Since the U.S. Federal Reserve began steadily raising interest rates in March 2022 to combat inflation, investors have been grappling with two key questions: Will these measures effectively stabilize prices, and when might the Fed change its strategy?
Recent developments provide some clarity. At the Jackson Hole Economic Symposium last week, Federal Reserve Chairman Jerome Powell noted that “inflation has come down significantly” and signaled a change of course.
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“The time has come for monetary policy to adjust,” Powell said. “The direction is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
From March 2022 to July 2023, the target range for the federal funds rate increased from 0% to 0.25% to a substantial 5.25% to 5.50%. While lower interest rates generally could boost economic growth and support investors, skepticism remains.
Peter Schiff, chief economist and global strategist at Euro Pacific Asset Management, has expressed serious concerns about the Fed’s upcoming shift in strategy. In a recent article on X, Schiff warned: “If you thought inflation was bad when the Fed claimed to be fighting it, wait until you see how much worse it is now that the so-called fight is over.”
His concerns go beyond inflation; Schiff also highlights looming risks to the U.S. dollar and the broader economy.
US Dollar Crisis?
Schiff looked at the U.S. dollar index, which measures the greenback’s value against a basket of foreign currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
The index was created in 1973 with a base value of 100, reached a peak of 164 in 1985 and bottomed out at around 70 in 2008.
More recently, the index fell following remarks by Powell suggesting a change in policy.
On August 23, Schiff noted: “The dollar index closed at 100.67. The index could easily fall below 90 before the end of the year, challenging the 2020 low.”
This expected depreciation of the dollar could have broad implications. In general, a weaker dollar makes U.S. exports cheaper and more competitive abroad, which could boost U.S. manufacturing and export sectors. However, it also makes imports more expensive, which could contribute to domestic inflation by increasing the cost of foreign goods and services.
Looking ahead, Schiff predicts that this downward trend will persist through 2025, saying: “I think this low will be breached in 2025, triggering a U.S. dollar crisis, collapsing the economy, and sending consumer prices and long-term interest rates skyrocketing.”
Schiff did not provide further details in his post, but a rapid decline in the dollar’s value could shake international confidence in the U.S. currency as a store of value and medium of exchange. The resulting economic turmoil could also impact the U.S. economy by making it more expensive to service dollar-denominated debt, particularly for foreign borrowers.
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The Fed’s mistake?
Schiff’s gloomy outlook for the US dollar leads him to favor an alternative store of value: gold.
“Gold rose today to close above $2,500 for the second week in a row,” he noted in another article on August 23. “Meanwhile, the U.S. dollar index fell to a 13-month low.”
He interprets this trend as evidence that the Federal Reserve’s policy change is ill-advised. “This clearly confirms that the Fed’s change of course is a mistake,” he says.
Schiff has consistently maintained that the battle against inflation is far from over. With the Fed’s pivot signal, his conviction only deepens, anticipating further price increases. He predicts a continued inverse relationship between the value of the U.S. dollar and gold, saying: “Higher inflation and lower rates mean the dollar crashes while gold soars.”
Traditionally, gold has been considered a hedge against inflation, as it is a tangible asset that is not subject to the whims of monetary policy that can inflate the supply of fiat money. The yellow metal has recently attracted considerable attention from investors, with its price climbing 23% in 2024 compared to the previous year.
Schiff doesn’t just theorize; he invests based on his convictions. Euro Pacific Asset Management’s latest 13F filing reveals that Schiff’s investment strategy places a strong emphasis on the precious metal.
As of July 30, Euro Pacific Asset Management’s largest holding was gold mining company Agnico Eagle Mines (AEM). Euro Pacific’s second largest holding was Barrick Gold (ABX), another major gold mining player.
For those who share Schiff’s outlook and are considering gold as a complement to their investment portfolio, the options are numerous. Investors can buy gold bullion, own shares of gold mining companies, invest in gold ETFs, and even take advantage of potential tax benefits through a gold IRA.
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This article is provided for informational purposes only and should not be construed as advice. It is provided without warranty of any kind.
