Gold and Gold Stocks are the
Best Bets, says Peter Schiff
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and Financial News
By Marc Davis, BNW Business News Wire
Gold prices are poised for a “spectacular” and prolonged
rally as the recession deepens and investors finally become disillusioned with
the U.S. dollar.
So says renowned Wall Street financial
forecaster and economist Peter Schiff, who loudly warned of the October 2008
stock market crash and accompanying recession as far back as 2006.
Since the global economic meltdown, the
president of the Connecticut-based investment firm Euro Pacific Capital has
struck a chord with rattled investors who have lost faith in America’s bedrock
financial institutions. Hence, his well-received television media blitz in
recent months has focused on extolling the virtues of owning gold bullion or
gold equities, as well as urging Americans to get out of U.S. denominated
In a recent on-camera interview with BNW
Business News Wire, Schiff suggests that the looming prospect of a
hyper-inflationary environment in the U.S. will severely debase the greenback
over the next few years. And the global investment community will realize that
gold represents the ultimate “store of value” as a safe haven replacement for a
discredited U.S. dollar.
Hence, gold bullion and gold-related
investments, such as gold equities, will prove to be the best way to shield
one’s money from the ravages of a protracted and severe inflationary
environment, Schiff says.
“If you really want to grow your wealth, you
should own gold in the mining sector,” he adds, while also suggesting that gold
equities (companies that are already in production) offer the greatest leverage
to rising gold prices.
“With gold stocks, there’s obviously a lot of
leverage to higher gold prices. As millions or billions of people discover gold
as a store of value and as a way to escape inflation, there’s going to be
tremendous demand and somebody’s going to have to supply that demand. It’s
obviously going to have to be mined,” he says. “So the companies that have gold
and mine it are going to see profit margins explode.”
This extraordinary scenario will be
accentuated by two key developments, Schiff says. One of them concerns the fact
that burgeoning demand for gold will continue to outstrip annual global output.
In fact, world gold production has been steadily declining since it peaked in
2001 in spite of a nearly U.S. $600 rise in gold’s price since then.
“Mines are not as productive as they used to
be. Supply is very constrained. So if we get a big increase in demand, there are
really no significant new gold deposits that are going to come on-stream any
time soon. So the companies that are already producing are simply going to be
able to get a lot more money for the ounces that they pull out of the ground,”
The other key consideration is an inevitable
return to the ‘Gold Standard’ as a way for the world’s central banks to attach a
meaningful valuation to each of their country’s currencies, Schiff says.
“The only solution to the economic problems
that we have today is a return to sound money… The world is ultimately going to
have to move away from the ‘Dollar Standard’ and back their currencies with
something real. I think gold is the best thing to use. Gold has been money for
5,000 years,” he adds.
“When we go back to a real monetary
standard…you’re talking about billions of people who don’t own any gold right
now who will. Where’s the gold going to come from? It’s going to get mined.”
So obviously, in order for the world to go
back to a Gold Standard, given how much paper money the U.S. government has
printed, gold prices are going to have to be up in the stratosphere to make it
work,” he declares.
“I think that gold is going to go to many
thousands of dollars an ounce. I’m not exactly sure how high but I think it will
be a spectacular run.”
Hence, gold producers will be big
beneficiaries of the paradox that the noble metal is gradually reverting back to
its traditional role as a last-resort hedge against economic turmoil and
political crises at a time when underground supplies are beginning to dry up.
This suggests that gold stocks will be
counter-cyclical investment stand-outs for the next few years, Schiff says.
Against a grim backdrop of painful and pronounced economic contraction in North
America, gold miners will literally have a license to print money.
“This is one sector that we can be very
optimistic about because gold companies are going to be in the business of
producing money. That’s going to be the money that people want. Not what the
central banks are printing, but what gold mines are producing. That’s going to
function as money,” he adds.
Yet, even though most gold producers are
already experiencing impressive year-on-year earnings growth that promises to
dramatically accelerate over the next few years, their lustrous prospects have
yet to win over the mainstream investment community, Schiff says.
“I think a lot of the gold stock prices don’t
reflect how high gold prices are going to go and what that’s going to mean to
the profitability of these companies. I don’t think that this is appreciated by
the market,” he adds.
Indeed, small to mid-sized gold mining stocks
are still being overlooked by most investors for their trend-bucking tremendous
growth potential, Schiff says. Additionally, most of these gilded equities have
been over-sold since the onset of the recession and can still be acquired at
bargain basement prices.
“Most stocks are significantly below what
they were (in 2007), even though the price of gold is higher and the cost of
mining is lower,” he says.
“And I think that the price of gold is going
to keep rising faster than the price of producing it. And so gold companies are
going to remain very profitable.”
Meanwhile, the next major up-leg in what
Schiff refers to as the early stages of a secular bull market for gold is not
far off, he says. It has merely been delayed by an unexpected and unsustainable
rally in the U.S. dollar in recent months. One that has been caused by global
deleveraging and by the false sense of security that investors gain from moving
their money into U.S. treasury bills in a time of crisis, says Schiff.
“One of the reasons that gold isn’t stronger
is because of this temporary strength of the dollar. This is keeping the gold
market in check. And the dollar is getting some of the safe haven money that
should be going into gold,” he says.
“At some point that will stop. The people who
are buying dollars will realize that there’s no safety in dollars. Because the
central banks are going to try to pay for the economic bailouts and stimuli by
looting the world’s savings and by printing money and debasing it.”
“So, if you want to escape that, you hold
gold, which is something that the government cannot debase,” he concludes.