|Going For Gold|
|01 May, 2012|
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[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.