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Going For Gold
By Drew Voros | 01 May, 2012

[This article previously appeared on HardAssetsInvestor.com and is reproduced with their permission]

Swiss-born and educated Marc Faber’s distinct voice is a common sound on CNBC and Bloomberg TV when it comes to big-picture forecasting in investments. The contrarian views of his “Gloom, Boom & Doom Report” often garner headlines, but Faber does go along with the crowd when it comes to pointing out the dangers of rising government debt and unabated monetary intervention. Hard Assets Investor’s managing editor Drew Voros caught up with Faber at his Hong Kong residence and spoke to him about gold, the Treasury market, which countries should be out of the eurozone and what an ideal portfolio allocation looks like.

Drew Voros: At the Inside Commodities conference last December in New York City, you presented a line chart that compared gold prices to US federal debt and showed the parallel trajectory lines of both. With debt increasing every day, your charts say gold will keep increasing, right?

Marc Faber: People say the price of gold is in a bubble stage and it is up substantially from the lows in 1999, which was, at the time, around US$252 per ounce. But at the same time, we had an explosion of debt, not just government debt, but private sector debt, and an explosion of unfunded liabilities such as in the pension fund industry, and not just with Medicare, Social Security and Medicaid.

So now, 12 years after the gold’s low, we are essentially in a situation where maybe the price of gold should be much higher because the economic and financial conditions are worse than they were 12 years ago. I go to lots of conferences and I usually ask the audience: “How many of you own gold?” Normally, hardly anyone owns it. I’ve been to conferences with thousands of people attending, and nobody owned any physical gold.

I doubt we are in a bubble stage. When you went to an investment conference in 1989, everybody owned Japanese stocks. And in 2000, everybody owned tech stocks. That is the bubble, when the majority of market participants own an asset. I think there are more people that own Apple stock than gold.

DV: What’s the biggest influence on gold right now? Is it all this sovereign debt?

Faber: We had the big move. The gold price overshot when it went to US$1,921 on September 6 last year. And then we oversold on December 29, when gold went down very quickly to US$1,522. I suppose around this level, gold’s price is moving sideways. I wouldn’t mortgage my house expecting prices to go up. They could still go down more and we would still be in a bull market even if gold prices dropped to US$1,200 per ounce, although that’s not in my forecast.

I’m telling every investor, in the long run, that central banks all over the world are going to print money because they know nothing else. The purchasing power of currencies will continue to go down. In other words, the price of gold and silver will move up in the long run.

DV: Why are central banks becoming net buyers of gold?

Faber: We have international reserves growing from a US$1 trillion in 1996 to US$10 trillion now, which is a symptom of monetary inflation. And these international reserves accumulate principally at the hands of Asian central banks and central banks in emerging economies. For instance, Thailand sits on foreign exchange reserves of US$150 billion, which, on a per-capita basis, is larger than the Chinese central bank reserves. The Russians also have large reserves, as well as the Brazilians and others. These central bank reserves, until now, were principally US dollars. Then they diversified somewhat into euros.

Even a central banker, with his just-below-average intelligence, will one day notice that maybe it’s not that desirable to be in the US dollar or Treasury bills that have essentially no yield. In other words, you have a negative real interest rate on these dollars. So they move money into gold. They should have done it a long time ago. But don’t expect too much from a central banker.

DV: Gold mining stocks have been depressed for some time. Do you think that will continue?

Faber: I have been arguing that you are better off in physical gold than in gold miner stocks, for a variety of reasons. And when looking at gold stocks, we need to distinguish between exploration companies and producing companies. The problem with the exploration companies is that a lot of them will have financing difficulties and they will have to cut down on exploration. They may not get financing at all. If you have 100 exploration companies, 80 to 90 of them could easily be out of business.

 

DV: What’s your read on the Treasury market?

Faber: There are two schools of thought. I am sure that, in the long run, Treasuries are an outstanding short. But there is also the shorter term.

If you said to me: “You can buy a 10-year Treasury for less than 2 percent”, I would say to you, playing the devil’s advocate, “It’s unattractive.” And you’d ask: “Why is it unattractive?” And I respond to you with: “It’s unattractive because in America, the rate of inflation is increasing between 5 and 10 percent.”

Different people have different inflation. But non-government statistics show that the cost of living is increasing by 5 to 10 percent per annum, including health care, insurance premiums, fees to the government, educational costs, and so forth. So at 2 percent, basically you have a negative real return, inflation adjusted.

But then, I can also argue: “I know that inflation is, say, 5 to 10 percent. And I only get 2 percent on Treasuries, but what about the stock market? Maybe I’ll lose even more.” So there is a lot of money flowing into Treasury notes and bonds and bills because people know that, for sure, they will be repaid since the government can print money. It is not a question that they will not be repaid, but at what value of the US dollar? That is the issue.

Some of my friends argue that the 10-year yields could drop to 1 percent, which is a possibility. But I think, before we drop to 1 percent on the notes and, say, 1.5 to 2 percent on the 30-year bonds, there will be so much money printing that the fiscal deficits would be so astronomical. Say you assume a 1 percent yield on a 10-year note yield. You would have to assume that we have deflation in the system. You would have to assume that we have gone back into kind of a depression stage. In a depression stage, the tax revenues would collapse. And the expenditures of the government, especially of the Democratic administration, would go up very substantially.

And so instead of the deficit being, say, US$1.5 trillion, it would be US$2.5 trillion. I think, at some point, the market will start to question owning government debt in the US.

DV: Germany seems to be the only parent in the eurozone calling for austerity, calling for spending cuts. That seems to be falling on deaf ears. Do you agree?

Faber: It’s very interesting that you bring this up, because I think the public is being brainwashed by governments and the media that interventions by the government are desirable, and that more stimulus is required, and more government spending on all kinds of programmes is needed. And they argue if the banks hadn’t been bailed out, you would have a catastrophe.

This is the same way that the people in Europe, the media and the government and the interventionists at the Financial Times, will tell you a breakup of the eurozone would be a disaster. But so far, nobody has been able to explain to me, in simple terms, why a breakup of the eurozone would be a disaster. I don’t see it as a disaster. On the contrary, I think countries like Spain and Italy and Greece and Portugal should be out.

DV: Do you think that the geopolitical threat from Iran has subsided at all over the last month? Or is this just Iran biding time a little bit?

Faber: Time is on their side. I’ve seen it with the Japanese negotiations in the 1970s. The Americans always went to Japan and wanted to force Japan to essentially let the yen appreciate strongly. And the Japanese always said: “Yes, yes; we do.” And then nothing happened. But they bought time. And if you talk to the Chinese, they also bide time. Politicians are very good at postponing important decisions.

And so the Iranians will always comply a little bit and continue their programmes. In my view, it is crystal clear that the aim of Iran is to have nuclear weapons. Now we may argue: “Well, should they have or shouldn’t they have?” Pakistan and India and France and Britain and the US and Israel have nuclear weapons. Why should other countries not have? I think Switzerland should have nuclear weapons.

 

DV: Do you think Iran’s oil can be replaced?

Faber: India and China will continue to buy Iranian oil. You know what the Chinese say and what they do are two different stories. And I think that yes, the world could probably live without the Iranian oil. But obviously, if it came to a confrontation and the sea lanes were interrupted, then obviously, there could be a spike in prices.

DV: Two questions on China. Experts are debating whether China is facing slower growth or merely pausing in growth. One, what’s your take? And two, has this created Chinese stocks to become undervalued?

Faber: It’s very difficult to know exactly what is happening in China. However, because I think China has a credit bubble, I am leaning towards a meaningful slowdown. They have a lot of bad loans that will have to be written off. There is a glut of property. And the Chinese economy is essentially a capital spending-driven economy, which has, of course, a much larger cyclicality than a consumption-driven economy. And so we could have a more meaningful slowdown.

I am not so interested in Chinese stocks, because I think there is a lot of fraud among Chinese companies. I don’t have the time or the analysts at my disposal to analyse these Chinese companies thoroughly.

DV: You’ve called for a correction in stocks. Now that we have seen uncertainty in the markets over the last few weeks, even with Apple, do you think this correction has begun?

Faber: It is easy to say that the correction would happen. More interesting is the thought that the early-April highs of 1422 on the S&P could be a longer-term high that we will not revisit for some time. The fact is simply that the technical position of the market has deteriorated very badly as the rally progressed from the October 4 lows of last year, when the S&P went down to 1074. The market is vulnerable. Many stocks sell off on news that is not really bad, but just not as good as expected. So I am of the view that maybe we have something more serious here.

Don’t forget that the S&P is, in essence, one of the very few indexes in the world that has beaten their highs in 2011. All the European markets have not made new highs and most emerging markets—with exceptions like the Philippines, Indonesia and also I think Malaysia — have not bettered 2011 highs.

DV: Is there any topic or area you want to touch on before we close?

Faber: I tell everyone that you have to be diversified in your assets. The risk of gold is that it doesn’t generate a cash flow. So assuming you had all of your money in physical gold, and it goes down, it’s going to be difficult to save your position. If you have a diversified portfolio and you have some physical gold and you have some fixed-interest securities and high-dividend shares and some real estate properties that provide you with some income, then if assets go down, you have at least have cash flow for reinvestment purposes.

I am a cash-flow person and I have a large, physical-gold position. I keep on buying a little bit of gold every month. I want to increase my allocation to gold. But I think there is a chance that before gold really takes off towards the upside again, that we have one more move on the downside. I wouldn’t rule it out.

DV: What would an allocation percentage be that you’d recommend to investors for gold?

Faber: Well, I’d put 25 percent in equities, 25 percent in physical precious metals, 25 percent in Asian properties and 25 percent in corporate bonds, mostly emerging economies.

 



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