The price of gold was a winner on Friday.
With much of the global equity markets capitulating thanks to geopolitical concerns in Ukraine, investors sought out the safe haven of gold.
The yellow metal crossed the $1,300 mark on the fear-based trade.
Peter Schiff, CEO of Euro Pacific Capital, thinks gold has more room to run.
His target is $5,000 and the reason why has nothing to do with geopolitical concerns.
What he believes, perhaps fervently, is that the Federal Reserve will never end quantitative easing, thus creating inflationary pressures of epic proportion.
This argument is not new. Schiff has been a long-time critic of Federal Reserve policies and in 2014 he is doing a bit of gloating.
In 2013 gold stumbled and stumbled badly. Many believed that the decline in prices was just the beginning.As the calendar turned, the number of gold critics increased substantially.
Schiff never wavered and thus far he is right. Gold has been one of the best-performing investment classes available this year.
Where he gets it wrong is the reason gold prices are rising.
Specifically, gold prices are doing well in direct correlation to the crisis in Ukraine. In other words, it is a fear-based trade not quite based on fundamentals.
With interest rates thus far declining in 2014, the real issue is deflation, not inflation.
And yet the Federal Reserve remains steadfast in its removal of quantitative easing.
While Schiff might be right with respect to future central bank reasons, he is dead wrong for now.
In fact, the Federal Reserve has nearly explicitly stated that short-term rates would be pushed higher as early as the beginning of 2015.
Those are hardly the statements of a dovish central bank needed to support higher gold prices.
Rather, it is the opposite and one could even argue that current policy is too hawkish.
Schiff seems to think the world would be infinitely better off without a Federal Reserve all together.
If you like chaos and anarchy, I suppose such a world would be OK. Hmmm, what investment would thrive in a such an environment?
Gold would soar and probably soar to the $5,000 price that Schiff is targeting.
I would say that Schiff is simply talking up his own book rather than truly believing that gold will go to $5,000.
What he fails to understand is that American capitalism is all about managed capitalism. That means a strong central bank with policies that can be used to smooth out the chaos.
Is it perfect? Not in the least, but it sure beats the alternative.
Just as a healthy aviation industry requires air-traffic control, so too does our economy.
Thus far the management of that economy is about as dead-on as it could get.
Looking forward we are gaining momentum with growth perhaps in excess of 3%. That would justify the current Federal Reserve actions and pretty much put a stake in the gold trade.
Don’t buy the hype of $5,000 gold. It’s pure fantasy.