(Kitco News) - As gold surged to a new record and silver hit a 14-year high Tuesday, economist Peter Schiff warned that the Federal Reserve is on the verge of making its "biggest error yet," a move he believes will accelerate a crisis of confidence in the U.S. government itself.
In a wide-ranging interview with Kitco News just hours before the Fed's pivotal interest rate decision, Schiff, the chief economist at Euro Pacific Asset Management, argued that the real risk to the economy is no longer from private debt, but in the perceived safety of U.S. sovereign credit. His stark warning comes as gold prices touched a fresh all-time high of $3,698 an ounce while the U.S. Dollar Index traded near a 10-week low.
The Fed's "Catastrophic Mistake"
With markets pricing in a 94% probability of a 25-basis-point rate cut according to the CME FedWatch Tool, Schiff argued the central bank is misreading the economy and should be doing the exact opposite.
"This may be the biggest error yet for the Fed," Schiff said. "Not only should they not be cutting rates, they should be raising rates."
He believes the central bank prematurely ended its last tightening cycle not because it had won its battle with inflation, but because of the banking turmoil that began last year. "They were just afraid to keep waging the war because of the collateral damage," Schiff stated.
"A Crisis of Public Credit"
According to Schiff, this policy error is a symptom of a much larger problem: a fundamental shift in the nature of the coming crisis. He was adamant that investors looking for a repeat of the 2008 mortgage bust are looking in the wrong place.
"The crisis that I believe that we're headed to is not gonna be similar to ‘08," he explained. "This is not going to be about a loss of confidence in private credit, but public credit. It's going to be about a loss of confidence in the US government".
The World Abandons the Dollar
As evidence for this loss of confidence, Schiff pointed to foreign creditors divesting from U.S. debt. He directly refuted a claim by Treasury Secretary Scott Bessent that U.S. bonds were the world's best performers this year.
"He's wrong about that because he's not factoring in foreign exchange," Schiff said. "The world has seen significant losses on US treasuries this year due to the 10% decline in the value of the dollar, which has more than wiped out the coupon".
This isn't just theory. According to the latest Treasury data, China's holdings of U.S. debt have fallen to their lowest level since 2009, at around $756 billion.
A Rally Without the Public
In a key insight for investors, Schiff revealed that the retail public is largely sitting out the precious metals rally. While the VanEck Gold Miners ETF ($GDX) has soared over 100% year-to-date, Schiff noted this has been happening without broad participation.
“We are not even close to the volume we had in 2020,” he said, referencing sales at SchiffGold. He said that in April, he urged investors to buy the "dirt cheap" miners rather than chase physical gold.
Now, Schiff sees the rally as being driven by more sophisticated players. “The central bankers are the primary drivers,” he said. “They haven't had any competition from private investors”.
He argued that silver, which hit a 14-year high above $42 an ounce, remains undervalued relative to gold, with the gold-to-silver ratio standing at a historically high 88-to-1. "When this becomes a retail-driven bull market as opposed to a central-bank-driven bull market, then I think silver is going to respond," he added.
The Political Wildcard
Schiff also warned that the institutional framework of the U.S. financial system is under threat, pointing to the ongoing legal battle over President Trump’s attempt to fire Federal Reserve Governor Lisa Cook - a case that tests the limits of the President's power over the central bank.
"I think there's a real danger right now that the Supreme Court... may actually rule that Trump does have the right to fire her," Schiff warned. "It could completely destroy Fed independence."
Ultimately, Schiff paints a picture of an economy at a crossroads, where decades of policy decisions are coming to a head, forcing a great repricing of the dollar, government debt, and hard assets.
Watch on the Kitco News YouTube channel here: Catch the full, unedited conversation where Peter Schiff explains the anatomy of the crisis, the risks to 401(k)s, and his forecasts for gold and silver.