Peter Schiff, chief executive of Euro Pacific Capital, isn’t surprised by the recent fall in the US stockmarket. Indeed, the perennially bearish gold fan has been expecting it for a long time. “The real time to ask what was going on was when the market was rising.” Compared with the rises of past few years, “what’s happening now makes a lot more sense”.
Ironically, President Donald Trump’s tax cuts – which had until now been seen as the great hope for corporate profits and otherwise overvalued equity markets – are largely to blame. These have “thrown a spotlight on the US deficit” (the annual amount of government spending that has to be covered by borrowing, rather than taxes). Schiff thinks the budget talks between Republicans and Democrats are only likely to make things worse as they will “lead to a lot of pork-barrel spending”.
Schiff expects the US budget deficit to go over $1trn a year. If you look at the most recent trade figures, then, excluding oil, we’ve just seen “the largest monthly trade deficit in the history of America”. While the government ran large deficits in the aftermath of the financial crisis, it was only able to do this because the Federal Reserve was buying $85bn-worth of government bonds a month. However, not only has the Fed stopped printing, but it is starting to unwind these purchases.
“Once you start to end the policy of cheap money then the whole economic bubble that has been created will disappear,” reckons Schiff. This can result in one of two scenarios – either “rates keep rising and markets keep falling”, or the Fed reverses its policy and “intervenes to prop up the stockmarket”. Whatever happens, the outcome is likely to be good for gold, which will benefit from its safe-haven status in the case of a crash, or will do well if the Fed launches another round of loosening.