, even if banks were willing to lend aggressively.
Third, the Federal Reserve and probably other central banks are paying banks NOT to lend. The electronic digits that are credited to banks are actually counted as assets and the US Fed therefore pays banks a few basis points on these "funds."
Goolsbee gets into none of this. He purposefully confuses monetary inflation with price inflation and then he contradicts Schiff's argument without explaining that the reason that money is not circulating and causing price inflation is because central banks and governments are purposefully preventing the circulation by force and by a kind of bribery.
The article also doesn't provide us with anything approaching a reasoned analysis about gold, silver and the dollar's changing price against gold this year. Instead, the article quotes a famous remark by Fed chairman Ben Bernanke, who told the Senate Banking Committee in July: "Nobody really understands gold prices and I don't pretend to really understand them either."
Many so-called gold bugs believe this to be a lie, accusing the Fed and other central banks of working in cahoots with large securities firms like JP Morgan to manipulate dollars versus "paper" gold, even though physical gold is in great demand.
The demand is certainly there. Late in October, Market Oracle and other alternative 'Net financial websites reported that China's gold reserves were, stunningly, at least 2.5 times higher than reported. Market Oracle then presented the following analysis:
The Chinese have for a long number of years expressed concerns about the direction Washington, led by Wall Street, is leading the world financial system and the global economy. In March 2009, the governor of the People's Bank of China, Zhou Xiaochuan, called for the creation of a new reserve currency, albeit in less forthright language.
The world needs a new "super-sovereign reserve currency" to replace the current reliance on the dollar, Zhou wrote in a paper published on the People's Bank of China's website. Zhou Xiaochuan is still China's central bank governor. The goal is to "create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run."
This sounds like he may be referring to gold, as gold is an "international reserve currency that is disconnected from individual nations" and has remained "stable in the long run." Toppling the dollar isn't enough today, however: "Several cornerstones should be laid to underpin a de-Americanised world," explains the Xinhua piece.
Another theory making the rounds – based on the kind of reporting in the above article excerpt – is that the international banking elite wants to move quickly to create a more globalized currency and is trying to "even out" commodities and currencies prior to building a basket. This could explain why gold has come under such pressure. It could also explain, at least partially, why the BRICs have done well while the US and Europe continue in a slump.
Schiff is certainly right to emphasize the importance of gold in particular to the world economy. Where we depart from Schiff is on timing. We think the business cycle is bullish for gold and silver but for one reason or another has been interrupted. Just as the stock market should not necessarily be climbing at this juncture in the business cycle, so dollar's fall against gold should not have been interrupted.
There are obviously massive forces at work disrupting the current business cycle, from what we can tell. The promotion is an elite one aimed at reigniting a great bull market that fell to pieces in 2008. Allowing for inflation, that market has still entirely been re-established, depending on what numbers you use.
Gold and silver likely have a long way to travel, and so do metals stocks. But probably not today and probably not tomorrow. The forces arrayed against them seem formidable currently.
Peter Schiff's day will come. But first, perhaps, the stock market will speak more loudly.