Peter Schiff Says Rising Yields Bode Well for Gold

Peter Schiff, who deals in precious metals and rose to fame by warning about the financial crisis of 2008 long before it happened, has again made news by saying that the current rise in bond yields is very good for the price of gold.

During an interview with Kitco News, the owner of an equities fund focusing on gold said that traders and investors have it wrong when they assume that rising yields are bearish for gold. The reverse is actually true, Schiff says.

He explains that when yields rise as quickly as they are now doing, the message is that the bond market is in freefall and could collapse at any time. Yields rise each time investors lose trust in a currency, and the issuer has to offer higher interest rates in order to attract buyers, Schiff says. He adds that this is exactly what is happening in the U.S. bond market.

Schiff points out that as yields rise and inflation also rises, investors start to realize that they are losing money by holding bonds. Such investors will then start selling bonds en masse and the money they obtain from those sales will be channeled into safe-haven gold to preserve their purchasing power.

This is the reason why Schiff says these rising yields are good news for gold prices. He says that the U.S. dollar is eroding, but the pace at which this is happening is still slow. As the pace picks up, investors will dump bonds rapidly and cause yields to climb even faster. It could get to a level where the government pays 50 cents on every dollar borrowed.

He also says it is ill-advised for the government to buy back long-dated bonds as it is currently doing. Replacing those long-dated bonds with shorter-term bonds on which higher interest rates are paid worsens the indebtedness of the government in the long term and accelerates the rate at which the bond market weakens.

Investors are watching this situation closely, he adds, and central banks are continuing to buy gold at unprecedented levels. Schiff sees gold climbing back to $5,000 before next year ends, and that is speaking conservatively, he adds.

He offers an explanation as to why gold slides each time yields rise. He says lots of traders are using algorithms, and those systems are trained to sell bullion each time yields rise. This explains why the price drop isn’t significant each time yields rise. Schiff says gold sellers will soon taper off, and gold could really take off thereafter.

If the gold market plays out as Peter Schiff is saying it will, gold miners like Platinum Group Metals Ltd. (NYSE American: PLG) (TSX: PTM) could see their revenues from bullion climb to levels they haven’t seen in a long time.

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