The outlook for Dollars, Yen, Euros, the Pound and Gold Bullion...
PRESIDENT and chief global strategist of Euro Pacific Capital, Peter Schiff has earned a well-deserved reputation for predicting the path of currencies worldwide, as well as forecasting the current meltdown in the global economy, reports Hard Assets Investor.
Schiff spoke recently to the Exchange-Traded Funds Report about the outlook for the US Dollar, other foreign currencies, and Gold Prices.
ETFR: What are the best-positioned currencies?
Peter Schiff: I like the Asian currencies, the Japanese Yen and the Singapore Dollar. In Europe I like the Norwegian Kroner and the Swiss Franc. I also like the New Zealand Dollar and the Australian Dollar. I also favor any currency that's pegged to the US Dollar, as long as it unpegs in due course.
ETFR: Why don't you like the US Dollar?
Peter Schiff: We believe the US Dollar is in a major long-term bear market, and as such, recommend keeping exposure to the Dollar at an absolute minimum. All long-term savings and investments should be denominated in select foreign currencies against which we believe the Dollar is likely to fare the worst.
It's too bad, because the Dollar has been a safe haven for a long time, and the world's de facto reserve currency. People used to say "What could be safer?" That used to be when the Dollar was backed by a strong, productive, export-based, savings-based economy.
Problem is, that's no longer the case, and now the Dollar is backed by nothing. The Dollar is strong on a relative basis but it makes no sense. That's a function of people wanting to own anything, and it's an aversion to risk without regards to the actual riskiness inherent in the Dollar.
ETFR: How bad will it get for the Dollar?
Peter Schiff: I believe there are two possible scenarios, both negative. Global stock prices and commodities will eventually recover but the Dollar will weaken. Or, commodities go up but stocks and the Dollar both weaken. Obviously the latter is a worse outcome. In either case, the Dollar goes down. I see the Dollar index dropping to 40 (it's now at 88), but the jury's still out if it goes much lower. It depends on if the rest of the world plays the devaluation game with us.
ETFR: How would you restore the value of the Dollar?
Peter Schiff: I would put a stop to the Federal Reserve setting artificial interest rates and printing trillions of Dollars out of thin air. Instead, get the Fed out of the markets and bring back balanced budgets, low taxes and robust production. I would also encourage people to go back to saving and producing, and to stop borrowing so much. All the borrowing further devalues the currency.
ETFR: Getting back to the currencies you like, why them?
Peter Schiff: Because I like the fact those economies, particularly the Asian region, will economically outperform the rest of the world. Those are nations that are producing or saving the most.
ETFR: There's been a lot of speculation on the breakup of the Euro. Is the Euro doomed?
Peter Schiff: Many investors, including major corporations and central banks, diversified their currency holdings into the Euro. Unfortunately, the world recession is hitting Europe extremely hard, particularly the large international exporters such as Germany, and the newly capitalist countries of the former Soviet Union. The plight of Eastern Europe has widened political cracks within the European Union to the point where there is now a serious risk that the euro and even the European Union could fail.
However, if there's a breakup of the Euro, it won't happen soon. The Euro is definitely headed lower, relative to the Yen and to Gold Bullion, but it's not going to zero. And it's certainly not going to underperform the US Dollar. The European banking system and economy are much sounder than the US.
Also, there's still demand from Eastern European countries who want to adopt the euro. So there may be a lot of negativity about the Euro, but to me that leaves room for a surprise to the upside.
ETFR: What about the British Pound?
Peter Schiff: I think the British economy is in the worst shape of all of them, so I don't see the Pound strengthening any time soon.
ETFR: Should the US government have a more active role in the direction of the Dollar?
Peter Schiff: I'm glad you brought up the government, because we believe that the growing imbalances in the US economy, its twin budget and current account deficits, its lack of domestic savings and the erosion of its industrial base have now reached a point where a severe recession is imminent. The Federal Reserve, Congress and the president, for lack of political will, are likely to exacerbate its severity, making the inevitable [more severe] recession that much worse, and increasing the probability of a hyperinflationary outcome, which would render the US Dollar, and all US-Dollar-denominated financial assets, practically worthless in terms of real purchasing power.
The best thing that the government can do for the currency is to preserve its value. And to do that it should advocate for and implement sound fiscal and monetary policies. The United States has a reduced competitive position which the Dollar doesn't currently reflect, but it will. To prevent that from happening, we need to pursue policies to maintain its value.
ETFR: What type of policies?
Peter Schiff: We need to encourage a higher savings rate, for consumers, businesses and the government. We need to have more manufacturing – produce goods and export them as opposed to constantly bringing them in from elsewhere.
ETFR: Are you a believer in the Gold Standard?
Peter Schiff: Yes, but I don't think it's coming back anytime soon. I have a lot of faith in gold's safe-haven status, particularly compared to currencies; even the Yen, which looked strong for a while, but eventually weakened against bullion.
With gold, there's no counterparty risk, there's no risk of oversupply, barring a big seller – which would still be constrained. There are currencies that compete with gold for safe-haven status, but their yields are extremely low, even zero. Not to mention their monetary inflation risk.
So it strikes me that investors are better off with Gold Investment than with any currency. In fact, we believe that gold is in the early stages of a new, secular bull market.
ETFR: Are you a fan of any emerging market currencies?
Peter Schiff: I like the Southeast Asian economies, so their currencies will outperform: Korean Won, Taiwan Dollar, Thai Baht, Philippine Peso. Those economies – in fact the entire region – will benefit from China gaining more traction in the global economy, and ultimately when Chinese domestic demand increases.
ETFR: I noticed you haven't said anything about the Chinese Yuan.
Peter Schiff: The Chinese work hard and save, and if they invest those savings in their own economy, that will hurt the US Dollar and strengthen the Yuan. In short, we've relied way too much on what I call "cheap China": cheap labor, products and capital. In the meantime, China continues to be a big buyer of our debt. Secretary of State Clinton went to China and asked them to buy more of our bonds. It's outrageous that we want the Chinese to subsidize our economy and buy Dollar-denominated debt, which will let us buy more of their products on the cheap with the proceeds.
Once the Chinese figure out that it's better for them to invest their own capital in their own economy, as opposed to investing it in someone else's economy, then we'll really be in trouble. They'll realize that they no longer need the United States. The same goes for all of the foreign governments who hold huge amounts of US Dollar Treasury debt.
Should these foreign central banks divert to domestic initiatives some of the funds used to buy US Treasuries, serious upward pressure on US interest rates will result. Should they actually sell parts or all of their holdings, they will likely put serious downward pressure on the US Dollar.
ETFR: What about emerging markets currencies, such as the Brazilian Real or the Colombian Peso?
Peter Schiff: We're not doing much in Latin America at the moment, but when natural resources and commodity prices come back, they'll benefit. Like gold, we believe that commodities in general are in the early stages of a new bull market. Basically, we favor currencies from countries that aren't misusing their credit and that are investing productively in their own economies; unfortunately, the US doesn't qualify as one of those countries.