2 December 2008

Not a genius: Buy Gold ~ Marc Faber

Days after Marc Faber advised every American to hold his gold outside of the United States, he comes back to the issue of the yellow metal in his latest client newsletter:

Faber describes the scale of wealth destruction over the last 12 months (and around the world) as complete and unprecedented. Ed Harrison (Credit Writedowns) describes Faber's thinking to mean that the government is going to reflate in order to avoid depression, and that means gold is more valuable. The government could even confiscate your gold again very soon.


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 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.

Commodity, 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.

A key difference this time, as compared to prior liquidity injections and fiscal measures by the US Fed and Treasury that lead to bear markets (such as seen in 1973-74), is the huge leverage built up in the system since 1980 (afterall, in 1973, derivatives hardly existed and securitisation was largely absent).

Hence, when credit growth began slowing in 2007 and when asset markets sold off, a huge deleveraging process was triggered, which then brought about further price falls and caused further deleveraging. Volatility also increased to record highs, not just for equities but also for commodities, currencies and bonds.

To navigate successfully between all these volatile and often unpredictable market movements you need to be a genius, notes Faber. Or else, look for a safe heaven such as physical gold (gold miners and silver could, however, outperform for a while).

In any event, an environment of negative real interest rates is gold friendly and will be highly inflationary in the long run.

…The arguments for holding gold and worrying about inflation are still valid and I do think that gold is a good hedge against that eventuality. Faber makes a very good argument for why inflation may be the endgame.

However, so far, the deflation scenario is the one that seems to be taking hold - lower commodity prices, lower asset prices, and eventually lower consumer prices. As debt levels are high, this is the scenario to fear.


Fast Ben said...

An economy built on debt is a false economy.

Debt Deflation said...

It is all about DEBT. The world is sturated with DEBT. But what do governments do? Deficit Budgeting thus creating even more DEBT.