Commodity Trade Mantra

Marc Faber on Gold, Oil, Currency, Stocks & Economy

Marc Faber on Gold, Oil, Currency, Stocks & Economy

Marc Faber on Gold, Oil, Currency, Stocks & Economy

In this exclusive interview, Marc Faber answers our followers’ questions on the future, the current global economy, central bankers’ manipulation and the impact on the economy and gold, the possibility for a debt jubilee and more…

Geoff: Hello, and welcome back to this month’s Ask the Expert. I’m your host, Geoff Rutherford, and online with me today we have a man who needs no introduction, Dr. Gloom and Doom, Dr. Marc Faber. Hello, Marc. How are you doing today, sir?

Marc: Fine. Thank you very much, and yourself?

Geoff: Wonderful. Wonderful. Thank you for joining us. We really appreciate that, today.

Marc: It’s my pleasure.

Geoff: So right now, Marc, we have a number of questions from our listeners. I’m not sure if you know, but all the questions here are questions submitted by our listeners here at Sprott Money, and let’s get it started to see what you have to say about these topics.

So firstly, it has been explained that the advantage of the US dollar being the world’s reserve currency is that the US government can print dollars it needs to pay its bills. Bonds are purchased by investors, both domestic and foreign, and the Fed creates money out of thin air. Why don’t other countries use their own central bank’s printing presses to buy their own bonds, and then use the currency they get from selling their bonds, to buy US dollars and then pay off the debts they owe?

Marc: Well basically, if the US buys its own bonds, then because of the status of being a reserve currency, they basically buy their own currency. If foreign governments would start to ease massively, then I suppose the currencies would weaken.

Now, you may say, “Well, why did the dollar strengthen amidst the fact that the US has printed money?” Well, there are some reasons. First of all, maybe the US dollar is not the ugliest among the several sisters, and two, because of the increase in oil production in the United States, the trade deficit has narrowed, and so the dollar can be strong for a while. I don’t think it will last, but the consensus is that the dollar is the strongest currency around. And these other countries, say if Thailand or Singapore or Indonesia would start to print money, then they would weaken their currencies, or that would be the perception.

Geoff: Now, you had mentioned oil as well, sir, and the next question is kind of along the same lines as that. With the slowing world economy that has led to a slowdown in oil demand, what do you think is the long-term future of oil? Likewise, if oil prices rise again, would you recommend buying Russian oil stocks?

Marc: Well, my view is that there are many explanations for the weakness in oil, including some theories that Saudi Arabia wanted to weaken Russia or the shale oil production in the US or Iran, and so forth. But my view is that the decline and sharp decline in oil prices signals a weakening global economy.

Now, in the last few days, I received many reports by brokerage firms and banks, and so forth. They all think that next year the economy in the world will be stronger than in 2014. This would not be my view. Reason A, the low yields on government bonds, that would seem to suggest to me that there are still some growth issues in the global economy, and the sharp fall in the industrial commodity prices would also suggest to me that the economy will be weaker than expected.

And I live in Asia. I can say that we’re not in a recession or in a deep recession, but there’s very little growth at the present time. In fact, I would argue that there’s hardly any growth at all. And as far as Russian oil stocks are concerned, and I think the oil price can rebound here short-term, but you might as well buy some oil drillers in the United States or oil servicing firms or oil companies. Why take a huge risk in Russian oil companies?

Geoff: Makes sense. Now likewise Sir, kind of moving over to gold as well, it has been said that you were not in favor of the Swiss Gold Initiative, in terms of the referendum. If that is the case, why?

Marc: That is completely untrue. I said that I was in favor, but I would prefer to have the National Bank in Switzerland owning at least 50% of their reserves in gold, not just 20%. That’s precisely what I said.

I also argued that it will not be accepted by the public, because the media was against it, all the political parties were against it, and so forth and so on. So I was in favor of it, but I didn’t expect it to be accepted by the public.

And the reason I’m in favor of it, I believe that central banks today have much too much power. Basically, central banks are run by bureaucrats, mostly academics. They studied at nice universities, and so forth. They crunch numbers. Ninety-nine percent of them never worked in the private sector, and to these people you give the authority, or the largest authority, to run the world with their monetary policies. That I will never understand. And I met many central bankers in my life. I would never give any dollars to them for management.

Geoff: Now, kind of sticking along the same line, sir, in terms of, I guess this is more a geopolitical question from one of our listeners. The question is, do you still consider the regimes of supposedly democratic Western nations to be legitimate? If not, what do you think is necessary to restore legitimate government in the Western world?

Marc: Well, this is a very interesting question because we have to ask ourselves, “What is a legitimate government?” Today we have a government, basically in the Western world, that has more voters who receive something from the state then people that actually pay for it. And so I think that democracy is an untested system. We had, maybe, 7000 years of history of civilization, and democracy is precisely, roughly maximum 100 years old, maximum, because in many countries, full democracy was only introduced less than 100 years ago.

Geoff: Mm-hmm.

Marc: Before, only a few people could vote, and the country that had basically invented democracy, Greece, only certain citizens could vote, not everybody.

Geoff: Right.

Marc: And so I’m asking myself, historically seen, we have to see the outcome of democracy. I don’t believe it will be a good outcome. But anyway, different people may say, “Okay. All governments are bad, but democracy is the best.” I’m not sure about that. Because I’ in Asia, Japan in the ’70s, ’80s, and South Korea, ’70, ’80s, Taiwan ’70, ’80s, Singapore until today, Hong Kong, until today, these countries never really had democracy, but they prospered.

Now you may say, “Well, there were some unusual conditions because of this and that, and so forth.” That may be true, but nevertheless, I’ve seen prosperity already in countries like, or in cities like Venice, Florence, Amalfi,Siena, developed, and they didn’t have democracy. In the German towns where prosperity developed, the trading towns, the Hanseatic towns, they never had democracy. So I’m not sure if democracy is the best system. I’m not saying that it’s not necessarily the best system, but it’s not yet proven. It’s just that society says democracy is good, but maybe it’s a farce. Does your vote have any impact?

Geoff: Mm-hmm. I mean, I suppose it kind of goes back to human nature in that sense. In other words, people are going to be people, so even the system in communism, where there’s kind of this idealized equal opportunity, people are going to be people. Greed takes over, and we have what we have happening today, as you mentioned, with central bankers.

Marc: The problem with communism was that the whole economy was run by the government. In other words, essentially the whole economy was 100% government. That was a problem. In Singapore we had the leader, for the last, essentially, 50 years, and he’s done a great job. And in other countries also we had great leaders, but the issue really is, “How much government do you want? How much transfer payments do you want?” In my view, a small government is the best, the maximum, say 15 to 20% of GDP. But now, in the Western world, we have, through all the transfer payments, governments that are close to 50% of GDP, and in some countries, more than 50% of GDP.

Geoff: Mm-hmm.

Marc: So you have socialism. And I’m not suggesting that the capitalistic system in the best, but probably, of all bad systems, it is the best.

Geoff: Now let’s take a look now, kind of going back to precious metals, and our next question is, will the US put a windfall profits tax on gold and silver ones these metals begin to break out? What should be done of this occurrence?

Marc: Well, I think this is, again, a very good question, because I’m sure that this will happen, not just the profit tax. I think the US government, when gold really starts to move, will take it away. They will pay something. Say like in 1933, they paid $25 per ounce of gold that people held, and after they have collected most of the gold – of course not the gold that was held by government officials, or to precisely say “by corrupt government officials,” because they’re all corrupt – they revalued the gold to $35. So the investor lost out. And I think what will happen, the US will eventually, under some kind of an excuse, whether it’s terrorism or whatever it is, expropriate gold. They’ll pay, say, at today’s price, $1220 an ounce, and then they’ll go to the ECB.

The ECB and the Federal Reserve are one and the same. The Bank of England also. They talk to each other every day. They’re the chief manipulators of everything. And then they say to the ECB, “Well, because we do it, you also should do it,” and the Draghi-type of – I don’t want to say what I think of him, but I say, Draghi-type of personalities, they’re saying, “Yeah. Yeah. We’ll do it also,” and then the Bank of England, of course, will do it also. Then they knock on the doors of the thrifts and say, “You thrifts, you also have to do it,” and the thrifts, they have no backbones anymore. The thrifts will say, “Okay. We’ll also do it.”

And so the threat is really for an investor, is where do you store your gold? Because if you have it in a bank or in an ETF, it may be taken away. And whereas I think that the Sprott Physical Gold are the best ones. When the US knocks on the door of Canada and says, “You have to do the same,” the Canadians will also say, “Yeah. Okay.” And so the best, probably, to store gold in Dubai, in Hong Kong, Singapore, physically.

Geoff: Physical ownership makes more sense, clearly.

Marc: It’s better. . .

Geoff: Mm-hmm.

Marc: . . . gold shares are, of course, incredibly low, compared to the physical price of gold.

Geoff: Well here’s another question, Marc. It’s more along the terms of an investment for our listeners. So currently, is it better for amateur individual investors to have some exposure to equities and bonds, or should they stay away from those markets altogether?

Marc: My view is very simple. I have no clue, although I’m an investment advisor, how the world will look like in five years time. Now, maybe some forecaster knows, but I haven’t met them yet, and I’d like to meet them yet. The fact is simply, we don’t know much about the future. We even know little about the present and the past. And my advice to anyone investing is diversification. You have to own some equities. You own some gold. You own some cash and bonds, and you own some real estate. That is what you should do, because we don’t know.

But in general, I believe that investors will be deeply, and I repeat, deeply disappointed by future returns. Some assets will go up, and some assets will go down. Just consider, oil drilling stocks have declined by roughly 40, 50% from the peak.

Geoff: Mm-hmm.

Marc: The oil price is down 40% in six months. We have a lot of volatility. If you owned your assets in Japan, in equities you did okay, because the equity market has rallied. Whereas the yen has collapsed. But if you owned it, say, in real estate, the real estate hasn’t rallied as much as the yen went down. If you owned it in cash, you’ve been basically losing a lot of money. So we have, nowadays, a lot of volatility, and nobody knows. It depends all on the interventions.

But I would say this, the whole world believes that because of money printing, stocks will automatically go up. That is far from certain. At one point, this correlation between money printing and stocks going up, will break down the way the correlation between money printing and gold price broke down after 2011. So we don’t know. This is my view.

Now, you listen, and somebody says, “What kind of an idiot do you have in your interview? He doesn’t know,” but this is the fact. I’d rather say that nobody knows for sure. A lot of money will be lost by people who are overexposed in a sector that will collapse in price, and some people will make money because they gambled on the right move, in exchange rates or in bonds or and stocks. But I don’t know. So I’m diversified.

There’s one thing I know.

Geoff: Okay.

Marc: The end will not be pleasant. We have a systemic risk, and the system, such as it is today, is not going to survive for long, maybe another five years, maybe another 10 years, maybe only one year, but the end will not be pleasant for investors. That is what I know.

Geoff: Understood, sir.

Now, let’s take a look at this now. Given the recent quintupling of the US monetary base and revelations of massive serial rigging of global currency markets, what do you think will happen when the US dollar falls to its real value? What do you think that real value is, for that matter?

Marc: Again, you have very good questions. Nobody knows for sure. I mean, the US is still a superpower, from a military point of view. From a prestigious point of view, the US is in the dumps, because everybody in the world now realizes what kind of a hypocritic leadership the US has. They go around the world and tell people about democracy. They tell people about human rights, about torture, about evil regimes, about nation-building, and what do they do? Torture. It has been exposed. So the prestige of the US is gone, forever, and nobody will ever trust the US anymore.

Geoff: I agree, sir. I think after we saw what happened in the UN, with the Council, and we’re hearing Barack Obama called the three most relevant threats to humanity, and he names Ebola number-three and the Russian Federation number-two. I think we’ve reached the point of absurdity at this point.

Marc: It’s a complete joke. And you have Dick Cheney and his mafia colleagues telling the world that this was absolutely legal, and so forth. I mean, it’s a complete joke. The Americans, when they travel alone, they’re welcome everywhere, but nobody in the entire world likes the US government any longer. That should be clear.

Geoff: Right. I see what you mean, sir.

Marc: They’re the laughingstock of the world, the laughingstock. Actually, it’s more tragic. It would be nice to be the laughingstock, but people look at the US. They come and advise other countries how to run their business, and so forth, and themselves, they live by American exceptionalism. What kind of story is this? It’s actually depressing.

Geoff: Well, let’s take a look now at the idea of global debt. What is your opinion about the possibility of a global debt jubilee? How might one be manifested?

Marc: Yes. I mean, I think this is the real issue, in the sense that what could happen is that, in a concerted effort, central banks around the world would essentially buy up all the government bonds. It’s possible. We don’t know. The U.S. Treasury and the ECD. Actually, the Bank of Japan is a good example. They’re buying all the government bonds that the government is issuing. What the outcome will be, we don’t know for sure, but again, my view would be that the outcome will not be very favorable. At some point, yields on bonds will go up.

Now, you may say, “Okay. If the government buys all the government bonds, how can yields go up?” Well, they can go up because there is a lot of debt outstanding already, and whereas the government debt may not collapse in price, in other words, yields on government bonds may not go up substantially. What may happen is that corporate bond yields, and in particular, high yield bond yields could go up substantially.

But I’m just trying to say, in my view, the current regime, run by central bankers, is not going to end well. I mean, someone has to pay for the government’s expenditures, and if you have these kind of deficits that we have in most countries, eventually something will happen. And we do not only have rising government debt. We have rising corporate debt, rising household debt, and so forth and so on, and we have the unfunded liabilities. Nobody talks about that.

I mean, let’s put it this way, I think it’s important for the individual to think this through very carefully. I don’t think the real estate will be expropriated, because everybody owns real estate, so it’s politically not acceptable, but it can be taxed more heavily, because it’s very visible. So I’m not so sure that real estate is the best investment, but at least you’re not going to lose everything.

Then comes equities, if you compare equities, say. In Switzerland, blue-chip stocks yield, say, around, have a dividend yield of maybe 3%, two and a half, 3%, and the government bond yield now, in Switzerland, is less than 0.25% on 10-year government bonds. So if I buy a thrift government bond for 10 years, the maximum I will earn, if I hold it to maturity, is, as of today, precisely 0.24% per annum. Doesn’t even cover my fees to the bank.

Geoff: Right.

Marc: Now, if I buy blue-chip stocks, I earn, say, a dividend yield of two and a half, 3%. In some cases more. In some cases a little bit less. But over a 10-year period, I think that the stocks are going to be a better investment than the bonds market.

Now, on the other hand, if I look at the US 10-year government bond yield, it’s 2.2% today. In France it is less than 1%. So I’m saying to myself, “Well, maybe government bond yields are reasonably effective,” and everybody is bearish about bonds. But as I said, I don’t know. I’m just saying, in absence of knowing, the best the investor can do is to say to himself, “Central banks have created a low-return environment, a low-return and high-risk environment, I may say, and in this low-return, high-risk environment, the best strategy’s probably to be diversified. I mean, I’m happy if, in the next five years, I don’t lose any money. (Laughs) Yeah right. I’m not greedy and want to earn any money. I prefer not to lose any.

Geoff: I think we don’t want to lose any, sir. I agree.

Marc: And US frauds, you know that. I mean, to take big exposures is a very risky proposition, and I want to explain to you why. When you print money, and this has been observed by Copernicus already in the 17th century and by David Hume and Irving Fisher, the money does not flow evenly into the system. So when you print money, some things go up, and others don’t. Some things go up, and then there is a bubble, and then collapse, like the NASDAQ in 2000 and the housing bubble in the US in 2007, and so forth and so on. So you just don’t know exactly when the bubble bursts, and not all assets’ prices are touched positively.

I was going to say, if you bought gold in 2011, at the peak, $1921, September, 2011, you lost a lot of money, but the logic would have said, “Oh. There’s money printing; the gold price will go up.

Geoff: Mm-hmm.

Marc: And so the way gold went down by essentially 40% since then and oil prices collapsed by 40% since then, the US stock market could also collapse, easily, by 40%. Actually, I’d be surprised if it only collapses by 40%. But I don’t know precisely from which level. That is the problem.

Geoff: Understood, sir.

Now, let’s take a look at a question about mining now. Recently, Rick Rule has said he’s expecting a capitulation in equities within the precious metals mining sector. Whether or not this capitulation is actually reached, with miners down 80%, why are institutional investors, or sovereigns like China, not moving into this space more rapidly and acquiring these shares at these hugely undervalued levels?

Marc: Well first of all, what is overvalued and undervalued is a subjective judgment, and I tend to agree with Rick that gold shares, okay, they’re down 80%, and they are cheap, compared to the physical price of gold and compared to Facebook and Google and all these Netflix type of stocks. That I agree entirely.

But you have to understand, institutional investors, either they are ETF, which are passive investors, so by indices, the S&P 500 or the Toronto Stock Exchange Index, or what not, or they are active managers, and the hedge funds are also active managers. Now, they don’t care about what will happen in five years time. They care what will happen within the next week. They want to be in stocks that move within a week, within a month, because they need to show performance. If they don’t show performance, then the clients leave them. So everything has become very short-term oriented, and I would suggest to an investor to forget about the short-term and to think from a longer-term perspective, where is their value?

I happen to think and agree with Rick Rule that there is value in gold mining shares, and I think they could easily rebound from this level by 30 to 40%. The GDXJ, the Junior Gold Mining Stock Index, has, in the first six months of the year, did rebound 40%, but then it came back again to essentially slow. So we have volatility in these stocks. And personally I hold, of course, much more in physical gold than in gold shares, but because I’m a director of NovaGold and Sprott Inc. and Sunshine Mining and Ivanhoe, I also own shares, and I think they’re very cheap at the present time, and they could easily double, all of them, easily.

Look. Investors buy high and sell low. Please remember that. I went to dinner, in 1999 in St. Moritz in Switzerland. There were lots of people with money and they said, “Oh. We make so much money buying and selling the NASDAQ and tech stocks as well. Then they ask me my opinion. I said, “Gold is very cheap.” It was, at that time, $255, or something like this. Then they said to me, “Gold only goes down,” because yes, it has gone down from $850 in 1980 to $255, but I told them, “Because it only goes down, it interests me to buy it, because it’s a neglected asset class.”

Now I don’t know, maybe gold goes still to $800 and maybe not. I don’t think so. But before the Swiss Initiative, the media was extremely negative about gold, because if the initiative in Switzerland would have been accepted, it would have given a message to the world, central banks may start, or they have to, under the pressure of the world, just to own some gold. And so the sentiment about gold, copper, the euro, oil, at the present time, is maximum, and I repeat, maximum bearish. So I think a rebound may take place. Is it the new leg in the bull market? Who knows? But I think gold could easily shoot up by $100 here, and gold shares could easily go up by 30, 40%.

Geoff: We really hope so. I think we’re waiting for a comeback at this point.

Marc: We shouldn’t hope. We should always think realistically. The fact is, simply, when I look at these people in central banks, and they’re monitoring things, and believe me they will never admit that they’ve been wrong. They’ve printed money like crazy, and the global economy basically is stagnating. And I’ve written about this. The more money you print, the more real wages go down. That is the problem.

Geoff: So Sir, the next question, actually – we just talked about Rick Rule – this question now is kind of centered around something that Jim Willie actually stated. Jim Willie states that the USA really didn’t stop their bond buying, and the reason Japan is printing is because the buying is going through their central bank now. Is there any truth to this? Have you ever heard anything about this before?

Marc: Well, there are many theories and so forth. I think they’re still buying bonds, because they earn the interest on assisting positions, and what they can do is, let’s say the ECD buy bonds, also the Bank of England or the bank of Japan, and so forth. That’s why said, the Fed and ECB and the Bank of England, the Bank of Japan, basically they talk to each other every day. They are the Mafia, the chief manipulators, and we don’t know exactly what is being said. That’s why it creates a lot of uncertainty in the markets, and in my view, undue volatility.

But one thing I’m sure of, before the whole system collapses, the governments and the agents, which are the treasury departments and the central banks, will do everything – everything – to protect the system from collapsing, and in my view, this will involve much more QEs around the world.

Geoff: Now, kind of going back to, we talked, well, I talked a little bit about Russia, and you talked about Russia as well. After the latest anti-Russia resolution, which I believe is Bill 758 of the U.S. Congress and a scathing condemnation and assessment of Ron Paul, do you think the US government is committed to starting World War III?

Marc: Well, I don’t think they’re committed to it. In principle, nobody wants war, but who knows? Under Obama, I don’t think it will happen. But in future governments, who knows? I hope it will not happen, because war is horrible, and the Western world, it does not have the spirit to fight wars anymore. You look at the millennials. (Laughs) How many of them do you think will be on the frontline. I have to laugh when I see all these Facebook clowns. If you think they’re going to fight the war . . .

Geoff: Right.

Marc: . . . never. They’ll send some soldiers, mercenaries, and the mercenaries are basically out to make money, not to fight really wars for the purpose of an ideal or a purpose. They’re out there to make money, and so the outcome is going to be disaster. If the US couldn’t do any better in Afghanistan and Iraq, what do you think would they achieve against China or Russia?

Geoff: Very true. That’s very true.

Marc: It’s going to be a disaster, but for defense stocks, it may be good. For gold, it may be good. I don’t know. But I’m actually happy to be 68, so I’ll pass away in, say, 10 years time. Don’t have to watch the disastrous economic and geopolitical decisions of the Western world. Sometimes it depresses me. Believe me.

Geoff: Well sir, it’s been a pleasure speaking to you. Of course, we’ve been speaking to Dr. Marc Faber, Dr. Gloom and Doom himself, and we urge our listeners to go to GloomBoomDoom.com to get more insight from this man who’s been speaking today. Dr. Faber, thank you for joining us today, sir. It’s been a pleasure speaking to you.

Marc: It was my pleasure. Thank you very much. Yes. I also wish your listener Merry Christmas. Although, nowadays it’s not even politically correct to say that in many countries. You should say “Festive Season.” But Happy New Year is still valid.

Geoff: Wonderful, sir, and all the best to you, too.

Marc: Yes. Thank you very much.

Geoff:Wonderful, and to our listeners, thank you for listening. This is Geoff Rutherford for Ask the Expert here on Sprott Money News. This is the last Ask the Expert for the year, so have a Merry Christmas and a prosperous new year. Take care.

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