Peter Schiff vs. Ben Bernanke on the Economy

Peter Schiff (lef); Ben Bernanke (right)

Gold and silver were hit hard following upbeat comments from the Federal Reserve’s Open Market Committee on Wednesday, March 14. Gold closed at $1,644 in London; down from $1,690. Silver was down from $33.58 to $32.84. Gold and silver were both down the following day, too, with final U.S. prices at $1,656 and $32.50, respectively. Is this a buying opportunity?

FOMC and Inflation Expectations

First, let’s look at what the Federal Open Market Committee is, and what was said. The FOMC consists of twelve members: the seven members of the Federal Reserve Board, and five of the twelve Federal Reserve Bank presidents. This always includes the president of the New York Federal Reserve Bank, but the others are rotated in and out. All Fed Bank presidents attend meetings, even though only five of the twelve can vote at any given time.

By law, the FOMC must meet at least four times per year in Washington, D.C. Lately, they’ve been meeting eight times a year. These meetings take place behind closed doors, with restricted attendance, but a statement is normally released after each meeting. In the statement released after the most recent meeting, Fed Chairman Ben Bernanke said that economic growth has been “frustratingly low,” and that this has impeded bank lending. However, there was upbeat news, too, as fifteen of nineteen passed their “stress tests.”

This “good news” led to a sell-off in gold and silver, as many precious-metals traders consider bad news for the economy to be good news for gold and silver, and vice versa. Why? Because the FOMC believes that all economic problems can be solved with the printing press, and the resulting inflationary money creation leads to higher gold and silver prices. When the Fed voices optimism, this means less inflation, which isn’t as bullish for nominal gold and silver prices.

They key word here, however, is nominal. Theoretically, money creation would lead to a rise in prices of all goods, but it would not lead to an increased value of any good. In the case of gold and silver, however, this isn’t quite true. That’s because gold and silver are alternatives to the dollar, so whenever the dollar weakens via inflation, there is increased demand for gold and silver that goes beyond the nominal rise in prices due to monetary inflation. Thus, when inflation expectations are lowered, this is bad for good and silver in the short term. But what about the long term?

Don’t Trust Central Planners

The key flaw in all of this logic is that the notion that the FOMC has any clue at all what it’s doing. Ben Bernanke, let’s remember, accepts crony-capitalist Milton Friedman’s explanation that The Great Depression was caused by the Federal Reserve not printing enough money. This theory has been decimated by Austrian economist Murray Rothbard, who demonstrated that it was the earlier over-creation of money and subsequent necessary contraction that caused the Depression. Nevertheless, Bernanke’s acceptance of the Friedmanite explanation shows his economic ignorance – if he thinks the economy is looking good, why would anyone trust him?

The Fed and the FOMC go back and forth as to whether or not the economy is strong or in another recession. We, of course, know that the recession never ended and has been going for a number of years now. So, while there was a sell-off in gold and silver on the notion that the Fed thinks the economy is strong and will therefore not hyper-inflate, by the time of their next meeting, they’re likely to change their tune. If you’re looking for consistency, you’re not going to find it from the Fed. Instead, you might want to look at someone like Peter Schiff, who correctly predicted the 2008 meltdown as early as 2006.

“If they think the U.S. economy is improving, [investors] are more likely to buy [stocks] than gold,” says Schiff, as to why gold and silver were down on Wednesday. “But the economy is not getting better. We’re spending ourselves into a deeper economic hole. The trade deficit is getting bigger.” None of this has really changed since the last FOMC meeting, and none of it will change by the time of the next one. The FOMC is fickle. Gold and silver are not.

Conclusion

Silver expert David Morgan says silver is a buy at $30 an under. Earlier, we at Silver Monthly hypothesized that “$40 is the new $30.” However, with silver flirting with the $30 level, setting aside some cash in order to be able to pounce on it if it should drop below $30 is probably wise. Long-term, silver’s outlook remains bullish; as does gold’s. In the short-term, savvy precious-metals investors should be hoping for a bigger pull-back, in order to allow more accumulation.

Peter Schiff (left); Ben Bernanke (right)