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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DosZap's picture

You of course have the right to be here, and speak just like anyone else.

You also have the right to be 100% wrong, which you are.

It's kind of like cutting someones throat, ear to ear......

They cannot believe whats happening, even as it's being done.

But, the end result is the loss of life.

We have no leadership......................NONE.

The best leaders we have are on this site, and in our Military.

The 10sq mile block you trust,is the most evil 10sq miles on this planet.

spartan117's picture

Try carrying all that food with you when you need to leave.

When the South Vietnemese needed to flee their country after the North had won the war, they used GOLD to buy their way onto departing vessels to the west.  I doubt the captains of those ships accepted MREs. 

shortus cynicus's picture

your logic is absolutely correct: it is much wiser to accumulate guns and in a need just kill someone who accumulated gold. P/E ratio is much bigger. But it doesn't work well in some countries, take Switzerland as example. Here is one historical note: http://en.wikipedia.org/wiki/Swiss_mercenaries

 

goldsaver's picture

Good call. Sucks that I shoot back though.

 

SilverIsKing's picture

What you meant to say is, "Sucks that I shoot first though."

goldsaver's picture

Thank you for fixing it ;-)

Aristarchan's picture

Very efficient business plan. In a total breakdown, those with the means and the will to use them can take what they need and prevent others from taking their stuff.

treemagnet's picture

Anybody have a thought here - whats the best gold stock thats actually backed by gold?  I've read some critiques of sprott, any ideas out there?

haskelslocal's picture

Fiat money is only money because God says so...

As is gold only money because someone says so.  Is rock truly greater than paper?  

The next "new money" will be Oxycontin. Procure yourself a drug store.

goldsaver's picture

Wow, did you get that one backwards skippy.

Gold is money because it has been money in every civilization for six thousand years.

Fiat is money because the government said so.

Every fiat dies. Gold is always gold.

TheMonetaryRed's picture

And zinc is always zinc.

And nickel is always nickel.

And copper is always copper.

Why, even a child could understand it.

Gold to $1700.

Aristarchan's picture

 

BEIJING, Nov. 8 (Xinhuanet) -- Seigniorage is a very old-fashioned word making a sudden reappearance in the modern world. It follows close on the heels by the confirmation announcement that the second round of quantitative easing in the United States would proceed.

Seigniorage describes the situation where a government makes a profit through the increase in the amount of money in circulation. It happens when the government prints more money and then uses that money to buy its own debt - issued as bonds or treasuries. Then the government pays itself interest on the debt.

Seigniorage became a real issue just under a century ago in Germany during the period between 1919 and 1923. The Weimar government ran large budget deficits to fund the war reparations debt - the same debt that was finally paid off in full less than a month ago. The Weimar government in Germany kept interest rates far below inflation, expanded the money supply rapidly and raised 50 percent of government spending through seigniorage. Increasingly, investors and others fear the US is moving down the same path with an aggressive policy of reducing the value of the US dollar which will lead to domestic inflation.

One of the core problems of the US economic crisis is the mismatch between fiscal value and asset value. Generally there are two ways to bring these two values together. They are through the exchange rate mechanism or through currency debasement. The US is starting the electronic version of the printing presses so people will have cash to pay off the credit binge the US has been on for decades. Printing money on this scale is inflationary, and is potentially hyper-inflationary. This debases the currency.

The US is funding the budget deficit through seigniorage. In the United States, the Federal Reserve (Fed) is buying $75 billion worth of US Treasury bonds a month up to a total of $600 billion. The shift to gold is not just as a protection against a falling US dollar, but it is also an inflation hedge against the consequences of seigniorage.

Without doubt this will re-flate the US economy and the rise in the Dow Jones Industrial Average confirms this, but the cost to other economies may be substantial. The US market has cheered the Treasury plan, but movement in the US dollar index and gold tell a different story as frightened money takes an exit.

The first issue is to decide how far the dollar can fall before it finds support. The second question is to identify the barriers the dollar must overcome before it can rise.

The weekly chart of the US Dollar Index against a basket of currencies shows strong historical support is located near $0.745. This marked the low point for the dollar in 2009 October. This support level is the upper edge of a wide trading consolidation band. The lower edge of this band is near $0.715. This low level consolidation was reached between March and August in 2008. A fall below $0.745 has a downside support target near $0.715. In this situation after the fall the strong resistance level is located at the old support level near $0.745. The historical behavior of the Dollar Index suggests a move below $0.745 could lead to several months of rally and retreat behaviour between $0.715 and $0.745.

The Dollar Index has developed a fan pattern. This is defined by an upper and a lower trend line. The lower trend line acts as a support level and allows the dollar to slide down this line towards the next horizontal support level, currently near $0.745. The upper trend line acts as a resistance level with a current value near $0.78. A sustainable rebound in dollar strength is shown only when the Dollar Index is able to move above $0.78 and also break above the historical resistance near $0.795.

The probability of a strong dollar rebound is low and the trend suggests there is a high probability of a fall below $0.745. This consistent dollar weakness will be reflected in other currencies and will support a continued rise in the price of gold. A sustained debasement of the US dollar does not provide a structural solution to the problems of the US economy. The already low dollar has not translated into a significant increase in US exports and domestic demand can only be stimulated by more credit spending. The strong downtrend suggests support at $0.74.5 will not be successful.

Intentionally or not, many see the US Dollar Index chart echoing with the first shot of a currency war.

 (Source: China Daily)

StychoKiller's picture

Apparently, the dollar index is not the only determining factor for the price of Gold -- both moved up today! (Gold over $1405)

EscapeKey's picture

Gold just passed $1,400 (, bitches!)

 

NationalizeTheFED's picture

rock on! silver is going through the roof as well!

Aristarchan's picture

That is good to hear! The only gold I own is a Rolex watch and a Thai Bhat chain. I did however, inherit a large amount of silver - mainly in the form of vases, samovars and dish sets - and a whole lot of uncut gems. Nearly all of it was purchased back in the early '60's in the Middle East...not sure how much it is worth.

RobD's picture

1400/27++ Baby!

Clapham Junction's picture

Nice to hear an opinion from someone without a conflict of interest.

How many of these sales people do we have to endure?

zaknick's picture

Not even particularly insightful either.... bleh

EscapeKey's picture

Schiff's been saying this for years.

 

NationalizeTheFED's picture

"What if they gave a war and nobody came?"

 

good point! So the "barbaric" metal is actually the metal of peace!

MatrixSurfer's picture

Well, heres what bugs me.  I have been involved in the markets professionally since 1994, and virtually every time EVERYONE is on one side of an issue, its time to go contrarian.  My head tells me there is no alternative to a destroyed USD with the current policy, but my instincts are on alert for some reason, and a few days ago I have actually bought some UUP (for a short-term play) just because so many are certain it is doomed.  I know, I know....but I just hate stampeding with the crowd while it goes over the cliff.  Most here are happy imagining massive fed manipulation of all markets, (myself included), well, is it in the feds interest to devalue and/or destroy the only thing they can issue with wreckless abandon?  Can't they just as easily have a hand in manipulating the dollar as the bond market?  I admit to feeling a little thick this morning; someone, (anyone) out there much smarter than me care to comment? 

goldsaver's picture

I will certainly not claim to be smarter than you. That is 142IQ's territory. But I think you are looking at it the wrong way. What percentage of investment capital in funds and 401Ks, etc are in gold and silver? What percentage is in stocks and bonds? I would say that PMs are the ultimate contrarian call.

NationalizeTheFED's picture

IQ142? lol, this guy doesn't even understand the most basic things, but I guess this is normal for someone super-"intelligent".

goldsaver's picture

Damn, I forgot my /sarcasm tag again!!

NationalizeTheFED's picture

Your mistake is that you think that everyone is buying gold and other precious metals when that isn't the case at all. This is purely imaginary and just in your head. In the real world, only a small handful of people are actually buying precious metals, the vast majority of people have very few if any precious metals investments. Gold mania means that most of the financial news will focus on gold, and the stock market being almost irrelevant..you will hear people on the streets talking about gold, silver..and noone talking about stocks/real estates/bonds. THEN you will have to think about getting into something else.

iota's picture

As much as I've hated giving credibility to the foam mouthed conspiraloons, it all makes a little more sense when you start thinking of it all as serving the agenda of something supra-govermental.

TradingJoe's picture

I do love ZH and its poster but truth be told, ALL are in Gold or Silver, as greedy as the same people we condemn here! Means, all gold/silver holders want the dollar to go to hell so they can make a huge profit, but, what then...? Totally Ironic, eh? I am long PM's too but with a tight stop, I don't trust the FEDs at all, this is too much of a good thing with the QE2, my humble take is there will rather be a deflationary correction, let's call it crash, before any meaning full rally/leg higher can occur! I don't like this herd mentality, very dangerous! "Markets cheer $600B" forgetting what the consequences ARE! Too funny!

goldsaver's picture

ALL are in Gold or Silver

I wouldn't presume to speak for others, but I suspect that not all posters in ZH are in PMs. I am. Would you not consider me a hypocrite or worse an idiot if I posted here but did not practice what I preach?

Means, all gold/silver holders want the dollar to go to hell so they can make a huge profit, but, what then...?

We rebuild our lives on the other side. BTW, if you are long paper PMs, you are not long PMs, you are long paper.

tmosley's picture

I hate to tell you, but you are long on the promises of proven liars and charlatans, not gold or silver.

If you don't hold it, you don't own it.

Jean Valjean's picture

We don't want the dollar to collapse so we can make a HUGE PROFIT.  We want the dollar to collapse because it represents a flawed system and we are interested in TRUTH, LIGHT, HONESTY, FAIRNESS and JUSTICE.

medicalstudent's picture

i would happily lose all my precious money so i can keep my quality of life where it is.

 

if us holders get nominally rich it will be because everyone else will get poor.

 

get real.

 

the silver price is the apocalyptometer.

iota's picture

As an aside, I think the USD/CHF-AG/AU correlation might have decided to take the scenic route today.

*kicks self*

Big Corked Boots's picture

+1

related lesson: when things are going to blow, they will blow very fast.

 

Gordon Freeman's picture

PM/commodities can have a long bull market, the dollar can collapse, gas go to $10/gallon, etc. all without the absurd breakdown of social order being predicted here.

All the gun-totin', ammo stockin', wannabe Rambos here had better remember that the first time they shoot their neighbor because their paranoia finally gets the better of them, it's going to be the last shooting they ever do.  So go ahead--make their day...

Aristarchan's picture

Ok...Ok...how about just a little flesh wound?

goldsaver's picture

- but you have no arms!

- Is only a flesh wound

goldsaver's picture

all without the absurd breakdown of social order being predicted here.

 

You do know we riot when our favorite sports team wins right? L.A. riots (Rodney King), Katrina, etc, etc

What do you think will happen when people go hungry and can not buy food? You think we will be as calm as a Hindu cow?

If you are serious and curious, I could post more discussing how it is very likely to happen.

Calmyourself's picture

"If you are serious and curious, I could post more discussing how it is very likely to happen."

I am agnostic here not because I do not understand your point and mostly agree, but because the Government will clamp down hard and quick.  The response to the riots you mention above were half-hearted.  Sure the cops had some fun with rubber bullets and such but no real serious measures were taken.

Jrsurf00's picture

Though I agree with your forecasts for gold resulting from the current and inevitable currency manipulation by governments surrounding the globe, i find it conflicting to rigidly label gold as "money". It is a little too mercantilist for my taste; I am of the belief that wealth creation does exist and that there isnt just a geographical shift of wealth that takes place in global markets. 

 

that said, i appreciate your analysis

goldsaver's picture

Your taste or mine are immaterial in the context of 6000 years of history. In every civilization and in every continent, gold has been money.

Wealth creation is not impossible when gold is money. The greatest wealth expansion in the US happened between the War of 1812 and the creation of the federal reserve (discounting the interruption known as the Civil War). Gold was money in those days. Gold is money today.

Temporalist's picture

I agree with you one doesn't "need" gold it just facilitates transactions between individuals.  There are cultures that still exist without precious metals or "money" at all.  And as long as one has "capital", intellectual or physical or abstract, that someone sees as valuable they can barter for anything. 

Gold, silver, copper, they are simple and humans are simple that is why PMs are historically money.

Temporalist's picture

Oooo Bloomberg just said the dreaded D word...dollar and gold are decoupling.

"“Fiat money has no place to go but gold,” the former Fed chairman said at the Council, according to economist David Malpass, who quotes Mr. Greenspan in one of Mr. Malpass’ emails on the political economy.

Mr. Greenspan replied that he’d thought a lot about gold prices over the years and decided the supply and demand explanations treating gold like other commodities “simply don’t pan out,”

Said the former Fed chairman: “If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it.”"

http://www.nysun.com/editorials/greenspans-warning-on-gold/87080/

 

"the former Federal Reserve chairman noted that the economy was foundering under "a heavy weight of uncertainty" that government stimulus has failed thus far to soothe, and advocated tax hikes as a means of "lifting this pall." "I think that we have got a fiscal situation in which if we don't curtail it quickly, we're going to have very grave problems ahead," he said. "I just can't visualize how we're going to get to next February with the budget we have. We have essentially put on the books a level of commitment which I don't think we physically can bear.""

http://nymag.com/daily/intel/2010/09/alan_greenspan_scares_suits_at.html

scratch_and_sniff's picture

Yeah lets peg everything to gold, great idea... its not so volatile! since 2000 weekly price moves have been almost twice that of the yen/$! Yes lets peg the lot to gold and really find out how fucked we are.

goldsaver's picture

Well, I guess you showed us. After all, fiat currencies do not change in price and there is no need to track them by the minute with a stock ticker... oh wait.

Jean Valjean's picture

No, let's not, that way we can just remain fucked.

Tortfeasor's picture

Pricing dollars in terms of yen is like pricing dog shit in terms of cat shit.

MiningJunkie's picture

Ain't no fever like gold fever...