Peter Schiff: Markets Rally on Peace — But the Fed Rules Everything

On Tuesday’s episode of The Peter Schiff Show, Peter walks through the latest flare-up with Iran, the strange market response to de-escalation, and the future of the wartime economy. He argues that headlines about war and peace are being subordinated to one force above all — the Federal Reserve — and makes the case that real interest rates, not hot-button events, drive gold and other safe havens.

He starts by reading and reacting to the president’s dramatic social-media posts threatening Iran and the odd way the message came across:

Then again this morning, as if that wasn’t enough, this morning Trump came out with another post where he basically threatened to kill Iran’s entire civilization; he said, “Tonight the Iranian civilization will die never to come back,” something like that. … I mean I don’t care what Trump says — how is he gonna give an order to drop bombs on bridges that are full of women and children? There is no way it was gonna happen.

He notes the conditional pause the president later announced and points out that calling a temporary suspension a ceasefire doesn’t make a settled diplomacy:

He’s not calling it off — all hell is still gonna rain down, he’s still gonna wipe out their civilization, he’s just gonna wait two weeks. I mean obviously he didn’t do it today, he’s not gonna do it in two weeks, and I think the Iranians realize that this is not gonna happen; this will be a double-sided ceasefire. … Now I don’t think they’re anywhere near a long-term agreement for peace with Iran, let alone the entire Middle East, so that’s just BS.

He argues that the media and White House spin about Iran’s concessions are exaggerated, and that any supposed Iranian “ten-point” proposal actually strengthens Iran’s hand:

The ten-point proposal is basically a complete victory for Iran. If those ten points that Iran is insisting on — if we agreed to those ten points — Iran would be in a much better position after the war than they were before the war. So what would we have achieved? We would be no safer and we would have elevated the position of Iran and diminished our own. I mean to me the two sides are as far apart as they were from the very beginning; I don’t see what Iran has conceded and the president is claiming that, you know, we’re almost there, like the whole mess is over but the mess that he created on his own.

Turning to markets, Peter points out a counterintuitive pattern: gold often falls when rhetoric heats up and rallies when tensions ease — which suggests something other than geopolitical fear is driving prices:

Whenever there’s an escalation in the rhetoric — this war is gonna get worse — gold goes down. But when we have a situation today, it gets de-escalated, there’s a ceasefire, gold goes way up. That is the opposite of what you would expect if gold is supposed to be a safe haven. You need a safe haven when there’s war; when it’s peace you don’t need a safe haven anymore — it does nothing that you need safety from because the hostilities are ending. But everything is keying off the Fed — everything — and it shows you that the Fed just has way too much power in the economy or in the financial markets.

He wraps up by arguing that  what matters is real interest rates — nominal rates minus inflation — and that Fed moves alone aren’t the deciding factor for gold or living standards:

But what all of these traders still don’t get is that the rate cuts are not what’s important; what’s important is where our interest rates are relative to inflation. It doesn’t matter if the Fed cuts or hikes — if inflation moves up more than the Fed hikes rates, or the Fed doesn’t hike rates at all and interest and inflation move up, you’re getting a reduction in the real rate of interest and that’s bullish for gold. And it’s not higher oil prices that are inflationary; higher oil prices don’t mean higher inflation. … The only reason that we can pay more for everything is because the Fed creates the inflation; the Fed creates additional money.