Marc Faber famously predicted the stock market crash in 1987 and is the editor and publisher of the newsletter, ‘The Gloom, Boom and Doom Report.’ Here he talks with Every Investor editor Chris Menon.
Chris Menon: You famously predicted the market crash in 1987. Is it true that you forsee an ’87 type crash in the next 12 months?
Marc Faber: Yes. I’ve been expecting a correction for the past 2 years, which would have been healthy. But since October 2011 when the S&P reached 1074 we haven’t had more than an 11% correction and we’ve been going up in a straight line. And usually markets that go up in a straight line become very vulnerable.
I don’t think we’ll see a correction but I think we are going to make a stock market peak, say in the next 3-6 months.
Chris Menon: When you say a stock market peak, you’re talking primarily about the S&P 500 or across the board?
Marc Faber: Across the board. Following the highs, whenever that might occur – but I don’t think it is that far away, because a number of technical indicators are rather negative – I think we will have at least a 20%-30% decline.
Chris Menon: What sort of technical indicators are you talking about?
Marc Faber: Well I look at 12-month new highs, which have diminished. In other words the market is being led by a narrow group of stocks. Then I look at the volumes, which haven’t picked up much, and on days when the market is going down volume is usually higher than on days when it is going up.
Sentiment is also very, very bullish. I mean no-one can see why the market should be going down. This is precisely the point of maximum danger.
When you have a bear market and no-one can see why the market should go up, that is the maximum level of negative sentiment. Now we are close to the maximum level of positive sentiment.
Chris Menon: In terms of asset classes and geography, is there any way that investors can build in some safety barrier to this?
Marc Faber: My sense is that since the early 1980s, when interest rates peaked out on the long bonds in America at over 15%, we had essentially a colossal asset inflation, where property prices, art prices, stock prices, bond prices have gone up globally. And now over the past 2-3 years some markets haven’t made new highs but basically we have very inflated asset markets.
I think that when the markets come apart there will be very few places to hide.
Chris Menon: Where do you think people might hide? I’ve heard you speak about precious metals as one such area.
Marc Faber: I think precious metals. If you look at the price of gold, it had a huge bull market from 1999 to September 2011, when it peaked out at US$1921. After that gold has been coming down to below $1200, and this year we rallied from $1200 to a high in March of $1392. Then we fell again and now recently we rallied again.
I think we may still be in a correction period but the most recent rally from less than $1200 up to over $1300 was accompanied by a lot of negative sentiment. Nobody believes in this bull market and most analysts and strategists recommend to sell gold.
I think maybe we may have bottomed out.
Chris Menon: Are you a buyer at these levels?
Marc Faber: Well I bought some around $1250, and I think if it comes down again to around the $1250 level I will again be a large buyer. I always have some gold and I buy every month some gold but this year I haven’t maxed by asset allocation, which is about 25% of assets in gold.
Basically, because stocks have gone up so much and because of the cashflow I get from bonds (both the emerging market bonds and real estate) I am now somewhat underweight gold. I’m looking for an opportunity to push up my weighting in gold again to around 25%.
Chris Menon: Over what time period will a buyer of gold now see a decent return?
Marc Faber: I think we may go down over the next 10 days or so. I think we are going to see a major low in gold within the next 2 weeks. I don’t think it will take that much time.
By the way, I think that so many people missed the initial rise in the price of gold and they are saying, “If it comes down somewhat, I will buy some.” Maybe it doesn’t come down very much.
Chris Menon: I’ve recently come across a prediction for gold to hit $10,000 by 2020-21. Is this a realistic target in your view?
Marc Faber: You’d better ask this question to Ms Yellen and to other central bankers, it all depends on how much money they will print. But in general, since the introduction of central banking in the world, money has lost its purchasing power. And in my view…
I think that the inflation figures that are published by the essentially dishonest government officials are completely bogus.
Chris Menon: You think it is running much higher, at least in food.
Marc Faber: My sense is that in most European countries and in the United States, the cost of living increases are in the order – and it depends on whether you have children or where you work or live; some cities have much higher prices increases than others – but in general, I think that the cost of living increases are between 5%-7% per annum.
In emerging markets I think they are more like 10% per annum.
Chris Menon: What’s your view on silver? Some consider that following its price has fallen by over 60% it represents a great buying opportunity.
Marc Faber: I think that silver is an attractive precious metal that may go up more than gold, but I stick to gold basically. I think that platinum may have the most attractive fundamentals.
Chris Menon: On what do you base that view?
Marc Faber: The platinum market is very small and there are very few large producers, like Russia and South Africa, and a squeeze could develop.
Chris Menon: But you personally favour gold above all other precious metals?
Marc Faber: Every investor has to know what is best for him. If you go to a doctor he doesn’t have a universal pill that will heal everything. There are different strategies. I have my reason for owning gold compared to silver: in particular the storage of gold is easier for gold than silver.
Chris Menon: You buy physical, is that your preferred way to hold gold?
Marc Faber: Correct. I have to say, early this year in January at the Barrons Round Table I recommended the GDXJ, which is the junior mining stock index for gold. Of course, if gold prices go up the junior gold miners have a much higher potential upside than physical gold, because they also came down by 80%-90% in the correction that ensued in 2011. So, every investor has to decide for himself what is more suitable for him.
For me to own gold is not to maximise profit but to have an asset that is not lent out to me by someone else. In other words, if I have a bank deposit then someone else basically has to repay me; if I buy bonds then I depend on the creditor to pay me, in other words the corporation that issued these bonds or the government. In the case of gold, having it physically delivered I have the ownership without having to go to someone else and say, please pay me.
Chris Menon: So no ‘counter-party risk’ as it were.
Marc Faber: Yes, precisely.
Chris Menon: Is there a risk with some of the bullion banks if you don’t have ‘allocated’ storage? Also, where you have that storage located, whether it is in the US, Singapore, Switzerland?
Marc Faber: Yes, there is always a risk if it is not allocated and delivered to you. And even if you store it in a safe deposit box there is also risk.
Chris Menon: For novice investors thinking of buying gold for the first time, what would be your advice?
Marc Faber: Well basically, my advice to investors is don’t put all your money into gold because in the very long run it is not the best investment. You have no cash flow, so there is no compounding impact the way you have with high dividend paying stocks or with bonds.
If I were an investor who doesn’t own any gold, I would buy every month some gold, whether it is one ounce or half an ounce or 5 ounces, or if you’re very rich ten kilos. I would just keep on accumulating with my savings some gold.
I buy every month. I have a standing order with the bank. They buy me every month a certain quantity of gold. Then in addition to that, I buy when the gold price when I think that the price is reaching a relatively low level.
As I said in my introduction, I think all asset markets are inflated. But on a relative basis gold would appear to me to be now reasonably inexpensive, certainly compared to the Dow Jones and the S&P 500.
Chris Menon: How is it that the price of gold can fall when QE money printing continues in the US (albeit at a slower pace), and in Japan and China and is likely to be introduced in Europe?
Marc Faber: Well basically, this is one of the problems of printing money, that prices don’t go up evenly. In other words, they go up irregularly and at different times. So why did home prices go down in the US with this last interest raise? These are things are things that happen? And why did some stocks collapse while they pursue expansionary monetarist policies?
The expansionist monetary policies bring out more volatility and I suppose that in September 2011, temporarily, the gold price became expensive compared to equities and bonds. And so we have this correction now, and the big question is not what happened in the past but what will happen in the future.
My view, as I explained to you, is that we have probably seen a low from which we can have a more meaningful rally.
Chris Menon: If you had to recommend a book that an ordinary investor should read, what would it be?
Marc Faber: I have a library of first editions of investment books. There is not one book that will give you the avenues to wealth. One book that has helped me a lot is ‘Manias, Panics and Crashes: A History of Financial Crashes’ by Charles Kindleberger. I knew him, he was a professor, a very nice and modest man.
To understand economics and the problems we have today, created by our incompetent ruling elite you should read Milton Friedman’s ‘Capital and Freedom’.