Peter Schiff: We're in a Depression, so Ditch Dollar and Buy Gold

Friday, 01 Jul 2011 11:53 AM

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The U.S. economy is stuck in a depression, not recovering from a recession, thanks to lax U.S. monetary policy, so investors would be wise to ditch dollars and invest in gold, says Peter Schiff, CEO & Chief Global Strategist at Euro Pacific Capital.

The dollar could lose 50 percent to 70 percent of its value, Schiff tells Newsmax.TV.

The Federal Reserve has ended a $600 billion bond buyback, known as quantitative easing, but don't expect its overall loose monetary policies to change.

Such programs temporarily prop up the economy and are politically popular, but they don't right the economy for the long term and jack up inflation rates and weaken the dollar in the process.

"I actually think we are in a depression, and a depression is interrupted briefly by the phony expansion that we get from the stimulus," Schiff tells Newsmax.TV.

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"All we are doing is spending more borrowed money, so we are not stimulating the economy, we are stimulating all the problems in the economy and we're making them worse."

The country is not going to experience real, genuine and lasting recovery until the government gets out of the way and allows the market to correct, Schiff says.

Doing so would be painful but lead to lasting recovery, which would be more beneficial to everyone in the long run.

Stimulus measures such as quantitative easing allow politicians to claim recovery while giving them just enough wiggle room to overlook the inflationary impacts that such policies entail.

"We need to go through a recession, as painful as that is. The government needs to stop numbing the pain with Novocain," Schiff says.

"What we need is a restructuring of our economy, we need less spending, less debt, less consumption, more savings, more production, less government, fewer regulations. A lot of things are needed to get a real recovery, but unfortunately we don't get any of that, we just get more of this artificial stimulus and we go from recession to recession."

So what's an investor to do in such a bleak environment?

Avoid the dollar and avoid investing in the U.S. housing market.

Stocks may go higher if loose monetary policy continues, but the value of those equities will be less in real terms if the dollar is weaker and inflation climbs.

"It creates the illusion that the stock market is going up when it's not. Our money is losing value and we are simply measuring stock prices in cheaper money, so it looks like stocks are going up but really it's our money going down, and so people might on paper be richer but in reality they are going to be poorer," Schiff says.

That means when people sell their stocks, food and energy are going to cost a lot more than in the past.

"We are going to feel a lot poorer when we go shopping."

Use the greenback as a weather vane; a weakening greenback will mean higher stock prices.

"My guess is it could lose at least 50 percent of its value from here, or maybe 60 percent or 70 percent or more, which means the stock market is going to have to double or triple just to stay even. I doubt that's going to happen but I could certainly see the Dow going up 50 percent with the dollar losing 70 percent of its value."

Gold, long a safe haven for investors looking to hedge against a weakening dollar, will climb, possibly beyond $5,000 an ounce, depending how expansive the Federal Reserve stays.

The metal is currently trading around $1,500 an ounce.

Foreign assets will be good plays as well.

"You need to be invested abroad, you need to be in foreign currency denominated in stocks and bonds, particularly in stocks, you need to own commodities, particularly precious metals — gold and silver," he said.

"I think this has been a winning strategy for the past decade, and I think it will continue to be a winning strategy particularly as long as we have a reckless Congress and an incompetent Fed chairman."

Housing, meanwhile, still has room to fall.

"If anyone is looking at housing as an investment, they are mistaken and should look someplace else."

Other investment professional have been quick to criticize the Fed's quantitative easing program, known widely as QE2.

"The damage to the Fed’s reputation as a bastion of financial stability is irreparable," says Lou Crandall of Wrightson ICAP, according to The Wall Street Journal.

QE2 was merely "better than for the Fed to announce 'we are giving up,'" adds Ethan Harris of Bank of America Merrill Lynch.

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