The Future of Gold, the Dollar and More
by Jennifer Schonberger
Recently by Peter Schiff: The Truth Behind China's Currency Peg
The dollar has had a huge effect on the stock market's moves this year. As the dollar has depreciated, many stocks have climbed higher; the logic is that a weaker dollar will boost the bottom lines of companies like McDonald's, Aflac, and Coke, all of which derive a substantial portion of their revenues from abroad. The depreciating dollar has also boosted commodity prices and associated commodity stocks like Freeport-McMoRan or Newmont Mining, serving to lift the market.
As we approach 2010, what is the future of the dollar, and what are the implications for the asset prices that move inversely to it? What does it all mean when it comes to rebalancing the global economy and our economic relationship with China?
For some insight on all this, I spoke with the man who had the foresight to call the financial meltdown in 2006: Peter Schiff, president and chief global strategist of euro Pacific Capital and author of the newly updated book Crash Proof 2.0.
Schiff believes the dollar is on a long-term downward trajectory, and that it could collapse if the government continues its current policies. That has implications for the stock market and gold, which he thinks could go to $5,000 an ounce.
Here's an edited transcript of our conversation:
Jennifer Schonberger: You've been bearish on the dollar for some time. Do you still stand by your bearish call for the greenback?
Peter Schiff: Yes. I think the dollar is going to fall for years. It's not going to fall every day, or every week. There are going to be periods of time where the dollar rallies — that's how markets work. Like a bull market climbs a wall of worry, a bear market follows a slope of hope. And there's always going to be hope that the dollar is going to recover, based on “maybe the Fed will raise interest rates,” “maybe the U.S. economy will improve.” But none of that is going to help the dollar. I think the dollar's fate has been sealed by the policies being pursued by the government and the Federal Reserve, and unfortunately it's a grim fate.
Schonberger: If the dollar does remain weak, as you expect, what are the implications in terms of rebalancing the global economy?
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Schiff: Part of rebalancing the global economy is going to necessitate a lower dollar. The reason the global economy is so out of balance is because the dollar is artificially strong. It's been propped up by foreign central banks, and this enables Americans to import products they really can't afford. So if we want the global imbalances to be solved, it's going to require a lower dollar — and that's what's going to happen. The longer foreign central banks artificially prop up the dollar, enabling Americans to keep spending borrowed money, the worse the global imbalances are going to get.
Schonberger: You recently wrote, “While [China's] peg [to the U.S. dollar] certainly is responsible for much of the world's problems, its abandonment would cause severe hardship in the United States.” Why?
Schiff: It would cause hardship in the U.S., but it's something that we have to deal with sooner rather than later. By propping up the U.S. dollar and by carrying U.S.-dollar-denominated debt — U.S. Treasuries, mortgage-backed securities — the Chinese have kept interest rates and consumer prices artificially low. Americans have been able to benefit from that in the short run because their mortgages, car payments, and credit card payments are lower. They can go to stores like Wal-Mart and get those everyday low prices. But those prices aren't because of Wal-Mart, they're because of China.
December 12, 2009
Peter Schiff is president of Euro Pacific Capital and author of The Little Book of Bull Moves in Bear Markets and Crash Proof: How to Profit from the Coming Economic Collapse.
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