Investment Research Group
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Faber is known for having called correctly a number of big turning points, including the gold bull market. He urged investors to buy gold in 2001, which has since more than doubled.
His message was of a world that is printing money to prevent a recession but getting deeper into trouble as asset prices reach bubble valuations.
“Asset prices have soared in value everywhere in the world since October 2002. Prices of stocks, commodities, real estate, art, and every kind of totally useless collectible have shot up. Even bond prices have until recently gone up as interest rates fell.”
“That all asset classes increased in value simultaneously around the world is most unusual. Previous asset bubbles were concentrated in just one or a few asset classes: In the 19th century, canal and railroad shares; in 1929, US equities; in the late 1970s, conglomerates; in 1980, gold, silver and oil; in 1989, Japan and Taiwan; and in 2000, the telecoms, media and technology sectors. But today every kind of asset is grossly inflated. How could this happen?”
The answer, of course, is that the US Federal Reserve pursued an ultra-expansionary monetary after the 9/11 attacks to prevent recession. It did so by cutting interest rates combined with a bond strategy that pumps money into the economy.
Consequently, all asset prices soared, particularly for US homes. A subsequent boom in refinancing and home equity extraction injected an overdose of adrenaline into consumption-addicted US households.
Thus, the US trade and current account deficit soared and this in turn provided the world with the excess liquidity, pushing up international reserves and the prices of assets in all countries including NZ.
However, two asset classes stand out as major losers: the Zimbabwe dollar and the US dollar, Faber says.
Faber does not make the Zimbabwe comparison for laughs but to illustrate what happened when Robert Mugabe tried to buy his way out of trouble by printing money, resulting in hyperinflation and collapse.
“In a credit, and hence asset price-driven economy, money supply and credit must continue to grow at an accelerating rate in order to sustain the expansion.”
“The moment credit growth no longer grows at an accelerating rate, the economic plane loses altitude. This is now the case.”
So what is the strategy now? Apart from avoiding the US dollar which will only get weaker, Faber says gold should rally further on expectations that supply of the precious metal will decline and demand for it will increase to hedge against inflation.
``The price of gold will continue to go up and probably very substantially,'' Faber said. ``In the long run, it's very clear that central banks are basically increasing the supply of money and the supply of gold is obviously very limited.''
Oil prices are also tipped to rise as political instability in the Middle East and other petroleum-producing areas threatens supply and global demand increases.
``Everyday the world is burning more oil than new reserves are added,'' Faber said. ``You won't see $12 dollars a barrel again in your lifetime.''
Can the commodity bull run continue? He thinks so because we had a bear market in commodities from 1980- 2001.We are in the fifth year of a commodity bull market and commodity price moves can last 45 years.
He is particularly bullish about agricultural commodities, advising New Zealanders to “buy a farm and learn to drive a tractor.”
