Peter Schiff believes the vicious pullback in the silver price has created a buying opportunity for investors seeking an entry point back into the metal.
Speaking with Eric King of King World News, the Europacific Capital CEO said the precious metals will benefit from weak economic data expected to be released this summer, forcing Fed chairman Ben Bernanke to reverse the U.S. central bank’s money printing hiatus and embark again on another “quantitative easing” program.
“I think it’s a buying opportunity,” Schiff said about the white metal. “I do believe the U.S. economy is slowing down, in fact I think it’s going to slow a lot more than people realize. But for that reason, I think that quantitative easing will not end over the summer. In fact, I think the Fed is going to step it up. QE3 could be even bigger than QE2 and that’s very bullish for precious metals and very bearish for the dollar.”
Aside from Schiff’s expectations of a renewed decline in the U.S. economy absent the Fed’s wide open money spigots, Bill Gross of PIMCO asked a more germane and most troubling question back in March, a question that Schiff, too, has posed for many months.
“Who will buy Treasuries when the Fed doesn’t?”
In Bill Gross’ March Outlook piece, Gross posited that question—the piece, by the way, was originally published on the PIMCO Web site (now removed), but a copy can be found at zerohedge.com.
Among other important musings in his 1,800 word letter to investors, Gross runs down the list of significant buyers of U.S. Treasury paper, noting that he expects surplus sovereigns will be “good for their standard $500 billion annually,” but banks and bond funds are cutting back on Treasury paper buying—in case of the former, lending again in place of parking capital in U.S. paper, and in the case of the latter, buying less Treasuries due to slower inflows of investor capital.
Moreover, Gross, who agrees with Schiff about the underlying weakness of the U.S. economy absent the Fed’s herculean money printing, questions the Fed’s ability to maintain artificially low interest rates as the Fed halts its buying spree of bills and notes, which by most accounts represents more than 50%, on average, of all maturities along the curve.
So, “who’s left?” Gross asked in his March letter.
“Someone will buy them, and we at PIMCO may even be among them,” stated Gross. “The question really is at what yield and what are the price repercussions if the adjustments are significant … What I would point out is that Treasury yields are perhaps 150 basis points or 1½% too low when viewed on a historical context and when compared with expected nominal GDP growth of 5%.”
Gross continues along the lines of Schiff’s argument, that is: all components of the Leading Economic Indicator (LEI) have been artificially inflated through money printing, a dangerous phenomenon of false signals once observed decades ago by the Austrian economist Ludwig von Mises.
“Bond yields and stock prices are resting on an artificial foundation of QE II credit that may or may not lead to a successful private market hand-off and stability in currency and financial markets,” Gross concluded.
Therefore, Schiff, who approaches the problem at the Fed in the same way as Bill Gross, believes rates are bottoming and have no where to go but higher, which will eventually give rise to talk at the Fed and on the Street that further QEs are necessary to hold the U.S. economy ship up a little longer to see if it will float on its own.
The argument will be made (already being made by Princeton economist and former Fed vice chairman Alan Blinder): if no Fed intervention, the U.S. economy will flounder into more lower economic growth territory, which will tank tax receipts and balloon an already out-of-control federal budget deficit—therefore necessitating further central bank intervention.
According to Schiff (and Gross), that negative feedback loop should put a strong tailwind to both silver and gold until the Fed refrains from its unprecedented “liquidity” operations—a scenario most unlikely, for now.
Schiff thinks the silver price at the recent $50 high “is not going to hold,” adding, “We are going to take that [$50 high] out and move a lot higher.”