August 28, 2008

Here's Peter Schiff on the commodities meltdown, the gold gutting and the dollar rise... Agree or Disagree?

Over the last few months, as the dollar rose more than 10% against a basket of other currencies, and as gold and oil sank to multi-month lows, many investors concluded that a threshold had been crossed, and that the bearish trend for the dollar and the bullish trends for commodities had finally come to an end. But rather than representing a sea change, these counter trend moves more likely signify that the established trends are about to kick it into a whole new gear. My take is that if you thought you had seen a bear market in the dollar and bull market in gold, oil, and other commodities, well, “you ain’t seen nothing yet”.

Corrections are often vicious, designed to shake loose as many investors as possible prior to a major move. The best bull markets carry as little excess baggage as possible. With few speculators on board to sell into every rally, the true believers who remain can receive the full benefit of a fundamental upswing. Violent downward moves also force out those that were too highly leveraged, or those who showed up late to the party with little understanding of the true fundamentals. Those who panicked and jumped out too low often scramble to reestablish positions at higher prices, further fueling the bull market.

This recent correction saw the most dramatic change in sentiment that I have ever witnessed. But the head fake that caused the market to commit was in fact not worthy of a high school benchwarmer. With absolutely no significant developments that could explain either a bottom in the dollar, or a top in commodities, investors placed their faith in price moments alone. Once the numbers started to show some retrograde motion, everyone simply assumed that a real change had taken place, and the momentum buying and selling began. The rapid movement reveals how clueless participants in these trades had become. Even those fund managers that seem to understand the fundamentals were fooled by the sharp price movements and the rhetoric they spawned.


bostonobserver said...

It was time for the dollar the strengthen, particularly against he Euro since the Euro zone economies are as bad off as the US (if not worse). I could understand the dollar weakening against the Yen and Renminbi but it made no sense for the Euro to rally based on regional economic strength (or lack thereof) and the makings of a mjor housing correction in much of the region.

The one thing that the Euro does have going for it is that the ECB has resisted the impulse to cut rates to nothing (or less, real rates in the US are <0).

I think the long term trend for commodities is up but the interim corrections will be brutal.

Anonymous said...

I agree with Peter, too much emphasis has been put on day-to-day momentum swings on commodity prices recently, it is quite embarrassing really. Fact is, supplies of energy and commodities are dwindling while demand is rising worldwide. Eventually all those regions that do not produce surplus will see currency devaluation while exporters will see currency valuation. Even a financial outsider with only modest intellectual facilities can see that.

Andrew from Russia said...

I can't help but notice that this thinking has gone from wildly contrarian in 2000 to mainstream in 2008, and so the next stop someday will be "denial". That said, I keep a pool account in silver as a counterweight to the increasing portion of greenbacks, but I'm not into the armageddon scenario of accumulating physical bullion at a loss of 18% VAT. Besides, the "dollar always goes down" sentiment seems to have reached its zenith here. It seems that the same people who kept greenbacks under their mattresses well into 2007 (so much were they hurt by the 1998 financial crisis) have now joined the dollar bear club - so the club has become overcrowded and I went out last November.

The Housing Bubble Ate My Balls. said...


"With absolutely no significant developments that could explain either a bottom in the dollar, or a top in commodities, investors placed their faith in price moments alone"

That about sums it up. Stocks and commodities is all day trade, speculation, and shorts these days.
Prices and volumes move on the news, quarterlies, and sound bites. There are very few longs in anything. There are few "Investors" moving the markets these days, however there are quite a few "traders" and "speculators", they ignore fundamentals, the big picture, and common sense. They look at charts, tickers, and news in a myopic minute to minute framework and make decisions based on emotion, panic, greed, and ignorance.

The dollar, oil, gold, stocks, etc is the same bunches of hedge funds, institutions, and day traders all moving as one big panicked crowd from one place to another inflating and deflating prices based on panic and speculation.

As I keep saying we aren't done with commodities yet, there is another big run up coming very soon, probably a great final burn out / blow out before things really go bad and stocks tumble due to panic and the fact that everyday more and more speculators and traders are loosing money because they all chase the same thing at the same time, soon they be broke and the Dow goes to 7000-9000.

Looks to me like the stock / commodities / dollar cycles are getting shorter and shorter.

Total burn out / implosion is not far off.

I am not a broker, I have $0 invested in anything, I just read and think... I could be totally wrong.

Anonymous said...

I disagree. I think that bad debts are accumulating faster than the bankers can replace them with fiats.


michael said...

i agree keith.

what about you?

dudelero said...

i am really not sure. europe is seing economic growth slowing which might force a rate cut. also the housing bubble was worse in europe than in the united states (spain, italy, greece, uk and scandinavia).
demand for oil should slow if there is a global recession. how much did demand go up again, vs prices?

Anonymous said...

With absolutely no significant developments that could explain either a bottom in the dollar, or a top in commodities, investors placed their faith in price moments alone.

What you talkin bout Willis?

The significant developments were lots of bad macro news from Europe---they're going into recession too. Explains both dollar rise (it rose most against pound and euro) and commodity decline.

In the long run, there will be permanent oil shortages, and maybe potash. Other commodities---not so much---they'll stay cyclical as they've been before.

Mammoth said...

So, does this mean that Gold will spike above $1,000/oz before the end of this year?

My crystal ball is too fuzzy to read these days.

But the fact that getting ahold of the physical stuff involves a long wait these days seems to point to a scarcity, which runs counter to the price = Supply vs. Demand theory.


Anonymous said...

the housing bubble was worse in europe than in the united states (spain, italy, greece, uk and scandinavia).


HUH? I thought Europeans were uber sophisticated and were too dumb to have a housing bubble. And how could they possibly have had a housing bubble in Europe when the US housing bubble was all Bush's fault?

you're an idiot said...

But I thought you said we were experiencing deflation.


keith said...

Schiff and I disagree

I'm in the deflation camp now (after the wild inflation we predicted)

Time will tell

One caveat to that is the impact on G8 currencies. Assets will continue to deflate, but money is another subject.

And gold is now in an epic tug of war.

Anonymous said...

Don't be fooled by the "deflation scare".

The central banks will do everything in power, even risk hyper-inflation to prevent deflation.

Currency values relative to each other is nonsense. What matter more is the absolute value of the printed paper- not its value compared to another piece of printed paper.

Once the mass herd realizes this, exchange rates between currencies will be an after-thought.

Remember what happened in the early 70s... Gold, after surging lost almost 50% of its value, before it shot to the moon to over $800.

Many 'traders' back then sold and lost, only to kick themselves in the nuts when Gold roared to $800.

If you are a 'trader' in commodities, good luck- it's a very VERY volatile asset class and requires a serious stomach to be profitable in.

If you are an 'investor' in commodities, then the current pullback should be an opportunity to increase your holdings.


Kevin said...

Keith --

I'm going to disagree with you about the "no significant developments". First, there is action on the Euro side of things which puts downward pressure on the Euro to the benefit of the dollar.

Perhaps more importantly, though, the Chinese have been quietly raising the dollar reserves that Chinese banks must hold. This lets them support the dollar without the Chinese government making a direct intervention in the market.

I'm looking for a meltdown in the Chinese economy to be the next shoe to drop.

Elvis said...

Builders need to stand together and "push back" on the banks.

tabsco said...

Schiff is right on this, Keith is wrong. Gold is money, it is not hurt by deflation. It can be hurt by an unwinding of general commodity funds, which is what has happened recently. But deflation on its own is not going to cause a drop in the price of gold. It will instead cause the price to rise.

keith said...

Did you not get my point?

We're in deflation big time right now.

But the G8 currencies are being debased

Gold suffers with deflation, gains with currency debasement, gains with flight to safety


Get it?

melb said...

Inflation or deflation? Everything you have will become worth less. Everything you don't have will become worth more. The worst of both worlds.

Anonymous said...

Bernanke has told us many times the Fed will never allow a deflationary spiral to take hold in the U.S. economy. What part of never don't you understand?

The easy way out for politicians, bankers, and debtors around the world is to inflate away the malinvestments and debts. Or, do you think they'll all join hands, sing a round of kum bay ya, and agree to a global austerity pact?

LOL - you deflationistas are too much! The fiat currencies are all headed to the trash bin of history, to be replaced by some new scripts -- just as worthless, but new. Gold and silver will retain their value as they have for thousands of years. People who make things for a living will prosper, while the people who consume for a living will suffer.

Anonymous said...

The government is a debtor. The government decides whether we have inflation or deflation simply by setting printing or not printing dollars.

Deflation is bad for debtors, good for savers. Inflation is good for debtors, bad for savers.

Gee I wonder which the world's biggest debtor nation will choose?

Anonymous said...

IMO, we are seeing a whole lot of manipulation going on. All around the world central banks are trying to keep the dollar from tanking further and commodities from killing their economies. IMO, we are not trading fundatmentals.

Mammoth said...

Keith, so you are in the Deflation camp.

One question, and this is not off-topic if you think about it:

How much does ONE single Bell Pepper cost in the grocery store where you live?

(Here in Seattle-land they are $1.25. Last year they were 2 for $1.00)

How much is London?


tabasco said...


You've been reading too much Mish and it's gotten you confused. Currencies don't get debased during deflation. And gold doesnt suffer during deflation. What we are seeing right now is a deflation of credit and an increase in the money supply. That is the true tug of war, and both of those are bullish for gold. But tradable assets do not go up in a straight line. What just happened was a correction caused by the unwinding of overheated commodity positions by overleveraged speculators. Like the commenter above astutely pointed out, the mid 70's was the most comparable time to now from a commodity investment point of view, and during the 70's gold went from $31 to $200, then corrected to $100, then rocketed up to $800. You don't want to miss that last ride, do you? This is what happens with secular investment trends: there is invariable a large mid-cycle correction due to increases in leverage beyond what the market can yet bear. Take the Dow Jones bull market from 1980-2000 for example. In 1987, there was a 40% market correction, yet if you had stayed in, the Dow made it to 4 times higher than it was in 1987 prior to the correction. Just as Peter said, these corrections shake out the overleveraged and the weak hands, which just makes the next phase even stronger. Now, whether the current gold correction is over is another question. We very well could see it correct further over the next few months, but don't be surprised when a few years from now we are looking at $2000, $3000, or $4000/oz prices for gold. And don't be surprised when you're posting this article once again after the fact and seeing that Schiff was dead on right.

keith said...


As a long time reader, you should remember my thinking was rampant and wild inflation, followed by deflation

I think there were quite a few HP'ers in this camp

We'll see. I'm not married to inflation or deflation. We're in unchartered waters. And the Fed always has the printing press.

Anonymous said...

Good article about implode-o-mter and banking failures.

Anonymous said...

The best strategy is to move your money OUT of the USA into REAL ASSETS of an economy that IS NOT experience INFLATION nor DEFLATION nor STAGFLATION nor DISINFLATION nor BUSHONOMICS nor CLINTONOMICS.

1. Japan 30%
2. Canada 30%
3. Germany 30%
4. USA Cas 10%

Anonymous said...

I think gold is going sideways for a while but could be significantly higher before the end of the year. Only a year ago $800 seemed like an incredible target. We have yet to see the major flight to safety when people become genuinely frightened about the banks. A few big banks have gone, the biggest rescu-bail-ed, but I don't think many people understand why (or how) and remain more concerned about house prices and not being able to get credit. If we see more widespread scenes of bank collapses and people not being able to access their notional savings then panic will finally become mainstream.

Mammoth said...

No argument from me on your predictions. And thanks to your blog I sold my rental house last fall and took a handsome profit.

But a previous poster said it best – Deflation in things you don’t need, and Inflation in necessities such as food, energy, health care, insurance.

Show me where there is deflation in the cost of food. And back to my earlier question:

How much does ONE single Bell Pepper cost in the grocery store where you live?


Anonymous said...

I will say this, with relentless 'supplyside' economics, and a belief or a right that deficits do not matter, gold will continue its rise until chairman cox and the SEC put a ban on going long gold!

I can see the memo already. "From this day foward one can only 'short' gold" by order of the PPT, um, er, I mean the SEC. Wink wink.

Anonymous said...

Kieth, repeat after me; 'one cannot have lasting deflation with ones government printing wildly unchecked'.

Supply siders won't allow it and won't have it. Better get used to $10 a gallon milk, and $2,000 an ounce gold, because it is coming and passing in a town near you!

investorinpa said...

Keith, Mammoth has a good point. In the things that DO matter (energy, food, gas, water, utilities, etc), there has been inflation. In things that don't matter (consumer goods, real estate home ownership, etc) there has been deflation. Gold as a whole is pretty much unchanged for the year to date. As credit contracts and there is a premium placed on spendable cash, it is going to get spent on essentials first. This will cause a spike in those prices while less than necessary items will deflate. Respectfully, I will disagree with your premise but think that Peter Schiff is overstating the inflation piece a bit.

pepper picker said...

Mammoth's Bell Peppers...

In Northern Virginia at Safeway, they are $1. Red ones are $1.50 and Orange & Yellow are $2.50. This based on their online prices.

I sort of like the idea of national & global price checks -- kinda cool.

I personally do not purchase many bell peppers though, but do grow a HUGE number of tomatoes & hot peppers for personal seasonal consumption as salsa. I figure I have about $20 in my garden and have gotten something well over $100 in return.

Lady Di said...

Roubini (deflationist) makes a lot more sense to me these days than Schiff, although I am long gold.

Gold requires patience. You will drive yourself crazy if you look at it day to day.

Anonymous said...

My opinion?

Gold is either going up or Gold is going down. The Dollar is either going up or the the Dollar is going down. Oil is either going up or Oil is going down.

Real Estate however... WILL ALWAYS GOING UP! Buy Real Estate!

mickeyc said...

There is nothing particularly complicated about what is happening:
we have asset deflation and consumable inflation. All of the best brains that are publicly writing on this try to contort themselves into one camp or the other.
The two forces are battling like crazy and in history one may be declared the winner but the reality is we are seeing both.
To those people screaming conspiracy in regards to gold: come on! Take a look at the chart. Any competent trader was out of gold around $92.50.

economics is my middle name said...

mickeye said:

"we have asset deflation and consumable inflation."


Credit and money are either expanding or contracting.

You can't have inflation and deflation occurring simultaneously

It's like going up and down at the same time.


economics is my middle name said...

Mammoth said:

"Deflation in things you don’t need, and Inflation in necessities such as food, energy, health care, insurance."


Many people often confuse deflation and inflation with the prices of goods and services. That is a very simplistic view.

Deflation/inflation is the expansion or contraction of credit and money.

We are clearly in a state of deflation which is also commonly viewed as the "destruction of debt".

A common misnomer is that deflation makes everything cheap and therefore, cost of living goes down. That couldn't be further from the truth. Deflation increases the cost of living, thus the explanation for all classes of assets going down and living expenses going up.

mickeyc said...

Anonymous economics is my middle name said...

mickeye said:

"we have asset deflation and consumable inflation."


Credit and money are either expanding or contracting.

You can't have inflation and deflation occurring simultaneously


You are really going to argue the point that asset values are declining and consumables are going up in price?! Wow. This is EXACTLY what is happening.

It is interesting that you post this under a pseudonym rather than your usual handle Frank. Did me calling you out on your lack of knowledge of credit scores inspire the change of tack?

I think it is relevant to point out that economics is as close to a worthless science as it is possible to get. I got a 4.0 in my econ classes in college so I understand the theory. The facts however are demonstrably so removed from standard economic theory as to make the whole discipline actually dangerous.

BTW to clarify my $92.50 sale price for gold in my post I was referring to the GLD ETF.

As a final thought someone who resorts to name calling anonymously on a matter of opinion has already consigned themselves to the losing section of society. It would be interesting to see if your online bravado would survive if we were in the same room together.

economics is my middle name said...

Mickeye said:

"I got a 4.0 in my econ classes in college so I understand the theory."


For someone that got a 4.0 in economics, you sure didn't learn much.


Anonymous said...

Again, don't let the 'deflation scare' spook you.

Must read:

Anonymous said...

"I got a 4.0 in my econ classes..."

Yawn. You can buy as degree and/or test scores, or attend a university in India, and get a 4.0. Doesn't mean a thing except to people without experience.

mickeyc said...

economics is my middle name said...

Mickeye said:

"I got a 4.0 in my econ classes in college so I understand the theory."


For someone that got a 4.0 in economics, you sure didn't learn much.



What did they teach you at Scottsdale Community College Frank?!

kohn_oc said...

You gotta love 'economic' analysis without thinking of politics. It's like a small child vowing to make a world a better place.

Deflation currently in progress serves one purpose only: to make money scarce so that finances can repossess.

But finances are so broke, they will need new money very soon.

So on one hand, finances want to tighten money so they can grab hard assets (gold included) at firesale prices.
On the other hand, finance is by far broke and politics will not let it go that way.

Money spigots will open after elections. Gold will go up.

To believe otherwise is to be naive.

Schiff or no Schiff, it doesn't really matter. Use your own eyes and brain, ok?

Anonymous said...

BS. The US will innovate its way out of this mess.