Gold: Bursting Bubble or Correction?

05/29/2013 8:30 am EST

Focus: COMMODITIES

Peter Schiff

CEO, Euro Pacific Capital, Inc.

Longtime gold bull Peter Schiff, from Euro Pacific Capital, explains how the recent decline in gold prices has affected his outlook.

Welcome to the MoneyShow.com Video Network. I'm Charles Githler here with Peter Schiff.

Peter, you're a long-time inflation hawk and a gold bug, and no one knows more about how to mix in investments and currencies with hard assets to protect yourself against inflation. Gold has been a very difficult investment, particularly in the last couple of quarters, with some notable ups and downs. What's going on with gold?

Well, you know it's only recently that the price of gold has come down. Remember, this bull market has been going since 1999. You had gold at $265 or $270, and then it got up to $1,900, so we've had a normal bull market correction.

The last time we had a correction like this was in 2008, except it was a little bit bigger percentagewise. And then gold almost tripled. So markets are entitled to a correction.

What's so amazing is how much bearishness has been created by this correction. You know, I can't read an article about gold now without seeing the word crash, bubble bursting, collapse. All the people that didn't see the stock-market bubble, that didn't see the real estate bubble, are convinced that gold's in a bubble and that's it already popped. Even though they never bought any gold themselves.

I think gold is one of the few markets that's not in the bubble. It is a legitimate bull market. It is being driven by the most inflationary monetary policy the world has ever seen.

Twenty-two central banks, right?

Yeah, not just in America...all around the world.

This bull market, unfortunately—because it's not a good thing that the price of gold is going up—but unfortunately it's going way up. I think maybe this might be similar to the big 50% correction that gold had in 1976, because it dropped from like $200 to $100, and then in four years it hit $850.

I remember it well.

The thing is, the US economy is in much worse shape now than it was in the late 1970s. And the Fed doesn't have the tools to control inflation, because the only reason that the gold market stopped rising in 1980 was because Ronald Regan came in and slashed marginal taxes and Paul Volcker raised interest rates to 20%.

We're not going to do that. If anything, they're going to raise marginal tax rates-—they already have—and interest rates, we can't raise interest rates. We can't even afford 5% interest rates. We probably couldn't even afford 2%. That's how broke we are at this point. So the fed has to let inflation run out of control, because the cost of putting out the fire, at least politically, is too great.

I think you've got a huge move coming. If you don't own any gold, take advantage of this pullback, and if you do own gold, buy more.

And you know what looks incredible to me? The mining sector. I've never seen in all the years I've been an investment professional...I've never seen so much bearishness on one sector ever.

Where would you play the mining sector in particular?

Well, the safest way to do it is with the best blue-chip stocks, because at least you know that they've got the balance sheets and they've got the resources to not go bankrupt.

I mean, if you get into some of the juniors, if you timed it right, you can make a lot of money. But you have to be careful in this environment, because the price of mining gold has skyrocketed over the years.

It's kind of ironic, because gold in a way is a victim of inflation. You would think gold would benefit from inflation, but because nobody believes there's inflation, gold is not priced where it should be. But the cost of mining has gone up dramatically.

I mean, a lot of companies now, their cost of mining is $1,000 an ounce, $1,200. These are companies that were making money ten years ago when gold was at $300. They can't make it now unless it's higher, because of all the inflation that has brought up the cost of mining.

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