Marc Faber: A Golden Opportunity

verfasst von Günter, 16.04.2002, 17:41

A Golden Opportunity
Marc Faber

In late 1999, in the midst of the gigantic NASDAQ bubble, I recommended in a column for a magazine that Bill Gates ought to switch out of his holding in Microsoft shares into gold. Since then the stock of Microsoft is down by about 40%, whereas gold has rallied by more than 10%. Moreover, gold shares, which had performed miserably for the last 20 years, began to outperform both the S&P 500, as well as bond returns. In last month's column, I wrote about"secular changes in leadership" and made the case that the bull market for US financial assets, including equities and bonds, which had started in 1982, had come to an end in year 2000, and that from here on a new leadership would emerge in an asset class other than US stocks. I argued that investors ought to switch out of US equities into the emerging stock markets of Asia and also into gold and gold mining stocks. I have several reasons for my positive stance toward precious metals. Broadly speaking, we had since 1980, a bull market in U.S. stocks and bonds, and a bear market in commodities. Thus, whereas in 1980, one ounce of gold, which was then selling for more than US$ 800, could buy one Dow Jones Industrial Average which was then hovering around 800, today, it would require almost 35 ounces of gold to buy one Dow Jones. In other words, in the early 1980s, the Dow was"cheap" and gold as well as other commodities were expensive, whereas now, the Dow and the S&P 500 are high while gold and all other commodities are extremely depressed. In fact, in the history of our capitalistic age, the gold price has never ever been so low and depressed when compared to financial assets. Don't forget that at the peak of the US stock market in 1929, when stocks were relatively high, it took 18 ounces of gold to buy one Dow Jones Industrial Average, whereas after stocks had collapsed in the 1929 to 1932 bear market one required just 2 ounces of gold to buy one Dow Jones average. Thus, it is clear that at present the Dow is very expensive compared to gold since it takes 35 gold ounces to purchase one unit of the Dow Jones Average. Also, being a firm believer that secular or long-term trends are from time to time reversed and that contrarian investors can greatly profit from such reversals, I am intrigued by the recent out-performance of gold versus equities. Maybe gold is rising now because investors are beginning to appreciate the fact that the annual physical demand exceeds the yearly supply. The annual supply from mines amounts to around 2,500 tons with a value of about $ 25 billion, but the physical demand is 300 or 400 tons higher. Thus, if central bankers would not sell gold from their reserves the price would undoubtedly rise. Now, it is conceivable that because the gold price has recently strengthened central banks will increase their sales and, therefore, depress the price once again. But, also consider the following. In Britain, several newspaper articles have already appeared, which accused the Bank of England of wasting the county's wealth. These articles argued that the Bank of England has already lost several hundred million of Pound Sterling by selling gold last year at a price, which was far lower than it is now. In other words, if central bankers around the world wake up to the fact that a new bull market in gold is underway, they may no longer sell their gold reserves because they will be afraid to look even more stupid, than they are, for having sold their gold right at the gold market's lowest point in the last 20 years! In this respect it is interesting to note that central bankers did not sell any gold in the late 1970s and early 1980s, when gold was above $ 600 and when they could have invested the proceeds from their gold sales in US long-term government bonds at over 13% interest per annum or in short term deposits yielding more than 15%. But now, with gold prices a tad above $ 300, and long-term bond yields at 5.75% and short-term rates below 3%, they consider it to be wise to make this switch. Talking about poor market timing and you do not have to look any further than to our central bankers, whose investment acumen is about as good as the one of the unfortunate investors who bought Internet stocks in March 2000, when the NASDAQ exceeded 5000!
Supply demand imbalances aside, it is also possible that the gold market is rallying because market participants are gradually growing more suspicious about Alan Greenspan's monetary policies. After all, it is remarkable that, while the Fed Fund rate has been cut since January 3rd 2001 from 6.5% to 1.75%, long-term bonds have failed to rally and are in fact, today, lower than they were January 2001, when the rate cuts began. Thus, the bond buyers seem to believe, as I do, that present easy monetary policies will lead down the road to more inflation. Consider the following. Since the beginning of 2002, the Goldman Sachs Commodity Index is up by 14% whereas the US stock market is basically flat. Service inflation is already running at more than 5% per annum. True, import prices are still deflating, but if sometime in the future the dollar were to weaken, goods inflation could pick up almost instantly. Moreover, if for the one or the other reason the economy was to slip back into a double or multiple dip recession, I have no doubt that the FED, which through its irresponsible monetary policies created history's biggest financial bubble, will once more do everything it takes to stimulate the economy with monetary means in order to avoid another economic dip. This particularly since the FED will regard the interest rate cuts of 2001 has having been successful at stimulating the housing market and consumption, which kept the economy afloat. Thus, with monetary measures a deeper economic slump was avoided than if the system had not been flooded with liquidity and credit. These recent monetary interventions could, however, have some unpleasant and unintended consequences, the way all interventions into a free market do. Last year's interest rate cuts did, namely, neither help the still overvalued NASDAQ very much nor lead to a lasting improvement in consumption. What the interest cuts did was to bring about a temporary housing and mortgage refinancing boom, which allowed consumers to reduce their equity in their homes to a record low and continue to spend on consumer goods. However, with interest rates now rising, it is increasingly likely that the housing boom will hit a roadblock and that consumption will at some point stagnate or decline. Thus, the FED will sooner or later have to administer to the credit addicted sick US economic patient an even larger and more potent dose of monetary stimulus, which will, in my opinion, lead to a pick up in the price of commodities, a rise in the rate of inflation and a massive fall in the value of the US dollar, whose strength looks increasingly suspect given America's growing external imbalances and its dependence on foreign capital flows. But, could the U.S. dollar really decline meaningfully against other currencies? In my opinion, it is not very likely that the U.S. dollar will fall against the Japanese Yen and along with it against other Asian currencies, since most emerging economies around the world have embarked on competitive devaluations in order to boost their exports. Moreover, if the Asian currencies do not strengthen and actually continue to weaken against the U.S. dollar, how could the Euro move up much against the dollar? No, I do not necessarily believe that the U.S. dollar will decline much against other currencies, the way it did in the 1970s, when it lost close to 70% of its value against European hard currencies. But, the U.S. dollar could depreciate in value against a basket of commodities. In other words, inflation would over time gradually migrate from financial asset such as the still expensive US stock market and the dollar to commodities such as oil, food and precious metals. The skeptics will of course argue that I am inconsistent by simultaneously forecasting another dip into recession and a rise in the price of commodities. Correct! Under normal conditions, commodity prices would decline in a recession because of the lack of demand, but when monetary policies are designed to avoid a recession at any cost, recession can unfold while commodity prices soar, as was the case in Latin America in the 1980s and in Asia following the Asian crisis. Don't forget that in Indonesian Rupiah terms the price of gold and other commodities have trebled since 1997, although the economy went into recession.
Moreover, one of the reasons I am not very optimistic about the U.S. economy is precisely the expected acceleration in the rate of consumer price inflation, which will bring about higher interest rates and cut into real income growth at a time when the consumer is already suffering from the NASDAQ asset deflation and a record indebtedness. Thus, I would argue that in view of the FED's believe that all economic evils can be solved by monetary means, an additional round of economic weakness would be even more bullish for commodities including gold than an immediate economic recovery, which would boost commodity prices right away.
There is another observation I wish to make about gold. The value of the annual supply amounts to around $ 25 billion and the entire market capitalization of all gold mining stocks around the world is about $ 50 billion. Compare this to the entire stock market capitalization of the world, which is around $ 25,000 billion and the annual supply of bonds around the world, which exceeds currently $ 3,000 billion and it becomes evident how even a very small shift of money could boost gold and gold mining shares. If US financial institutions alone decided some time in future to allocate just 1% of their assets in gold, more than $ 250 billion would flow into bullion and gold shares and send its price to the moon! This, especially, since as mentioned above, the annual supply from mines is valued at only $ 25 billion and also because of the large gold short position, which is estimated at between 4 and 8 years of mining supplies!
There are several ways to play rising gold and commodity prices. For now, I recommend the purchase of gold mining companies such as Newmont Mining (NM), AngloGold (AU), ASA (ASA), Harmony (HGMCY), Agnico Eagle (AEM), Placer Dome (PDG), Freeport McMoran (FCX) and Glamis (GLG). However, should the price of gold rise in the next few years by as much as I believe it will then I am concerned that central bankers, who sold their gold near the bottom, will scramble to buy it back at higher and higher prices in order to carry on with their investment policy of selling low and buying high! Worse, the world's central banks, which by then will have lost most of their credibility will persuade governments to nationalize gold mines, and to declare the ownership of gold by individuals as illegal, the same way the US government did in the depression year 1933. So, at some point in future investors will have to own physical gold well hidden in some safe place!


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gesamter Thread:

• Marc Faber: A Golden Opportunity - Günter, 16.04.2002, 17:41
  • Re: Marc Faber: A Golden Opportunity - Button, 16.04.2002, 18:00
    • ja, irgendwie heftig, oder? - Günter, 16.04.2002, 18:14
      • Re: da will wohl einer Angst schüren und selbst fett einsteigen - Ecki1, 17.04.2002, 09:14
    • Re: Marc Faber: A Golden Opportunity - Diogenes, 17.04.2002, 15:45