Investments

Dr Marc Faber

The renowned expert on economies’ & markets’ downfall, Dr Marc Faber, has recently made his views on the state of the world economies known in an interview with CNBC and he is not all that optimistic either :

The new bank bailouts are not likely to work because they are run by the same people who prolonged the economic agony by throwing money at weak companies rather than allowing them to fail and encouraging the strong ones, Marc Faber, the publisher of the Gloom, Doom and Boom Report, told CNBC Monday.

Britain threw its troubled banks another multi-billion pound lifeline Monday by allowing them to insure against steep losses and guaranteeing their debt, while an adviser for U.S. President Elect Barack Obama said the rest of the TART money will be used to clean out bad assets from the financial system.

“The financial crisis has occurred because of government interventions,” Faber told “Squawk Box Europe.”

It is not all bad news, however, says the man who dislikes bail-out packages :

“The contractions actually serve to build for the future growth, because the weak competitors are eliminated. If you support the weak competitors you essentially penalize the strong competitors and therefore I am very much against these bailout packages.”

Not surprisingly Faber predicts a tough 2009 with a possibility that the second half could prove even worse than the first half and he seems not to share some of the optimism expressed by many experts that the world economies and markets are set for a recovery in the 2nd half of 2009 :

Investors counting on the fact that stock prices are very low for long-term growth should bear in mind the Japan lesson, where prices are virtually at the same level they were in 1981, Faber noted.

Commodities may be a better play as some time, when the global economy picks up, prices will rise because investment in new exploration or mining has all but stopped, he said.

“I have shares in Asia, mining stock, exploration companies, physical gold,” Faber said.

“As far as currencies are concerned, I think the dollar is a disastrous currency but the others are even worse. I am leaning more towards the view that the dollar could strengthen even more.”

Watch and listen to the entire interview here

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Key commodities such as Gold and Silver both had a volatile 2008 with gold doing better overall than silver. Analysts are now trying to predict where gold is headed and the views differ quite a lot from UBS’ prediction that gold will hit USD 700 in 2009to Citigroup’s overly optimistic prediction that gold will reach USD 2,000 in 2009.

Volatility has always surrounded these two precious commodities with silver showing the greatest ups and downs in value, but while most analysts focus on gold and its future prices, some experts are pointing to gold’s baby brother silver as the commodity to consider for investment in 2009.

This post looks into what some experts and analysts have to say about gold and silver prices for the new year.

Christopher Barker of The Motley Fool is emphasizing the fact that the historical average ration of 1:20 between gold and silver prices is not in place at the moment pointing to, he argues, that silver could be in for a bigger surge in prices than gold:

Sources like Peter Schiff and Citigroup have suggested that gold may reach $2,000 per ounce in 2009. Legendary investor Jim Rogers recently declared his intention to exit all dollar holdings. Personally, while I also see gold reaching $2,000 at some point during this historic run, I am not convinced it will come quite that quickly. The ratio of gold to silver prices stands near 80-to-1, suggesting silver may also have a nice recovery in store as it trends back toward an historical average ratio of about 20-to-1.

Barker remains optimistic overall on both gold and silver price development for 2009 and also points to the fact that lately in Q4 some mining companies’ shares increased by more than 100% and would hence also be potential investment targets besides the metals themselves, however, he offers here a word of warning:

Mining is a capital-intensive industry, so a constrained global credit market is forcing many companies to scale back exploration and development activity in attempts to shore up balance sheets. Combined with a nasty dip in base metal prices, which are generally key to keeping gold and silver mining costs within economical ranges, these challenges create something of a minefield. Despite my bullish outlook for the precious metals themselves, I still see the outright failure of some mining companies as a distinct possibility, and I suspect some uninspiring fourth-quarter earnings results could challenge shares in the near term. For the quality miners, though, I believe that substantial upside leverage to higher gold and silver prices awaits.

My Foolish criteria for selecting quality miners include:

• A close examination of the balance sheet. Reasonable debt ratios may be acceptable in cases where production growth is a given, but otherwise a debt-free miner like Goldcorp (NYSE: GG) looks enticing.
• Critical mass. Some junior miners may ultimately enjoy the greatest leverage of all, but their smaller scale often reduces flexibility in adapting to challenging conditions. Tread carefully for now!
• Operations in geo-politically stable regions. Agnico-Eagle takes the cake.
• Low-cost of production. Yawanna check out Yamana for gold, and Silver Wheaton for silver. The quality of ore grades are a factor as well.

His conclusion, however, is very optimistic on behalf of precious metals:

Until the fundamental outlook for the U.S. dollar reverses course, I maintain that gold and silver investments offer the best safe-haven characteristics available anywhere. If a 2% gain for gold outperformed the equity markets in 2008, imagine what a truly precious bounce in 2009 could achieve.

Lawrence Williams of Mineweb.com is also cautiously optimistic on behalf of both gold and silver for 2009 but points out that for silver the complexity of its price development and dependants is far greater than for gold as silver has multiple usage:

Silver is a bit of a different animal, but does tend to ride on gold’s coat tails – but in a far more volatile manner given its production patterns and industrial usage.  Unlike gold, silver fell back 57 percent from peak to trough and will likely continue to be far more volatile than gold in the months ahead.  If gold does surge, then silver may do even better in percentage terms.  If gold falls there is the possibility silver will do even worse.

To an extent silver as a commodity is a bit of a red herring – or it is at the moment.  While more and more uses are found for the metal in emerging communications and bacterological fields and supply may well be primarily dependent on byproduct output from zinc and lead mining, where huge closures are taking place, the main drivers remain in its position as an investment vehicle and in the jewellery market.  Price movements remain very much tied to gold and it is in the performance of the latter where sliver’s potential for price increase, or decrease, really lies – despite the views and the protestations of the true silver bulls who are, perhaps even more evangelical in their outpourings than the gold protagonists.  If you have a positive  view on gold, then buy silver and hang on for the roller coaster ride could be the path here!

His 2009 predictions for gold and silver are very much in sync with those of Mr. Barker:

Overall I suppose one should be cautiously optimistic on the outlook for gold and silver in the year ahead.  Gold fundamentals look relatively strong and prices seem to be well supported above the $740 mark which should limit the downside risk.  Upwards the sky would seem to be the limit, but the reality is that gold has moved pretty cautiously through the recent financial quagmire and is likely to continue to do so.  $1,000 gold still has to be in prospect sometime in 2009, and once reached may well be maintained, particularly if the dollar starts to fall again.

Predictions from Golfseek.com also speak of increasing gold prices for 2009 but they are even more optimistic about silver:

        Silver will do very well – Silver has been a neglected and almost abandoned orphan in the economic storm.  The common wisdom says that economic activity is slowing, so industrial metals like silver will have reduced consumption and should be sold.  Past readers of the Optimist will attest that my views are neither common nor wisdom, so I am free to take a contrary approach.  Just as fewer houses being constructed reduce the need for copper wires, and fewer automobiles being built reduce the need for platinum in catalytic converters, the quantity of silver needed for many industrial uses is also likely to be reduced.  In the case of silver, however, the reduction in industrial demand is likely to be more than offset by a greater reduction in the supply of silver which is produced as a by product of base metals mining.  As base metal prices and production plummet from reduced economic activity, the sharply reduced supply factor should provide a positive tone for silver prices.  Also, if the odd silver sidestep cycle continues in 2009, then it is possible that the price of silver could target $25 per ounce in the next 12 to 16 months.

Gold will hit a new high price – Gold continues to track the expanding “cornucopia” channel I constructed two and a half years ago.  As the current credit crunch dissolves into higher inflation, I think it reasonable to expect gold to once again race to the top of that channel.  I am hopeful that the U.S. dollar price of gold will approach $1,250 within the next 12 to 16 months.

Commodityonline.com quotes David Morgan for saying that whilst silver is doing quite well, it is not performing as well as gold:

Both silver and gold markets have become victims of the credit crisis, which actually started in August of 2007. Things really got going to the downside on the annual rollover of August 2008 and that has continued. If you look at gold irrespective of the dollar—in other words, vis-à-vis other currencies—it’s doing quite well. And if you look at gold in U.S. dollars vis-à-vis any other market such as the Dow Jones, the S&P 500 or the oil market, it’s actually holding up better than most markets.

Silver is doing not as well as gold, but better than the base metals. And since silver is really an industrial metal and a monetary metal, you would expect it to perform during recessionary times as it has—better than the base metals but not as good as gold.

Mr Morgan, who is the founder of the Silver-Investor.com and publisher of the Morgan Report, 
 also subscribes to silver having a far greater potential in terms of price increases than gold and his reasoning is:

 I believe that the supply of silver is so small relative to the population base that it won’t take much new buying to carry silver far, far higher. You have to remember that silver hit $50 an ounce in 1980 and there was roughly four times more silver available above ground than now. Also, the money supply was about one-seventh the size that it is now. So if you use those facts—that the silver supply, instead of being 2 billion ounces of fine bullion, is less than 500,000 ounces and that the money supply, M1, is about six or seven times greater—that shows you a high, high potential that silver could certainly go up.

This blog will curiously follow the prices of both gold and silver but from the above experts’ opinions it seems very likely that whilst gold will remain an attractive investment, silver may be an even better one !

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This blog has been researching what the experts say at the moment as there seems to be divided views on whether to buy gold now with its price lingering below the USD 800 mark / ounce.

First on to the positives, who feel that Gold at its present value is indeed a good buy :

6 Good Reasons For Buying Gold.

* Gold is your best bet as an insurance policy against bankrupt countries and failed currencies and/or economies.

* High and growing Treasury Debts will lead to inflationa nd hence cause gold to surge in value. Donald Luskin concludes, that gold, the most inflation-sensitive commodity, is coming to realize that when the Treasury issues as much debt as it is now, eventually the Fed will have to buy some of that debt to keep interest rates low, and ultimately that will lead to inflation.”

 * Gold is and always has been an asset class of its own and is a strong hedge against uncertain times.

* With gold you can have a physical asset unlike equity and other paper-like investments. (On this issue many advise that you hold physical gold instead of paper gold - see what one expect has to say on paper gold vs physical gold here.

* Gold is very cheap at present ! Many gold experts feel that gold is heavily undervalued and could go as high as USD 1,500 - 2,000 / ounce in the next year or two. (read here for one view of gold reaching USD 2000 in the next 2-3 years!).

* The amount of gold on the planet is very stable (i.e. unlike the supply of paper money) and hence it will always maintain its value better than paper money.

3 Reasons for not buying gold.

* Inflation is turning to deflation (hence the argument that gold acts as a safe haven against inflation is no longer valid). Andrew Mickey notes that “A lack of inflation will certainly put the brakes on any bull market in gold. That is, if we’re really still in a bull market for gold.”

* The high volatility of gold prices at present indicates that we are not, despite what some experts have claimed, in a Bull Market for gold and hence sceptics do not expect the price of gold to soar for some time.

* The price of gold has traditionally been linked with the oil prices, and as we all know the price for oil has dropped from a stagger USD 148 / barrel to now around USD 40 / barrel, with many expecting oil not to make a major come-back again due to slowing demand from major industrialist countries.

Andrew Mickey concludes :

“Should I be buying gold right now?” The answer, for most of us, is no. Gold, at $770 an ounce, is at a midpoint. And if you’re looking to buy gold, chances are you’ll be able to pick it up a good bit cheaper than you can today.”

Conclusion. 

Present uncertainties in almost all sectors and asset classes will cause gold to remain volatile for some time, so if one is looking for a short term investment, gold is most likely not the choice or recommendation of this author. However, there seems to be solid arguments for gold being a good investment class if one applies a longer time horizon due to its renowned role as a safe haven against inflation and troubled economies and currencies.

Not everyone agrees to the ever-lasting value of gold of course and Warren Buffet once said that. “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

The renowned Dr Doom & Gloom, Marc Faber disagrees with that - check out his latest views on gold from a recent video post on this site.

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Traditionally, during dire times and bear markets, gold has always proven to be a solid investment and safe haven for investors around the world. Recently, however, gold has not followed the traditional trend of surging during heavy equity market drops and it has only been above the USD 800 mark shortly.

This post investigates opinions on where gold is headed and if indeed it it remains a great investment.

Firstly, an Indian perspective in suggested from Livemint.com and Mr. RN Baskhar :

Investment is always fraught with risk. And with most investments losing value in recent times, many people have begun looking at gold again. But is it safe to invest in gold? There are three ways to answer this question.

The first is the price at which it is bought. Like any commodity, there are highs and lows. If gold is purchased at the high level in its price cycle, it will take some time to recover cost of investment.

A classic situation took place in 1980 where for a short time on a single day, gold prices scaled $800 (Rs39,920 now) an ounce. Those who bought gold then had to wait for at least 20 years before prices reached that level again.

Another way of looking at gold is as a hedge against inflation. Gold has (almost always) registered higher average price increases than average inflation rate in most countries. Moreover, unlike any other commodity, it shows little volatility.

The third way to look at gold is how its price appreciates. For instance, if one considers a 20-year period (the normal time frame for an individual to encash the benefits of his savings), gold was a marvellous investment in dollar terms. But as Indian prices were always higher than international prices, anyone who invested in gold at prices prevailing at that time will feel the pain of not seeing his investments pay off. So, never buy gold in India without comparing international prices.

Dr. Marc Faber

“The most precious asset going forwards will still be Gold ,” says Marc Faber, Thai-based Swiss fund manager – and publisher of the Gloom, Boom & Doom Report – speaking to Bloomberg.

“I only buy physical gold, because I don’t trust derivative products, I don’t trust ETFs , and I advise every American to hold his gold outside the United States.

“At some point, between January and March next year, you have to get out [of equities and exchange-traded commodity trusts]. The global economy is imploding – I repeat, imploding – and there’s not going to be a recovery despite all the government intervention.

“In their insanity, central banks have become money printers. So you have to become your own central bank. You cannot trust central banks any more.”

He also seems to think the government could confiscate your gold again very soon - but some of Harrison’s readers argue Faber is dead wrong.

On many things, however, Dr Doom has been right, many times before. This time, like many observers, Faber uses that much over-used word in his latest newsletter to describe the scale of wealth destruction over the last 12 months around the world: complete and unprecedented.

Stocks around the world are down by 50%, property prices have collapsed and commodities are in some cases down by 50% or more. World stock market capitalisation is down by approximately 50%, which equals to losses for equity holders of around $30 trillion. Add to this the losses from non-government bond portfolios, CDOs, MBSs and assets such as ships (the Baltic Dry Index is down by more than 90%) the losses that investors and businessmen have taken are simply colossal.

In the case of commodities, losses have been staggering especially for industrial commodities whose demand is driven by industrial production and capital spending. Nickel is down from a May 2007 peak at $53,452 per ton to around $10, although he adds, individual  commodities can have widely diverging performances the same way in the stock market different sectors and stocks do not reach peaks and troughs at the same time.

 

Finally, Ira Epstein of IECo has some interesting views on where gold prices are headed too and goes on to ask himself if gold will be a winner for 2009 having concluded that it wasn’t that in 2008 :

Deflation, Inflation, Depression

Take your pick what 2009 will bring. My expectation, no matter the outcome in 2009, is that Gold will prove to be one of 2009’s better “safe haven investments”.

Just this year alone we’ve witnessed a burst in the inflation bubble along with a massive onset of deflation. We’ve witnessed so much deflation that Crude Oil Prices are down in but a few months over $100 a barrel, a loss of nearly 2/3^rds of its value. Corn prices have fallen nearly 60% or so. Most major stock indices are down 40% or more this year.

Gold is also down this year as well. Gold closed 2007 near $840 an ounce. The February Gold contract is currently trading near $765, so year to date Gold has lost nearly 75$ an ounce. A 9% loss year to date. Obviously Gold bought by foreigners trading in Euro’s or other major currencies to buy Gold may have turned a profit since the Dollar has rallied about 12% against many major currencies. However, getting fancy about Gold investing is not what it’s about.

As I see it, regardless of what economic outcome we see in 2009, my expectation is for Gold to play an important role in wealth preservation. Interest rates are so low that in some cases buying a treasury instrument costs more than the interest earned. More important, I see Governments around the world spending funds they don’t have in a desperate move to shore up their economies. Seeing the enormous amount spent by the US Government on bailouts means at some point the value of the Dollar comes into question. As such, I don’t have a lot of faith in the value of the Dollar holding up in 2009. If the Dollar falls, that should support Gold.

As simple as it seems, once money starts being lent by banks and Mortgage Company’s, that lending process will go a long way in removing fear about the future. Right now, the mentality one of overwhelming doom and gloom, so much so that around the world people now fear another Great Depression.

Assuming Governments get money moving, once those funds begins to move through the economy, that money begins to chase goods and services. Goods and services that there will be fewer of due to the world economic slowdown. The seeds of inflation are therefore in place. It’s a change in money movement and economic mentality that is necessary to trigger it.

Keep in mind that at market bottoms things always looks their worse, just as at tops they look their best.

Economically speaking, things are bad and look bad.  

I can also recommend that you check out his video commentary !

In conclusion, no one of course knows where gold is headed but it seems that many agree that in these uncertain and dire times, gold is probably a better bet than most investments and certainly equity.

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Latest video from Marc Faber on Gold

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