Dominique de Kevelioc de Bailleul: Speaking with Yahoo Breakout, Euro Pacific Capital CEO Peter Schiff chastised the Federal Reserve for maintaining ultra-low interest rates at the expense of retirees. But the outspoken critic of the Fed has a strategy for older Americans to survive the crisis in the U.S. dollar without taking on unnecessary risk. Get my next ALERT 100% FREE
First, Schiff warns all investors of the trend of the U.S. dollar. It’s down. The Fed, in its effort to prevent a sovereign debt and banking collapse, is on course to print the dollar “into oblivion” to replace the financial hole left from bad debt still maintained on the books of the banks and at the Fed, according to him. [Related: Powershares U.S. Dollar Bullish ETF (NYSEArca:UUP), Powershares U.S. Dollar Bearish ETF (NYSEArca:UDN)]
“I think what retirees need to understand, is that when the dollar is wiped out, all dollar denominated debt instruments are going to go with it,” Schiff stated. “So what they have to do is get out of the dollar completely.”
That means, though ‘safe’ assets denominated in U.S. dollars, such as U.S. Treasuries, municipal and corporate bonds will most likely return the face amount of the bond to maturity, the value of those bonds will drop rather rapidly over time, according to Schiff.
A return of two percent on a 10-year U.S. Treasury won’t keep up with food and energy costs, if those commodities appreciate at an average rate of, say, 6 to 8 percent per year. In other words, Schiff believes the U.S. will continue a repeat of the ‘stagflation’ of the 1970s, but during this decade, the rate of inflation could turn out markedly worse.
Moreover, due to the low rates paid on dollar denominated bonds, Schiff sees a troubling trend by some fund managers who offer retirees ‘higher yielding’ U.S. Treasury funds. These higher yields can only be achieved by ‘leveraging up’ the fund, a risky proposition to retirees, according to him.
“A lot of them [retirees] are buying longer-term U.S. Treasuries, you know, maybe 30 years to get extra yield. In so doing, they’re taking enormous risk,” Schiff explained. “In fact, many of the funds that are out there are actually levering up longer-term debt. That’s incredible risk. Other people are buying overpriced stocks.”
Schiff outlines the dilemma presently facing retirees (and other investors), that the financial media refers to as ‘financial repression’, a term used to describe Federal Reserve policy of coaxing investors into assets as a potential means of achieving a meaningful yield by taking on more risk.
Schiff thinks Fed policy is wrong, but he also believes there is a way out for retirees.
“So retirees need to buy gold and silver,” he said, a recommendation also made by famed author Richard Russell of Dow Theory Letters. “If they want more current income, they need to look toward foreign sources. I particularly like high-dividend paying foreign stocks. [Related: SPDR Gold Trust (NYSEArca:GLD), iShares Silver ETF (NYSEArca:SLV)]
“But if you can’t take that risk, you can still buy bonds denominated in foreign currencies. But what you don’t want to do is make the mistake of buying long-term U.S. dollar denominated bonds, because I think the biggest losses in this financial collapse are going to be absorbed by ,felt by, the bondholders. Even those who own U.S. government bonds or municipal bonds, bonds that are thought to be low risk are still going to be wiped out as the dollar collapses.”
As a summation of the Schiff strategy for retirees, he suggests that the techniques of wealth preservation today differs from a more ‘normal’ investing environment in that assets held should be denominated in foreign currencies, not U.S. dollars.
Allocations between stocks and bonds may not necessarily need to vary from a typical retiree portfolio of investments; it’s the currency in which the assets are denominated that matters in a Schiff strategy.
He likes the currencies Swiss franc (NYSEArca:FXF), Australian dollar (NYSEArca:FXA), Norwegian krone, Singapore dollar and Canadian dollar (NYSEArca:FXC).
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