6 Great Investment Questions To Marc Faber

In the latest episode of Ask the Expert, by Sprott Money, Dr. Marc Faber was the invitee. Below are the answers from Marc Faber on 6 excellent questions from Sprott Money readers. Subscribe for future updates at SprottMoney.com.

With the slowing world economy that has led to a slowdown in oil demand, what do you think is the long-term future of oil? Likewise, if oil prices rise again, would you recommend buying Russian oil stocks?

Marc Faber: Well, my view is that there are many explanations for the weakness in oil, including some theories that Saudi Arabia wanted to weaken Russia or the shale oil production in the US or Iran, and so forth. But my view is that the decline and sharp decline in oil prices signals a weakening global economy.

Now, in the last few days, I received many reports by brokerage firms and banks, and so forth. They all think that next year the economy in the world will be stronger than in 2014. This would not be my view. Reason A, the low yields on government bonds, that would seem to suggest to me that there are still some growth issues in the global economy, and the sharp fall in the industrial commodity prices would also suggest to me that the economy will be weaker than expected.

And I live in Asia. I can say that we’re not in a recession or in a deep recession, but there’s very little growth at the present time. In fact, I would argue that there’s hardly any growth at all. And as far as Russian oil stocks are concerned, and I think the oil price can rebound here short-term, but you might as well buy some oil drillers in the United States or oil servicing firms or oil companies. Why take a huge risk in Russian oil companies?

Currently, is it better for amateur individual investors to have some exposure to equities and bonds, or should they stay away from those markets altogether?

Marc Faber: My view is very simple. I have no clue, although I’m an investment advisor, how the world will look like in five years time. Now, maybe some forecaster knows, but I haven’t met them yet, and I’d like to meet them yet. The fact is simply, we don’t know much about the future. We even know little about the present and the past. And my advice to anyone investing is diversification. You have to own some equities. You own some gold. You own some cash and bonds, and you own some real estate. That is what you should do, because we don’t know.

But in general, I believe that investors will be deeply, and I repeat, deeply disappointed by future returns. Some assets will go up, and some assets will go down. Just consider, oil drilling stocks have declined by roughly 40, 50% from the peak.

The oil price is down 40% in six months. We have a lot of volatility. If you owned your assets in Japan, in equities you did okay, because the equity market has rallied. Whereas the yen has collapsed. But if you owned it, say, in real estate, the real estate hasn’t rallied as much as the yen went down. If you owned it in cash, you’ve been basically losing a lot of money. So we have, nowadays, a lot of volatility, and nobody knows. It depends all on the interventions.

But I would say this, the whole world believes that because of money printing, stocks will automatically go up. That is far from certain. At one point, this correlation between money printing and stocks going up, will break down the way the correlation between money printing and gold price broke down after 2011. So we don’t know. This is my view.

Now, you listen, and somebody says, “What kind of an idiot do you have in your interview? He doesn’t know,” but this is the fact. I’d rather say that nobody knows for sure. A lot of money will be lost by people who are overexposed in a sector that will collapse in price, and some people will make money because they gambled on the right move, in exchange rates or in bonds or and stocks. But I don’t know. So I’m diversified.

The end will not be pleasant. We have a systemic risk, and the system, such as it is today, is not going to survive for long, maybe another five years, maybe another 10 years, maybe only one year, but the end will not be pleasant for investors. That is what I know.

Given the recent quintupling of the US monetary base and revelations of massive serial rigging of global currency markets, what do you think will happen when the US dollar falls to its real value? What do you think that real value is, for that matter?

Marc Faber: Nobody knows for sure. I mean, the US is still a superpower, from a military point of view. From a prestigious point of view, the US is in the dumps, because everybody in the world now realizes what kind of a hypocritic leadership the US has. They go around the world and tell people about democracy. They tell people about human rights, about torture, about evil regimes, about nation-building, and what do they do? Torture. It has been exposed. So the prestige of the US is gone, forever, and nobody will ever trust the US anymore.

What is your opinion about the possibility of a global debt jubilee? How might one be manifested?

Marc Faber: Yes. I mean, I think this is the real issue, in the sense that what could happen is that, in a concerted effort, central banks around the world would essentially buy up all the government bonds. It’s possible. We don’t know. The U.S. Treasury and the ECD. Actually, the Bank of Japan is a good example. They’re buying all the government bonds that the government is issuing. What the outcome will be, we don’t know for sure, but again, my view would be that the outcome will not be very favorable. At some point, yields on bonds will go up.

Now, you may say, “Okay. If the government buys all the government bonds, how can yields go up?” Well, they can go up because there is a lot of debt outstanding already, and whereas the government debt may not collapse in price, in other words, yields on government bonds may not go up substantially. What may happen is that corporate bond yields, and in particular, high yield bond yields could go up substantially.

But I’m just trying to say, in my view, the current regime, run by central bankers, is not going to end well. I mean, someone has to pay for the government’s expenditures, and if you have these kind of deficits that we have in most countries, eventually something will happen. And we do not only have rising government debt. We have rising corporate debt, rising household debt, and so forth and so on, and we have the unfunded liabilities. Nobody talks about that.

I mean, let’s put it this way, I think it’s important for the individual to think this through very carefully. I don’t think the real estate will be expropriated, because everybody owns real estate, so it’s politically not acceptable, but it can be taxed more heavily, because it’s very visible. So I’m not so sure that real estate is the best investment, but at least you’re not going to lose everything.

Then comes equities, if you compare equities, say. In Switzerland, blue-chip stocks yield, say, around, have a dividend yield of maybe 3%, two and a half, 3%, and the government bond yield now, in Switzerland, is less than 0.25% on 10-year government bonds. So if I buy a thrift government bond for 10 years, the maximum I will earn, if I hold it to maturity, is, as of today, precisely 0.24% per annum. Doesn’t even cover my fees to the bank.

Now, if I buy blue-chip stocks, I earn, say, a dividend yield of two and a half, 3%. In some cases more. In some cases a little bit less. But over a 10-year period, I think that the stocks are going to be a better investment than the bonds market.

Now, on the other hand, if I look at the US 10-year government bond yield, it’s 2.2% today. In France it is less than 1%. So I’m saying to myself, “Well, maybe government bond yields are reasonably effective,” and everybody is bearish about bonds. But as I said, I don’t know. I’m just saying, in absence of knowing, the best the investor can do is to say to himself, “Central banks have created a low-return environment, a low-return and high-risk environment, I may say, and in this low-return, high-risk environment, the best strategy’s probably to be diversified. I mean, I’m happy if, in the next five years, I don’t lose any money. (Laughs) Yeah right. I’m not greedy and want to earn any money. I prefer not to lose any.

And US frauds, you know that. I mean, to take big exposures is a very risky proposition, and I want to explain to you why. When you print money, and this has been observed by Copernicus already in the 17th century and by David Hume and Irving Fisher, the money does not flow evenly into the system. So when you print money, some things go up, and others don’t. Some things go up, and then there is a bubble, and then collapse, like the NASDAQ in 2000 and the housing bubble in the US in 2007, and so forth and so on. So you just don’t know exactly when the bubble bursts, and not all assets’ prices are touched positively.

I was going to say, if you bought gold in 2011, at the peak, $1921, September, 2011, you lost a lot of money, but the logic would have said, “Oh. There’s money printing; the gold price will go up.

And so the way gold went down by essentially 40% since then and oil prices collapsed by 40% since then, the US stock market could also collapse, easily, by 40%. Actually, I’d be surprised if it only collapses by 40%. But I don’t know precisely from which level. That is the problem.

Will the US put a windfall profits tax on gold and silver once these metals begin to break out?

Marc Faber: Well, I think this is, again, a very good question, because I’m sure that this will happen, not just the profit tax. I think the US government, when gold really starts to move, will take it away. They will pay something. Say like in 1933, they paid $25 per ounce of gold that people held, and after they have collected most of the gold – of course not the gold that was held by government officials, or to precisely say “by corrupt government officials,” because they’re all corrupt – they revalued the gold to $35. So the investor lost out. And I think what will happen, the US will eventually, under some kind of an excuse, whether it’s terrorism or whatever it is, expropriate gold. They’ll pay, say, at today’s price, $1220 an ounce, and then they’ll go to the ECB.

The ECB and the Federal Reserve are one and the same. The Bank of England also. They talk to each other every day. They’re the chief manipulators of everything. And then they say to the ECB, “Well, because we do it, you also should do it,” and the Draghi-type of – I don’t want to say what I think of him, but I say, Draghi-type of personalities, they’re saying, “Yeah. Yeah. We’ll do it also,” and then the Bank of England, of course, will do it also. Then they knock on the doors of the thrifts and say, “You thrifts, you also have to do it,” and the thrifts, they have no backbones anymore. The thrifts will say, “Okay. We’ll also do it.”

And so the threat is really for an investor, is where do you store your gold? Because if you have it in a bank or in an ETF, it may be taken away. And whereas I think that the Sprott Physical Gold are the best ones. When the US knocks on the door of Canada and says, “You have to do the same,” the Canadians will also say, “Yeah. Okay.” And so the best, probably, to store gold in Dubai, in Hong Kong, Singapore, physically.

Recently, Rick Rule has said he’s expecting a capitulation in equities within the precious metals mining sector. Whether or not this capitulation is actually reached, with miners down 80%, why are institutional investors, or sovereigns like China, not moving into this space more rapidly and acquiring these shares at these hugely undervalued levels?

Marc Faber: Well first of all, what is overvalued and undervalued is a subjective judgment, and I tend to agree with Rick that gold shares, okay, they’re down 80%, and they are cheap, compared to the physical price of gold and compared to Facebook and Google and all these Netflix type of stocks. That I agree entirely.

But you have to understand, institutional investors, either they are ETF, which are passive investors, so by indices, the S&P 500 or the Toronto Stock Exchange Index, or what not, or they are active managers, and the hedge funds are also active managers. Now, they don’t care about what will happen in five years time. They care what will happen within the next week. They want to be in stocks that move within a week, within a month, because they need to show performance. If they don’t show performance, then the clients leave them. So everything has become very short-term oriented, and I would suggest to an investor to forget about the short-term and to think from a longer-term perspective, where is their value?

I happen to think and agree with Rick Rule that there is value in gold mining shares, and I think they could easily rebound from this level by 30 to 40%. The GDXJ, the Junior Gold Mining Stock Index, has, in the first six months of the year, did rebound 40%, but then it came back again to essentially slow. So we have volatility in these stocks. And personally I hold, of course, much more in physical gold than in gold shares, but because I’m a director of NovaGold and Sprott Inc. and Sunshine Mining and Ivanhoe, I also own shares, and I think they’re very cheap at the present time, and they could easily double, all of them, easily.

Look. Investors buy high and sell low. Please remember that. I went to dinner, in 1999 in St. Moritz in Switzerland. There were lots of people with money and they said, “Oh. We make so much money buying and selling the NASDAQ and tech stocks as well. Then they ask me my opinion. I said, “Gold is very cheap.” It was, at that time, $255, or something like this. Then they said to me, “Gold only goes down,” because yes, it has gone down from $850 in 1980 to $255, but I told them, “Because it only goes down, it interests me to buy it, because it’s a neglected asset class.”

Now I don’t know, maybe gold goes still to $800 and maybe not. I don’t think so. But before the Swiss Initiative, the media was extremely negative about gold, because if the initiative in Switzerland would have been accepted, it would have given a message to the world, central banks may start, or they have to, under the pressure of the world, just to own some gold. And so the sentiment about gold, copper, the euro, oil, at the present time, is maximum, and I repeat, maximum bearish. So I think a rebound may take place. Is it the new leg in the bull market? Who knows? But I think gold could easily shoot up by $100 here, and gold shares could easily go up by 30, 40%.

Go to the video.

Receive these articles per e-mail

Subscribe for the free weekly newsletter and receive 3 papers about physical precious metals investing