By Edward Harrison of Credit Writedowns
Marc Faber is in a bullish mindset, particularly on gold. In a wide-ranging interview with CNBC TV-18 in India, Faber talked about where he sees markets headed and why he thinks gold will never drop below $1,000 an ounce.
Private sector contracting while public sector expanding
This is the frame that Marc Faber puts on recent events post 2008 panic, namely that we are likely to see an era of increased government intervention. This is an echo of comments Bill Gross has been making for some time. We are seeing this stimulus on both the fiscal and monetary sides through fiscal stimulus programmes and quantitative easing worldwide.
The economy has not responded robustly given the size of stimulus, Faber says. Asset markets, on the other hand have. This sets up a clear dichotomy between ordinary citizens and those who benefit most from asset price appreciation on Wall Street and elsewhere in the financial sector. Moreover, the spill-over of asset price appreciation into commodity prices further constrains purchasing power for ordinary citizens.
Less certain about carry trade
Faber is less certain about the U.S. dollar carry trade. He sees a dollar overhang due to the enormous U.S. current account deficit and $7.7 trillion in U.S. dollar reserves as more the issue. Many are looking to sell these dollars and hedge their exposure in precious metals and other currencies.
Treasury bearish
The one area where Faber is bearish is U.S. treasuries. He says:
There is a risk that at some stage in 2010, the government bond markets (would) weaken considerably because I don’t understand why anyone who would now buy a 10-year US treasury at a yield of less than 3.5%. It’s a losing proposition. I also don’t understand why anyone could buy a 30-year US treasury at a yield of 4.4%. So I think that eventually yields will go up and this could disturb the stock market.
Not as bullish on equities
Given the huge uptick in share prices globally, Faber believes there is now limited upside going forward. He says the risk/reward in equity markets at present is not favourable. Moreover, profit margins are cyclically high due to cost-cutting. Faber anticipates weakness in profits in 2010, causing earnings to disappoint and precipitating a correction.
Bullish on commodities and precious metals
His logic is as follows: cash is now trash with zero interest rates. So holding cash means underperforming. Bonds present an unfavourable risk/reward. Therefore, commodities and precious metals look attractive. One must also have equities exposure.
Interestingly, he makes a fairly explicit statement in favour of peak oil from about 1:40 in the second video below. The world is adding less in oil reserves than it consumes. That necessarily means a tighter supply/demand dynamic, especially given the demand in emerging economies for oil.
He uses a technical argument to make his money quote (in bold):
I believe that whereas in the past the USD 1000 per ounce level was kind of a resistance level, now it becomes a support level. I don’t think that you’ll see gold below a USD 1000 per ounce probably ever again.
So I’m actually quite positive. Maybe gold at this level is a better buy than it was at USD 300 per ounce in 2001.
If videos don’t appear they are also embedded on original post.
Marc Faber Interview: Part 1 (6:19)
Marc Faber Interview: Part 2 (5:42)
Sources
Gold will never fall below $1,000 an ounce: Faber – Live Mint
Gold won’t fall below $1000/oz level ever again: Marc Faber – Money Control
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Remembering back to 1980 when the price of gold (in 1980 dollars) was over $800…the pundits, who were convinced then that gold would never go down in price again…
It takes from $2.61 – 5.18 of todays dollars to equal one of those 1980 dollars, depending on what method one uses to calculate. (See http://www.measuringworth.com/uscompare/)
This means back in 1980 the price of gold was at least $2,000/oz, and by some measures over $4,000/oz.
One should be VERY wary of anyone who says, “never” in referring to any market/business cycle.
Someone should send him David Lereah’s “Why housing boom will not bust”.
Did you know that it costs around $450, all-inclusive, for big miners to mine one ounce of gold?
Excellent post Edward! I agree with everything he says except gold which is pretty close to its Elliot wave target.
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mark
I see heavy manipulation by the Federal Reserve and its cronies, Goldman etc …
The gold market is not big enough that GS couldn’t run a program to kill the price of it.
If the Fed can run hundreds of billions in treasuries through off shore black trades by intermediaries then gold will certainly be vulnerable.
Th name of the game is whipsaw, and all the trading profits that it generates for the market movers, especially when they coordinate their moves.
Yves, Edward, others — Do you agree with this gold value line of reasoning? Would love to have your opinions in the lead-in to a piece like this rather than just providing us a (nicely done) summary of his points. From a personal finance perspective, I’m extremely skeptical about a market trends argument about an asset’s future price when the asset has an almost completely speculation-based price.
For what it’s worth, I think there’s almost no real floor to gold’s value because so much more has been hoarded that could be dumped onto the market than is needed for its relatively modest commercial uses. I wouldn’t let my clients invest using Faber’s logic unless they clearly understood they were taking a gamble and were really betting on how people’s perceptions of the economy and risk would play out, not on how the economy would actually do.
I’m sorry Marc. You’re wrong on the hyperinflation call and you’re wrong here too. Gold got tossed overboard for good as a proxy currency in 1971 and it’s not coming back.
You’re right..Gold is much to valuable to come back as a currency!
Gold is coming back as the chosen wealth reserve of the world. The madness of storing your excess production into paper currency will end. The Central Banks and super rich are steadily transferring their wealth into the greatest, safest,and most sensible means of storage..Gold
Kind of reminiscent of “oil will never go below $100 again,” circa June 2008, yet within 6 months it was $40USD…
Ancient poeple, among them the ancient Chinese, valued cowrie shells. They used them like we use fiat paper money now.
You could buy a lot of stuff with a lot of cowrie shells then. Perhaps it will be in fashion again one day.
So, this is actually a good time to invest in some cowrie shells as you will be getting in before the crowd. And if you would sent me some money (yes, I will take dollars), I will show you the best ways to get into cowrie shells.
That’s a bit of a misnomer there. The cowrie shell acted in the same fashion as gold did for the societies that used it. West Africa is the best example here. Sea shells were limited supply items that had advantages in terms of societal utility and portability much as gold did. As a result, it took on a central role as money in many ancient societies. See this Wikipedia entry:
http://en.wikipedia.org/wiki/Shell_money
The purpose of gold or cowrie shells is to give an alternative value to money than the one it gets as a medium of exchange. Fiat money has no intrinsic value. Cowrie shells and gold had alternative uses which made them valuable.
The only thing that has real value is your own labor. Money has always been used to deceive. The only difference with gold is that it’s easier to pretend that somehow it’s different.
Talking his book. Two weeks ago he was saying the dollar would go to zero. Maybe he was talking about confederate dollars! There is still a huge overhang of global debt that has yet to be destroyed, but will be. Destruction of debt shows that less of our economy is funded by imaginary dollars, and real dollars, hard currency will prevail.
Who wants the dollar to go to zero? Goldbugs, that’s it.
Oh also I agree that the value of labor is more honest, unfortunately as long as we keep our current trade policy with China active, labor values will continue to be depressed because they have a huge labor advantage by about 4:1 to the US. China will not run out of labor anytime soon.
While gold as an investment class is growing, the vast majority roughly two thirds of the demand constitutes gold for use in jewelry. ETF’s are growing but still less than 15% of the total. On the supply side the marginal supply, i.e. new supply that can come on stream from new mines or supply growth in existing mines pencils out at $300 up to $600/ounce fully loaded (depends a little on exchange rates since a lot of these mines sit in non dollar denominated countries a la South Africa). In any normal market price is determined at the margin with the implication that a growth in a new source of price inelastic demand (keeping other sources of demand equal) will push up prices. The issue with gold is that it’s not in the short to medium term governed by ordinary market forces, and just like short sellers can destroy a company by a self fulfilling (Soros would say reflexive) process of taking large short positions in a stock, so can Gold continue bubbling in the wake of continued bad news on the dollar, the macroeconomy and any other easily available piece of data that can justify piling into a bubble. I think the price of gold could easily keep going up to the $2000 level (driven by it being a magnet for both uncertainty, inflation and dollar weakness) but equally if sentiment and confidence in it falters and the first derivative turns negative , the price could easily fall below marginal supply cost (markets tend to ovewrshoot on the downside to clear”). Figuring out what the likely triggers are for either scenario is the work of good commodity trader. I’m not smart enough.
see Gold world council for the demand details
http://www.research.gold.org/supply_demand/
To gain the confidence and calm the fears of irrational people.
When you lose trust in the currency they pull out the shiny object and you are dazzled by it.
Yeah, “GOLD!’ It’s basically worthless. Warren Buffet said “We dig it up, put it back in the ground and pay people to stand around guarding it.” A relic?
Makes you wonder why every central bank in the world holds so much of it…
Hmmm
I may not be the most savvy investor around, but in the past 20 years or so, of all my investments, it seems gold has been the one that showed the best performance. With most everything else I seem to have either lost or barely broken even.
Additionally, the idea of owning gold transcends the direction of markets. It alleviates one of our deepest fears and needs: survival. For example, my mother once told me that during World War II in Europe, the people who had gold or silver fared well, while many of those who did not, starved to death. Stories like that continue to perpetuate to this day, so some people may buy it for more than investment or protection from inflation purposes.
Vinny
What strikes me: all replies are gold bearish, while the article and any 10 year chart show the extremely bullish pattern.
Are these reviews are all by Fed employees, or just reflecting the sheer ignorance of the readership ?
FACTs count: check the gold charts on your countries currency.
Gold cant be printed, so the ratio to fiat money adjusts accordingly.
THINK straight, & stop listen to the ney sayers who stayed wrong the last 10 years.
Good Luck & BUY physical gold bullion.
I’m with you and Vinny G, James.
To anarkst who says that one’s labor is the only thing of value, well maybe, but money is a medium of exchange and a store of value. One’s labor may be the former (in a barter situation, if someone needs your labor), but it’s sure not the latter. If you don’t work today, that opportunity is gone.
I hope that I’m neither bearish nor bullish on gold. Rather, I’m bearish or bullish on things in general. Every aspect of our financial world bounces around, gold stays in the same place, providing a reference point.
To those who say gold’s time is past, then why does anyone pay attention to it? Why do central banks hold it? If it’s just a dead metal, a ‘relic’ to Keynes, why was it deemed necessary to criminalize its possession in the US for 40 years? How could having an ounce under your mattress threaten the republic? That’s a lot of power for something that just sits there and has few uses.
Gold’s time is just now beginning. It has a lot of catching up to do as it replaces paper products as the store of excess wealth. Gold is a sponge at the bottom of Exter’s Pyramid that will make our Global Financial system viable again.
I had hoped my sarcasm was obvious. Sadly, no. We are on the same page with regards to gold’s shine.
@James – The answer to your question is that it’s the sheer ignorance of the readership. They can’t seem to understand the simple fact that you can’t print gold.
As to the “debt overhang”, no matter how large it is, it is still finite. The government’s ability and will to print is virtually infinite.
The reason for the ignorance is much broader. People just don’t understand that there is no such thing as fundamental value. All value is relative.
@Middyfeek: agreed on the ignorance, but you must admit that the thrust of education and media has been to pretend that, while gold is costly (why jewelry is so expensive) it has no actual value. Anyone who says otherwise is some kind of nut (think what the term ‘goldbug’ implies; there are no such dismissive terms for those who buy paper investments).
I only escaped this mindset by chance. As I was a coin collector from and early age and saw silver disappear from circulation almost overnight in 1965.
In a country like the US we are obsessed with the stock market (I live in Europe, where few people own shares individually.). We are trained to equate the major indexes as proxies for the larger economy.
Another problem for public awareness is that, while we tend to brag about our gains in houses or paper investments, gold holders (especially those with physical) tend to be reserved, even secretive, and for good reason. We don’t publicize our beliefs or trumpet our gains.
The point of all this is that lack of awareness among the readers of NC should come as no surprise. They are heavily drawn from financial professionals, who deal in paper and electronics. Give them a break and hope that they wise up.
Sounds like a sell signal to me!
You may be right.
Sell, by all means, and don’t worry about covering. This is the top.
Bernanke must be doing a good job if he can convince people that he can create lots of dollars, lower the interest rate on those dollars to close to zero and many people still believe they would be better off holding those dollars than something like gold.
Gold is meta-money. Gold, by having fewer productive uses in the “real” economy, is actually more suitable as a neutral store of value. Its price should tend to be less volatile than other, more essentially “useful” PMs. This makes it as neutral and durable a store of value as we have discovered. Gold is one form of money among many. It may a bit “clumsier” and less “efficient” compared to the elegance of “virtual” digital money, but this is precisely its significance — it provides a physical check and balance when human collectives over-extend their resource allocation agreements relative to present and future obligations.
The ideal form of money is a stable, neutral, readily available store of value whose supply growth is constrained. Gold best fits this description, followed by silver. Those who eschew gold have eschewed the painful discipline of physical constraints in favor of the unlimited, elegant, intangible world of ideas. At this point in I submit that we are best served with a mix of physical and fiat money. I don’t think we can go back to a purely coin-based metallic system of exchange. But we still need the discipline that metallic money enforces.
As a long time reader here, I too am dismayed at the allegiance to the US dollar fiat Ponzi racket that has been expressed in the comments here. Capital, as stored value, or savings – in US paper is a gamble considering the deepening debt quagmire that the US Casino is mired in behind the distraction of the bright lights of the dominate media with their pretty cheerleaders and over-stimulated bully announcers.
Time will reveal what is real.
Some rich people invest in art work such as Picasso’s painting which, of course, has no more value than a piece of old rag to some people. You can’t even cut a piece of it to exchange for bread. Gold is different. It is the ONLY stable, universal currency of the last 5000 years. Just look at Zimbabwe’s hyper-inflation and see the role of gold in that country.