The price of gold is priced at a little more than $1,700 (at the time of this writing). Last month, it hit a 10-month high of close to $1,800 per ounce. Goldbugs and financial experts have high hopes for gold and see it still far away from its peak – the same case can be made for silver bullion.
After it was announced that President Barack Obama would have a second term, gold prices fell nearly $10, but will this be a long-term trend? With the latest round of quantitative easing from the Federal Reserve and the monthly Operation Twist, many are expecting gold to hit new highs in 2013 and 2014 because of inflation.
Fed Chairman Ben Bernanke has claimed that Operation Twist, a one-year-old measure that consists of purchasing $400 billion of bonds with maturities of six to 30 years and sells bonds with maturities of less than three years, is revenue neutral.
However, Peter Schiff, former Republican senate candidate and President of Euro Pacific Capital, has a differing opinion. When Operation Twist was announced a year ago, he warned of the ramifications of low interest rates, which is something he has been doing on live television since 2005.
“Just as the Fed used its interest-rate-fixing power to make dot-coms and then housing appear to be viable long-term investments, they are now using QE3 Plus to conceal the fiscal cliff facing the US government in the near future,” wrote Schiff in his latest monthly newsletter.
“As the Fed extends the average maturity of its portfolio, it is locking in the inflation created in the wake of the ’08 credit crisis. Back then, we were promised that the Fed would unwind this new cash infusion when the time was right. Longer maturities lower the quality and liquidity of the Fed’s balance sheet, making the promised ‘soft landing’ that much harder to achieve.”
Other than monetary policy, adherers to the Austrian School of Economics also argue that low interest rates set a bad precedent when it comes to fiscal policy. Just like consumers, politicians will only think of the short-term rather than the long-term and create loads of debt for future generations.
Schiff added the contraction in precious metals prices is due to “election optimism and a misunderstood jobs report.” Despite the drop in gold, Schiff still advises to stay in gold for the long-term because “QE3 Plus” is providing a signal to increases in gold and silver in the near future – he noted that short-term developments are never reasons to invest in precious metals.
“When the Fed officially announces its commitment to QE3 Plus in December, I wouldn’t be surprised to see a much bigger rally,” explained Schiff. “For that matter, many are keeping an eye on the election outcome before making a move on precious metals.”
Jeff Clark of Casey Research explained in the same newsletter that gold is projected to hit $2,300 by Jan. 2014. How? Clark makes the correlation between the U.S. monetary base and gold prices by using long-term charts that show “one outperforms the other until the other catches up.”
Utilizing data from the Federal Reserve Bank of St. Louis, the correlation coefficient is +0.94 and since the monetary base is still expected to grow, gold will rise 30 percent within the next 15 months and possibly hit $2,500 an ounce by the end of 2014.
The U.S. isn’t the only one inflating their monetary supply. Other countries and their respective central banks, such as the European Central Bank (ECB) and the central banks of China, Great Britain, Japan and Switzerland, are all adding to their balance sheets and creating inflation.
“The largest economies of the world are all grossly devaluing their currencies. This will not be consequence-free. Gold and silver will be direct beneficiaries,” said Clark. “There are other consequences, both good and bad, of gold hitting $2,000 and not stopping there … The message from these likely outcomes is to continue accumulating gold – or to start without delay. Waiting will have consequences of its own.”
A couple of years ago, Schiff claimed that gold would hit $5,000 per ounce and though that has not yet occurred, he still stands by his comments.
In an interview with the International Business Times late last month, Schiff reiterated his projection of $5,000 per ounce. Noting that he has been buying gold since 2000 when it was at a very low price of $200, Schiff advises that anyone who wants to protect themselves against inflation should be buying gold right now.
“First of all it’s definitely not too late to buy, do not wait for Crash Proof 3.0 to buy Gold,” said the former economic adviser to the 2008 Ron Paul presidential campaign. “Given the fact that all what’s happens and all what’s likely to happen and that Gold is still this close to $1000 people should be buying. The fact that Gold is going up is the reflection of inflation and not just in America.”
In a separate interview with Yahoo! Finance’s Breakout, Schiff warned that the U.S. will most likely see a currency crisis, a sovereign debt crisis and higher unemployment numbers, an increase in food and energy prices and a rise in interest rates during the president’s next four years in office.
Schiff may not be wrong. Economic Collapse News took a look Wednesday at the president’s second term, which spells a $20.3 trillion national debt, a massive budget deficit, a vast increase in taxes and a sluggish economy.