Wednesday, September 21, 2011

Q&A: Marc Faber, Global investment analyst - Business Standard

A renowned global investor and author of The Gloom, Boom & Doom report, Marc Faber, believes the BSE Sensex may not go down to the 8,000 levels, but it would come down from the current levels. He spoke to Jitendra Kumar Gupta
on gold prices and the economic crisis, which he believes could be bigger than the one seen in 2008.

Edited excerpts:
About six to eight months earlier, many economists were saying a dollar crisis may only be seen by 2012 or 2013. Is the time shortening, in the light of renewed concerns over the US and EU economies?
We never really had a recovery in the Western world. The stock markets went up because of the money printing and support in 2009. My view is that they can probably muddle through for another two-three years by piling up the fiscal deficit or printing more money. I do not know when it will happen in 2012 or in 2018, but the next crisis will be worse than the one in 2008. I do not think it will happen overnight but I think, over time, the value of paper money will fall in a low interest and high inflationary scenario.

Has QE3 (the third round of quantitative easing, in the US) started and what do you expect from it?
This time, I think they may not make an official announcement. But some kind of a silent QE3 is already underway, considering that M1 growth (cash and near-cash deposits) has accelerated to the fastest expansion in 35 years. I have no idea what the Keynesian interventionists, led by Bernanke, Krugman & Co will come up with next, except that they will further pursue their erroneous economic policies. The only question is how far they will move and what the impact might be on asset markets.

What does this mean for the various asset classes, especially on commodity prices?
I think cash and bonds are not very desirable. Equity and precious metals look okay. However, there will be more volatility. The prices of anything, whether commodity or stocks, depend on many factors. As far as commodities are concerned, I think the global economy is slowing significantly and the demand for industrial commodities will not grow that fast.

Can Indian markets remain insulated from what could happen in the Western world?
Indian and global markets are correlated. If the global markets slow down, the Indian markets, too, would slow down.

What is your asset allocation at this point?
I have 25 per cent in real estate and real estate-related equities here in Asia, 25 per cent in gold, 25 per cent in stocks and 25 per cent in cash.

Is it possible for Indian markets to drift lower, below 2008-09 levels?
I think the Indian markets will not go lower to those 2008 levels, but would go lower from the current levels to, may be, 12,000-15,000 levels. From their low in 2009, the Indian markets till recently rose to 21,000, which is almost 100 per cent returns. I do not call this a bear market rally, but a bull market. We now have had the beginning of a bear market.

Are you looking at adding equities at current levels?
How can I buy more equities if I think the markets will go lower? For someone who has no equities at all, I would tell to start buying near 12,000-levels. And, if someone has 100 per cent of his money in stock, then I will say, sell some of it.

Is there more upside in gold?
I have a reason. I have been writing every month that people should accumulate gold. Yes, there is more room for gold to appreciate further. Most people do not own gold. Most people think gold prices are very high. Today, the gold price is cheaper than in the 1980s when it was around $400 an ounce, considering the increase in global monetary base and the US money printing.

Will that hold true for silver, too?
Gold and silver will move in the same direction, but I prefer gold, though I have friends who prefer silver.

What will drive the gold price?
Gold bottomed out in late January and peaked out on August 23. My first thought was that the closely correlated move between treasury bonds (T-bonds) and gold was illogical. Then, I considered that investors panicked into T-bonds because of a scare that the financial system would implode (flight to safety). For the same reasons, investors rushed into gold. In other words, the gold buyers were not buying gold because of inflation fears but because they were afraid of a systemic failure.

I think it is important for investors to understand the role of gold as an insurance against a systemic failure and not necessarily as a hedge against inflation. I should add that I own gold for both reasons, believing that it will perform well in both an inflationary and deflationary environment. In addition, I am not selling any gold but traders should realise the gold price is extremely overbought and that it could easily drop toward the 200-day moving average – that is, between $1,500 and $1,600 (not a prediction). As I just said, I am not selling my gold because I expect much higher prices in future. But, near term, both T-bonds and gold appear vulnerable to a more serious correction.