Distrusting the gold trade: A response

Frank Rumpenhorst/AFP/Getty Images

by Peter Schiff

(MoneyWatch) The argument between those who believe in gold as an investment and those who prefer to rely on stocks and bonds is an old one. It's a beef that can get heated, quickly veering from how best to make a buck into fundamental questions about how we order our economy and what we expect from our government. Gold enthusiasts criticize central bank "easy money" policies and see rampant inflation around the corner, while stock investors may well welcome low interest rates and a bit of inflation.

In a recent post, MoneyWatch blogger Larry Swedroe cautioned investors to be wary of forecasters' predictions about the precious metal, a position he has taken in columns going back to 2009, during which time gold has outperformed stocks. Swedroe's last post post prompted this response from noted investor Peter Schiff, CEO of EuroPacific Precious Metals, a bullion dealer based in New York, who believes the U.S. is living beyond its means and is heading for financial catastrophe, making gold a necessary investment. This is Schiff's response to Swedroe's column.

In an article entitled "Ignore the 'buy gold now' crowd" on CBS MoneyWatch this Monday, columnist and equities analyst Larry Swedroe criticizes forecasters who remain bullish on gold despite its monumental decade-long run.

He links to an interview in which I forecast that gold will rise above $5,000/oz before this bull market ends. Unsourced, Swedroe modifies my prediction to $2,300/oz by the end of 2013. While I typically forecast overall market direction rather than timing, I'm fairly comfortable with the words Swedroe put in my mouth. I believe gold will continue to rise and close 2013 significantly higher than present levels, and I'm invested accordingly. What I find most disconcerting in Swedroe's piece is everything that follows. He goes on to question both a) investment forecasting as a practice and b) gold as an asset in general.

Swedroe starts by warning that forecasters are not to be trusted. He "doesn't recall" any forecasters advising clients to invest in gold at the lows prior to 2003. Fortunately for my clients, I was making that very recommendation at that very time. I have continued my bullish call unwaveringly for the entire bull market, not because of a "religious belief" in the metal, as Swedroe alleges in the comment section under his column, but because the fundamentals driving the market have only become more pronounced.

My stance on gold is founded on the same logic that supported my successful forecasts of a dot-com bubble in '99-'00, a housing market collapse in '06, a credit crunch in '07, the resulting bailouts and "jobless recovery," and also the forthcoming flight from the US dollar and Treasuries. My willingness to make accurate predictions in the face of doubt from mainstream analysts was documented by a fan in the viral YouTube video "Peter Schiff Was Right."

Swedroe writes that "there are no good forecasters, just overconfident ones." Perhaps he simply hasn't met a good forecaster. I have been addressing gold naysayers long before precious metals became a target in the financial media. For video evidence, see this televised skirmish with Mark Haines on CNBC in 2005. More in depth analysis can be found in my past commentaries, including this from 2006 and these more recently.

So Swedroe's position is not new to me. The reality is that the period from 1980-2001 was a historical anomaly for the country operating the world's reserve currency. [Former Federal Reserve Chairman] Paul Volcker's dramatic interest rate intervention; a period of rising free trade, tax-cutting and deregulation; the rise of personal computing and the Internet; and the peace dividend from the fall of the Soviet Union all helped muffle U.S. dollar inflation - allowing it to become regarded as the ultimate "safe haven" asset by private and public investors worldwide.

Even so, much of the '90s boom was driven by easy money and paid for by economic malaise since 2001. Indeed, much of that inflation fueled gold's early rise.

Since 2001, the Fed has only doubled down on these foolhardy policies, and Congress has worked in tandem. Swedroe correctly connects gold's rise to negative real interest rates and concern over Washington's direction, but then suggests:

There's certainly the possibility that the inflation many fear won't materialize, the U.S. economy will get back on track, the Fed will end its current policy, and that real interest rates will revert to their mean.

Anything is possible. Investing is the art of determining what is probable and how it will affect the price of various assets. Swedroe never offers a mechanism by which a government with debts over 100 percent of GDP, a central bank growing only more dovish over time, a population demanding more and greater entitlements, and a Congress unable to permit spending cuts to which it had previously bound itself is going to accomplish this miraculous turnaround.

Does Mr. Swedroe expect the Fed to force the U.S. Treasury into honest default? If not, the default will continue to be accomplished covertly through devaluation, which will continue to drive the price of gold higher in dollar terms.

Understanding policy distortions and their inevitable influence on prices is the key advantage of Austrian School investors over the mainstream. When I examine an asset, I don't simply look back at average performance over my living memory. I consider the asset's economic utility and how that is likely to be affected by recent and anticipated events and government policies. I don't expect respect based on my credentials, but on my accuracy over time.

On that measure, I feel comfortable calling myself a good forecaster, as well as a confident one. As to the doubters, I'll quote myself circa 2006: "Noncommittal 'advice' conveniently allows advisors to have it both ways ... it is worthless to investors."

[LarryswedroeCBS]

quizibo
I wrote a response which should go up today and we'll hold him accountable for his forecasts, not allowing him to cherry pick. We'll let readers judge if Schiff is a good forecaster or just another legend in his own mind
Best wishes
Larry

[LarryswedroeCBS]

CRWILSO6
Before you judge I suggest you wait to read my response to Peter Schiff's comments.
Best wishes
Larry

[Quizibo]

Hey Larry,
Peter Schiff is a moron who is only still afloat because of his little cult. If you take an indepth look at his basket of investments you would see that if he didnt have the precious metals division (that popped up in the gold run) his firm would be over (most of his investments lose on average 40% of their value or go bankrupt).
It is also cute how he always refers to his 'Peter Schiff was right" video as if he thinks a few edited clips of him saying the same things over and over again makes him right at anything (it doesnt). If I keep saying that California is going to be hit with a disasterious earthquake everyday until it finally happens does that make me any more right? Lets not forget the numerous other people that actually predicted or saw the housing bubble coming; notably, Steve Keen (who won an award for it), Greg Mankiw, Paul Krugman, Goldman Sachs (who were shorting their own securities to cover the losses they knew were coming) and many more institutions. But lets give Schiff the benefit of the doubt, lets say he did see it coming and just didnt repeat the same thing over and over again and completely missed out on the bull market prior to make his customers money and the jump ship. What about all the other stuff he was wrong about (and there are many videos on the many, many things he is wrong about. Just go to youtube and in the search bar type in "***********" you will see over 800 videos of him making wrong calls over and over again)? The hyperinflation, the gold 2000 by the end of 2010, gold 5000 by the end of 2012, bond collapse, dollar collapse, defaults, China decoupling, shorting treasuries, stock market collapse, back to the gold standard, and numerous other things, lets not even get started his investment stragedy.
The man is a walking joke who keeps repeating the same things over and over and over again and when he is wrong, he doubles down and yells louder (e.g. after he wrote an article for the Wall Street Journal the editor had to retract it and make corrections because Schiff was wrong about the inflation data, so now he is on a media rampage trying to prove that CPI is being manipulated even though independent studies show nearly the same data as the CPI).
It is really quite sad.

[Quizibo]

they edited out the name of the channel. Its Schi t treport (eliminate the spaces)

[crwilso6]

Again, Schiff owns another unqualified "expert" blogger/analyst/economist. Peter is always honest about how crappy the economy is and the reality of how bad our debt has become.

[miguelgg]

It's no secret that Schiff has a company that sells metals to investors (Europac Precious Metals); so he personally benefits by telling people to buy gold:
On one side, he says: "The end is coming! Buy gold!"
On the other, he says: "I sell gold"
What strikes me is that if he's so certain that gold is such a great investment, he continues to get rid of it! Not only that, he's selling it in exchange of dollars! The very thing that he's been saying will collapse. Wouldn't it be cheaper for him if he just kept his gold for himself and become billionaire?
Oh, or maybe he's so rich now that he feels like he doesn't need more wealth, so he's selling his gold to benefit "others".
Yes, that's maybe why he does it. Out of the nobleness of his heart.