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extracts from "tomorrow's gold" by dr marc faber

  1. Billy Gatess

    5,609 Posts.

    Extracts from "Tomorrow's Gold" by Dr Marc Faber

    "Tomorrow's Gold" seeks to offer investors a view of where money is to be made in the future.
    Dr Marc Faber said "…the road ahead … might be rocky, but one that will always offer great excitement for those with an eye for opportunity".

    On real estate: "I believe US real estate is not overpriced on average compared to US equities and property prices in Europe - but some trophy markets do seem very extended and I doubt US real estate will become a major investment theme for the long term ''
    "Real estate in other locations around the world is, however, another matter… the world is experiencing a colossal change in economic geography .. Cities like Shanghai, Beijing, Moscow, Ho Chi Minh, Bangalore and so on are developing very quickly and becoming far more important economically and therefore, real estate prices will rise there in the long term" … could yield very high returns in the next five to ten years".

    On commodities: "All great commodity bull markets started from a low that was put in place by oversupply… In fact, the current situation reminds me very much of196-70 - the eve of one of the greatest commodity booms… no one could conceive that oil prices would approach $US50 a barrel on the spot market in 1980 and that gold and silver would rise by more than 20 times over a decade! Nor did anyone think the US Dollar would decline by as much as it eventually did" ..

    On the US Dollar and advice for individual investors: "The US Dollar, which is now almost as overvalued as in the mid 1980s (by some measures, even more) is likely to have started a multi year bear market. However .. this bear market is unlikely to be as dramatic as the 1970s … as neither Europe and Japan nor any emerging economy would wish to have their currency appreciate by much more than another 10-15% against the US Dollar. Therefore the most likely scenario will be that all currencies depreciate against a basket of commodities, including naturally, gold and silver .. for the individual investor .. my advice would be to purchase a basket of commodity futures and roll them over periodically".

    On expectations of high returns: "It seems to me that if there is an "iron law" of very long term investing, it is that superior returns are only temporary .. in the long run, they start to produce negative returns and eventually vanish… Even the most successful investments failed to deliver a 5% return in the very long term".

    On booms: "The boom is usually erected on a massive popular delusion. In 1980, investors believed that inflation was about to accelerate further .. They paid $US850 an ounce for gold, $US50 for silver and drove energy related shares to lofty levels believing that oil prices would rise to $US80. In 1989, investors began in earnest to believe that the Japanese stock market was no longer subject to market forces and paid 100 times earnings for companies with mediocre growth prospects .."

    On locating the phases in equity markets: Phase One: The spark; Phase two the Recovery cycle' Phase three, the boom; phase four - downcycle doubts; Phase five - realisation; Phase Six, Capitulation and the bottom.
    "In Phase six the error of pessimism will depress business and result in a prolonged contraction .. therefore as the news deteriorates, prices often no longer decline but begin to build along term base for a renewed advance."
    Dr Faber gives the example of Latin America and especially Argentina in 2002 as at Phase Six.
    Dr Faber said, "Personally I like to buy markets during phase zero. Usually, there is no huge price risk during this phase because prices are already very depressed. The risk instead lies in the fact that markets can build bases for several years with continuous backing and filling .. But the good news is that stocks move from weak hands into strong hands, so when phase one suddenly starts there is little or no supply of shares and stocks can double or more almost overnight. I should like to stress that percentage wise, during phases one and two, the potential for capital gain is very significant".
    Warning that putting money in emerging markets is difficult, he added, "Most of the countries at the bottom are clearly still in phase zero … It is clear that , say 20 years ago China, India , Vietnam and the former Soviet Union would have been right at the bottom of the fountain (of wealth) but today they are climbing the fountain rapidly .. A country such as India may be in many respects backward but it may have an edge in one or several industries such as in the IT sector and in generic drugs. Therefore, I would urge investors not to ask too much about which country has the best economic prospects and the most attractive stock market, but which sectors and which companies are the most promising within the emerging universe".

    Dr Faber said that while commodity booms are characterised by greed based on fear, "In financial manias, on the other hand, the fear element is negligible (the only worry is that your neighbour's investment club or your fellow fund manager is making more money than you in the market)".

    In a chapter on the economics of inflation Dr Faber quoted Ernest Hemingway, "The first panacea for a mismanaged nation is inflation of the currency' the second is war. Both bring a temporary prosperity; both bring permanent ruin".
    Dr Faber said that "most investors believe that inflation is bad for financial assets and good for real assets such as gold, silver, diamonds and real estate. However, what is usually overlooked is the fact that, in very high inflation economies, at some point, stocks become ridiculously undervalued in real terms and therefore provide outstanding buying opportunities. I call this phenomenon "the paradox of inflation".

    On the rise and fall of centres of prosperity: Dr Faber, tracing the rise and fall of cities and nations from ancient times to now, said, "We have seen that centres of prosperity do change over time - and we can expect much of the same in the future. The difference may be that change could, in fact, accelerate…. Compare the industrialisation of the American continent with recent development in Asia. It took America about a hundred years to industrialise, and by 1900 agriculture and mining were still more important than manufacturing. Japan, Taiwan and South Korea industrialised in about 40 years and now China has essentially done it in a little more than 20! .. No other country in the world has ever developed, in such a short space of time, such a large financial market as China"… I believe the economic geography will once again change radically - with the Ningbo-Shanghai-Tianjin corridor becoming the principal cluster of economic activity".

    On deflation in the US, quoting Robert Prechter's reports Dr Faber said, "As a holder of gold shares and physical gold and foreign currencies, I sincerely hope that Prechter is right and that there will be genuine deflation in the domestic price level in the US. In such case, the economic mess will be complete, as the default rate among corporate borrowers will soar even further than it has over the past twelve months. At the same time, the confidence and blind faith of investors in the omnipotence of Alan Greenspan will finally collapse and lead to a panic. That gold prices could go through the roof in such an environment isn't difficult to envision.
    "So, with or without inflation, investors should own some physical gold and silver, gold and silver shares, a basket of commodity futures and companies in resource rich emerging economies"… such as Brazil, Argentina, Indonesia, Russia, Malaysia, Thailand and Vietnam".

    In his epilogue Dr Faber says, "Under the worst imaginable economic scenario, the emphasis on picking lowest-cost producers would be of crucial importance as in today's highly competitive environment, only the very fittest can survive"…

    Summing up, "So, I would expect that the new world order will not only come as a result of the enormous changes I envision for the global economic landscape, but also as a result of new economic theories far more aligned to the Austrian School of Economics. This should also explain my long term optimism about the future, since I regard it as crucial that market forces drive economic activity, and not some kind of central planner: regardless whether they stand forth as senior officials of totalitarian regimes - or come cleverly disguised as central bankers".

    * * *

    Dr Faber's discussion of market cycles and various theories is too technical to lend itself to excerpts and is being skipped.
    A wealth of historical and economic information in the book has also had to be omitted.
    For those who would like to read the book in its entirety - the book "Tomorrow's Gold" is available via Amazon.com and costs $US29.95 plus packing, about $US41.

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