Speaking with GoldSeek Radio host Chris Waltzek this week, Euro Pacific Capital CEO Peter Schiff expects the re-inflation trade to dominate in an unprecedented way in 2012, as money mangers send oil, gold and other dollar-sensitive assets much higher in price, or at record prices, in their effort to flee the dollar.
In particular, the former U.S. senatorial candidate from Connecticut expects gold to reach its inflation-adjusted high of approximately $2,300 this year, citing the Fed’s reaffirmation on Wednesday that it intends to further suppress rising interest rates for another three years.
Schiff contends that the dollar will suffer greatly as a result, “fizzling” out of investor portfolios as the market realizes that the alleged dollar strength last year has been nothing but an illusion brought about by the euro’s relative weakness against the Greenback.
“In fact, it [U.S. dollar] is already fizzling,” Schiff told GoldSeek Radio. “In fact, it’s fizzling quite a bit today after Ben Bernanke basically said zero percent interest rates will be here until the end of 2014, so we got an extra year or so of zero percent interest rates. Although I think it [dollar collapse] is going to hit the fan before 2014, but, that’s got gold up $40 today [Wednesday].”
According to Schiff, professional traders will view the Fed’s most recent language as a signal that more debt monetization by the Fed is planned for 2012, with a lower dollar as the price paid for a Fed monetary policy of affecting artificially low interest rates in the U.S. Treasury and corporate debt markets. But Schiff doesn’t see how the Fed getting a free lunch from its actions.
Within 24 hours of the Fed’s statement of Wednesday, the USDX has already broken below its 40-month MA support of 79.72 and has accelerated downward on Thursday to 79.21 in early afternoon trading.
“They [Fed] have to create massive inflation to keep interest rates that low, especially as prices are rising, they will continue to rise,” Schiff added. “I think we could see record high oil prices this year. It’s clearly the consequences of all this money printing the Fed has to do to keep buying up the bonds to keep interest rates low.”
Schiff continued, “It’s reasons to buy more gold, buy more silver,” as a weaker dollar elicits more central bank buying of gold as a hedge against heavily-weighted dollar bank reserves.
While the euro was weak against the dollar throughout the second quarter of 2011, central banks began aggressively accumulating the yellow metal as its price, in dollar terms, dropped.
However, also during the second half of 2011, U.S. money supply has again stalled, according to economist John Williams of Shadowstats.com. That stall remains as the telltale signal to central bankers that the Fed, indeed, needs to step up purchases of future Treasury issuances, on top of maturing U.S. debt and illiquid mortgage-backed securities, if Bernanke has any chance of achieving his objective of negative real interest rates.
On Jan. 23, India-based The Economic Times stated, “The WGC, an industry-backed group, said in November it expected central banks to add some 450 tonnes of gold to their existing reserves in 2011, driven mainly by purchases from emerging economies that are seeking alternative investments to the U.S. dollar.”
Many gold analysts expect central banks to accelerate purchases of gold, led by China’s central bank, whose gold reserves continue to rise along with imports of gold from its principal supplier, Hong Kong.
Though Beijing reports its gold reserves at a considerable lag to its central bank’s activity in the marketplace, gold consultancy firm GoldCore reported earlier this month that China imported a record 102 metric tons of gold in November, as the that latest print shocked the gold community into reassessing their price targets for 2012.
GoldCore continues, “Informed speculation” suggests that some of Hong Kong’s gold exports to China include the People’s Bank of China, with one analyst telling Bloomberg following the news, “there is always the possibility that some purchases were made by the central bank.”
Gold’s $200 move off its bottom in December and breakout above the $1,700 point to a resumption of the gold rally. The gold pundits are wrong, according to Schiff.
Without naming any analyst in particular, Schiff suggested that talk of the end of the gold market bull, as heralded by economist Nouriel Roubini and Kitco’s Jon Nadler during the December plunge, is pure nonsense.
Data show that American investors own so little gold, which indicates to Schiff and gold expert Peter Grandich (in an interview with GoldSeek this week) that the gold price has further room to run much higher before the manic stage ends at a top.
“We’re a long way from a blow-off top that you would get at the end of a bubble,” Schiff said. “We might eventually get there, but we’re years away and thousands of dollars an ounce away.”
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