Two persistent myths convince gold bears that the price of gold will remain low – a looming series of interest rate hikes from the Federal Reserve and the fact that gold did not rally during the last round of quantitative easing. Peter Schiff explains why both of these myths are ready to die following Friday’s terrible job report. The silver price surged significantly higher on Friday’s news, and Peter thinks it won’t be long before gold also breaks out of its trading range. Investors are quickly running out of time to take advantage of these low prices.
Below you find the video.
Follow along with this full transcript:
It’s Monday morning following Friday’s release of jobs data that was much weaker than what the consensus forecast had been. Rather than creating more than 200,000 jobs and rather than revising upward the prior month to greater than 200,000 jobs, we got a number that was far below – not only for September but also for August. As a result, we had a rally in both the price of gold and silver. In fact, silver is gaining on or adding to Friday’s rally. It’s now trading at better than the three-month high, it’s up about $0.40 an ounce this morning following more than a $0.70 per ounce gain on Friday.
Now, gold was up about $25 on Friday. It’s actually down a buck or two last I checked here this morning. In fact, gold is still trapped in the trading range. It’s really been trading between, let’s say, the low $1100’s and $1140, $1150, right now around $1137. But I do believe that ultimately, gold is going to follow silver’s lead and break out to new highs. Really what’s kept the metal range bound is you have the buyers at the lower end of the market who are steadily accumulating gold, who are long-term buyers and who understand the favorable long-term outlook for gold. And you have all of these speculators who are bearish on gold because of their false beliefs that the Fed is about to raise interest rates and that higher interest rates are going to be bearish for gold. I think they’re wrong on both counts.
First of all, even if the Fed were about to raise interest rates, which I have never believed was the case. But even if that was in fact the case, there is no historical evidence to suggest that the rate hikes would actually be negative for gold. If you look historically, there are some times where rate hikes are bearish for gold and there are other times when it’s not. For example, when Paul Volcker was very aggressive in hiking rates in the early ’80s, those higher rates proved very bearish for gold, especially since gold had risen so spectacularly in the bull market that preceded that hawkish Fed.
But if you look at the experience more recently with Alan Greenspan, the way he raised interest rates very slowly following the Fed’s cutting them to 1% in the aftermath of the bursting of the dot-com bubble – those moderate rate hikes were very bullish for gold. Even if the Fed were to raise interest rates, the pace that Janet Yellen was talking about was going to be much slower than the Greenspan pace, which was extremely bullish for gold when the Fed hiked rates as slowly as it did. Yellen has always said that the first rate hike is not even that important. What is important is the fact that she’s going to be so late or so slow in raising them again and so moderate in her approach.
And in fact, the rate hike that she was talking about or bluffing about was only a quarter of a point. I mean, that’s nothing. How would moving rates from zero to 0.25 really undermine the case for owning gold? It wouldn’t. All I think you have is speculators with a narrative and pushing a trend. But ultimately they ran into a wall of buying and their repeated efforts to really knock gold below $1100 failed. It did dip below there slightly but it wasn’t able to stay there. And you know the bears have been trying to get gold below a thousand for a couple of years and they haven’t been able to do that.
But I do think that ultimately it’s the bulls that are going to be in charge of this market once the bears are forced to throw in the towel. And I think the economic data that we got on Friday is going to be the beginning of that. I think silver is certainly showing gold the way to go. And the fact that silver has been able to rally this strongly shows that the dynamic is turning. I think when we get the November reports later this year, it’s going to continue to show weakening on the job front and soon all this talk about higher interest rates is going to be replaced with new talk about a fresh round of quantitative easing – QE4 – and I think that is going to be super bullish for both gold and silver.
Now, some investors are going to say, “Hey, wait a minute, Peter. QE3 wasn’t bullish. Gold went down with QE3, so why should QE4 be any different?” Here is the reason. When the Fed did QE3, the market’s reaction was, “This is it. The Fed is finished. This is the end of all the money printing.” And so during QE3, the markets began looking forward to the end of the QE program and the beginning of a rate hike tightening cycle. Once the markets are disappointed and we have QE4, I don’t think the market is going to be so quick to assume that QE4 is the end of it, that we won’t have a QE5 or we won’t have a QE6. I think the reaction to QE4 is even going to be more spectacular on the upside than was the reaction to QE1 or QE2.
And another reason I believe that is because I don’t believe the dollar is going to have all the support of the emerging market economies like it did back in 2010, 2011 when we had a currency war. All the emerging markets tried to limit the dollar’s decline against their currencies. And I think that also limited the gains for gold, which of course, were priced in dollars.
But this time around, I do not believe the foreign central banks are going to make the same mistakes. I think a lot of these economies now realize that the biggest problem they’ve had over the last year or two has been a stronger dollar and anticipation that the dollar will get even stronger. So I think a weak dollar will provide some much needed relief to all these economies. And of course if all of their currencies are rising against the dollar in tandem, then no one currency is going to worry about losing some type of competitive advantage relative to another, because I think the dollar is going to sink against all currencies, including the yuan.
I think, though, that what’s important for the gold and silver market is that this myth is about to die. The pretense that the Fed is about to raise rates, that a rate hike is just around the corner is going to end. It cannot withstand all of this negative economic news. In fact, I think I read that Goldman Sachs (NYSE:GS) is now saying the Fed is more likely to raise rates for the first time in 2017 than 2016. Forget about rate hikes this year. They’re saying forget about it for next year. That is not going to happen until 2017. Well, one thing that Goldman Sachs is overlooking is between now and then we’re probably going to be back in recession. And what does that mean? That means QE4.
In fact, there’s a pretty good chance that we might get a negative GDP print for the third quarter. And if we get a negative GDP print in the third quarter, I bet we get one in the fourth quarter too, and that means we’re in recession. And of course we know what the Fed is going to do. And don’t think that it’s crazy for me to forecast this because remember, the great recession of 2008 began in December of 2007. And by the middle of 2008, just before the financial crisis, no one on Wall Street or the Federal Reserve even had a recession anywhere in its forecast, even though the economy had been within one for more than half a year. So it’s certainly probable the Fed has made the same mistake again and has either overestimated the strength of the US economy or has been afraid to admit just how weak the economy is out of fear of starting a self-perpetuating spiral.
But in any event, I think that this trading range in gold is going to break and my advice would be not to wait for the breakout, to anticipate that breakout and buy now. And as far as silver is concerned, it’s already broken out. But the good news is both metals are still very cheap, not only relative to where they’ve been in the past, but relative to what I think they’re going to be in the future. Thanks for listening.