Well known economic analyst Marc Faber still likes gold, especially when compared to equity prices. In his October 2009 Gloom Boom & Doom report, Faber discusses his long-term outlook for the shiny yellow metal:
“Some pundits will argue that precious metals are expensive, but this isn’t my view. Why would anyone not own some gold, rather than US dollars, when interest rates are near zero? Dollars can and will be printed en masse, whereas the supply of precious metals is extremely limited.”
For those still trying to decide whether gold/silver, Marc Faber lays out a pretty simple and effective argument. In addition to the historical evidence for a depreciating dollar, the current policies instituted by the Obama administration, The Fed and Treasury clearly point to, not only continued degradation of the US dollar, but an acceleration in its declining purchasing power. Dr. Faber is not saying one should put all of their net worth into gold, but securing at least a part of personal assets with precious metals will certainly not hurt. Though Faber focuses on the US dollar in this particular GBD Report, he has repeatedly stated that gold will rise against most paper currencies for the same reasons as described above.
“…returning to the argument that gold is expensive, it would appear that it is actually still a bargain compared to the S&P 500. At present, gold sells at about the same level as the S&P 500, but if I am right about the size of future US fiscal deficits and about the Fed neglecting to protect the purchasing power of the US dollar, I could envision a time when gold will sell for at least two or three times the value of the S&P 500. Also, if an investor were convinced that equities will do better than gold, he should consider investing in a basket of gold and silver shares, which are relatively depressed compared to the price of gold”
Equities have certainly outperformed gold over the course of the last six months. But, if gold is really a safe haven asset (which we are pretty sure it is based on thousands of years of historical evidence), then gold will likely outperform equities and most other asset classes in real terms as the economies of the world continue to fall apart.
Preppers and survivalists will often focus any gold allocation at owning physical bullion in the event of a total systemic meltdown. In this respect, the argument is sound, as gold, silver and other precious metals can act as real money for bartering. But, for those who leave open the option of an economic breakdown without a total collapse of the system as we know it, considering equity gold positions may actually pay off much more in the long run. While gold may have rocketed from $750 to a little over $1000 over the last year, many precious metals stocks have seen gains in excess of 200% over the same time period.
Lorimer Wilson, a commentator for Kitco.com has an excellent recent piece on just this topic, focusing specifically on junior precious metals mining stocks. In his article What Would $5,800 Gold Mean for Junior Miners? Wilson says:
“If gold, for example, were to escalate considerably in price (i.e. to $2,000, $3,000, or even more) in the next few years it would have a significantly positive impact on the profitability of the companies who mine it and the royalty companies that buy it from marginal producers. For example, with gold priced at $1,000/oz., and the cost of production at perhaps $600/oz. the gross profit margin of gold mining companies would be 40.0%. If 2 years from now, however, gold were to increase to $2,000 and the cost of production were to increase by only 20% to $720/oz. then the mining companiesâ€™ gross profit margins would have gone up from $400/oz. to $1280/oz. or 220%! “
It is natural to be hesitant of stocks in the current economic climate, especially considering the alleged manipulations by investment banks, hedge funds and high frequency trading platforms. And while manipulators may be able to control prices for weeks and/or months at a time, gold’s long term trend is intact, and is headed up, not down. The global fundamentals of the economy will determine where capital will flow for safety, and right now, all signs point to gold for the next several years. Whether you choose to buy gold bullion or mining shares for some added ‘leverage’, the important thing is that you have some form of gold in your portfolio.
Disclosure: Long Gold