Gold bug Schiff counters Goldman on first drop since 2000

Peter Schiff lays an iPod-sized bar valued at about $40,000 on the sun room floor of his Connecticut mansion, and calculates it would cost about $250,000 for each floor tile to pave the room with gold.

He shows off $50 gold chips, to be used when paper money becomes worthless, a prediction repeated on his daily two-hour radio show broadcast from his basement studio to 68 stations in 30 states and 50,000 listeners online. The unabashed gold bug’s Euro Pacific Capital Inc. manages a $20 million mutual fund that invests in stocks related to the metal and lost 6.4% since it began in July. The Philadelphia Stock Exchange Gold and Silver Index slid 1.8% in the same period.

Schiff, 50, isn’t fazed that gold is heading for its first annual price drop in 13 years, or that Goldman Sachs Group Inc. has called it a “slam-dunk sell.” He predicts bullion will reverse its 21% year-to-date decline and probably surge 52% to reach a record $2,000 an ounce within a year. That’s just the beginning: Before President Barack Obama leaves office in 2017 the U.S. will default, the dollar will collapse, hyperinflation will strike and gold will skyrocket, he says.

“I’m waiting for the dollar crash, I’m waiting for the real crisis to hit that I know will benefit gold,” Schiff said Oct. 18 over lunch of spinach-and-beet salad and stewed rabbit in the sun room after the radio show. “The longer it takes, the longer I have to wait for that payday. But the longer it takes, the bigger that payday is going to be.”

Critics Laugh

With inflation at or below the Fed’s 2% target for the past 11 months, the Standard & Poor’s 500 stock index reaching record levels and the dollar strengthening against major currencies in the past year, Schiff knows his forecasts make some people laugh. He’s used to it. They also scoffed in 2006 when he predicted on television that housing prices would plunge, lenders would go bankrupt and stocks would plummet, as they did two years later.

“They should take him seriously -- he was right with a lot of other ones,” Ron Paul, the former Republican Representative from Texas who has called for abolishing the Federal Reserve and auditing the U.S. gold depository at Fort Knox, Kentucky, said by phone on Oct. 23. Schiff was an economic adviser to Paul’s presidential campaign in 2007.

No Danger

“They don’t want to admit that people in the free market are right because they would have to give up government planning and government power and give up their wars and give up the welfare state,” Paul said.

Schiff’s predictions don’t persuade Austan Goolsbee, an economics professor at the Booth School of Business at the University of Chicago and former chairman of the Council of Economic Advisers under Obama.

Gold bugs, investors who buy the metal as protection against a collapse in financial assets, fail to understand that the Fed’s pumping money into the economy only offsets banks’ tighter lending and stockpiling cash, Goolsbee said. Until credit conditions return to “normal,” there’s no danger of inflation, he said.

“They have been saying that for literally four-plus years, and they have been egregiously wrong,” Goolsbee said by phone Oct. 30. “As a matter of mathematics, they’re just adding up the numbers incorrectly to say that they think there’s going to be 200% inflation.”

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