How To Play Peter Schiff’s “Bullion Collapse” Theory

To investors’ relief, the Fed sent yet another strong signal that it is preparing to take action to boost the nation’s lackluster recovery. According to the minutes released on Wednesday, the central bank has “judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.” Although no one is exactly sure what the Fed has in mind, many believe that another major bond-buying program may be right around the corner. And with the elusive QE3 slowly becoming more of a reality than a sheer wish, commodity investors are already debating how exactly the Fed’s actions will affect them [see also Why U.S. Unemployment Figures Are a Complete Lie].

But of course one man already has an answer: Peter Schiff, one of the most prolific names in gold investing, has spoken once again. The investing Guru, who is well-known for his bold predictions on the global economy and where he thinks markets are headed next, recently stated that gold is currently priced for a collapse.

Since falling from its highs of nearly $1,900, the price of gold has been skirting around the $1,600 level. And although there is no shortage of sour U.S. economic reports, investments in this precious metal have faltered, keeping gold from hitting new highs. Schiff cites that corrupt mega banks and the government have manufactured a wave of propaganda on Wall Street, trying to persuade investors that there is no true value in gold. The bearish sentiment has spilled over into gold mining stocks, whose shares have been hammered recently by poor earnings reports. If this market phobia continues, Schiff believes that investors will be able to continue buying gold at well below established highs [for more commodity news and analysis subscribe to our free newsletter].

However, Schiff also said that he has seen this kind of a market before, and claims he has a relatively good idea of how things could pan out: “Gold will continue testing the $1,600 barrier until it surprises to the upside. This could be spurred by the announcement of QE 3, a calming of fears in Europe, or any shock to the Treasury market. Treasuries have temporarily overtaken gold as the primary safe-haven asset. Once that dynamic is broken, I believe the counterflow into gold will be tremendous.” After the “haze” over investors is lifted, Schiff goes on to predict that that a price collapse is inevitable – but not for gold. Instead, investors should prepare for the market for U.S. dollars and dollar-denominated debt to fall off a cliff, which would send precious metals skyward.

Ways To Play

For those who feel that Schiff is correct in his bold prediction, or is at least headed in the right direction, we outline several ways to make a play on this precious metal:

• SPDR Gold Trust (GLD): By and large the most popular gold fund in the world, GLD is home to over $60 billion in assets and tracks physical gold bullion. This fund is popular both for “buy and hold” investors given its physical structure, but also to traders as it has a very active options market. Be warned, however, that a number of investors feel that GLD is no more than a paper asset and is not worth their money.
• iShare Silver Trust (SLV): This physically-backed ETF has over $8.5 billion in assets and is an investor favorite, trading more than 7.7 million times each day. SLV will allow for investors to use options to make appropriate bets [see also Jim Rogers: Silver Is a Better Investment Than Gold].
• Physical Precious Metal Basket Shares (GLTR): Although not as large as SLV or GLD, this ETF provides investors exposure to not only gold and silver, but also to palladium and platinum.

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Disclosure: No positions at time of writing.