Distrusting the gold trade: A response

by Peter Schiff

(MoneyWatch) The argument between those who believe in gold as an investment and those who prefer to rely on stocks and bonds is an old one. It's a beef that can get heated, quickly veering from how best to make a buck into fundamental questions about how we order our economy and what we expect from our government. Gold enthusiasts criticize central bank "easy money" policies and see rampant inflation around the corner, while stock investors may well welcome low interest rates and a bit of inflation.

In a recent post, MoneyWatch blogger Larry Swedroe cautioned investorsto be wary of forecasters' predictions about the precious metal, a position he has taken in columns going back to 2009, during which time gold has outperformed stocks. Swedroe's last post post prompted this response from noted investor Peter Schiff, CEO of EuroPacific Precious Metals, a bullion dealer based in New York, who believes the U.S. is living beyond its means and is heading for financial catastrophe, making gold a necessary investment. This is Schiff's response to Swedroe's column.

In an article entitled "Ignore the 'buy gold now' crowd" on CBS MoneyWatch this Monday, columnist and equities analyst Larry Swedroe criticizes forecasters who remain bullish on gold despite its monumental decade-long run.

He links to an interview in which I forecast that gold will rise above $5,000/oz before this bull market ends. Unsourced, Swedroe modifies my prediction to $2,300/oz by the end of 2013. While I typically forecast overall market direction rather than timing, I'm fairly comfortable with the words Swedroe put in my mouth. I believe gold will continue to rise and close 2013 significantly higher than present levels, and I'm invested accordingly. What I find most disconcerting in Swedroe's piece is everything that follows. He goes on to question both a) investment forecasting as a practice and b) gold as an asset in general.

Swedroe starts by warning that forecasters are not to be trusted. He "doesn't recall" any forecasters advising clients to invest in gold at the lows prior to 2003. Fortunately for my clients, I was making that very recommendation at that very time. I have continued my bullish call unwaveringly for the entire bull market, not because of a "religious belief" in the metal, as Swedroe alleges in the comment section under his column, but because the fundamentals driving the market have only become more pronounced.

My stance on gold is founded on the same logic that supported my successful forecasts of a dot-com bubble in '99-'00, a housing market collapse in '06, a credit crunch in '07, the resulting bailouts and "jobless recovery," and also the forthcoming flight from the US dollar and Treasuries. My willingness to make accurate predictions in the face of doubt from mainstream analysts was documented by a fan in the viral YouTube video "Peter Schiff Was Right."

Swedroe writes that "there are no good forecasters, just overconfident ones." Perhaps he simply hasn't met a good forecaster. I have been addressing gold naysayers long before precious metals became a target in the financial media. For video evidence, see this televised skirmish with Mark Haines on CNBC in 2005. More in depth analysis can be found in my past commentaries, including this from 2006 and these more recently.

So Swedroe's position is not new to me. The reality is that the period from 1980-2001 was a historical anomaly for the country operating the world's reserve currency. [Former Federal Reserve Chairman] Paul Volcker's dramatic interest rate intervention; a period of rising free trade, tax-cutting and deregulation; the rise of personal computing and the Internet; and the peace dividend from the fall of the Soviet Union all helped muffle U.S. dollar inflation - allowing it to become regarded as the ultimate "safe haven" asset by private and public investors worldwide.

Even so, much of the '90s boom was driven by easy money and paid for by economic malaise since 2001. Indeed, much of that inflation fueled gold's early rise.

Since 2001, the Fed has only doubled down on these foolhardy policies, and Congress has worked in tandem. Swedroe correctly connects gold's rise to negative real interest rates and concern over Washington's direction, but then suggests:

There's certainly the possibility that the inflation many fear won't materialize, the U.S. economy will get back on track, the Fed will end its current policy, and that real interest rates will revert to their mean.

Anything is possible. Investing is the art of determining what is probable and how it will affect the price of various assets. Swedroe never offers a mechanism by which a government with debts over 100 percent of GDP, a central bank growing only more dovish over time, a population demanding more and greater entitlements, and a Congress unable to permit spending cuts to which it had previously bound itself is going to accomplish this miraculous turnaround.

Does Mr. Swedroe expect the Fed to force the U.S. Treasury into honest default? If not, the default will continue to be accomplished covertly through devaluation, which will continue to drive the price of gold higher in dollar terms.

Understanding policy distortions and their inevitable influence on prices is the key advantage of Austrian School investors over the mainstream. When I examine an asset, I don't simply look back at average performance over my living memory. I consider the asset's economic utility and how that is likely to be affected by recent and anticipated events and government policies. I don't expect respect based on my credentials, but on my accuracy over time.

On that measure, I feel comfortable calling myself a good forecaster, as well as a confident one. As to the doubters, I'll quote myself circa 2006: "Noncommittal 'advice' conveniently allows advisors to have it both ways ... it is worthless to investors."