Peter Schiff Explains What Currency War Will Mean For Gold

Tyler Durden's picture

From Peter Schiff's Gold Report

The Currency War - Good For Gold

As the world awaits another $500 billion flood from Bernanke's printing press, central bank governors from Brasília to Tokyo are preparing to respond in kind. This is the monetary equivalent of a nuclear war, except instead of radiation, bombs of inflation threaten to make the world economy uninhabitable for saving and productive enterprise.

While much of the attention has been focused on China and accusations that it is a "currency manipulator," the first shot in this war was clearly fired by the US Federal Reserve. Last month, the Fed came out with a statement that, for the first time ever, said inflation is rising at a rate "below its mandate." That is, they acknowledged that the deflation threat had passed, that prices were stable - but they still intended to send prices higher.

Since the Bretton Woods Agreement was signed in the wake of World War II, the global monetary system has been based on the US dollar. This means that when the Fed decides to create trillions of dollars of inflation, other countries can't simply say, "let them dig their own grave." Instead, because their international transactions are denominated in dollars, they feel a pressure to maintain relatively stable exchange rates between their currencies and the dollar.

Most countries do this informally and have their own (bad) reasons for maintaining a certain level of inflation. China, however, is more literal in its devotion to the dollar system, perhaps due to its psychology as a new arrival on the world stage. So, in recent history, the People's Bank of China has largely maintained a "peg," by which it currently offers to pay 6.8 RMB for every dollar deposited, no matter how many extra dollars the Fed prints. To put it another way, China, and to a certain extent the entire world, is on a Dollar Standard -- like the Gold Standard, but based on another fiat currency instead of a precious metal.

What this also means is that China does not intentionally devalue its currency against the dollar, but only to keep pace with the dollar. Chinese Commerce Minister Chen Deming said as much in an interview on October 26: "Uncontrolled" issuance of dollars is "bringing China the shock of imported inflation." Most emerging markets are the same way. In order to prevent rapid economic dislocations, and often to appease their powerful export lobbies, these countries seek to maintain a status quo versus the dollar - whether through inflation as with China or capital controls as with Brazil and South Korea, or both.

In short, the currency war is really just the rest of the world trying to shield itself from a barrage of nuclear dollars.

The end result is that the entire civilized world is locked in a race to inflate, and no fiat currency is truly safe. In my brokerage business, I advise clients to buy companies - not currencies - in countries that I believe will thrive in the war's aftermath. China could dump the peg tomorrow and, after a period of adjustment and write-offs, would continue to grow apace. The UK, on the other hand, is happy to be locked in a competitive devaluation as it helps the government avoid imminent default while it puts through budget reforms. But regardless of their strategic positions, all major central banks will likely engage in some money printing to keep their currencies level with the rapidly devaluing US dollar - until the greenback loses its reserve status. (This may happen sooner than later, if an agreement this month between China and Turkey to stop using dollars in their transactions is any indication.)

As the Fed seeks to blow up the global monetary system, I take comfort in the fact that gold cannot fight a currency war because it is not a currency. Gold is money. Currencies used to be backed by money until the global fiat system was introduced under President Nixon. Fiat currency can be printed at will until the economy collapses, as has happened many times in history. Money is impossible to devalue at the whim of politicians because it is naturally scarce. Even in the ruins of Europe after the Second World War, when there was no central authority and chaos reigned, an ounce of gold was worth what it always had been.

If we are witnessing a fight to the death among fiat currencies, then gold is surely the Red Cross - a peaceful arbiter and source of mercy for our accumulated savings. While I do believe that life will go on after this war, as with all others, the thought of the world's savers all hiding their assets safely in gold brings to mind the old question: What if they gave a war and nobody came?

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Anal Picnic's picture

I'll start buying dollars when the paper they are printed on is worth their face value.

tired1's picture

Anyone have insights as to how Russia will be affected. Read lask week that China/Russia were seeking to trade directly with their own currencies.

Charley's picture

Debasing currency from gold was the first form of QE. Gold allowed a floor to be put under interest rates because, while it didn't pay interest, even in the form of a hoard it carried an effective interest rate of zero. Debasing the currency allowed government to impose negative real interest rates on savers. These savers were then forced to loan their money to Washington as the next least risky form of savings wioth at least a zero rate of interest.

The current round of QE is doing the same for savers who hold their savings in the near money form of treasuries. Buying up the treasuries allows Washington to place an effective negative interest rate on them. Savers will be moved out of US treasuries and into other-government debt -- see China in Portugal. The point is to force China to save in riskier assets. If inflation rises, these riskier forms of debt will be squeezed.

Although no one will admit this, in post-war economic theory, savers are the problem...

Charley's picture

Of course, when the savers are national entities, we call them mercantilists... i.e., China, Japan, Germany, etc...

DosZap's picture

"Although no one will admit this, in post-war economic theory, savers are the problem..."

No ain't dat a biatch?.

The RESPONSIBLE humans are the problem.

Who would have thought,doing,living a proper quiet, and fiscally responsible lifestyle would cause you to be the cause of the FIAT systems destruction.'s a the same slimy,greedy, theiving SOB's that have been the issue since the dawn of time.

jellydonut's picture

What about silver?

Ragnarok's picture

It will return to its historic exchange rate with gold of ~15-20:1.

BigJim's picture

That is the usual ratio given for silver:gold in the earth's crust.

But given that silver is used up in industrial applications, and gold isn't (virtually all the gold ever mined is still in usable existence, whereas most of the silver ever mined is to all intents and purposes gone forever) it's quite possible that the ratio will be even lower.

masterinchancery's picture

Particularly since the very limited world supply of gold will be under heavy pressure if gold starts to be acquired by the masses.

Clark_Griswold Hedge Mnger's picture

silver is doing nicely, thank you.

SLW has been really nice to me lately, can't imagine it has anything to do with POMO /sarc/

SWRichmond's picture

I am also loving my SLW.  Oh, and BTW, HL is up a buck as I write this.  12.6%.  Today, bitches.  Wanna know how many shares I own?  Muahahahaha.

TheMonetaryRed's picture

"Even in the ruins of Europe after the Second World War, when there was no central authority and chaos reigned, an ounce of gold was worth what it always had been."

Yeah, and real estate always goes up in value. 

EscapeKey's picture

Constant exponential growth != static value.

TheMonetaryRed's picture

What in the world are you talking about?

EscapeKey's picture

Peter Schiff is talking about an ounce of gold retaining its value. You are equating that to house prices always rising = perpetual exponential price development.

Those are not the same.

TheMonetaryRed's picture

No, what I'm talking about is that neither gold nor houses "retain" value because they're valued in an evolving marketplace. They don't have any value other than the value people assign to them.

Schiff is just another Wall Streeter talking his book.

redpill's picture

Did he run for Senate just to "talk his book" too?

Comparing the real estate bubble to the current gold price demonstrates a complete misunderstanding of the role of gold through much of human history.


Eman Laer's picture


No, what I'm talking about is that neither gold nor houses "retain" value because they're valued in an evolving marketplace. They don't have any value other than the value people assign to them.

You could also say that food doesn't "have any value other than the value people assign to them". 

Schiff is just another Wall Streeter talking his book.

I think you don't know much about Peter Schiff.


medicalstudent's picture

i would have thought the people who disagree with peter schiff would not have survived this far in evolutionary time.


i would have been wrong today.


but what about tomorrow?

7againstThebes's picture

   <i>They don't have any value other than the value people assign to them.</i>

Of course. "...tis nothing good nor bad but thinking make it so."  The value of an ounze of gold goes up and down all the time.  Schiff's point is that the price of gold is not vulnerable to the schemes of politicians. On the other hand, the price of gold is extremely sensitive to the actions of politicians, which is a bit of a paradox.  Gold can't be bossed around, which is why it is not liked by political authority.

goldsaver's picture

Ah, but grasshopper, is gold's price volatile because gold is volatile? Or is the price volatile because fiat is volatile? There are two sides to every exchange. You must not limit your analysis to a single side.

The value of an ounce of gold, as compared with goods/services/products (purchasing power) has been stable for thousands of years. It is the value of the fiat that has changed.

Absinthe Minded's picture

Bingo! I think we have Bingo here!

masterinchancery's picture

gold is an efficient, low-cost store of value without significant carrying costs. Real estate is a consumer good with very high carrying costs and great exposure to confiscation in most societies. No comparison.

Bill Lumbergh's picture

Any money manager who publishes or interviews talks their book by default...why would you expect someone to espouse a certain belief system and invest their funds in a noncongruent manner?

Charley's picture

In the ruins of Europe there was a shortage of everything. Now, there is surplus productive capacity in everything. This is not post-war Europe! Make money by understanding the real -- not wishful -- situation.

lolmao500's picture

I don't have gold. Know why? I prefer have years of food, ammo and guns then gold.

goldsaver's picture

They are not mutually exclusive, I hold both. It is called diversification. I have a year worth of staples (sugar, grain, salt, rice, beans, etc), a side/long arm for every family member, 1k rounds of ammo per firearm. Water filtration and first aid kits. I also have gold and silver. Why? There are 3 possible outcomes in the current FUBAR environment.

1. Slow stagnation. Think Carter years or Japan. In that case, violent crime will rise due to anger, opportunity and hunger. Foodstuffs will be available, but at a much higher price. Unemployment is a very likely possibility. Under that scenario, food is stored to feed my family and sidearms would be necessary. PMs can be slowly sold for inflated dollars to buy necessities in case of unemployment.

2. Temporary hyperinflation / market disruption. Several months of empty shelves, no money available for purchases and rioting in the streets until a new currency is issued. Again, beans, bullets and band-aids very useful in this case. Gold and silver would serve as a bridge to safeguard my wealth until the new currency is issued and as a monetary unit to purchase things that I might not have thought of, pay for services I might need (dental work or mechanical work in cars, etc) and as a means to purchase BK property for farming or production after the collapse.

3. Mad Max. All of the above plus PMs would be useful for safe passage out of the country. Airplane tickets, bribes, etc. Start over elsewhere.

TradingJoe's picture

Man, I cannot but love this insane fatalism, where the heck is it coming from?!

Rich V's picture



The daily news headlines?

masterinchancery's picture

Well put. Gold and silver provide protection against the black as well as the grey Swan event.

redpill's picture

Exactly.  The reason I own physical gold and silver is not because I know what is going to happen, rather I own it because I don't.

Obama2012's picture

i dont have gold because i have faith in our leadership. you people are crazy if you think the world is going to end or the dollar is going to die. we have the best military stationed in all the right places. as much as you people hate obama because he's not like you at least he's keeping america's priorities straight. stop letting poor people suffer at the hands of the rich, promote education and healthcare, secure resources. things are finally back on track

-Michelle-'s picture

You are quite the skilled satirist.  Not capitalizing your letters is a fine touch.

Absinthe Minded's picture

Is satirist synonymous with assclown? This guy is the administrations wet dream, another dolt watching CNN not even realizing our dollar is going right down the shitter! Wake up! Gold isn't in a bubble, FRN's are in a tailspin. Guess who has all the parachutes?

-Michelle-'s picture

Just giving him the benefit of the doubt.  I prefer not to think that anyone could actually be so willfully ignorant.

goldsaver's picture

Wow, really? I must have missed the /sarcasm tag, please try again.

If you are serious, welcome to reality. You must choose between the red pill or the blue pill, the choice is yours. If you choose the red pill we can only show you how deep the rabbit hole goes, nothing else. What you do is up to you. Stick around a few weeks. Read daily what is been said in these pages. Then ask yourself, if I prepare for a disaster what is the worst that can happen? Food can be eaten, ammo shot at the range and PMs can be sold at a profit. But if you don't prepare and we are right, what will happen to you and your family?

Are you ready to trust your life to the same FEMA that ran post Katrina ops? Or the same leadership that dealt so efficiently with the BP oil spill? Would you trust the people at the DMV with your life?

Obama2012's picture

you know how many times i've heard about the end of the world in my life? know how many times it's happened? exactly

you people need to chill out, theres been enough senseless death in the past due to doomsday cults. if thats really your thought why are you on the internet? go buy some purple nikes and build a cabin in the woods

SilverIsKing's picture

Obama2012: "you know how many times i've heard about the end of the world in my life? know how many times it's happened?"

SilverIsKing: "do you know how many times the end of the world happens?"

DaveyJones's picture

you're right, it will never happen to us because we're different, and we have a big army and a big strong government. History has no examples. "/

goldsaver's picture

Wow, you are serious. Why do you frame reality to your lifetime? Did civilization not exist before your birth?

OK, first lets define couple of things. TEOTWAWKI is different for every person. Mad Max might happen, eventually, but it might not. So lets look at other possibly disruptive events that would impact you life and decide, are you ready for them?

Do you live in a flood area? Do you have sand bags just in case?

Do you live is a hurricane area? Do you have a generator, food and water, some candles stashed in a drawer, just in case?

Could you loose your job and be unemployed for 6 moths? Do you have a bit of savings to tie you over?

The end of economic world has happened many times in the past. Wiemar, Chile, Argentina, Zimbabwe are some recent examples. Here in this country we have gone thru the dust bowl era, soup lines, the seventies inflation. Are you so dense that you do not believe that either of those could happen here? Do you believe that our government is much more efficient than the governments of Germany post WWI, Chile and Argentina?

Every empire fails. Phoenician, Greek, Roman, Egyptian, Ottoman, British, French and the US. Always painfully and with great disruption. Are you ready for it?

Do you truly believe that disruptions to the supply chain are impossible? That oil can not go to $300 a gallon? That fiat currencies can and always do fail?

We are not a doomsday cult. Quite the opposite. We refuse to drink the kool aid. We are not here to wait for the end so we can die. We are preparing to live and prosper.

Warning, I (since I would not presume to speak for others here) will not feed you, clothe you or shelter you. I will try to teach you how to fish. If you don't do it, you starve.

DocLogo's picture

There's a big difference between "the end of the world" and the end of a world order. World orders fall and collapse all through history. Italian people still exist. The Romans, however, are no more. I think the sentiment here on this site is preparing oneself for the transition from dying empire to what comes next. We all know the world will be here for billions of more's us we are worried about.

quasimodo's picture

Why bother? He/she has most likely took a lethal dose of kewl aid at this juncture

Spalding_Smailes's picture

promote education and healthcare, secure resources


Education for what ? How to stack boxes at walmart,target and the debt you take on for the education ... ugggg, how about a long term focus on job growth in the u.s.a and not giving out hand jobs in india ....

Obamacare = Business albatross ...

Securing resources ? The trillions he has spent has secured inflation in food,oil, ect ...

His trillions are used prop'n up fail'd assets for the banks.

StychoKiller's picture

Dontcha just love how the Govt always comes up with these nifty programs to "help" us with our problems?  They're so nifty in fact, that the Govt is gonna make them MANDATORY, because no one in their right mind should be deprived of the program's usefulness by making it voluntary!  What a crock!

mtomato2's picture

Everybody relax.

This assclown has been around less than two weeks.


"Look what I found, mommy!  Can I keep him?"  "No, child, not unless you want to clean up after him..."


digalert's picture

"i have faith in our leadership"

Thanks, I needed a good laugh today. In fact, why don't you put your faith right where you keep your hope and change stash.

StychoKiller's picture

I too have faith, in fact I have certainty:  The Govt WILL ALWAYS come up with a way to make my life MORE MISERABLE!

ThreeTrees's picture

It's a good thing this is a comment thread on the internet, cuz if you had to speak that big statist dick in your mouth would make you unintelligible.