Marc Faber: ‘Gold a Bargain Compared to S&P500′

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 companies’ 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

Comments

[User 353732:]

Certain equities are also an effective hedge against inflation . Moreover,since many of these equities pay dividends there is some current income,unlike gold. This is not to deny the attraction of gold as a reliable store of value but these selected equities serve the same purpose and may be more familiar to the retail investor than gold as dollar hedge.

They include:
----Companies that are predominantly in the hard asset business:energy, metals, ores, timber, agricultural land,
-----Companies that provide essential goods and services( including protein and vaccines) to the middle and lower middle( just emerging from subsistence level existence) classes of the Global South
-----Companies with formidable global consumer brands:the brand equity of these companies will likely maintain value in real terms, as the dollar declines,the brand equity inflates which means the stock prices in nominal dollar terms increase
------Companies that focus on either bandwidth or nuclear technology for the Global South: bandwidth and nuclear technology are also hard assets in the 21st century and will maintain real value against the vapor dollar

Nov 01 11:40 AM

[mbkelly75:]

I have both Gold and Silver in my portfolio (represented by CEF) for just the reasons that Mark Faber has in his report. User 353732 has it right - certain equities also quite effective against inflation. He has a good list that is well thought out and well written also. One more item for the list is simply dividend paying stocks with a minimum of 5 years of RAISING their dividends. Historically - these have also beaten inflation and provided a good protection against deflation also. Thank you to the writer for an interesting list for more
DD.

Nov 01 05:33 PM

[yblarrr:]

You can't eat it. It doesn't get dividends.

Just like stocks alot of you will be left at the top of the market
wondering what happen.

Nov 01 05:52 PM

[mbkelly75:]

If you use it as a percentage portion of a balanced portfolio and re-balance when needed instead of once a year - it certainly will pay dividends, or least get you more of the cash needed to buy the dividend-paying stocks. What you do is sell some of the Gold/Silver that has gone up in price and use that cash to buy more of the dividend-paying stocks that went down as Gold/Silver went up. I check to see if my portfolio needs re-balancing every two weeks. It makes a huge difference over time. At the same time - when the dividend-paying stocks go up enough in price - you can sell enough of them to buy more PMs or Bonds - whichever one (or both) is out of balance. By the time you do this several times - you will see the difference this makes in your portfolio's value.


On Nov 01 05:52 PM yblarrr wrote:

> You can't eat it. It doesn't get dividends.
>
> Just like stocks alot of you will be left at the top of the market
>
> wondering what happen.

Nov 01 07:02 PM

[LilBob:]

Anytime I see ecstatic quotations of outlandish values, such as:

<it>"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."...</it>

it reminds me of past claims of assets reaching ridiculous and unsustainable levels-remember the claims of $200/barrel oil, $20/gallon gas, etc in the summer of 2008?-and I'm instantly turned off. Once these kinds of stories and claims start appearing it's a pretty good sign that the end of the asset bubble is nearing and it's almost time for the next big market collapse, the one that we'll be told "was completely unexpected, no one could have possibly seen this happening to the market". Right now is probably a good time to start cashing out of gold.

Nov 01 08:45 PM

[Slvrizgold:]

MBKelly, I will be selling my top PM mining stocks a few years down the road and be buying blue chip stocks with PEs around 5 and yields of 8% or more. Or fixed income that will be available in the teens or higher.

THAT'S THE FUTURE imo. Forget selling gold now if you take a long view. The rebalancing I will be doing is allocating gold stock profits to MORE bullion on price spikes, like the one still in process until springtime.

Nov 01 11:24 PM

[secmaven:]

The largest producer of both gold and silver, China, is promoting the sale of these metals to its own citizens. Why would he politicians do this if the price of these metals will be allowed to drop in value? When the Chinese unpeg the Yuan and it once again starts to appreciate against the dollar gold and silver prices in dollar terms will increase in lockstep. Long GPR, ECU and JG.

Nov 02 01:46 AM

[Fibozachi:]

Just amazing how such sensationalistic pieces detailing the "imminent" explosion to "insert xyz thousand here" are accepted while quality pieces of analysis that point toward the downside are shunned.


While we will most likely not observe actual inflationary pressures anytime before Q3 2011 at the very, very earliest. Deflation is the clear name of the game. With the $USD appearing to have bottomed last week at the possible end of Primary wave 2 (circle), the $CRB Index, Gold and related key issues such as Freeport-McMoRan (FCX) appear to be developing further signs of distributive pressure. Before going gaga for gold, please evaluate the technical profile of its price action against the other G-7 currencies as well as that of the @GC continuous futures contract; might be surprised by what you find.

www.zerohedge.com/arti...

Nov 02 03:44 AM

[mbkelly75:]

You might be right in your strategy, but maybe not. A lot of good analysis says that you might be wrong also. I have found that I can be terrible at predicting where the markets will go, so I just do what works for me. Frequent checking to see if re-balancing is needed and doing it when needed has been very helpful to me. I put new money in monthly so selling is not always needed to re-balance, just putting the new cash where it is needed can do a large part of it. Markets go up and they go down - that is the only sure thing.


On Nov 01 11:24 PM Slvrizgold wrote:

> MBKelly, I will be selling my top PM mining stocks a few years down
> the road and be buying blue chip stocks with PEs around 5 and yields
> of 8% or more. Or fixed income that will be available in the teens
> or higher.
>
> THAT'S THE FUTURE imo. Forget selling gold now if you take a long
> view. The rebalancing I will be doing is allocating gold stock profits
> to MORE bullion on price spikes, like the one still in process until
> springtime.

Nov 02 09:33 AM

[Doc 224899:]

If gold goes to $2000, what do you think happens to the dollar, or the yuan, or the ruble? Most scenarios that would bring gold to $2000 are going to raise the costs of gold production proportionately.

So here's the homework assignment: figure out what global market conditions raise the price of gold but raise the costs of gold production proportionately less, that would also permit Americans to profit from investing in international gold miner stocks (forget American gold miners - too many regulations and lawyers and environmentalist plaintiffs).

My guess is that such a scenario would involve OPEC or China/India/Brazil/Russia replacing the dollar as the trading currency for commodities.

Nov 02 10:12 AM

[Whippet:]

Neither does the FRN. And what good is a 5% taxable dividend yield in a stagflationary environment??? And stagflation is the best you can hope for.


On Nov 01 05:52 PM yblarrr wrote:

> You can't eat it. It doesn't get dividends.
>
> Just like stocks alot of you will be left at the top of the market
>
> wondering what happen.

Nov 02 02:15 PM

[Whippet:]

No; they will raise the cost of SOME of the inputs (fuel, wages, new ventures) proportionately while others will stay the same (existing long term contracts, owned real estate). When you leverage the margin you see Very Nice returns...


On Nov 02 10:12 AM Doc 224899 wrote:

> If gold goes to $2000, what do you think happens to the dollar, or
> the yuan, or the ruble? Most scenarios that would bring gold to $2000
> are going to raise the costs of gold production proportionately.
>
>
> So here's the homework assignment: figure out what global market
> conditions raise the price of gold but raise the costs of gold production
> proportionately less, that would also permit Americans to profit
> from investing in international gold miner stocks (forget American
> gold miners - too many regulations and lawyers and environmentalist
> plaintiffs).
>
> My guess is that such a scenario would involve OPEC or China/India/Brazil/Russia
> replacing the dollar as the trading currency for commodities.

Nov 02 02:19 PM

[LilBob:]

On Nov 02 03:44 AM Fibozachi wrote:

> Just amazing how such sensationalistic pieces detailing the "imminent"
> explosion to "insert xyz thousand here" are accepted while quality
> pieces of analysis that point toward the downside are shunned.<br/>
>
I'm siding with Fibozachi here. Let me "splain" something to you here folks. There's a particular pattern that's emerged over the last ten years and it's pretty consistent; here are the steps:

1. A particular investment segment goes bullish amid an otherwise lackluster or weak economy and a great deal of money is poured into that area of the market or that particular commodity.

2. After equity prices in that market sector have been run up to a level that-under normal circumstances-would be considered to be ceiling territory "analysts" and Economist types start predicting outrageous and unprecedented levels of future value, creating a great deal of hype that lures in a lot of retail investors and less savvy brokers.

3. A significant cadre of large institutional investors and more savvy brokers cash out of that equities sector having-through the law of supply and demand, increased dollar velocity in that market sector etc.-essentially picked the pockets of a lot of less savvy investors.

How many times over do you have to see this happen before you start to realize it might be the work of some unscrupulous individuals who are hoping to capitalize on the irrational exuberance of the little fish?

Nov 02 04:15 PM

[goodasgold:]

" ... the irrational exuberance of the little fish"?
More than 99 percent of the little fish and most of the big fish are still not in gold or silver and they will be gasping on the fiat currency shore when gold and silver really take off. Even the central banks, the fiat thieves, are becoming net buyers of gold. What else do you need to know. A little gold fish.

Nov 02 11:25 PM