-->A NEW CLASS OF LEADERSHIP
By Marc Faber
It may come as a surprise to readers of The Daily
Reckoning, but the outlook on U.S. equities as overvalued
and the heralding of a coming bull market in gold are not
universally shared views. Robert Prechter, author of
"Conquer the Crash," for example, thinks that while the
stock market is indeed overvalued, the CRB Index and the
gold price are about to tumble again.
After its sharp run-up since late 2001, the CRB Index and
the gold price could indeed, in the near term, be
vulnerable to some further profit taking. But I very much
doubt that we shall see new lows for commodity prices,
since demand in Asia, and especially in China, is at
present rising rapidly.
Moreover, the economic policies in the United States -
which seem to be designed to worsen the existing external
imbalances, weaken the U.S. dollar, and increase the budget
deficit for as far as the eye can see - are more likely to
lead to inflationary pressures than to outright deflation,
as Robert Prechter maintains.
In this scenario, the price level in the United States will
be deflated through a depreciation of the dollar, and not
through outright deflation of prices in the U.S.. The fact
that import prices have been rising recently, and in
January were up by more than 5% year on year, would seem to
support this conjecture.
But one point the gold bears make in order to foster their
case is that, while the gold price has this year exceeded
its high made in the summer of 2002, gold shares have
failed to confirm the advance, since they didn't exceed
their highs reached last summer. This non-confirmation of
rising gold prices by gold shares - and, incidentally, also
by the price of silver, which hardly moved during the
recent gold price surge - is viewed as very negative from a
technical point of view.
While I am also somewhat concerned about this non-
confirmation in the near term, there are three observations
worth making. Although the oil price has continued to
increase, oil and oil servicing shares have performed
miserably and have not followed the oil price surge on the
upside at all. Therefore, in the case of oil (a sector that
we like), we have an even starker non-confirmation.
In this respect, investors must understand that it is not
uncommon, following an extended bear market, for assets
that have entered the first stage of a major advance to
experience serious price setbacks and even to re-test their
lows. This is because, at the beginning of a new secular
bull market (in our case, for commodities), which follows a
bear market lasting more than 20 years, there are always
tremendous cross-currents at play.
But investors still tend to play by the 'old' rules of the
investment game (buy the S&P 500, the NASDAQ, and the TMT
sector) and are unaware that 'new' rules have been
introduced. After the bursting of a bubble, these 'new'
rules lead to a massive shift in leadership.
Historically, however, the new leadership does not emerge
smoothly. Following gold's initial rise in the early 1970s,
for example, its price corrected by almost 50% between 1974
and 1976 before soaring again until January 1980.
Similarly, bonds rose sharply between 1981 and 1983, but
almost re-tested their 1981 lows in 1984.
As a result, investors who have a longer-time horizon
should not be overly concerned about the recent bout of
selling in the gold market. A further decline is not a
forecast, but merely a possibility which investors should
consider.
Gold has risen by more than 40% since its low in April 2001
of around $255, and even a decline to around $280 would not
alter its long-term significant upside potential.
Regards,
Marc Faber,
For the Daily Reckoning
P.S. While I do believe we have come to a major turning
point in the asset markets - which will favor hard assets
like gold and commodities in the future at the expense of
financial assets - this case is not so clear-cut as to
indicate that all financial assets should be liquidated and
only hard assets should be purchased. While U.S. financial
assets may under-perform commodities in the next few years,
commodity-related and basic stocks should provide superior
returns in an environment of rising inflation rates and a
weak dollar. In particular, equities in resource-rich
emerging economies should outperform equities in the
industrialized economies of the West.
P.P.S. We should also consider the fact that the recent
surge in commodity prices, and especially gold, was to a
great extent fuelled by hedge fund buying. And since the
gold group was the second-best-performing sector in 2002,
it is only natural to see some profit taking now by the
hedge fund community, which tends to be very much trading-
oriented. Therefore, for the reasons just outlined, I am
not overly concerned by gold and oil shares' non-
confirmation of the strong performance of physical bullion
and oil.