Marc Faber – Current Views on the Economy and What to Expect in the Future

Marc Faber Interviewed at Slovenia Resource Conference (04:21) [October 11th, 2008]

Marc Faber Interviewed by CNBC (03:26) [March 18th, 2008]

Marc Faber Interview [October 14th, 2008]
Part 1 (07:05)
Part 2 (07:05)

Marc Faber Lecture at Slovenia Resource Conference [October 11th, 2008]
Part 1
Part 2
Part 3
Part 4
Part 5
Part 6
Part 7
Part 8

The lecture given by Marc Faber at the Slovenia Resource Conference was very helpful in explaining the current economic situation and what is to be expected in the future. I would encourage anyone who wants to see some clear information and coherent analysis, to watch the recently uploaded videos of the lecture on youtube I posted above.

Similar sentiment was echoed by Puru Saxena in his recent commentary.

His suspicion is that the dollar will continue to strengthen in the short run, and gold could drop to $700 or even $600 an ounce. There are two factors that he suggests that could push gold lower in the next few months. The first is that further deleveraging will continue to force selling and drive all asset prices down further. Secondly, is the possibility that the market has made a short term bottom, the economy starts showing signs of recovering and markets will rebound, shifting the mainstream perception to thinking that the worst is over, and there is no need to own gold. He has compared the current period to that of after the crash of 1929, where stocks were oversold, and rallied back over 50% (but did not make new highs) before ultimately turning around to make new lows as the country entered depression. He expects markets to make this short term bottom sometime in October or November of this year, allowing for the possibility that this low has already been reached, and markets will regain some of their losses in the next few months.

Long term however, Faber is very bullish on gold, as he recognizes that Ben Bernanke is a money printer, who is destine to send the price of gold much higher as the dollar is debased. He expects gold to outperform the stock markets, and also predicts a one to one ratio of the Dow Jones to gold in a few years. He is predicting the bankruptcy of the US government and the devaluation and possible destruction of all fiat currencies sometime down the line.

Even though I recognize the possibility that gold will fall below $700, I would still recommend that everyone should buy some physical gold as soon as possible. The last time gold fell below $800 an ounce, many gold bugs turned bearish and started talking about $700 and $600 gold. This was the time when gold had its most spectacular rally, including an $80 move in four hours of trading, ultimately brining the price above $900. Sharp corrections in the gold price are designed to shake out the weak and leveraged players in the market so that the bull is able to charge forward with as few speculators on its back as possible. Those who are waiting for gold to hit $700 or $600 may end up finding themselves left in the dust if they fail to enter the market before the rush into the small asset class. And if gold makes another quick move above $900, those waiting for $700, may then wait for $850 gold. But then if gold surges ahead over $1000, those waiting for cheaper prices will be forced to make a difficult decision. Either they will have to pay a much high price than they were originally hoping, they can pray that the price of gold comes back down to a cheaper price, or they may never buy gold at all and miss out on the bull market. Someone who was thinking of buying at $800, but tried to wait for gold to go to $700 or $600, will ultimately find it difficult to ever justify paying $1000, $1200, $1500, $2000 or more for the same ounce of gold. Therefore, it is much better to be a few days too early, than one day too late. The economic situation is critical enough that it is better to err on the side of caution, rather than risking holding onto worthless dollars. Anyone buying gold at these prices is guaranteed to make money in the long run, so it is not necessary to time the markets perfectly. Those who buy into the gold market now or who are already holding positions should not be scared by further declines in the gold price. Any further drops should be looked at as tremendous buying opportunities because the long term fundamentals for gold show no sign of changing any time soon. There are too many people around the world who understand the severity of what is occurring, and will hold onto gold no matter what. A drop in price will not necessarily lead to more selling, and may in fact encourage more buying instead. Further declines in the gold price may lead to more shortages and higher premiums in the physical markets. So even if investors are waiting to get a cheaper gold price, there is no guarantee that there will be any physical metal available to purchase if the price does fall. With high demand for physical gold and fear of counter party risk, investors are starting to take delivery on COMEX contracts. Many of these contracts are in danger of default which would send the price of gold much higher very quickly. Massive short positions that have to be covered at some point may be forced to go into the tight market to buy the physical product in order to make delivery, resulting in default and/or much higher prices.

I believe that gold prices in the short run will be determined by the US dollar. If the US dollar continues to rise above 83 on the dollar index, then gold prices will likely fall. If this is the case, I expect the declines in gold measured in foreign currencies to not be as severe as US dollar declines, since gold has performed much better lately from the perspective of non-US investors in most foreign currencies. However, if the economic crisis takes another turn for the worse, like the possibility of another large bank failure, a run on the banks, a large company going bankrupt, an entire State (like California) going bankrupt, or even a terrorist attack, war with Iran, flu pandemic, power outages, internet systems crashing, and countless of other unpredictable events could cause a flight into both gold and the dollar, which would both be viewed as a safe haven and could rise in tandem. And there is always the risk of foreigners dumping dollars or big money players buying into the small gold market, both of which could send gold much higher virtually over night.

A further rise in the US dollar will have to compete against Ben Bernake and his money printing. With the Federal Reserve now loaning out an average of $437.5 billion per day, it certainly brings into question how much longer the dollar can strengthen considering that the monetary base is exploding at an unprecedented rate. Central Banks around the world have already pledged to lend out “unlimited” dollars to solve the financial crisis, which should prevent the dollar from strengthening, in addition to the fact that bond yields are incredibly low. The Federal Reserve is trying to pump enough money into the system to fight the credit contraction, and currently, the credit contraction is winning the battle. But I would caution investors who think the Credit Crunch will overpower Helicopter Ben Bernake, for he is the money printing champion of the world and inflationary forces are certain to return with vengeance.

There are good arguments for both gold going lower, and higher in the short run. No one has a crystal ball and is able to predict short term moves with any degree of certainty. In the long run though, the price of gold has to go much higher, which is all that really matters.