Gold a bubble? No chance, says respected Swiss investor Marc Faber.
The reason that people think gold is a bubble, says Faber, is that its current price of around $1,700 per ounce seems a lot higher than its 1999 price of $252. But despite the significant gains, gold is still not as widely owned as other assets were during past examples of bubbles.
"In 1989, everybody owned Japanese stocks. And in 2000, everybody owned tech stocks. That is the bubble, when the majority of market participants own an asset. I think there are more people that own Apple stock than gold."
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The increase in gold's price is down to the huge increases in debt levels, not tech-boom-style irrational exuberance.
"We had an explosion of debt, not just government debt, but private sector debt, and an explosion of unfunded liabilities such as in the pension fund industry, and not just with Medicare, Social Security and Medicaid."
This creates "a situation where maybe the price of gold should be much higher because the economic and financial conditions are worse than they were 12 years ago." The hard times encourage indebted governments to print even more money, driving up the value of gold.
Faber, who writes the Gloom, Boom and Doom newsletter, also thinks that the growing reserves of emerging market governments will also help the gold price in the long run. "International reserves accumulate principally at the hands of Asian central banks and central banks in emerging economies", notes Faber. Right now those reserves are in dollars and euros but Faber thinks that will change.
"Even a central banker, with his just-below-average intelligence, will one day notice that maybe it's not that desirable to be in the US dollar or Treasury bills that have essentially no yield. In other words, you have a negative real interest rate on these dollars.
"So they move money into gold. They should have done it a long time ago. But don't expect too much from a central banker."
But despite his bullish stance on gold Faber is wary of buying mining stocks. In particular, he doesn't like explorers. "The problem with the exploration companies is that a lot of them will have financing difficulties and they will have to cut down on exploration. They may not get financing at all. If you have 100 exploration companies, 80 to 90 of them could easily be out of business."
Of course, you shouldn't have all your money in gold. Instead investors should diversify, says Faber. "I'd put 25% in equities, 25% in physical precious metals, 25% in Asian properties and 25% in corporate bonds, mostly emerging economies."
James graduated from Keele University with a BA (Hons) in English literature and history, and has a NCTJ certificate in journalism.
After working as a freelance journalist in various Latin American countries, and a spell at ITV, James wrote for Television Business International and covered the European equity markets for the Forbes.com London bureau.
James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report.
He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.
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