By: Peter Schiff, Euro Pacific Capital
The recent sharp decline in gold and silver prices may be panicking buyers, especially those who are new to the market. However, I have been actively accumulating precious metals for more than a decade, and from my perspective, given the volatile nature of metals, this type of action is par for the course. In my experience, every sharp decline has shown itself to be an opportunity rather than a warning.
There is an old expression that markets take the stairs up but the elevator down. In this case, it seems precious metals missed the elevator completely and just fell down the shaft. But this type of sharp decline can be characteristic of a bull market. However, these drops tend to shake out the leveraged speculators and those who have jumped reluctantly on the bandwagon. At the first whiff of uncertainty, these uncommitted investors throw in the towel, leading to increased volatility.
This kind of sentiment tends to be overly emotional and misses the big picture. This latest gold sell off was sparked by Fed Chairman Bernanke’s admission last week that Washington’s Keynesian stimulus has failed. He admitted that despite trillion-dollar deficits and a gross devaluation of the dollar, the economic picture remains bleak. As such, he outlined the Fed’s “Operation Twist” his latest stimulus effort. Taking the Chairman’s distress to heart, investors dumped “risk assets” like gold and silver. But stimulus is the very reason why we have been buying precious metals in the first place.
While the Fed has been careful to avoid describing the Twist as new stimulus, this is exactly what it is. It is a policy that was first tried, and failed, in the early ’60s. I’m sure that it will fail again. Instead of expanding the Fed’s balance sheet with fresh money printing, it tries to encourage more borrowing and lending by lowering long term interest rates. Right now, the move has restored confidence. But I don’t believe that it can last. When it fails, more quantitative easing will be unleashed.
In the meantime herd instincts seem to have taken over and many people are making bad decisions. They’re betting that the Fed has turned off the monetary spigot for good, forcing investors to “get defensive.” Losses from the recent broad stock market sell-off are likely generating margin calls, and many investors may be taking profits from their gold and silver investments to cover.
It’s my belief that they are as wrong now as they were when this happened back in 2008. The reality is that the US economy is most likely in the midst of a depression. I believe the Fed and the Administration are going to do whatever it takes to mask that fact – and their only tools are spending and printing. If the economy fails to revive, I believe many more banks will start failing. To prevent another highly unpopular round of bank bailouts (possibly termed TARP II), the Fed will likely launch its next round of quantitative easing (QE III). If I’m correct, the prospects for gold and silver should be bright.
Given the gains we have seen thus far in 2011, many people may have felt this bull market had gotten ahead of them. They may be lamenting a train that had left the station. Well, perhaps the train just stopped, and even backed up a bit. I don’t expect it to idle for long.
Remember gold is, in my view, temporarily losing its luster because the dollar is temporarily regaining some of its shine. But those buying dollars now are those who were surprised by the renewed weakness in the U.S. economy. They had previously sold their dollars to buy “riskier” assets that they thought would perform well as the U.S. and global economies recovered. As they concede their mistake, they are reversing those trades. They were wrong about the recovery and I think they are just as wrong about the dollar and gold.
It’s my opinion that a weakening U.S. economy is far more bullish for precious metals than a strengthening one. That is because the Fed is more likely to print money, and in larger quantities, when the economy is weak than when it is strong. And so, I’m convinced that the economy will slow against a backdrop of inflation rather than deflation. Gold and silver are traditionally the best hedges against inflation.
Viewed through this perspective, the current correction can be an opportunity to buy physical bullion. But don’t be cajoled into leveraged accounts or other gold sales rip-offs.
But if you’re looking to help protect your assets for the long-term, now may be the time. If you believe in the unreliability of paper money and the cluelessness of our economic leaders, don’t get caught in the game of trying to find the lowest possible price.
CEO and Chief Global Strategist
Euro Pacific Capital