Peter Schiff on Gold and Money

There is no shortage of criticism of central bankers and their policies. But there is at least one thing that they are getting right, according to Peter Schiff, CEO of Euro Pacific Precious Metals: central banks around the globe are buying and holding more gold. And when it comes to that trend, Schiff advises investors to do as central bankers do, not as they say. Most people don’t own any gold, he said, and they need to start buying.

With over two decades of experience in finance, Schiff has taken on many roles. He is a financial commentator, a broker, and an adviser. Schiff is also an author. In a recent article, he wrote that he devoted a whole chapter in his latest book, The Real Crash: America’s Coming Bankruptcy – How to Save Yourself and Your Country, to the merits of the gold standard. That caught the attention of Gold Investing News (GIN).

In an interview, Schiff told GIN that publicly, central bankers talk about why they don’t like gold or think it’s a barbaric relic, yet they apparently want more of it. It is a trend that he believes will accelerate as central banks figure out that fiat, or paper money, needs something behind it, something tangible.

“It can’t be just a piece of paper,” he said. “Gold is the most logical choice as a reserve for the paper.”

GIN: What are you talking about in the statement, “global monetary order is on the verge of reset?”

Peter Schiff: I mean a collapse of the fiat-based system where the dollar is at the center and other currencies are backed by or pegged to the dollar, and the dollar acts as the primary reserve asset. That system has produced enormous global imbalances that are straining the global economy. Ultimately, I think the whole thing gives way and what returns is what existed prior to the dollar standard, and that is a global gold standard, which is the only thing that really works.

GIN: So you believe that paper currencies issued by various governments as they exist will continue, but they will be backed by gold?

PS: They won’t continue as they exist because right now they have no value. They are backed by nothing.

Most paper money initially existed as a substitute for gold. That’s what gave it value. But right now what gives a currency value is other currency. Most countries hold reserves and the reserves are other currencies. If you are a backing up the euro with the dollar, what’s backing up the dollar?

I don’t think it is going to go to a point where all you have is coins and bars of gold, but I do think that we are going to have to go back to a monetary system based in gold, not based on paper.

GIN: In what time frame do you foresee this happening?

PS: That is a little harder to try to pinpoint. You can’t know for sure. I do think we are experiencing the death throes of this system. You see what happened in ’08 to ’09 during the financial crisis and what’s going on in Europe and emerging markets right now.

You have countries that have lived beyond their means, with bloated governments, huge trade deficits, and people living off the government. Then you have others where poor people are working hard and underconsuming and their governments are buying all this debt and propping up the extravagant countries. All of this has to change. There’s a tremendous moral hazard involved with this system.

GIN: What has changed in central banks’ policies toward gold?

PS: Central banks are choosing to increase their gold holdings as a percentage of total reserves. They obviously think there is a reason to do that. It doesn’t make sense to back up one currency with a hoard of other paper currencies. There needs to be a real anchor there.

I think that central banks are well behind the curve. If you look at the percentage of above-ground gold controlled by central banks, it’s historically low. Hence the fact that central banks are trying to increase their holdings. They’ve got a long way to go to get where they need to be.

GIN: You pointed out that central banks have stopped selling gold. Other than concern about the devaluation of currencies, are there any other reasons that central bankers could claim that they have chosen to stop selling gold?

PS: That would be the only real reason. You have to have an opinion of the future value of gold in order to determine whether you want to sell it or hold on to it. Obviously if they are not selling gold that they had previously planned on selling it’s because they think the price is going up. If the price was going down they would sell.

GIN: If your theory is correct, why would a country, such as India, try to discourage its people from buying gold as opposed to one like Turkey, which is trying to incorporate gold into the broader monetary system?

PS: Most governments, not all of them, but most, certainly don’t want their citizens using gold. They want them in the currency that they are creating. When they are debasing money, or printing money, they are spending it and they want it to have as much value as possible when they originally spend it. Of course once they spend it, it will lose value for them and everyone else that holds it. But they need demand for their currency. They need as many people as possible holding it and transacting it. The more people that use gold, the harder it makes it. So they are naturally opposed to people trying to use real money as a replacement for what they are printing.

GIN: You said that because of their purchasing power central banks have an outsized effect on price. I suppose this means that when they are buying it provides a level of support for prices?

PS: Yes, when they’re buying there are more buyers in the market and that’s supportive of the price. The more buyers you have, the firmer the price is going to be. When central banks were selling it was a headwind the market had to overcome. Now it’s a tailwind that central banks are joining the buyers.

GIN: Why isn’t central bank buying providing more price support right now? Prices have been declining.

PS: It depends on how much they’re buying. I do think there is some private sector selling for these market conditions … liquidity needs, profit taking, etc. But at some point everyone is going to be competing to buy gold – central banks, investors, speculators, savers. Everyone is going to want it and I think the price is going to go a lot higher.

GIN: You mentioned that institutional investors are once again starting to see precious metals as a legitimate form of investment. What turned them off initially?

PS: The ’80s and ’90s.  You had 20 years where gold and silver prices did nothing but go down and stock and bond prices did nothing but go up. If you had your money in gold for those 10 or 20 years, you missed out on enormous gains. It was that track record for the money managers and portfolio managers that started their career in the  ’80s, which is when a lot of people came to Wall Street. By the end of the ’90s, with the Dow at 10,000 and the NASDAQ at 5,000, but gold at like $250 and silver at about $4, it basically pounded out any sense of optimism on the metals or why to buy them.

Over the past decade or so, you have seen the flip side of that as you’ve seen stock prices have come down a lot relative to gold. Now you are getting a change where people are more comfortable holding gold because in the rear-view mirror it doesn’t look so bad for gold. Bonds have not come down as much relative to gold, but I think the bond bubble is going to burst and will be falling for years too. And gold will look that much better.

GIN: Where do you think gold prices will go this year?

PS: I think they are going to go higher. Whenever it breaks out, it’s overdue, whether it’s this year or next year. Look at what has happened recently in agriculture prices. Look at soybeans, they have just taken off. There’s normally a pretty good correlation between soybeans and precious metals. And it’s not just soybeans, also wheat and corn. So I think it is going up and will go higher in 2013.

GIN: Are you also bullish on the miners?

PS: Absolutely. I think they are really cheap and they are a reflection of the general apathy out there in the investment community towards gold and the high degree of skepticism that professional money managers have for gold. Despite the performance they are not betting on a continuation of that performance by buying gold stocks.

GIN: You said when investors want to buy gold they need to buy bullion and avoid falling into the traps of buying numismatics or rare gold coins and other things. What is the case then for investing in miners?

PS: Miners produce the bullion. If there is going to be more demand for gold from investors and central banks, where is the gold going to come from? They have to dig it out of the ground and sell it. As the price of gold goes higher, their profit margins increase. So if you are very bullish like I am and think there is going to be a big increase in gold, it’s a huge opportunity for miners.

I think there are a lot of people out there that are speculating in the stock market. They have all kinds of tech stocks or social media stocks. If you want to gamble in the stock market, I would much rather gamble on a mining stock than a social media stock.

GIN: Are there any categories of miners that you suggest or discourage?

PS: The blue chip, or senior mining companies, are very cheap right now. They’re as cheap as I’ve ever seen them on P/E basis. For people who want to get started that’s the best way to go. They should have those before they start getting more aggressive.

Say all you buy is some exploration plays and they don’t do very well, it might turn you off, and you won’t want to invest anymore. If you start with the blue chips, you have the lowest probability of losing. And if you have a good experience, then you may want to move up the risk pyramid with some of the smaller producers.

Of course if you happen to time the market really well, you can make more money with some of these smaller companies, but for someone with no exposure I wouldn’t want to take the risk that they timed it wrong.

Securities Disclosure: I, Michelle Smith, do not hold any equity interests in companies mentioned in this article