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Peter Schiff and the Case for $5,000 Gold

Written By Geoffrey Pike

Posted December 23, 2015

With the recent Fed rate hike, a lot of predictions are being made. One prediction you won’t hear much of these days is higher gold – particularly that gold will hit $5,000 per ounce.

The Fed hiked its key rate on December 16 after being near zero for 7 years. The market had been anticipating this move for a while. In fact, it took a lot longer than expected.

There’s no question that this rate hike was already built into market prices to a large degree. Still, there was a lot of uncertainty on how markets would react and there still is. Stocks initially went up, but then took a big hit at the end of the week.

Gold had a bad day last Wednesday, and this just seemed like a continuation of a downturn for the metal. The price had already fallen below $1,100 per ounce and is expected to finish the year down.

A Fed that it raising its key rate is correlated with a tighter monetary policy. But really, the Fed has already had a tight stance for the last year, at least in regards to the money supply. The Fed has not been expanding its balance sheet since the end of QE3 at the end of October 2014.

This should all be bearish for gold, and in some ways it is. But that hasn’t stopped at least one person from calling for higher – much higher – gold prices. Peter Schiff appeared on CNBC the day after the Fed announcement and he was asked (not so politely) about his prediction for $5,000 gold.

Schiff stood by previous statements and said that gold is still headed to $5,000. Schiff gained a lot of notoriety when his prediction of a housing bust came true. But he has been very bullish on gold and bearish on the dollar, so he has taken a lot of criticism from some of the mainstream press.

This latest move by the Fed does slightly increase the odds for a recession or some kind of economic downturn. I am quick to point out though that the latest Fed announcement is not what will cause a recession. It was the extremely loose monetary policy from 2008 to 2014 that misallocated capital and savings that is ultimately responsible. Any Fed tightening just exposes its previous errors.

Schiff believes the declining economy will get worse and that the Fed will have to quickly reverse course next year. He predicts negative interest rates and a new round of digital money printing. He said that QE4 will be bigger than ever.

Timing Markets

When you examine people’s predictions, it is not that important to ask whether they will be right or wrong. Sometimes it is just better to ask if there is a reasonable chance that what the person is saying makes sense and could come true. And if that is the case, are you prepared for it?

From this perspective, I think people should pay attention to what Schiff is saying. The scenario he outlines is quite possible.

If you have ever studied Austrian school economics, the Austrian Business Cycle Theory explains how the boom/ bust economy works. When the Fed creates money out of thin air and sets interest rates artificially low, it misallocates resources and sets up unsustainable bubbles. Once the monetary inflation stops, or even slows down, the bust will ultimately follow.

The problem here is timing. There is always a lag effect. You can’t really predict when something is going to happen. While a recession in 2016 is a real possibility, I am not prepared to say that the Fed will be reversing course next year. Sometimes things take longer to play out than expected.

Sure, it doesn’t do any good to make really long-term predictions with short-term events. For example, I could say that we will get a recession sometime in the next 20 years, but that would be useless information. On the other hand, it would be silly to predict a recession in the next 3 months, as this time period is barely a blip.

So if I had to quibble with Schiff on one thing here, it is his prediction on the timing. It is not to say that he will be wrong, but just that we can’t really know when things will play out.

But the scenario laid out by Schiff is a scenario that is realistic and even probable over the next few years. If what he is saying comes true, is your portfolio prepared for this? Are you mentally prepared for this? These are really the questions worth asking.

As to his prediction for $5,000 gold, it again comes down to timing. I have absolutely no doubt that it will hit this level. I just have no idea how long it will take to get there. That would be less than 5 times its current price level. Gold went up five fold in about a 10-year period of time starting in 2002.

With the massive national debt and unfunded liabilities, there is little doubt that the government/ central bank will attempt to solve the problem – or at least kick the can further down the road – by using inflation as one of its main tools.

In other words, $5,000 gold is not only possible, but also very probable. It is just a question of when. If it happens sooner than most would expect, as Schiff predicts, are you properly positioned to protect your wealth or even profit from such a move?

We are going to have to see either QE4 or a massive increase in lending by the banks to unleash significant inflationary pressures, which is what will ultimately drive gold higher. A new bull market in gold will come. We will see $5,000 gold one day. It is just a question of when. It won’t be in 2016.