We have an economic slowdown in emerging economies that is very pronounced and I think some emerging economies may be submerging soon, and have actually significant economic problems. Then the question arises, “Will they continue to buy gold?” Say if there was a recession in China, in the downturn, would people buy gold?
I think if the Chinese economy imploded, it is likely that the currency would begin to weaken, the yuan. Or the government would implement even a devaluation of the yuan. It could be the case. If that were the case, then I think that Chinese individual investors would rather shift some of their money into gold which they can buy in China nowadays than keep their funds in the local currency. So I think that’s actually a trouble in Asia and also geopolitical problems in Asia and in other regions of the world may actually lead to rather higher gold demand.
From Tekoa Da Silva, Bull Market Thinking:
During a time of stagnating emerging market growth and increasing Asian gold demand, Marc Faber, Director of Sprott Inc. and Publisher of TheGloom, Boom and Doom Report, was kind enough to share a few comments.
According to Marc, “if the Chinese economy imploded, it is likely that…the government would implement a devaluation of the yuan,” leading to similar currency moves in the region.
Here are his full interview comments with Sprott Global Resource Investment Ltd.’s Tekoa Da Silva:
TD: Marc, the narrative on natural resources involves Asian demand. You live in Asia. So what’s happening on the ground there and can we rely on continued growth in the region?
MF: Well, that’s a very good question because we have an economic slowdown in emerging economies that is very pronounced and I think some emerging economies may be submerging soon, and have actually significant economic problems. Then the question arises, “Will they continue to buy gold?” Say if there was a recession in China, in the downturn, would people buy gold?
I think if the Chinese economy imploded, it is likely that the currency would begin to weaken, the yuan. Or the government would implement even a devaluation of the yuan. It could be the case. If that were the case, then I think that Chinese individual investors would rather shift some of their money into gold which they can buy in China nowadays than keep their funds in the local currency. So I think that’s actually a trouble in Asia and also geopolitical problems in Asia and in other regions of the world may actually lead to rather higher gold demand than lower gold demand.
TD: Marc, what are your thoughts on the regional Asian conflicts going forward and how might that impact natural resources?
MF: Actually, my view is this; we wouldn’t have a conflict in Asia if there was no intervention by the U.S. The U.S. has a security pact with Japan and has military bases and naval basis all over Asia.
The Chinese economy is highly vulnerable to interruptions in the supply of metals and of oil, because 47% of global metals consumption is nowadays from China[i]. It’s up from 4% in 1990 and 10% in year 2000. So they have become a huge factor. For their industrial production, they need resources; they need iron ore from Australia, copper from Australia and elsewhere, and oil from the Middle East. That’s their only source of oil, the Middle East, compared to say the U.S. that can source oil from Canada, from Mexico and who have a rising domestic production.
So the Chinese are very concerned about interruptions of supplies and I think that over time, the Chinese will want to control the East and South China Sea. I do not think that they have any aggression plans, but the U.S. wouldn’t be particularly happy if the Chinese or the Russians had military bases in the Caribbean, in Mexico, in Canada and so forth. The Chinese cannot accept to be encircled by military bases by the U.S. in Central Asia, South East Asia, and North Asia. I think the tensions will actually increase over time.
TD: Marc, when we look at gold, it has been sideways to –
MF: It has been down.
TD: Right, over the last three years. But when you look at the fundamentals today as compared to 2011, how would you describe the difference?
MF: Well basically, we had a huge run-up in prices between 1999, from $255 oz. to $1921 oz., in early September 2011. We’ve been in a correction period.
Now, I think the correction period was partly justified because there was too much enthusiasm and too much speculation leading to the peak in September 2011. But I think that there may have been some market manipulation as well, could be. My sense is that the correction has probably come to an end, because if anything, the fundamentals are much better today than they were at that time, but the price is down.
I always tell investors, that every investor understands the principle “buy low and sell high,” but when prices are low, nobody wants to buy. We had very negative sentiment recently. I’m not so sure about asset markets, because we could one day, after this colossal asset inflation of the last 20, 30 years, also have asset deflation.
But when I compare say gold shares and the price of gold to the S&P, the S&P is up substantially since 2011 and gold is down substantially. So if you compare say the performance of gold shares to the S&P, I think it has been a disaster for gold shares.
When I look around at asset prices; real estate, bonds, equities, paintings, collectibles, vintage cars, I think the price of gold is actually one of the few assets that are relatively cheap, relatively inexpensive. In particular, as my friend Eric Sprott always says, “Gold shares now are at a very low level.”
TD: Marc, given your world travel experience, how would you characterize the value of water as a natural resource and what do you think might be some of the opportunities and pitfalls in investing in that resource?
MF: Well, as you know, we still have colossal poverty in the world. Usually extreme poverty occurs in areas where you have no water. Water is very important, it’s a scarce resource. Countries that are endowed with a lot of water like Canada, or even the U.S., or some European countries like Switzerland (we have a lot of water), and are very fortunate.
Countries that have no water like the Sub-Saharan Africa, they are very unfortunate. So I believe that one should invest in water. I suppose there is an execution risk but I think water would be, if you want to have development aid, if you want to improve the standard of living of people, I would rather address the water problem, the proper water distribution, the irrigation, than to give them vaccines and gifts.
TD: Marc, what drew you to be a Sprott Inc. board member?
MF: Well, a while ago, I think 5 or 6 years ago, Eric Sprott asked me if I would consider being a board member and I supposed that the reason I was asked is Eric is a subscriber to my newsletter to The Gloom, Boom And Doom Report.
I had written a book in 2001, called Tomorrow’s Gold: Asia’s Age of Discovery, which was not specifically about gold, but it was about the coming bull market in commodities driven by the incremental demand from China. So I think that he saw a fit at least philosophically, and that he also considered my abilities as an administrator and so he asked me to join the board.
TD: Marc, in your dealings with people around the world, what have you noticed are some of the characteristics that lead to the building of wealth as an outcome?
MF: Well, it’s a funny story. I went to a high class school in Switzerland. Not that we were rich, but I was in this class, and in the class there were several very well-to-do Swiss family members. The children of these families, most of them have no more money. One still has a lot of money because his grandmother in her youth was studying in Paris and she took a liking in the 1910-1920s impressionists. So they have Van Goghs and Renoirs and Matisse, even in the toilet they have so many of them. The appreciation of these paintings was fantastic.
Another one is well-to-do because he inherited money from an uncle of his. So it’s funny that some entrepreneurial families that were – especially at that time, in either construction or in the textile industry, they are all essentially gone. But the largest wealth of my school friends came from inheritances.
Then when I came to Asia, I liked Asia in 1973. I went to Hong Kong because people were very entrepreneurial and risk takers. It’s like they like to gamble and they’re not afraid. In Switzerland everybody is always afraid to lose money, but in Asia they take risks and some of the entrepreneurs became immensely rich. Immensely rich starting from zero.
These are people that were frugal with themselves. They worked very hard and they were also benefiting from asset inflations. In Hong Kong property prices have gone ballistic over the last 30, 40 years. So anyone who owned properties became automatically very rich. I’m saying this because I am of course completely against money printing as the central banks do, because they enrich basically people that own assets. And the people that don’t own assets, their wealth or their standards of living are going down. That creates then a growing wealth and income inequality that then leads to social unrest or geopolitical problems.
TD: As an extension of that last question Marc, as an administrator of assets, what are the characteristics you look for before deciding to give money to other people?
MF: Well, most of the money that I look after, I manage. But I believe that we don’t know about the future, and I may have my views about investments and maybe someone else has a different view or a different skill set or a different niche of expertise.
For example, I don’t know anything about biology. I also don’t understand social media. But maybe there is someone out there who is specialized in those sectors, and to him I would allocate some money. Or for instance I’m familiar with Russia because my partners and I founded either the first or second Russia fund, Firebird, at the time in 1993.
But I’m not today an expert on each Russian company. So for investments in Eastern Europe and in Russia, I would give my money to somebody else, or even in Asia. I don’t have the time to visit every company. I know lots of families that own businesses and so forth, but I’m interested also to see what other fund managers are doing.
So if I know a fund manager that is specialized in Asian shares and value oriented, I give him some money and I can also see a little bit what he’s doing. So I allocate some money to different managers.
TD: Now what about a CEO? What are the characteristics you might look for in a resource exploration or development company CEO that meets with you and says, “Marc, we’re looking for financing”?
MF: Well, I think in every company you want management that is skillful. Obviously that has talent, and preferably, you have management that has their interest aligned with yours as a shareholder.
In other words, they ideally own a lot of shares in the company you invest in. Good management is management that can adapt to change.
That is the key because when I started to work on Wall Street, the favorite stocks among institutional investors were companies like Sears, JC Penney, Kodak, Xerox, Polaroid, and so forth. Most of these companies have disappeared because management was not able to adjust to the changes in the world.
I mean there was at the time an analyst at who followed the photographic industry, Polaroid and Kodak. They were these two companies and on the periphery she followed Fuji photo film.
Her projections were how many people in the world would buy a Polaroid camera over the years, and how many pictures the world would take with Kodak cameras, and then how many films eventually Kodak would sell.
Her projections were eventually all exceeded—but not with Kodak films and not with Polaroid cameras. But with mobile phones that were taking pictures electronically. I mean you see every idiot nowadays taking pictures all the time to put on Facebook, to look at himself or herself. Nobody is interested in these pictures except themselves. But it didn’t benefit Kodak and Polaroid.
So there are these changes that occur in the world of investments and that is why I always say when you have these studies about, for example by Jeremy Siegel, on how the Dow Jones has performed between 1800 and today. I once told Jeremy, “Look Jeremy, if you invested in 1800, in stocks in the U.S., 80% of the companies at that time were canal companies and banks. In the first big bust, the Depression of 1840, 1841, most of them went bankrupt and eventually all the canal companies in America went bankrupt, all of them, even the most profitable ones, like Erie Canal.”
Then people invested in railroads in the 19th century. By 1895, 95% of the railroads went bankrupt. So the studies don’t take these statistics into account; how many companies fail if you invested in stocks in 1929. Most of them no longer exist.
TD: Marc, your fellow board member at Sprott Inc., Rick Rule, commonly notes that bull markets are the authors of bear markets and bear markets are the authors of bull markets. When you look at the general equities market here today, how does it strike you?
MF: In a free market economy, you will always have price fluctuations. The Federal Reserve today artificially manipulates asset prices up. It’s a huge mistake but that’s what they do. To answer your question specifically, we had a bear market that ended March 6th, 2009, at S&P 666. We are now over 1800, up almost three times. Over the last two years, most equity markets around the world, emerging market stock markets have been down or moving sideways, they’re no longer following on the upside. In the U.S., an increasing number of shares are breaking down.
We had extremely optimistic sentiment just before Christmas. We had very heavy insider selling and we have high valuations and extremely high corporate profits by historical standards if you look at margins and so forth.
So my view is in a month’s time, the bull market will be five years old. This is the second longest bull market in the last 100 years. I wouldn’t buy shares here. I’m not interested.
Now can the market go up another 20 percent? I wasn’t interested to buy the NASDAQ in late 1999, but between January 2000 to March 2000, the NASDAQ went up another 30%. Afterwards people were crying when they realized their losses.
So I think yeah, the markets go up and down. I think that the upside potential now is very limited and there is considerable downside risk, considerable. Probably more downside risk than investors realize.
TD: Marc Faber, Director of Sprott Inc. and Publisher of The Gloom, Boom and Doom Report, thank you for sharing your comments.
MF: My pleasure. Thank you.
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Tekoa Da Silva
Bull Market Thinking