The US economy is a bubble, and it probably won’t be long before it pops.
That’s one of the statements Peter Schiff made at the recent International Metal Writers Conference in Vancouver. Speaking to the Investing News Network at the sidelines of the show, he added, “I think the bubble has gotten about as big as it’s going to get, and I think when this thing pops — look out. Because there’s a lot of air that’s going to come out.”
Schiff, who’s president and CEO of Euro Pacific Capital, believes investors need to be prepared for that collapse, and emphasized that they can get ready by securing assets that will do well when it happens. “People need to look for real safe havens,” he said, adding, “obviously gold is going to be one of the best safe havens around.”
In his opinion, “there is no limit to how high gold can go, because there’s no limit to how low the [US] dollar can go.” He explained, “it’s not really that the price of gold is going up, it’s [that] the value of paper currencies is going down, and you can measure that loss of value with the price of gold.”
Watch the video above to hear more of Schiff’s thoughts on the US economy and gold, including how he recommends getting exposure to gold. The transcript for this interview can be viewed below.
INN: We’re here at the International Metal Writers Conference, and you’ll be speaking later today about the economic bubble in America. It’s a complex topic, but could you talk a little bit about what an economic bubble is, and how we got one in the US?
PS: A bubble would be an economy that is really not sustainable. It is based on, in our case, artificially low interest rates provided by the Fed, and the extent to which the US is able to live beyond its means by borrowing money from foreign creditors to pay for products that [it] didn’t produce. So our economy is a bubble — it’s not a sustainable economy that is based on underconsumption and capital investment and savings, and production. It’s based on debt and consumption and cheap money. And I think the bubble has gotten about as big as it’s going to get, and I think when this thing pops — look out. Because there’s a lot of air that’s going to come out.
INN: Is that a thing that’s going to happen quite soon, or a little further in the future? Do you have a time frame for that?
PS: In the scheme of things it’s going to happen soon. When they write the history books about this time period, this is the time period where this bubble comes to an end. But whether soon is this year, or next year or even several years in the future, I can’t know that. In fact, I would have thought, had you done an interview with me, you know eight years ago, 10 years ago, I would have thought that the crash would have happened by now. But it hasn’t. Not because I was wrong about predicting it, but just because the bubble has gotten so much larger. Now, I never really put a time frame on it, and said, “oh, this is the year it’s going to happen.” Because I don’t know. But what I do know is that it’s coming. And I do think investors should be prepared for it.
INN: How should they be prepared? What do they need to be doing right now to get ready for that?
PS: They need to invest in the asset classes that will do well when this bubble pops. You have to recognize that the bubble really is in the US dollar, and dollar-denominated instruments, such as bonds that pay in US dollars, or financial assets that are priced in US dollars. And so people need to get protection from that. Although the US dollar isn’t the only currency that’s going to lose value, and America isn’t the only economy that has a bubble. But I think America’s is the largest. And so I think the most damage will happen to the dollar, and people that are investing in the US. So people need to look for real safe havens, which is one of the reason that I’m here at this mining conference — obviously gold is going to be one of the best safe havens around. And … there’s a lot of mining companies here that are actually going to be sitting on gold reserves that are going to be far more valuable in the future than they are today.
INN: Would you recommend buying some physical gold, buying gold stocks — a little bit of both?
PS: That depends on your time horizons, your risk tolerance … what your objectives are. If you’re just trying to preserve your wealth, then just owning physical gold is the way to go. If you’re trying to really grow your wealth, then you may achieve that with gold mining stocks. Of course, you could achieve the reverse. There’s a lot more risk in buying into a company that mines gold. And of course, there’s a lot of companies here that are exploration companies — they don’t even have gold, they’re hoping to find it. That’s even riskier than the companies that own it, and just want to get it out of the ground.
There’s a lot of complications. It might be that you have gold, but it may cost more to mine it than it’s worth when you’re going to sell it. But of course, that would change if the price of gold goes as high as I think — then some of these mining companies that can’t profitably mine gold at $1,200, with gold at $2,000, $3,000, $5,000, then all of the sudden it’s a different dynamic. Now gold that’s worthless because it’s too expensive to extract … now it’s very valuable.
INN: Do you have a gold price prediction? How high do you think it could go?
PS: There is no limit to how high gold can go because there’s no limit to how low the dollar can go, or other fiat currencies. So it’s not really that the price of gold is going up, it’s just the value of paper currencies that’s going down. And you can measure that loss of value with the price of gold. But, you know, there is a limit to how expensive gold will get relative to wheat, or oil, or copper or other commodities that historically have relationships with gold. You’re talking about real things. But there is no real value to any of these fiat currencies. They can all ultimately go to zero. And if the dollar is worth zero, then the gold price is infinite.
INN: We’ve talked a lot about gold, the US dollar and how they relate to commodities prices. But China has a huge impact on commodities as well. The country was just downgraded for the first time in quite a long time — can you tell me how that could play into commodities?
PS: I think ultimately the Chinese are going to be even bigger buyers of commodities in the future than they are today. And they’re already pretty big buyers. We’re here in Canada … China buys a lot of commodities from Canada. But I think they’re going to buy more when they finally abandon their currency peg. I think right now you have a lot of traders who have been betting against the RMB, and they have been shorting it. And that’s probably part of the reason that you have this downgrade. But I don’t believe that Chinese bonds are going to go into default. I mean, the Chinese are borrowing in their own currency, which they can create.
What you need to look at when you’re rating the credit of a sovereign is [whether they are] going to be in a situation where they create inflation. Like the US, lot of people will think, “well, you know, the US Treasury will never default on US debt, so therefore it should be rated triple A.” That’s not the point — even if we don’t default, we are going to inflate. It is impossible for the US government to repay its debts in money with purchasing power. So they’re going to end up defaulting through inflation. I don’t think that the Chinese are going to do that. I think Chinese government debt would be safer to hold than US government debt. When we hit this dollar crisis — and I think it’s coming — I think the really big move in the Chinese currency is going to be up, not down. And I think the speculators who are shorting the currency are going to end up losing a lot of money. And as that Chinese currency goes up, so too will demand for commodities from Chinese consumers that now have much more valuable currency to buy commodities. And so what will happen as the Chinese RMB goes up [is that] commodity prices in China will come down and demand for commodities in China [will go up]. And now China’s going to be importing a lot more raw material.
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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.