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Why Gold Looks Better Than The S&P: Marc Faber

Published 03/09/2014, 01:50 AM
Updated 07/09/2023, 06:31 AM

“When I look at asset prices; real estate, bonds, equities, vintage cars… I think that gold is actually one of the few assets that is relatively cheap, relatively inexpensive.”

Marc Faber, author of the Gloom, Boom, and Doom Report, and a Director of Sprott Inc. shared his most recent views during a recent visit to our offices. In particular, he’s seeing cracks in the broad stock market become apparent:

We had a bear market that ended March 6th, 2009, at S&P 666. We are now over 1,800 — up almost three times.

We had extremely optimistic sentiment just before Christmas. We had very heavy insider selling, with high valuations, and extremely high corporate profits by historical standards.

Over the last two years, most equity markets around the world, in emerging markets, have been down or moving sideways. They’re no longer following U.S. stocks up, and in the U.S., an increasing number of shares are breaking down.

In a month’s time, the bull market will be five years old. This is the second longest bull market in the last 100 years. These are all signs of a top, so I wouldn’t buy shares here. I’m not interested.

Can the market go up another 20 percent? Perhaps.

I wasn’t interested in buying the Nasdaq in late 1999, but between January and March 2000, the NASDAQ went up another 30%. Of course, people were crying shortly thereafter when they realized their losses.

So, the markets go up and down. I think that the upside potential for most stocks is very limited now and there is considerable downside risk. Probably more downside risk than investors realize.

Marc also speaks to a possibility of a slow-down (or outright economic implosion) in Asia and what that means for gold and hard assets. Read on for the full interview (or watch here):

Sprott Global: Marc, you live in Asia. What’s happening on the ground there and what does that mean for gold and natural resources?

Marc Faber: Well, that’s a very good question because we have an economic slowdown in emerging economies that is very pronounced.

I think some emerging economies may besubmergingsoon, and have significant economic problems. The question arises, “Will they continue to buy gold?” Say if there was a recession in China — a downturn — would people buy gold?

I think if the Chinese economy imploded, it is likely that the currency, the Yuan, would begin to weaken. Or the government would devalue the Yuan.

If that were the case, then I think that Chinese investors would shift some of their money into gold rather than keep their funds in the local currency.

So I think that a problem in Asia — and geopolitical problems in Asia and in other regions of the world — may lead to higher rather than lower gold demand.

Marc, what are your thoughts on the regional Asian conflicts going forward and how might that impact natural resources?

My view is this: we wouldn’t have a conflict in Asia if not for the intervention by the U.S. The U.S. has a security pact with Japan and has military bases and naval basis all over Asia.

The Chinese economy is highly vulnerable to interruptions in the supply of metals and of oil. 47% of global metals consumption is from China. It’s up from 4% in 1990 and 10% in the year 2000. So they have become a huge factor.

For their industrial production, they need resources; they need iron ore from Australia, copper from Australia and elsewhere, and oil from the Middle East. That’s their only source of oil — the Middle East –, compared to say the U.S. that can source oil from Canada, from Mexico and who have a rising domestic production.

So the Chinese are very concerned about interruptions of supplies; I think that over time, the Chinese will want to control the East and South China Sea. I do not think that they have any plans for aggression, but the U.S. wouldn’t be particularly happy either if, say, the Chinese or the Russians had military bases in the Caribbean, in Mexico, in Canada and so forth.

The Chinese cannot accept to be encircled by U.S. military bases in Central Asia, South East Asia, and North Asia. I think those tensions will increase over time.

Marc, when we look at gold, it has been sideways to –

It has been down.

Right, over the last three years but when you look at the fundamentals today as compared to 2011, how would you describe the difference?

Well basically, we had a huge run-up in prices starting in 1999, from $255 oz. to $1921 oz. in early September 2011. We’ve been in a correction period since.

Now, I think the correction period was partly justified because there was too much enthusiasm and too much speculation, leading to the peak in September 2011.

But I think that there may have been some market manipulation as well. My sense is that the correction has probably come to an end. If anything, the fundamentals for gold are much better today than they were at the time of the peak, but the price is down.

Every investor understands “buy low and sell high” as a principle, but when prices are low, nobody wants to buy. We had very negative sentiment recently.

Of course, we could one day enter a long-term downtrend after the long period of growth and asset inflation over the last 20 to 30 years.

But when I compare gold to the S&P, the S&P is up substantially since 2011 and gold is down substantially. If you compare the performance of gold shares to the S&P, it has been a disaster for gold shares.

When I look around at asset prices; real estate, bonds, equities, paintings, collectibles, vintage cars, I think the price of gold is actually one of the few assets that are relatively cheap, relatively inexpensive now.

Marc, given your world travel experience, how would you characterize the value of water as a natural resource? What do you think might be some of the opportunities and pitfalls in investing in water, which Rick Rule has found very attractive?

As you know, we still have colossal poverty in the world. Extreme poverty usually occurs in areas where you have no water. Water is very important, it’s a scarce resource. Countries that are endowed with a lot of water, like Canada, or part of the U.S., or some European countries like Switzerland (we have a lot of water), are very fortunate.

Countries that have no water like those in Sub-Saharan Africa are very unfortunate.

So I believe that one should invest in water. I suppose there is a lot of risk; but if you want to aid development, if you want to improve the standard of living of people, water would be a good place to start. I would rather address the water problem – with proper water distribution and irrigation — than to give these countries vaccines and gifts.

Marc, what drew you to be a Sprott Inc. board member?

A while ago, I think five or six years ago, Eric Sprott asked me if I would consider being a board member. Eric was a subscriber to my newsletter to The Gloom, Boom and Doom Report.

And I had written a book in 2001, called Tomorrow’s Gold: Asia’s Age of Discovery, which was not specifically about gold, but it was about the coming bull market in commodities driven by the incremental demand from China.

So I think that he saw a fit philosophically and also considered my abilities as an administrator and so asked me to join the board.

Marc, in your dealings with people around the world, what characteristics have you noticed lead to the building wealth?

Well, it’s a funny story. I went to a high class school in Switzerland. Not that we were rich, but in the class there were several very well-to-do Swiss family members. Of the children of these families, most have no more money. One still has a lot of money because his grandmother was studying in Paris in her youth and took a liking to the 1910-1920s impressionists. So they have Van Goghs and Renoirs and Matisses — even in the bathroom they have so many of them. The appreciation in value of these paintings was fantastic.

Another one is well-to-do because he inherited money from an uncle of his. So it’s funny that entrepreneurial families that were – at that time — either in construction or the textile industry, are essentially all gone. The largest wealth of my school friends came from inheritances.

I liked Asia when I first came there in 1973. I went to Hong Kong because people were very entrepreneurial and risk takers. They like to gamble and they’re not afraid. In Switzerland everybody is always afraid of losing money. In Asia, they take risks and some of the entrepreneurs have become immensely rich — immensely rich starting from zero.

These are people that were frugal with themselves. They worked very hard and they also benefited from asset inflation. In Hong Kong, property prices went ballistic over the last 30, 40 years. So anyone who owned properties became very rich.

I’m saying this because I am of course completely against the money printing that the central banks do. They basically only enrich people that own assets. For people that don’t own assets, their wealth or their standards of living go down.

This creates growing wealth and income inequality that leads to social unrest or geopolitical problems.

As an extension of that last question Marc, as an administrator of assets, what are the characteristics you look for before deciding to give money to other people?

Well, most of the money that I look after, I manage myself. I believe that we don’t know the future; I may have my views about investments and someone else may have a different view, a different skill set, or a different niche of expertise.

For example, I don’t know anything about biology. I also don’t understand social media. But there is probably someone out there who is specialized in those sectors, and I would allocate some money to that person. Or for instance, I’m familiar with Russia because my partners and I founded one of the first Russia funds, Firebird, in 1993.

But I’m not an expert on each Russian company today. So for investing in Eastern Europe and in Russia, or even in Asia, I would give my money to somebody else. I don’t have the time to visit every company. I know lots of families that own businesses and so forth, but I’m interested to see what other fund managers are doing.

So if I know a fund manager that is specialized in Asian shares and is value-oriented, I may give him some money. So I allocate some money to different managers.

What about a CEO? What do you look for in a resource exploration or development company CEO that you would consider financing?

I think in every company, you want management that is skillful, that has talent, and preferably that has their interests aligned with yours as a shareholder. In other words, ideally, they own a lot of shares in the company you invest in.

Good management is management that can adapt to change. That is key because when I started to work on Wall Street, the favorite stocks among institutional investors were companies like Sears, JC Penney, Kodak, Xerox, Polaroid, and so forth. Most of these companies have disappeared because management was not able to adjust to the changes in the world.

There was at the time an analyst who followed the photographic industry, in particular Polaroid and Kodak. On the periphery she followed Fuji photo film as well.

Her projections depended on how many people in the world would buy a Polaroid camera over the years, how many pictures the world would take with Kodak cameras, and how much film Kodak would eventually sell.

Eventually, her projections were all surpassed—just not with Kodak film and Polaroid cameras. But with mobile phones that were taking pictures electronically. Nowadays, you see every idiot taking pictures all the time to put on Facebook, or to look at him or herself (nobody is interested in these pictures except themselves!) but it didn’t benefit Kodak and Polaroid.

That is why I always am skeptical about these studies. For example Jeremy Siegel published a study on how the Dow Jones has performed between 1800 and today.

I once told Jeremy, “Look Jeremy, if you invested in 1800, in stocks in the U.S., 80% of the companies at that time were canal companies and banks. In the first big bust, the Depression of 1840, 1841, most of them went bankrupt. And eventually all the canal companies in America went bankrupt, all of them, even the most profitable ones, like Erie Canal.”

Then people invested in railroads in the 19th century. By 1895, 95% of the railroads went bankrupt. The studies don’t take these statistics into account; like how many companies failed if you had invested in stocks in 1929. Most of them no longer exist.

Marc, Sprott Inc.’s Rick Rule commonly notes that “bull markets are the authors of bear markets and bear markets are the authors of bull markets.” When you look at the general equities market here today, how will the bear market in natural resources play out?

In a free market economy, you will always have price fluctuations. Today, the Federal Reserve artificially manipulates asset prices up. It’s a huge mistake — but that’s what they are doing.

To answer your question specifically, we had a bear market that ended March 6th, 2009, at S&P 666. We are now over 1,800 — up almost three times.

Over the last two years, most equity markets around the world, in emerging markets, have been down or moving sideways. They’re no longer following U.S. stocks up. In the U.S., an increasing number of shares are breaking down.

We had extremely optimistic sentiment just before Christmas. We had very heavy insider selling, with high valuations, and extremely high corporate profits by historical standards.

In a month’s time, the bull market will be five years old. This is the second longest bull market in the last 100 years. These are all signs of a top, so I wouldn’t buy shares here. I’m not interested.

Can the market go up another 20 percent? Perhaps.

I wasn’t interested in buying the NASDAQ in late 1999, but between January and March 2000, the NASDAQ went up another 30%. Of course, people were crying shortly thereafter when they realized their losses.

So the markets go up and down. I think that the upside potential for most stocks is very limited now and there is considerable downside risk. Probably more downside risk than investors realize.

Marc Faber, Director of Sprott Inc. and Publisher of The Gloom, Boom and Doom Report, thank you for sharing your comments.

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