Thursday, January 2, 2014

Peter Schiff: The Long and The Short of Gold Investing

By Peter Schiff

There are two types of gold investors: those trying to make money on short-term market timing and those looking for long-term asset preservation. It was the fear-driven trading of the former that helped gold break $1900 in 2011, and for good reason - stormy markets steer investors to safe havens.

But gold's fortune has shifted in the past two years, and finishing 2013 down 28% seems to have sealed its fate - at least in the eyes of the short-term speculators. In reality, the same forces that are stabilizing stocks and suppressing gold are also the fundamental reasons long-term investors have been buying gold since the turn of the new millennium. The so-called recovery we're now experiencing is just a lull in a storm that hasn't yet abated.

Losing Touch With Reality

From the fiscal cliff at the beginning of the year to the budget stalemate and government shutdown in the fall, the US was not exactly a model of financial stability in 2013. Yet with each of these stories, the markets shrugged off any large dips and went on to reach record high after record high. The stock market exceeded most expectations - the S&P and Dow rallied 29.6% and 26.5% respectively, with the volatility index staying remarkably low.

The official explanation for this market behavior is that the economy really is improving. A growing GDP and improving jobless rate are the leading economic indicators that support this conclusion.

However, the real reason behind 2013's stability in spite of mixed economic news was the extremely accommodating Federal Reserve policy. Markets have become hyper-aware of this Bernanke Put over the course of the year.

Compare the markets' taper tantrums earlier in the year to their reaction to the Fed's December announcement of "taper-lite."

In both June and August, with the mere talk of tapering, the S&P and Dow tumbled. The assumption was that when the Fed started tapering their Quantitative Easing (QE) program, interest rates would also start to rise. Overvalued stocks plunged in preparation for a higher interest rate environment.

However, this December, when the Fed set an official January date for tapering, these indices did not drop as they had before, but immediately jumped to new highs. Why the different reaction to essentially the same news?

Because the Fed's December announcement was not the same.

Normal No Longer Means Healthy

The key element of Bernanke's "taper-lite" was not the $10 billion-per-month cut to QE, but the explicit commitment to maintain low interest rates for the foreseeable future. Bernanke basically guaranteed the fed funds rate would remain near 0% for at least a couple more years.

This commitment to artificially suppressed interest rates ruins the charade that the economy is getting healthier. Why on earth does a healthy economy need the support of free money?

The short-term data may appear good on its face, but people are waking up to the bigger picture of this so-called recovery - namely that it isn't a recovery at all.

It's well-recognized now that most new jobs are low-wage, low-skilled placements. Often these are part-time or temporary retail or restaurant positions. This may be why both median income and the percentage of the population employed remain well below pre-crisis levels. The jobless rate has only improved because people have simply given up trying to find employment.

Meanwhile, the latest data from the Bureau of Economic Analysis shows that in the last months of 2013, personal spending rose more than personal income, while the savings rate dropped. In other words, we're back to digging the hole that caused the Panic of '08.

This is one of the longest and slowest recoveries the US has ever experienced, but the mantra of Wall Street maintains that all is well because the stock market is up. We're supposedly returning to normal.

The truth is that "normal" no longer means "healthy" when it comes to the economic stability of the United States. It really means that we are back to where we were prior to the Panic of '08.

Selective Memory

Only a short-term mindset could ignore the parallels between our economy today and ten years ago. Heading into 2004, the headlines sounded almost identical to today's, with talk of an improving economy that still suffered from less-than-optimal employment numbers.

More importantly, it was in 2003 that Alan Greenspan cut the fed funds rate to 1% - the lowest it had been for more than 40 years.

We all know how that story ended. Most economists agree that the interest rate policy of Greenspan's Fed spurred the irresponsible lending practices and speculation that drove the US into a housing crash and then a financial meltdown.

Yet here we are again, with the fed funds rate at record low levels. Nothing has changed in ten years - the supposed recovery we're experiencing now is simply a product of this endless cheap money.

A Sober Analysis

In times like these, long-term gold investors feel like the designated drivers in the corner of a frat party. It might seem like we're missing the fun, but we must remember that we're playing a different game than the short-term speculators.

Our drunken friends have had some cheap thrills in 2013, but this stock market growth rests on an unstable foundation of artificial stimulus and cheap money. We are more interested in waking up without a hangover, a wrecked car, or worse. The longer interest rates remain suppressed, the crazier markets will behave when rates rise. And if Greenspan's one year at 1% rates helped trigger the crash we saw in '08, imagine imagine what three years and counting of Bernanke's/Yellen's 0% rates portends for the next crash.

Peter Schiff is Chairman of Euro Pacific Precious Metals, a gold and silver dealer selling well-known bullion coins and bars at competitive prices. 


  1. Flawed Fee Model Distorts U.S. Trading, Virtu Says

    Regulators could stem the migration of U.S. equity trading to dark pools by coordinating a cut in trading fees, an action exchanges are unlikely to take on their own, according to one of the biggest high-frequency firms.

    Most exchanges are charging users too much -- 30 cents per 100 shares -- pushing transactions off public markets to lower-cost private platforms such as dark pools, said Chris Concannon, an executive vice president at Virtu Financial LLC in New York. Regulators should review enacting a blanket reduction of the fees, which would also curb the rebates exchanges pay traders who facilitate transactions, he said.

    The system of charging investors for trades while paying brokers, a model known in the industry as maker-taker, is common in the U.S. and elsewhere after market making by humans became less profitable over the last decade. While these pricing systems probably can’t be dismantled, there are “things you can regulate to mitigate their impact on market structure,” Concannon, whose firm provides offers to buy and sell securities on the New York Stock Exchange and dozens of other venues globally, said during an interview.

  2. Sun Zhaoxue: US Intends To Suppress Gold To Ensure Dollar’s Dominance

    I’ve got a confession to make: I believe in conspiracy facts. After having witnessed scandals like NSA, LIBOR, Lance Armstrong, ISDAfix, money laundering by too big to fail banks, rigging currency rates, the fall of Madoff, the US sub-prime event, bank bailouts (in Europe and the US), the Greek tragedy, 9/11, the Iraq invasion and Enron, I came to the conclusion it is just what people do when there is money and power at stake: they conspire.

    When it comes to gold price manipulation there are currently four camps:

  3. Turkey’s silver imports climbed in December to the highest since at least 1999 and inbound shipments of gold rose to the most since July as the metals capped their biggest annual decline in more than three decades.

    Imports of silver gained to 41.6 metric tons last month, 36 percent more than in November and above September’s amount of 39.9 tons, according to data on the Istanbul Gold Exchange’s website going back to 1999. That took the full year figure to 227.8 tons, 60 percent more than 2012 and compared with 42.1 tons in all of 2011. Gold imports increased 64 percent in December to 31.6 tons, the data show.

    Turkey’s Imports

    Turkey, which boosted gold shipments to Iran in 2012, became a net importer of bullion after ending exports to the Islamic Republic in July, the then Economy Minister Zafer Caglayan said in August. World powers agreed in November to give Iran about $7 billion in relief from economic sanctions over six months, including the suspension of certain sanctions on gold and precious metals.

    Turkey’s gold imports totaled 302.3 tons last year, more than double the previous year and the most since at least 1995, according to the Istanbul Gold Exchange. Silver imports last year were the most since at least 1999.

  4. 2013 The Year of JP Morgan - 'The World's Only Enduring Currency'

    There are some very good reasons why China and India and quite a few of the new emerging economies are seeking safe havens from the dollar. It is not because 'they hate our freedom.' It is not because 'they are ignorant of economics.' It is not because 'they are a bunch of gold bugs.'

    It is because the Western financial system is become a shell game of frauds, and is largely unreformed.

    And the dollar has become a vehicle for exporting these frauds to the rest of the world.

    If you do not understand this, you can understand little of what is going on, and will understand little of what will happen next.

    But to paraphrase Upton Sinclair, sometimes it is difficult to get a man to understand what his paycheck encourages him not to see.

  5. No, this is not identical to 2004. There were 1.4 billion in excess reserves in Nov 2003 and 2.4 trillion in Nov 2013. Also, in 2004 there were a few people calling a bubble. Now almost everyone is calling a bubble and a few people saying there is not one. The market psychology is reversed. The Fed's dual mandate will always pump up the market since it means the Fed is lowering interest rates and interest rates compete with the market. There is not a stock market bubble. Gold's bubble is deflating and look for gold to be mid-800s this time next year.

    Excess Reserves of Depository Institutions (EXCSRESNS) (millions of dollars)

    2003-11-01 1482
    2013-11-01 2392529


    1. The World Enters 2014 In An Extremely Dangerous Position
      I entered 2013 with an expectation of a mid single digit return to about 1500 in the S&P 500 and was obviously horribly wrong but I was not alone as the median price target for 2013 given at the end of 2012, according to Bloomberg, was 1550. I was right on my belief of mediocre economic and earnings growth but didn't fully appreciate what $1T of money printing could do to one's investing mood, paying up for low quality earnings driven by lowered interest expense, stock buybacks, lower tax rates, reduced depreciation expense due to anemic levels of capital spending and stingy wage growth. The Fed’s $1T of 2013 QE created $5.4T of market cap, quite impressive. That said, the major catalyst of a QE friendly Fed in 2013 MAY see the reverse and a finish to the latest round of QE. I emphasize ‘may’ because we know this knob will get turned back up again if the economy and the markets turn down sharply. My reference point for the end of QE and its impact is simply what happened to stocks at the end of both QE1 and QE2 where the major indices fell 15-20% in the following months. QE doesn’t create a safer world, it is just a temporary high and the danger always comes on the flip side as previously seen.

    2. "Gold's bubble is deflating and look for gold to be mid-800s this time next year."

      If the price of gold is above 800 next year, how about you go the f*** away for good? Fair enough?

  6. The Fed's Betrayal Of The Middle Class

    Certainly most of this is not a surprise to readers and no doubt many do question the Fed's loyalty but keep this point in mind - the Fed has done little if anything to generate economic growth over the last 5 years but they have done much to assist their owners in getting even bigger than they were before.

    That truth has led me to reconsider my views as it relates to the Fed and to the whole idea of privately owned central banks and the exorbitant privilege these banks are afforded by the fractional bank credit creation scheme. I have been led - reluctantly - to consider the possibility that the central bank/fractional reserve system is designed to enrich and empower an elite group at the top of the social strata and at the expense of the middle class.

    You see I have never - until recently - even considered the idea that the system was structured to work to the detriment of the middle class. I was educated to understand the benefits of the system and had no reason to consider any other possibility. That said, the Fed's actions since the recession make no sense to me if the idea is that the Fed is working to stimulate the economy and benefit the middle class as they claim. It does make sense to me if the goal of the Fed is to strengthen and consolidate power in the hands of a few banks at the top.