"
...I wish to add that I am not a "gold bug". I would much prefer to live in a world in which central banks' top priority was to safeguard paper money's purchasing power and its function as a "store of value". I would also much rather live in a world in which the US dollar was a strong currency, and where America was as free as it was in the 1960s, and the economic and financial imbalances weren't as extreme as they are today. As Steven Roach recently remarked, "no nation has ever devalued its way into prosperity". But the fact is, the time has come when we can no longer trust central banks.
Therefore, each individual must be his own central bank and maintain adequate reserves for himself in the form of physical gold. The supply of paper money is potentially endless, whereas the supply of gold is very limited. In fact, gold production from mines is declining."
-- Dr. Marc Faber, An Embarrassment of Riches, Part II
The Daily Reckoning
London, England
Wednesday, November 21, 2007
(
Part I )
The Daily Reckoning PRESENTS: In the conclusion of this two-part essay, Dr. Marc Faber explains that our country's balance sheet is worse than advertised and what investors can do to protect themselves from the monetary instability. Read on…AN EMBARASSMENT OF RICHES, PART IIBy Dr. Marc Faber
November 21, 2007
SourceThe Goldilocks protagonists will say, "Yes, consumption is a symptom of economic strength." Personally, I think it depends on how consumption came about. If it was achieved by the household sector selling assets and going deeper into debt, then consumption is eroding the production capacity of a country and will lead to impoverishment, as is indicated by the dollar's loss of value.
The point is simply this: in the current expansion phase, which began six years ago, the performance of the US economy and US asset markets in dollar terms looks better than is the case in reality. What kind of an adjustment we should make is debatable. It might perhaps be unfair to measure US GDP and asset markets in gold, using as a starting point a very depressed price level of gold as was the case in 2001. But even if we took a gold price of, say, US$400 or US$450 (in the 1980s and 1990s, it seldom traded above US$450), the recent performance of GDP and asset markets would be dismal.
Therefore, while the Fed can lower interest rates further and see to it that asset markets stabilize - or even appreciate - in dollar terms, it is far from certain they would increase in hard currency terms. So far, strong MZM growth in the third quarter would rather seem to have boosted the performance of emerging markets and of commodities. Also, whereas major indexes have made new highs in the US, it should be noted that the majority of shares have failed to make new highs. (Among brokerage shares, only Goldman Sachs has made a new high.) As mentioned above, the strong rise in the Nasdaq 100 Index (up 20% from the August low) was driven by a handful of shares whose performance begins to resemble the performance of Chinese stocks (see Figures 30 and 31)! In my opinion, there is much to lose from buying these over-extended momentum stocks (including AAPL (NASDAQ:AAPL), GOOG (NASDAQ:GOOG), AMZN (NASDAQ:AMZN), RIMM (NASDAQ:RIMM), WYNN (NASDAQ:WYNN), etc.).
From my earlier reports and my thoughts above, one could reason that I am very negative about the US dollar. This is certainly the case from a longer-term perspective. However, we should also recognize that current sentiment towards the dollar is very negative and that the Fed has some power to force the European Central Bank (ECB) also to cut rates. Let us assume that, because of additional rate cuts in the US, the Euro strengthens further. At some point, the political pressure on the ECB will surely increase and demand rate cuts in order to weaken the currency. The situation in Asia is more complex. So far, Asian central banks have resisted their currencies appreciating strongly against the US dollar. But with money supply growing at around 20% in China and 24% in India, and with inflation accelerating in Asia (in particular, food inflation), Asian central banks may have no other option but to tighten meaningfully and let their currencies appreciate against the US dollar.
However, as soon as their economies weakened or their over-extended stock markets collapsed, monetary conditions would be eased very quickly. If this were to occur, I suppose that the world would be left with only one currency of total integrity: gold and other precious metals.
Consequently, if one were to bet on a continuous loss of purchasing power of the US dollar and other currencies - a safe bet with respect to the US dollar in the long term - my recommendation would be to own physical gold as cash currency, which could also be bought in the form of an ETF (GLD).
I am asked constantly how gold would perform in a deflationary collapse. With the propensity of the Fed and the ECB to flood the system with liquidity and to take "extraordinary measures" whenever problems arise, deflation is a remote possibility for the foreseeable future.
So, before worrying about deflation, I would worry about inflation accelerating strongly in the years to come - especially if the US economy stagnates. But let us assume that at some point in the future deflation follows. What then? In my opinion, deflation could only be triggered by one event: a total collapse of the existing global credit bubble. And the only event I can think of that would trigger such a debt collapse would be a third world war. The failure of a large bank - say, Citigroup - wouldn't do the trick, because the Fed would immediately bail it out (unless Ron Paul is US President).
Now, in a debt collapse, where would you rather have your money? In bank deposits, in CDs, in dubious commercial paper, in bonds, in money market funds - all of which would experience soaring default rates - or in physical gold, ideally in a safe deposit box? I think that, particularly in a debt collapse, physical gold would shine, as people the world over would become extremely concerned about, not the return on their money (interest), but the return of their money. This would be particularly true of Asian central banks, which now have less than 2% of their reserves in gold but hold massive quantities of all kinds of debt securities.
Consequently, while I find the gold price to be currently somewhat overbought, I still think that gold will be one of the best investments over the next couple of years. In particular, I would expect demand for gold from individuals around the world to increase meaningfully - especially in Asia - at a time when production is unlikely to increase. I wish to add that I am not a "gold bug". I would much prefer to live in a world in which central banks' top priority was to safeguard paper money's purchasing power and its function as a "store of value". I would also much rather live in a world in which the US dollar was a strong currency, and where America was as free as it was in the 1960s, and the economic and financial imbalances weren't as extreme as they are today. As Steven Roach recently remarked, "no nation has ever devalued its way into prosperity". But the fact is, the time has come when we can no longer trust central banks.
Therefore, each individual must be his own central bank and maintain adequate reserves for himself in the form of physical gold. The supply of paper money is potentially endless, whereas the supply of gold is very limited. In fact, gold production from mines is declining.
Regards,
Dr. Marc Faber
for The Daily Reckoning