Gold and silver continue to struggle with significant selling pressure. Last Friday, gold dropped some $40 as bond yields rose yet again. There continues to be this expectation that rising inflation and economic growth are going to force the Fed’s hand and cause it to pivot to tighter monetary policy sooner than expected. But in his podcast, Peter Schiff reminds us that inflation is not a threat to gold. And he says anybody betting against the yellow metal and on the dollar is going to lose.
The yellow metal is down 9% on the year and about 17% from the high last August. The catalyst for the sell-off in gold has been the sell-off in the bond market. Bond yields continue to spike. On Friday, the yield on the 10-year Treasury pushed as high as 1.61% and the 30-year hit 2.4%. Peter said it was one of the biggest interday moves in the bond market that he’s ever seen.
Gold and silver have been pressured because of the mainstream view that the selloff in the bond market is a sign of economic growth and the Fed will have to respond to inflation with monetary tightening sooner than expected.
Some of the economic data seem to support the growing economy narrative. Personal income shot up 10% in January. But as Peter pointed out, the big jump in personal income corresponds with stimulus checks arriving in the mail. If you back out all of the government transfer payments – welfare, unemployment, etc. – personal income actually declined in January.
So, people actually earning money - that went down. But people receiving checks from the government, that went up. But that is not how a strong economy is made. You don’t have a strong economy by printing money and sending it to people who aren’t working. You build a strong economy when people are employed productively making things or providing services. That’s not what we’re doing. This is not economic growth.”
And of course, there is more stimulus coming down the pike. The House has already passed the $1.9 trillion stimulus plan. As Peter put it, the checks are all but in the mail.
The only reason they don’t bounce is because the Fed is printing money. … This is not a strong economy. This is a gigantic bubble. But people on Wall Street can’t differentiate between a bubble and genuine economic growth.”
Peter also pointed out that despite the fact nominal interest rates are rising, real interest rates are actually falling. Inflation is accelerating faster than interest rates. And short-term rates remain at zero.
I don’t know where people got the idea that what affects the price of gold is the yield on a 10-year Treasury or the yield on a 30-year Treasury. That’s not it. There’s a lot of risk when you buy that far out on the yield curve, especially when rates are this low.”
The rate that’s important when contrasting it with gold is the overnight rate – the Fed funds rate.
That is stuck at zero and it’s not going anywhere.”
Federal Reserve Chairman Jerome Powell keeps telling us that. During testimony before Congress last week, Powell said he thought it would take three years to get to the 2% inflation target. This despite the fact that the recent University of Michigan sentiment numbers revealed consumers expect 3.3% inflation in the coming year.
Consumers are wrong. Inflation is likely to be much higher than 3.3%, but at least they’re closer to it than the Fed.”
Meanwhile, Wall Street continues to focus on the fact that this is somehow bad for gold.
When we had the big selloff in bonds that spiked yields, last week, the stock market finally reacted with a big sell-off Friday. That breathed a little life into the bond market as investors bought Treasuries as a safe haven. Peter said they should have been buying gold, but they sold that too.
Gold is the real safe haven if you understand the real threat. The real threat is inflation. And low-yielding US Treasuries – buying a 10-year Treasury at 1.46% … there’s no safety there. That is a negative real yield. You need to buy gold. But traders haven’t figured this out. They’re still using a playbook that no longer exists, and they don’t understand or appreciate the situation that we’re in. They all expect the Fed to fight inflation. It’s impossible. They can’t fight inflation. They’re going to surrender without a fight. Inflation is going to win, and anybody owning dollars is going to lose. And anybody betting against gold is going to lose.”
Peter also reminds us that at some point, rising interest rates will tank the stock market. Higher interest rates are particularly problematic for growth stocks. What will the Fed do if the stock market crashes? We’ve already seen how the central bank responds to a plunging stock market. It will ride to the rescue with more quantitative easing.
When it happens, it’s going to be a stampede out of the dollar and a rush to get into gold, which is why people should be buying the dips now. Don’t worry about it. If people who don’t understand where we’re headed are doing the wrong thing, you just keep on doing the right thing.”