Peter Schiff, Chairman of SchiffGold, CEO and Chief Global Strategist of Euro Pacific Capital, Inc, believes the Federal Reserve’s December interest rate hike was actually the end of the Fed’s tightening cycle that began with the first talk of tapering quantitative easing (QE) several years ago. Economic data will continue to be weak, and the US will likely be in an official recession in 2016 if it isn’t already. The Fed will be forced to restart QE and lower interest rates again, maybe even into negative territory. When that happens, investors who have been selling gold on expectations of economic health will have to reverse their bets and begin buying as gold rallies.
All throughout the year, I was saying that I didn’t believe the Federal Reserve would raise interest rates at all in 2015. And I thought that for two reasons. One, I didn’t believe the economy could handle it. And two, I didn’t believe the stock market could handle it.
Now, during the year, the Fed was trying to have its rate hike cake and eat it too by talking about raising interest rates but not actually doing it. And I thought the game plan was to pretend that both the economy and the markets could withstand higher interest rates; that they were strong enough for it, but not actually raise rates. Because I knew that if the Fed did make the mistake of raising rates it would prove that the economy and the markets couldn’t handle it.
But by the time we got to the final meeting in the waning weeks of December, the Fed had really backed itself into a credibility corner, and it thought that it had no choice but to raise rates, because failure to do so would be perceived as a lack of confidence in both the economy and the markets. And the Fed was afraid of that. It was also afraid of being wrong, because the Fed had been hinting that it believed the economy would be strong enough for a rate hike by the end of the year, and if they didn’t deliver on that promised hike, that it would be an admission that they were wrong.
So they went ahead and they raised rates anyway. And now what has happened since? Well, exactly what I said was going to happen. The air is already coming out of the bubble because the Fed pricked it. The US stock market is now off to its worst January in the history of the stock market. We now have many of the indexes like the S&P and the Dow in correction mode, down over 10%. The NASDAQ, again, down over 10% just since the Fed hiked rates. But you have other measures like the Russell 2000 already down better than 20%. The Dow Transports, which is a smaller average but is very economically sensitive, that index is getting close to down 30%; solidly in bear market territory.
What’s happening with the economy? Well, the Atlanta Fed already has its estimate for fourth quarter GDP from last year at just 0.8. And I think that estimate could be too optimistic. I think it’s possible that the fourth quarter GDP numbers by the time they revise them is going to end up being negative. But even if the last quarter of 2015 is at negative, I believe the first quarter of 2016 will be negative. So the recession either began late last year or early this year. But I believe we’re already in a recession, and we’re in bear markets in stocks.
Now, what is the Fed going to do? Because just a few weeks ago, they basically gave us the all clear, they blessed the recovery and the markets by raising interest rates and proclaiming victory. Now, we’re going to have to snatch a defeat from the jaws of victory. The Fed is going to have to somehow do an about face and try to maintain some semblance of credibility. Because the only thing that’s going to stop this correction from turning into a bear market is for the Fed to capitulate and admit that the economy is weaker than they thought. That they had made a mistake raising rates, or maybe try to blame what’s happening on some events that nobody could have possibly predicted. But they’re going to come up with some face-saving excuse why to reduce interest rates and relaunch quantitative easing.
Now, what does this mean to the price of gold? Well, remember on this video blog and all throughout the year, I said that if the Fed finally raised interest rates, I believed that that would be the buy signal for gold. That it would be a buy the rumor, sell the fact. That the price of gold had been falling for years anticipating a rate hike. In fact, it wasn’t just one rate hike that gold was anticipating, but a series.
However I said that by the time the Fed finally raises rates, it’s going to be a buy the rumor, sell the fact. And in fact the fact is not going to live up to the rumor, because this is not the beginning of a tightening cycle. That rate hike was the end of a tightening cycle that first began a couple of years ago with the taper talk. So the first rate hike was not the actual hike, but was when the Fed started talking about tapering QE.
And so by the time they got around to actually raising rates, that was the end of the tightening cycle, not the beginning. And that the next move by the Fed is going to be to launch a new easing cycle, which I think will take interest rates into negative territory. Remember they’ve been negative all along from a real perspective. The interest rates have been lower than the actual rate of inflation. In fact they’re even lower than the government’s reported rate of inflation. But I think the Fed is actually going to take interest rates into a negative territory nominally. And I think they’re going to launch QE4.
So the rally in gold that began after the Fed hiked rates is going to continue and accelerate. In fact the day the Fed hiked rates, there was a knee-jerk reaction when the price of gold went down. I said that that might happen, and gold got down to around $1050. It has since rallied back above $1100. It’s now slightly below. But I think the bottom is in, and the question is, how much air is the Fed going to allow to seep out of this bubble before it tries to plug the hole that it created by reversing the rate hike and launching QE4.
But in the meantime, gold is still an incredible buy because most people still haven’t connected these dots yet. They’re still wedded to the narrative of an economic recovery and higher interest rates. And that is what has caused this three-year correction in the price of gold. It’s the false narrative. Everybody believing that what the Fed did worked. That seven years of quantitative easing and 0% interest rates have worked, and now the economy is healed, and we’re going to have higher rates, and the US economy is in great shape. This entire narrative is a fantasy.
The Fed didn’t solve our problems, it exacerbated our problems. We put a Band-Aid on a cancer. And now the Fed is trying to remove the Band-Aid, and now we can see the wound underneath has gotten much, much worse. So now they’re going to have to come back with the mother of all quantitative easing programs, and we’re going to have the mother of all rallies in gold, as everybody has to quickly reverse their bets. They have to go from selling gold because the Fed was going to hike in a strong economy to buying gold because the Fed is now easing and relaunching QE4 because we have a recession and a bear market.
The only question is, where are they going to get the gold? There is not enough gold to satisfy that demand. Which is why you need to buy your gold now before all the professionals and the speculators and the hedge funds try to reverse their shorts. By the way, we arranged a special on Canadian Maple Leafs which ends at the close of business on Friday. We’re selling Maple Leafs, 1-ounce coins, for as low $33 over spot. That’s the lowest we’ve ever sold them. It’s one of the best prices you’re going to find anywhere online.
So I would suggest if you don’t already own any gold, that you take advantage of this special on Maple Leafs and buy some from SchiffGold. And if you already do own gold, you should buy some more. And by the way, buy some silver while you’re at it too because silver is still very cheap and I do believe that if I’m right on the price of gold going up then the price of silver is going to go up even more.