Peter Schiff, a well-know entrepreneur and economist, is a proponent of the Austrian school of economics, and he had predicted the subprime crisis. This gives us two good reasons to listen to him. According to him, the actual downside move for gold looks quite a lot like the one in 1976, which had only been temporary. As a matter of fact, after President Nixon closed the « gold window » on August 15, 1971, the price of gold kept rising, from $35 an ounce to close to $200 at the end of 1974. In an inflationary context (11% in 1974), gold was playing its role of protecting against prices rising. But the Fed reacted by hiking its rates, and succeeded in bringing back inflation down to 5% in 1976. Gold went back down to close to $100/oz. There was much optimism in 1976 : the first oil crisis was over and recovery seemed imminent. We now know that it wasn’t so, because the crisis was much deeper than a single rise in the price of an oil barrel, and there was no real recovery until Ronald Reagan liberalized air transportation, the telecoms etc. Meanwhile, gold turned to the upside, from 1977 to 1980 (peaking in 1980).
The context, today, looks the same. A « recovery » is being sold to the public by the mainstream media, financial counselors and political leaders. French President François Hollande announces « the crisis is behind us »; he must have made a u-turn without realizing it! In the United States, GDP growth for the first quarter has been revised down from 2.4 to only 1.8%. Does 1.8% sound like a recovery? It’s not, but many people believe in it and that weighs on the price of gold. And we know, of course, that manipulations occur with massive selling of « paper » gold (certainly initiated by central banks), while physical gold sales are doing very well. That plays a role as well.
« Gold’s plunge is saying a lot about consumers’ confidence in global recovery », wrote the New York Times on August 29… 1976. Some are writing the same things today, so let’s not fall for it. As in 1976, we are only in a remission, due to massive monetary printing from the central banks of the US, Japan and Europe. There is no inflation yet, but we are witnessing asset bubbles (sovereign bonds, commodities), which boils down to the same thing, more or less (« asset inflation »). So, while we hear a little less about the crisis, public debts are soaring, banks’ balance sheets are still degraded, and there is no recovery at all. There will be no recovery, and the actual crisis is much worse than it was in the ‘70s.
Investors must remain calm and keep a critical mind permanently. They have to go beyond the big media noise. And now is really not, really not the time to sell one’s gold.