Why Peter Schiff Is Still Wrong About Gold . . . For Now

While Peter Schiff, and others of his ilk, have remained staunchly bullish of gold since the all-time highs in 2011, I feel they have done a terrible disservice to those that have followed them for the last 3+ years of “pain.”  Schiff is nothing more than an uber-bull, or gold-bug as some may call him, who continually calls for $5000 gold.  And, since markets move in two directions and not just “up,” I believe that anyone who is uber-anything should be dismissed, as there is no appropriate substance being proffered by simply saying the word “up” every day.  Ultimately, they will be right, but, in this case, you have to deal with a multi-year 40-60% draw down before eventually being correct.

This past week, I read an article by Myra Saefong reiterating Peter Schiff’s perspective about gold going to $5000.  So, let’s look at Mr. Schiff’s underlying perspective a little more closely, and see if he is finally going to be right.  Or, should people consider our perspective that Mr. Schiff’s followers have more pain to experience in the near term, as metals have a lower low to be seen before the next bull phase takes hold.

First, last year, Mr. Schiff was of the exact same perspective regarding gold, and, he has been of the same perspective on gold since it topped in 2011.  However, we called the top to gold within 6 dollars of the actual top in 2011, while most were still looking for gold to exceed the $2000 mark along with Mr. Schiff.  In fact, we even called the downside targets correctly even before gold topped.  And, since that time, gold has lost 41% of its value from its high to low during this correction.  Yet, Mr. Schiff has stayed staunchly bullish during this 40% draw down.

Second, last year, Mr. Schiff maintained the perspective that “renewed weakness in the dollar and strength in oil and other commodities will add to gold’s appeal during 2014.”  Well, at Elliottwavetrader.net, we actually foresaw the dollar rally back in May of 2014, along with oil’s topping, not to mention the further drops in gold.  Yet, Mr. Schiff simply dismisses the drop in gold as being “completely out of touch with reality.”  So, if I understand this correctly, the market is out of touch with reality, but Mr. Schiff is not.

Moreover, I want to digress for a moment and point out something to those that feel that the dollar must drop in order for metals to rise.  There is nothing written in stone that states that the dollar must fall for the metals to rise.  In fact, if one closely observed the market action since November of 2014 until the end of January of 2015, gold rallied almost 15% while the dollar rallied over 9%.  And, yes, we at Elliottwavetrader.net expected both markets to rally together at that time too.  Yet, Mr. Schiff believes that only dollar weakness will cause a rise in metals; out of touch with reality indeed.

Third, Schiff seems to claim that only further Quantitative Easing will cause the metals to rise.  But, this was the same perspective he had with all the previous QE programs were instituted by the Fed.  So, let me get this straight.  We had QE1, QE2, Operation Twist, and then QE3, and metals are still near their lowest levels in 4 years.  Yet, we are to believe that QE4 will be the one that supposedly causes the metals to rise to $5,000?  Does anyone else see the inconsistency in this argument?

Fourth, in Schiff’s recent interview, he noted that “what is holding gold back  . . . is the idea that the Fed is going to be raising interest rates.”  But, wait a second.  For years, all I have been hearing is that a rise in interest rates evidences inflation, which is the real driver of gold.  So, isn’t the common theme that gold will go up when rates go up, because that is supposedly a signal of inflation?  Yet, when looking a little deeper into what Schiff is now suggesting, it seems that low interest rates are needed to cause gold to rally? And, is not a drop in rates commonly viewed as being associated with periods of deflation? So, is it deflation which will cause gold to rally or is it inflation?  

The answer is that golds’ movement is not based upon either if you look honestly at the history of gold’s movements.  Let's take a look at the 2007-2009 time frame, which evidenced the most recent period of deflation in our markets, and see if we can glean anything from the metals action in relation to deflationary market pressures and dropping interest rates.

We all know that the S&P500 topped in October of 2007 and began an estimated 300 point decline into March of 2008, and then we saw a corrective bounce in the equities for a couple of months. During that same period of time, the metals continued to rally. So, here we have “evidence” of the metals supposedly rising during a period of deflation.

But, when we then look towards the May 2008 - March 2009 severe decline in the equity market, we witnessed the metals also experienced significant declines within that time period.  In fact, gold lost a little more than 30% (yet, rallied again, thereafter). So, when one is presented with these facts, does it make sense that the metals are surely going to rise during periods of deflation and/or low interest rates?

I seriously hope you can all put aside your personal biases towards the metals, and recognize that they are not necessarily going to rise during periods of deflation, or due to the drop in the dollar or interest rates.  Oddly enough, metals can rally during periods of deflation or dollar appreciation, and they can fall during periods of deflation and dollar appreciation.  And, the same applies to periods of inflation as well.  I know you are likely thinking to yourselves, "Avi has really lost it this time." But, in all honesty, how can you come to terms with the reality of how they reacted during the 2008 broad equity market carnage, which was clearly a deflationary event?  Did they act as the supposed “safe haven” during the strongest period of deflationary pressures experienced since the Great Depression, especially while interest rates were dropping precipitously?

The one thing said by Mr. Schiff with which I agree is that “the moves in gold come in waves.”  And, these wave movements are driven by waves of sentiment.  And, that is exactly what we track at Elliottwavetrader.net.  In fact, not only did the tracking of market sentiment allow us to call the drop into the November 2014 low, we were able to call the rally off the November low, the high in January, the bottoming in March, and the current rally off the March lows.  But, unlike Mr. Schiff, we still believe that lower lows and more pain are still in store for those that have been continually bullish since 2011.

So, I would urge anyone reading prominent pundit “expectations” about metals to test them against the reality of their price action history.  And, if someone suggests to you that it is a matter of interest rate sensitivity or an inflation/deflation argument or a factor of quantitative easing, you need to think long and hard about if the price history of metals supports their proposition.  I suggest that it will not.  Rather, metals are purely a sentiment trade, and unless you understand how sentiment drives metals, you will more than likely be caught on the wrong side of a popular fundamental argument along with Mr. Schiff.  Ultimately, he will be “right.” But, do we all have the deep pockets to be able to withstand yet another drop to lower lows before being proven right?

Avi Gilburt is founder of ElliottWaveTrader.net.