Gold bug Schiff counters Goldman on first drop since 2000

November 4, 2013 05:33 AM

Peter Schiff lays an iPod-sized bar valued at about $40,000 on the sun room floor of his Connecticut mansion, and calculates it would cost about $250,000 for each floor tile to pave the room with gold.

He shows off $50 gold chips, to be used when paper money becomes worthless, a prediction repeated on his daily two-hour radio show broadcast from his basement studio to 68 stations in 30 states and 50,000 listeners online. The unabashed gold bug’s Euro Pacific Capital Inc. manages a $20 million mutual fund that invests in stocks related to the metal and lost 6.4% since it began in July. The Philadelphia Stock Exchange Gold and Silver Index slid 1.8% in the same period.

Schiff, 50, isn’t fazed that gold is heading for its first annual price drop in 13 years, or that Goldman Sachs Group Inc. has called it a “slam-dunk sell.” He predicts bullion will reverse its 21% year-to-date decline and probably surge 52% to reach a record $2,000 an ounce within a year. That’s just the beginning: Before President Barack Obama leaves office in 2017 the U.S. will default, the dollar will collapse, hyperinflation will strike and gold will skyrocket, he says.

“I’m waiting for the dollar crash, I’m waiting for the real crisis to hit that I know will benefit gold,” Schiff said Oct. 18 over lunch of spinach-and-beet salad and stewed rabbit in the sun room after the radio show. “The longer it takes, the longer I have to wait for that payday. But the longer it takes, the bigger that payday is going to be.”

Critics Laugh

With inflation at or below the Fed’s 2% target for the past 11 months, the Standard & Poor’s 500 stock index reaching record levels and the dollar strengthening against major currencies in the past year, Schiff knows his forecasts make some people laugh. He’s used to it. They also scoffed in 2006 when he predicted on television that housing prices would plunge, lenders would go bankrupt and stocks would plummet, as they did two years later.

“They should take him seriously -- he was right with a lot of other ones,” Ron Paul, the former Republican Representative from Texas who has called for abolishing the Federal Reserve and auditing the U.S. gold depository at Fort Knox, Kentucky, said by phone on Oct. 23. Schiff was an economic adviser to Paul’s presidential campaign in 2007.

No Danger

“They don’t want to admit that people in the free market are right because they would have to give up government planning and government power and give up their wars and give up the welfare state,” Paul said.

Schiff’s predictions don’t persuade Austan Goolsbee, an economics professor at the Booth School of Business at the University of Chicago and former chairman of the Council of Economic Advisers under Obama.

Gold bugs, investors who buy the metal as protection against a collapse in financial assets, fail to understand that the Fed’s pumping money into the economy only offsets banks’ tighter lending and stockpiling cash, Goolsbee said. Until credit conditions return to “normal,” there’s no danger of inflation, he said.

“They have been saying that for literally four-plus years, and they have been egregiously wrong,” Goolsbee said by phone Oct. 30. “As a matter of mathematics, they’re just adding up the numbers incorrectly to say that they think there’s going to be 200% inflation.”

‘Gold Standard’

Schiff began his radio show, which he calls “the gold standard in talk radio,” in 2010, around the time of his failed run for the Republican nomination for U.S. Senate from Connecticut. He finished third with 23% of the votes, behind Linda McMahon and Rob Simmons.

On Oct. 18, the day after the U.S. would have defaulted had lawmakers failed to reach a deal on the debt limit, he came downstairs to the studio wearing a blue Hugo Boss polo shirt and jeans. Soon he was talking gold. It was down less than 1% on the day, and 24% in the past 12 months.

“Thank God we got so many stupid people that don’t understand the value of gold because that means that people who do understand are able to buy it at a low price,” Schiff said into the microphone. “Don’t necessarily get mad, get in on it.”

Jeff Currie, the head of commodities research at New York-based Goldman Sachs, said at an Oct. 8 conference in London that gold would fall after lawmakers reached a deal on the U.S. debt limit. Schiff went on CNBC Europe to say Goldman Sachs had it backward: Allowing more government debt would push gold higher.

Bernanke Puzzled

Currie declined to comment through a spokeswoman. Gold, which closed at $1,316.20 an ounce on Nov. 1, will decline to $1,050 by the end of 2014 as the U.S. economy improves, the dollar strengthens and the Fed reduces its bond-buying program, Goldman Sachs analysts said in an Oct. 18 report.

“Nobody really understands gold prices and I don’t pretend to really understand them either,” Fed Chairman Ben S. Bernanke told the Senate Banking Committee in July. Other central banks kept expanding reserves after gold peaked in 2011, losing $545 billion in value.

Assumptions like Currie’s on why investors have lost faith in gold as a store of value are false, according to Schiff. The economy is only growing because of government spending, so debt continues to swell, he said.

Radio Advice

To hold interest rates low, the Fed will have to keep buying bonds, which means printing more dollars, Schiff said. Foreign countries use them to buy U.S. bonds -- in effect lending the U.S. more money to pay back what’s already owed. Governments such as China eventually will balk, Schiff said.

“The minute China tells America, ‘I want my money back, I don’t want to loan it you again, just give me the money,’ then we default,” Schiff said on the radio. “The sooner the Chinese do this the sooner we can start fixing our economy, because the longer they wait, the bigger our problems get.”

Schiff’s listeners call in wanting to know how to prepare. Mike from St. Lucia asked about a $1 trillion treasure allegedly hidden in a New Mexico mountain, that if found would make a dent in the national debt. “We don’t have that much time” to discuss such theories, Schiff said.

Ellen from New York asked whether to save pennies minted prior to 1982 because the copper is worth more than one cent. “Can’t-lose investment,” Schiff replied. Luke from Cincinnati asked if he should spend his $5,000 savings on gold or silver, bought through Schiff’s company. “I like both metals,” the host said.

Independent Reading

While Schiff acknowledged his radio show is a way to promote his brokerage, he said it’s not only about making money for himself. He wants to give people an alternative to mainstream media and economics.

Schiff, who was born in New Haven, Connecticut, studied finance and accounting at the University of California, Berkeley, and began his career as a financial consultant with Shearson Lehman Brothers. He said his independent reading, on history and economics, was more influential than his formal education.

He started Euro Pacific Capital in 1997, and the company now oversees more than $2 billion in eight funds. Schiff rose to prominence a decade later because of his predictions of looming economic collapse. His notoriety grew with his Senate bid and radio show. In November 2011, Schiff visited Occupy Wall Street protesters in Manhattan’s Zuccotti Park to “represent the 1% [and] see if I can have a dialog with the other 99%.” The debate, recorded by the libertarian journal Reason, lasted almost two hours.

Father’s Influence

In the dedication to the 2009 revision of his book “‘Crash Proof: How to Profit From the Coming Economic Collapse,’’ Schiff credited his father ‘‘whose influence and guidance concerning basic economic principles enabled me to see clearly what others could not.’’ Irwin Schiff has long advised people that they didn’t have to pay income tax, and is serving a 13-year sentence in the Federal Correctional Institution in Fort Worth, Texas, for tax evasion.

Peter Schiff says he admires the Austrian school of economists including Friedrich Hayek and Ludwig von Mises, who held that the purposeful actions of individuals explain economic phenomena. Mainstream thought is self-interested: politicians get to spend money they don’t have, academics get recognized with prestigious government appointments, and Wall Street makes commissions on easy money, he said.

Schiff was often a guest on cable television shows in 2006 and 2007, when he predicted the housing bubble and global recession. Fox Business Network host Neil Cavuto once invited him to continue with his exposé on Santa Claus. Instead he published ‘‘Crash Proof” in February 2007.

9,300 Square-Feet

Four months later, U.S. housing prices fell for the first time in 13 years, according to data from the Federal Housing Finance Agency. In November 2008, a fan produced a video compilation of Schiff’s appearances called “Peter Schiff Was Right,” which has been viewed on YouTube 2.2 million times.

Schiff was so confident properties were overpriced that he rented until age 46. In 2009, he bought his 9,300 square-foot house in Weston, Connecticut, for $2.4 million. He added a pool house, tennis court, pavilion and sun room, and the home is valued at $3.1 million on real estate website (Schiff disclosed assets of at least $64.7 million during his Senate run.)

Even as Schiff predicted the housing bust, his advice in “Crash Proof” to buy gold and international currencies and stocks would have lost money in the bubble’s immediate aftermath.

‘They’re Lying’

While gold rose 32% from the time of the book’s release to the end of 2008, the MSCI World Index excluding U.S. equities fell 41%, more than the 36% loss in the S&P 500. The U.S. dollar strengthened during the period against 10 of 16 major currencies, including the British pound and Brazilian real.

“If I say this is going to happen and then it all happens that way, but the markets react differently because they don’t really understand what just happened, that was my mistake in overestimating the intelligence of everybody else to figure stuff out,” he said.

Why does Schiff, presented with the same publicly available information as everyone else, draw the opposite conclusion?

“Because I understand what I’m looking at,” he said. “Either they don’t, or they’re lying.”

After finishing the radio show, Schiff leaned back in his chair, put his MacBook Air in his lap and played an almost seven-year-old Fox Business News clip, in which his younger reflection warned of people buying houses with no documentation, no money down and interest-only mortgages. “So what?” other guests interrupted. So real-estate values would vanish like dot- com stocks, the brown-haired Schiff said, over laughs. The gray-haired Schiff, watching, shook his head.

“When I say something new, they still laugh at me and make fun of me as if I’ve never gotten anything right,” he said. “Everything that I’ve ever predicted is going to have to come true, and then some people might still say he’s a broken clock.”

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