In a recent interview with Equity Management Academy, Dr. Marc Faber and Patrick MontesDeOca talk about the dangers of the global central banker’s current monetary policies. This is a very candid and transparent interview that looks at the real possibility that central banks could potentially destroy the global economic system as we know it today.
Dr. Faber publishes a widely read monthly investment newsletter, “The Gloom Boom & Doom Report” which highlights unusual investment opportunities, and is the author of several books including “Tomorrow’s Gold”.
Since 1973, he has lived in Hong Kong and from 1978 to 1990, he was the Managing Director of Drexel Burnham Lambert (HK) Ltd. In 1990, he set up his own business, MARC FABER LIMITED, which acts as an investment advisor and fund manager. The following is the original transcript of this interview:
PM: Welcome to Trading Talk Dr. Faber. In a recent report, Sprottgroup.com pointed out that the Vaults are Booming in Asia. Can you give us your insight as to why there is so much gold potentially headed towards Asia and China’s record demand for the yellow metal?
MF: First of all, in Asia it has always been a tradition to own gold particularly in Hong Kong, Singapore, Indonesia, Malaysia, Thailand and of course India. And in recent years China has opened up, where it was illegal to own gold until about 10 years ago. Now the government is actually encouraging people to own gold, so the demand has been very strong and further increased due to the huge increase in the number of well to do people in China and in the wealth of Asia. So demand is rising very rapidly. I also like to point out that China is basically and likely to eventually have the world’s currency and may wish to back their currency with gold.
PM: Do you expect the record levels of demand to continue in the future?
MF. Yes. I think it will rather increase and decrease. In India, they made it very difficult and expensive for people to buy gold. But of course it will encourage smuggling and so the demand will continue and it will not go away. And in the case of China, I think that eventually if the economy slows down, the government may do what other central bankers are doing everywhere in the world: print money and weaken the currency. So I would expect that specially if there was an economic problem or crash in the Chinese economy that the gold demand from China will actually increase not decrease.
PM: What is the driving force in this transformation of the ownership of gold from the West to the East and China in particular?
MF: Well, we have to realize that over the last 15 years or so we have a shift in the balance of economic power from the old world which is Western Europe and the US (and to some extent Japan) to emerging economies. Most of the growth in the global economy over the last 10 years has come from emerging economies, notably from China. And so there has been this shift in the balance of economic strength to the East, a transfer of wealth from the West to the East evident with demand obviously shifting to the East. Keep in mind that a central banks still will own roughly 21% of all the gold in the world but most of it is in the hands of the western central banks if they still have it. That is the big question as Eric Sprott has raised this question in numerous occasions. But say in Asia we have central banks that have very large foreign exchange reserves. In the case of China more than $3 tn … but they have maybe 2 to 3 percent of their money in gold so they can increase it significantly over time. And in fact it will happen in all the other emerging economies including Russia, Kazakhstan and other Central Asian Republics and Middle East.
PM. To move into the mining sector Dr. Faber…are the metals mining sector a Buy, Hold or Sell strategy?
MF: I’m always amazed that when you talk to investors everybody agrees that you should buy low and sell high but when it comes to actual investors behavior, they buy high and sell low. In other words the most popular stock in year 1999-2000 was the overpriced NASDAQ stock. And today they made a lot of noise because the NASDAQ went over 4000 when in in March 2000 it was 5100. But 13 years later you’re still below the peak and more recently the most popular stocks where companies like Yelp, Tesla, Linkedin, Salesforce, Facebook. And these were the highest flying stocks but now all of them are down 20% from their recent highs or more. Tesla is down 35%. So people buy things that are moving and usually they are moving closer to the top. And they don’t want to buy what is inexpensive. If I look at all the assets in the world, fine wine, real estate stocks and commodities, I have to say that gold and silver are relatively inexpensive and gold and mining shares in general is the only sector in the market that is very cheap.
PM: Are we experiencing the destruction of gold demand in the West or is this a significant indication of the shift in power from West to the East or the end of the US dollar as the world’s reserve currency?
MF: Well I think that the dollar will stay as a reserve currency not because anything in particular is good about the US dollar. I have to say that the energy dependence of the US from foreign producers has been diminishing, so that is a plus. But there are so many other negatives including Obama Care, the lack of education and the dysfunctional government. But in general from a currency point of view I think the dollar should have been stronger. The problem is the other countries and the other currencies are no better. So in my view well to do people and those people that are thinking for themselves, they will overtime continue to diversify out of paper money into physical gold.
PM: How can a major correction in the US Stock Market affect the rest of the World Stock Markets?
MF: Well I’m not saying that every market trades around the S&P. But most markets are quite closely correlated to the S&P. If the S&P closes up 15 points it is likely that in Asia most markets will be up tomorrow. And if the S&P closes down 15 points, it is likely that most Asian markets will be down tomorrow. Similarly, the European markets will kind of follow the S&P. So the impact of the US economy on the global financial market is very large both in terms of interest rates and in terms of equity price movement.
PM: Do you see a significant correction in US stocks on the horizon or just a minor correction in a long-term bull market?
MF: Well I been arguing now for almost a year that we might have a 20 percent correction in the market but I always explain, it is also possible that we are in a market like in 1986/87 when the market just kept on going up and up and eventually we have a huge 40 percent crash within two months. And that scenario in my opinion is now increasingly likely sometime in the next 6 to 9 months. We may continue to go up but we don’t know when the end is here. As I mentioned before, these high flying stocks that were leading the market they no longer are participating. At the same time we have established technology companies like Intel, Cisco, lower today than in 2010, IBM lower than in 2011. But at the same time we have strengths in oil shares and in very, very high quality companies such as Proctor and Gamble, Johnson & Johnson, and Walmart that may still support the market. If you ask me I think the technical picture in the market doesn’t look particularly good. So all I’m saying, we bought the Dow in March 6th 2009. In 6 months time on March 6th 2014 the bull market will be essentially 5 years old. This is longer than most bull markets have ever seen. We went up from the low S&P 666 to over 1800 we are up almost 3 times. So if someone tells me we are at the beginning of the bull market that’s nonsense we are somewhere near the end of a bull market and I don’t think it’s particularly good time to increase equity positions. I think it’s a good time to reduce them.
PM: To move back into the metals markets again, is the gold and silver ratio telling us anything about the value of silver?
MF: Well, some experts may tell you that yes, it has a meaning. I don’t think the meaning is all that relevant. I am constantly asked by people whether I like silver or gold or which one they should own. All the precious metals will basically move in concert. In other words… if gold goes up silver will go. Now, will silver go up more than gold who knows…there are times silver has risen more than gold, there were also times when silver has declined more than gold because it’s a more speculative precious metal. I think if someone wanted to have a basket of precious metals I would look essentially at owning both gold and silver and probably also look at platinum because there, the demand supply situation is rather favorable.
PM: Do you prefer to own gold or stocks as a long-term investment?
MF: I prefer to own physical gold and to store it outside the United States. It is an important issue to consider – where do I store my gold. And because I’m on the board of some gold and silver mining companies, resource companies including Sprott Inc., I own shares in mining related equities and also in mining companies such as Ivanhoe mines and Novagold, Sunshine mining. So I have an exposure to both. If you ask my personal preference I prefer to own physical gold because I think that the entire financial system is going to implode at some point in the future.
PM: What are your comments on the US monetary policy with regard to QE or are we going to see tapering from the current $85 bn monthly bond purchases by the US government?
MF: Well basically I’ve been arguing for a long time that the us monetary policies are a disaster because you cannot deliberately create bubbles in order to push sustainable economic growth. You can create a bubble that creates an artificial boom so – called cracka boom. But that is followed by a collapse like NASDAQ off 2000 or the bubble that led to the housing bubble that collapsed in 2007/08. Then the damage on the economy is far greater than the earlier benefits and the FED’s never realized. Now the FED, their media friends and the academics of course, they will all come forward and say Mr. Bernanke saved the world in 2008/09, when in fact Greenspan and Bernanke almost destroyed the world. That is not mentioned properly in the media and that is a fact. And we have artificially low interest rates post 2001 when the FED fund rate dropped lowered to 1% until June 2004. We are now in the fourth year of an economic recovery, as I mentioned earlier, almost after 5th year anniversary of the bull market and we still have a FED fund rate around 0%. It will lead to a colossal misallocation of capital. It punishes savers that have saved of all their lives for retirement that have some money in the bank, they get no interest on that money anymore. So they’re forced to essentially speculate and it will end very badly. But will it end very badly tomorrow or in 3 years from higher levels… who knows? I’ve seen money printing exercises that have lasted a very long time until they finally came to an end in a catastrophe.
PM: Is the US economy strong enough to require such a change in monetary policy?
MF: I mean basically we have the same things since November 2008 when QE was introduced the first time. At that time they were talking about an exit strategy. You will never hear about an exit strategy today. They talk about maybe tapering. When they started in 2008, my argument was, believe me we are going to go to QE 99. We are never going to stop the program because when governments introduce new programs under the excuse of urgency to fix something usually these programs stay in place for a very long time. And all this talk about tapering, maybe they’ll do a kind of cosmetic tapering at some point, like actually I have to say as of today this year alone, the FED’s have bought more than $1 tn worth of treasuries and mortgage backed securities because they not only have this $85 bn of asset programs but they also have the accruing interest to invest. So they bought much more than they have made public. Now, can they go down from a purchase of $85 bn?… Yes, it’s going to be cosmetic. As soon as the economy weakens again, as soon as their is an economic crisis, they will go to $150 bn a month or more.
PM: What is your view on the US dollar and gold if interest rates begin to rise and how would this affect the world economies?
MF: I think it’s quite likely that interest rates will go up, but we have to understand in what context. At the present time we have a 0 based fund rate. Now, please explain to me and your listeners what do you think are your cost of living increases annually in the US? 1% , 2% or more likely more than 5%, including insurance premiums, food, energy and healthcare. My view for most American families is the cost of living increases are between 5 and 10% per annum. We have a 0 fed fund rate, so in real terms inflation adjusted, the fed fund rate is negative in the order of 5% or more. And if they increase one day the Fed’s fund rate somewhat in the order say maybe two percent three percent that would be a huge increase already. By then already maybe the cost of living increase would be 10% or 15% So, I think that under Yellen and the other FED governors that are all dovish, basically with very few exceptions, the FED funds rate will stay negative in real terms inflation adjusted, that is positive for gold in the long run.
PM: On behalf of our audience I want to thank you sincerely for this precious time we have spent with you. Can you give us some information on how our clients can get in contact with you directly?
MF: They can go to the website www.glomdoomboom.com The final comment I will like to make is that I truly believe that the central bankers are going to bankrupt the world. It may take awhile but they are well on the way to do it.
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