Wednesday, November 6, 2013

Peter Schiff: Gold Hold It or Fold It?

By Peter Schiff

It's starting to feel like we are part of a giant poker game against the US government, whose hand is the true condition of the American economy. The government has become so good at bluffing that most people feel compelled to watch how the biggest players in the game react to determine their own investment strategy.

Unfortunately, this past month revealed that even pros like Goldman Sachs have no idea what sort of hand Washington is really hiding.

Goldman Bets Against Gold

A week into the government shutdown, Jeffrey Currie, head of commodities research at Goldman Sachs, declared that gold would be a "slam dunk sell" if Washington resolved the budget debate and raised the debt ceiling. The call was based on an underlying narrative that the US economy is experiencing a slow, but inevitable, recovery.

Taking this recovery as a foregone conclusion, conventional Wall Street analysts saw two clear choices for Washington. On the one hand, Congress could reach an agreement, raise the debt ceiling, and allow the recovery to continue. This would allegedly have been the final nail in the coffin of the safe-haven appeal of gold.

On the other hand, if no agreement were reached, the government would have been forced to default on its debt. This would have erased any signs of recovery and sent the economy spiraling back into a terrible recession - while boosting the gold price.

Goldman reasoned that Washington would never allow the latter to unfold and suggested investors prepare to short or sell gold.

While Washington did kick the debt can down the road as predicted, gold rallied 3% on the news - the complete opposite of expectations. That is, expectations outside of Euro Pacific.

Misreading the Signals

After seeing an investment theory crushed by reality, a rational investor would take a moment to reexamine his premises. In Goldman's case, this would mean second-guessing the conventional belief in an imminent or ongoing US economic recovery.

Yet, the day after Washington reached an agreement, Currie reaffirmed to Goldman's clients that his US economic outlook for 2014 is positive and that he believes gold faces "significant downside risks."

Currie must not have wanted to muddy his message by acknowledging that his original forecast was flat wrong. He did, however, hedge his statements by acknowledging that the Federal Reserve would likely hold off on tapering its stimulus until next year.

Major Wall Street investment houses have come to rely on the investing public's short-term memory to skate by on these bad calls. When the next forecast is issued, clients and subscribers quickly forget that Goldman was blindsided by the Fed's taper fakeout in September. [Read more about the taper fakeout in my previous Gold Letter.] That Currie accepted the government's new taper timeline within a month of being burned by the last shows how little stomach they have for sticking to the fundamentals - and how little accountability they face for getting it wrong.

Instead, major players like Goldman Sachs are betting their books on the government's fearless bluff. In the eyes of Wall Street, the economic indicators support this conclusion - inflation is subdued, GDP is growing!

The Bluff Exposed

I've been an outspoken critic of this official data for years. Over the course of my career, I have witnessed the government dramatically change the way it calculates inflation, GDP, and other statistics. While Washington's latest figures show a year-over-year CPI increase of just 1.2%, the private service ShadowStats, which recalculates the data along the lines that the government used to, finds that real consumer inflation is closer to 9%.

My guess is the true number lies somewhere in between, but that it would be much higher were the US not able to export much of its inflation abroad. The process works as follows: the Fed prints money (inflation) and uses it to buy Treasuries and mortgages. The government and banks, in turn, pass much of that money to consumers, who spend it on imported goods. The money then flows to foreign manufacturers of those products, who then sell it to their own central banks, who print their own currencies (inflation) to buy it. This money goes out to pay wages, rents, etc., which the recipients then spend on goods & services. Finally, the foreign central banks use the dollars they buy to purchase US Treasuries and mortgages, starting the cycle again.

It's a complicated relationship, but the end result is that inflation created in the US ultimately bids up consumer prices abroad and Treasury prices at home. In other words, our trading partners have to pay much more for goods & services while Americans get to borrow limitless money for next to nothing. The products our trading partners "sell" us increase the supply of goods available to American consumers while simultaneously decreasing the supply available to everyone else. That is what I mean by "exporting inflation," and the important thing to remember is that its result is to mask inflation at home and transfer wealth from emerging markets to the US.

(Click for source)

The bluff gets worse. These understated CPI numbers distort real GDP, which would be lower if the true inflation rate were applied. The GDP calculations also include items like government expenditures, which are possible only because of money printing and not a result of any real economic production. Again, compare the official figure of 1-2% GDP growth in the second quarter of 2013 to ShadowStat's figure of negative 2%.

(Click for source)

If investors can't bring themselves to question official data, there's another way to see through the government's bluff: look to foreign central banks, which are actively preparing for the day when the dollar is no longer the world's reserve currency.

The Bank of Italy recently affirmed that its gold reserves are essential to its economic independence, while the World Gold Council reported that this past year, European central banks held onto more of their gold reserves than ever before. China, the largest holder of US debt and the biggest consumer of gold in the world, has started openly talking about ending the dollar's reserve status. And while we don't know the total gold reserves of the Chinese government, there are signs that they are stockpiling.

Even US Treasury officials admit that the US will never sell its gold reserves to deal with debt obligations. One spokesperson said, "Selling gold would undercut confidence in the US both here and abroad, and would be destabilizing to the world financial system."

Time to Cash Out

So, who should investors believe about gold? Wall Street bankers who directly benefit from asset bubbles created by the Fed's inflationary stimulus?

No, it's time for individual investors to leave the table and redeem their chips. Just remember - the longer you wait to cash out of the US dollar, the less you're going to get for your winnings.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.


  1. I read the phrase "US...exports other countries..." As US...EXTORTS...

    Both are apt.

  2. Schiff is just digging a deeper hole for himself with this article. Simply admit you got it wrong and that you have been wrong for 5 straight years. Figure out why you got it wrong and adjust your understanding of the economy. Learn from your mistakes. Pretending you are right and everyone else is wrong makes you look like a fool and a liar.

    1. When you come back and defend one of your "drive by troll posts" let me know.

      Otherwise fuck off.

    2. Adjust your understanding of the economy? As in " I guess printing money doesn't cause inflation, therefore Americans should no longer be forced to work, and the government should let every one of us print our own legal tender, since the world will absorb it forever." ???

    3. Time to stop feeding the troll. Some of Mr. Wolfgang's comments have at least provided distorted facts to be refuted, but this latest is just a "nah nah nah, no its not" childish rant. No numbers, no sources to help resolve who is right about the real inflation rate or how Schiff's analysis doesn't hold water.

  3. Can someone explain to me how the "G" portion of the GDP equation is handled under QE?

    For instance, are they backing it out under "transfer payments"? Are the Treasury purchases handled differently from the MBS's?

    Thanks in advance if you know off the top of your head.

  4. Jerry, if you think Schiff is looking to dig a hole, maybe you could loan him your shovel when you're done with it--IF you'll ever be done with it.

    I made a gold purchase on 10/30/2008, just over five years ago, at a price of $737.10 per ounce. Looks like gold closed today at $1,317.70 per ounce. I'll take an 11% annualized return any day.

    But let's look at the USD index over the same period: on 10/30/2008 it closed at 84.82, whereas today's close is 80.505. Not so hot. So in terms of investment advice over five years, how has Schiff's recommendation to buy gold and avoid the dollar been faulty?

  5. If you bought in 2011, at a high of $1,923, it's been faulty. I understand the Fed creates bubbles and that the Treasury is dependent on Fed money to even pay existing debt. However, Japan limped along like this for over 20 years. There is no guarantee the US dollar is going down in a weak economy with every other country printing like madmen. India has put a heavy tax on gold, stifling demand. There are just a lot of factors to consider, and Schiff is just a little too confident in his outcome for my taste. Still, I've learned a lot from him.

    1. Only a fool will leverage and invest... buying at $1,923 in 2011 should have been only on dollar averaging for able funded persons, if you are scared don't play big boy games, if you can't wait sell at a loss. Truth will bare in time.

  6. Shadowstats does not recalculate the numbers for inflation, he just arbitrarily tacks on 7% and calls it good. Shadowstats is a fraud designed to sell subscriptions to gullible people. Nothing wrong with that, let the market work, but don't be fooled.

    1. Evidence? My understanding is that he uses the old calculation that the government USED to use.* While his alternate inflation data tracks with the current way of calculating the CPI, the shadowstats unemployment data has diverged from the U3 and U6 since around 2009.** If he is dumb enough to perpetrate the simple fraud of tacking on 7% on inflation data (as you say), why does he not engage in a similar ruse with unemployment? If he is in fact simply using the old method of calculations, then why does his unemployment figures start diverging in 2009 from the official numbers? Manipulation by the gov't?

      *from the ShadowStats website: " CPI chart on the home page reflects our estimate of inflation for today as if it were calculated the same way it was in 1990"

      **again from ShadowStats: "The seasonally-adjusted SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994. That estimate is added to the BLS estimate of U-6 unemployment, which includes short-term discouraged workers."

    2. The evidence is right here, quoting Mr. Williams as only adding a flat percentage to the CPI numbers and not doing any calculations. I am sure he would like to give the impression that he does actual calculations but when asked point blank, had to admit that there wasn't anything there.

  7. Yet another way to see that the Shadowstats figures are made up entirely is to look at the GDP numbers which Mr. Schiff presents. Setting GDP equal to 100 in 2000, the posted growth rates over the next 13 years currently imply a GDP in the range of about 82. Combine this with population growth and US standards of living have apparently fallen by more than 20% in real terms since 2000, that's just ludicrous. Shadowstats inflation numbers don't hold up to any scrutiny. Sad to see this posted here.

  8. "Combine this with population growth and US standards of living have apparently fallen by more than 20% in real terms since 2000"

    Seems about right, from here.