Wall Street predators: The Fed's shift will be a big mistake, and gold will “break through the sky”

Since the Federal Reserve began continuing to raise interest rates in March 2022 to deal with inflation, investors have been struggling to resolve two key questions: can these measures effectively stabilize prices, and when is it likely that the Fed will change its strategy?

Recent developments have made the situation more clear. At the Jackson Hole Economic Conference held last week, Federal Reserve Chairman Powell stated that “inflation has declined significantly,” and indicated that the policy will be reversed. “The timing and pace of interest rate cuts will depend on upcoming data, changing prospects, and a balance of risk.”

Although generally speaking, lower interest rates can stimulate economic growth and thus encourage investors, there are still voices of doubt.

Peter Schiff (Peter Schiff), chief economist and global strategist at Euro Pacific Asset Management (EuroPacific Asset Management), expressed great concern about the Federal Reserve's upcoming policy changes. In a recent article published on X, he warned, “If you think inflation is bad when the Federal Reserve claims to fight inflation, then wait and see how bad inflation will become after the current false confrontation ends.”

Schiff's concerns aren't limited to inflation; he also highlighted the potential risks facing the dollar and the wider economy.

Dollar crisis?

Schiff conducted research on the US dollar index, which measures the value of the US dollar compared to a basket of foreign currencies, including the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc.

The US dollar index was established in 1973, with a benchmark value of 100. It reached a high of 164 in 1985, and fell to a low of around 70 in 2008. Recently, the index fell after Powell made a speech hinting at a policy shift.

The US dollar index closed at 100.67 on August 23. Schiff stated, “The index will easily fall below 90 before the end of the year, challenging the 2020 low. ”

This prediction of a depreciation of the dollar could have widespread effects. A weaker dollar usually makes US exports cheaper and more competitive overseas, which may boost US manufacturing and exports.

However, it also makes imported goods more expensive, thereby increasing domestic inflation by increasing the cost of foreign goods and services.

Looking ahead, Schiff predicts that the depreciation trend of the US dollar will continue until 2025. “I think the dollar will bottom out in 2025, leading to a dollar crisis, economic collapse, and soaring consumer prices and long-term interest rates.”

Schiff did not provide further details in the article, but the rapid depreciation of the US dollar could damage the international community's confidence in the US currency as a store of value and medium of exchange. The resulting economic turmoil may also affect the US economy, increasing the cost of repaying dollar debts, especially for foreign borrowers.

Is the Federal Reserve wrong?

Schiff's pessimistic predictions for the US dollar inclined him to choose gold as an alternative to a store of value.

“Gold rose today and closed above $2,500 for the second week in a row,” he wrote in another post on August 23. Meanwhile, the US dollar index fell to its lowest point in 13 months.

He interpreted this trend as evidence of an unwise shift in the Federal Reserve's policy. “This clearly confirms that the Fed's shift was a mistake,” he said.

Schiff has always believed that the fight against inflation is far from over. As the Federal Reserve signals a shift, his conviction is firmer and he anticipates a further rise in inflation.

He predicts that the value of the dollar and gold will continue to show an inverse relationship. He said, “Higher inflation and lower interest rates mean that the dollar will fall to the bottom, while gold will break through the sky.”

Traditionally, gold is considered a guarantee against inflation because it is a tangible asset, unaffected by monetary policy, and does not depreciate due to supply expansion like fiat money. Recently, this precious metal has received a lot of attention from investors, and its price soared 23% in 2024 compared to the previous year.

Schiff is not only doing theoretical research; he is also investing according to his beliefs. According to the latest 13F document submitted by EuroPacific Asset Management, precious metals have received great attention in Schiff's investment strategy.

As of July 30, EuroPacific Asset Management's largest shareholding was gold mining company Agnico Eagle Mines (AEM), and the second largest shareholding was Barrick Gold (ABX), another heavyweight company in the gold mining industry.