Tuesday, December 6th, 2016 MST

Gold, still a contrarian investment

Resourceinvestor.com interviewed Dr. Marc Faber, economist and editor of “The Gloom, Boom and Doom Report,” an economic and financial publication that promotes “against the grain investments.” The interview was especially interesting because he sees gold as still a contrarian investment. But first, Dr. Faber’s salient observations, which should be of interest to all precious metals investors.

Dr. Faber says economies are booming around the world, but that the U.S. is already in recession – if inflation (price increases) were measured properly. More economists are starting to say that the U.S. economy has turned down.

When asked about Alan Greenspan, Dr. Faber unloaded, calling Greenspan “a hopeless forecaster, a hopeless economist.” Faber faults Greenspan for denying that he created “this huge [subprime] mess by having kept interest rates artificially low for too long.” To Faber, Greenspan is “not a person that I would consider to be trustworthy in terms of either economic statements or forecast.” That’s a strong condemnation of a man whom the world at one time treated as royalty.

Now, though, the flaws in Greenspan’s inflationary policies are becoming evident to nearly everyone, and Greenspan may go down in history as the worst Fed Head ever. I say “may” because our present Fed chairman, Ben Bernanke, has already earned the moniker “Helicopter Ben,” for his statement that the Fed’s ability to create money is equivalent to dropping money out of a helicopter. Recent interest rate cuts by the Fed and its creation of billions of dollars of “liquidity” suggest that Bernanke was cut from the same cloth as Greenspan. Bernanke and Greenspan may end up being judged equally bad Fed Heads.

As for those mired in the subprime mess, Faber says that it’s not just the known subprime lenders, but also the subsidiaries of such entities as GE Capital and General Motors Acceptance Corp. Even some mining companies got caught in the subprime mess. The result is reduced liquidity as lenders have become more cautious. Never fear, however, the Fed and the European Central Bank have jumped into the breach, creating new dollars and euros in efforts to provide liquidity to the markets. The end result, of course, will be higher prices across the board.

As for the dollar, Faber says that it may strengthen over the next few months, but that over the long-term “the dollar is a doomed currency because you have a money printer at the Fed and you have basically Hank Paulson at the Treasury who comes straight out of Wall Street and who has more interest in stabilizing the price of Goldman-Sachs stock than of having a strong dollar.”

Now, for those observations that were of special interest to me.

Dr. Faber bills himself as a “contrarian investor” who runs “against the grain.” In short, Dr. Faber likes investments that are being ignored by mainstream investors. RI asked him about gold with this statement: “You say precious metals, and especially gold, are likely to out perform financial assets for years to come. Now that doesn’t sound very contrarian because a lot of economists are calling for a rally in gold.”

That’s when Dr. Faber said that “… the price of gold will also come under some pressure…,” but long-term “… you have essentially a friend of gold at the Federal Reserve because he will print money. That will be very supportive of gold prices, whether you have inflation or whether you have deflation. In both cases it will be gold supported. So in any weakness, I would buy gold.”

Dr. Faber concludes that from his travels around world giving talks and seminars, only 3% to 5% of the seminar attendees own gold. That means that something like 95% of investors, who are sophisticated enough to attend seminars, do not own gold.

To further support his contention that gold is still a contrarian investment, Dr. Faber noted that Asian central banks have a maximum of 2% of their reserves in gold and that the Sovereign Wealth Fund has “practically no gold exposure.” Central banks are mainstream; Sovereign Wealth Fund is mainstream. The mainstream public is nowhere near this precious metals market.

Among the general population, I’d say that less than 2% own gold and it may be less than 1%. Gold is still a contrarian, against the grain, investment, which means that this precious metals bull markets has a long way to go. I think that investors should follow Dr. Faber’s advice and buy gold (and silver) on dips.