Wrong Reason to Buy Gold

It’s among the most irresponsible and dangerous things I’ve ever heard someone say. It may even be criminal, because the reason he’s saying it is simply to enrich himself — at the expense of anyone who listens.

I would liken him to Bernie Madoff, but I don’t know if anyone is actually listening to this fool’s claims…

I’m talking about Peter Schiff and his incessant claim that the U.S. dollar is on the verge of collapse and that you should own as much gold as possible.

All too often, Schiff makes his rounds on the financial media outlets and spouts off about the U.S. dollar. He’s been doing this since the financial crisis, and he has been completely wrong. And he will continue to be wrong.

Anyone that acts on his advice is going to lose money.

Let’s take a look at a few of his comments from last week…

About the record-breaking U.S. dollar rally:

I’m surprised it’s rallied this much but that doesn’t mean it’s permanent… When traders wake up to reality and realize how wrong these [bullish dollar] bets are, they’re going to unwind these trades and the dollar is going to unwind quickly.

So far this year, the U.S. dollar made its sharpest move higher in nearly 20 years.

Schiff makes it sound like it’s unusual for the USD to move sharply. Truth is, that’s exactly how the dollar moves…

Big move down in 2007-08, big move up in 2008, big move down in 2009, big move up in 2010, big move down in 2010-11. This chart suggests that the flat period from 2012 to 2014 is what’s unusual, not the rally….

Seems like maybe you shouldn’t be surprised to see the dollar rally.

Schiff says traders will “unwind these trades quickly,” but he should know that it’s not just traders who deal in currency — companies do it all the time.

For instance, if Apple sells iPhones in Europe, it has to have euros.

Oil is often denominated in U.S. dollars, which means a non-American buyer has to get dollars first, then trade them for oil.

And when traders do “get out of the U.S. dollar,” they have to get into something. The purchasing power has to go into some asset, like another currency, a bond, a stock… something.

And when it comes to picking which something, the U.S. dollar is a top choice.

Is it perfect? No. But it’s safer than most other currencies, and the Treasury market is extremely liquid, so you don’t have to worry about getting in and out.

Is there another currency that’s better than the dollar? The euro? No way. China’s yuan? China has capital controls — you can’t just go buy yuan. The Swiss franc is a good one, but there aren’t enough of them to go around.

Schiff likes to make the moves in the U.S. dollar sound simple. They’re not. Currency moves are very complicated.

Is the Fed Evil?

Schiff doesn’t like the Fed, it’s clear:

When people realize we can never raise rates and it’s permanent QE, that the Fed can’t shrink its balance sheet and has no ability to control inflation – they’ll be no place to hide… The real move of the dollar is going to be a crash.

Yes, the Fed is always a hot-button topic. Just say the “F” word (Fed) at a social function, and you’ll hear all about how the Fed members don’t know what they are doing and should be audited/ended/jailed.

Unfortunately, Schiff’s comments are once again over-simplified and plain wrong.

It’s just not true that the Fed can’t shrink its balance sheet. Sure, it’s huge: $4.5 trillion. But that’s mostly short-term bonds. And when the bonds mature, you get your money back. All the Fed has to do is let the bonds on its balance sheet mature, and the balance sheet gets smaller.

Now, at the present time, the Fed is reinvesting the money it gets when bonds mature, thereby keeping its balance sheet from shrinking.

I’m surprised more investors aren’t aware that the Fed doesn’t have to sell bonds to shrink its balance sheet. Of course, Schiff knows this — but all he has to do is mention the “evil Fed” and people are ready with the pitchforks and torches.

People love to complain that the Fed has left interest rates at zero for too long. But what are the negative outcomes so far? Truth is, not all that much has happened. Housing prices haven’t ballooned. Stock market valuations are not extreme by any measure.

And finally, the whole notion that the “real” move for the dollar will be a crash and that the rally for the dollar is “fake” is just asinine. Price is what is. To suggest higher prices are fake because they go against your expectations is just dumb.

You Can’t Time the Market

Here are a couple more gems from Schiff…

On the timing of the dollar crash:

I don’t think it’s going to take decades [for the dollar to fall]… I’m surprised it’s taken this long… But I do believe the fact we’ve had to wait so long, it’s an even bigger pay day. All the problems have gotten bigger. The Fed has inflated the mother of all bubbles.

On what gold’s price will do:

Gold’s going a lot higher… There’s no real ceiling on gold because there’s no floor on the dollar.

Here’s the thing: I have no problem with gold right now. It’s been beaten up, and the mining stocks are downright hated. Some of them trade below their cash levels. And gold prices have been pretty stable.

What’s more, there’s no real catalyst for gold (aside from Schiff’s dollar fear mongering).

The contrarian in me thinks that so many negatives must mean gold — and especially gold miners — are a buy right now. And it has little to do with the U.S. dollar.

Fact is, if the dollar crashes, so will gold. That’s what happens in a crisis. Everything goes down in price. Remember what happened to gold in 2008-09? Prices fell from $1,000 an ounce to $700.

There’s an old saying: The market can stay irrational longer than you can stay liquid. The point of this is not that the market is irrational. Sometimes it is; sometimes it isn’t.

The point here is that when the market doesn’t agree with our beliefs, we call it irrational. And if you stick to your guns when the market is going against them, well, you’re going to lose a lot of money.

This is what Peter Schiff is asking you to do. He’s asking you to bet against the dollar. He’s telling you, “Hey, don’t make money in stocks, don’t collect dividends, don’t let proven wealth-building strategies like compound interest help you. Stick with me — we’re going to be right one of these days.”

I wouldn’t hold my breath if I were you…

The bottom line is this: Peter Schiff doesn’t care if you lose money following his ridiculous advice. He’s just trying to get new clients to sell stuff to. And he’s throwing out all the negative buzzwords he can to get you on board: the Fed, zero interest rates, QE, bubbles, dollar crash.

It is high time charlatans and snake-oil salesmen like Schiff got what they deserve — that is, to be ignored.

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.