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 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.”
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.”
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.”
James McKeigue
Contributing Editor, MoneyWeek (UK)
Publisher’s Note: This is an edited version of an article that first appeared in MoneyWeek
From the Archives…
What Newton Knew About House Prices …That the IMF Should
2012-05-11 – Kris Sayce
Why a Greek Exit From the Eurozone Could Be Great News For Markets
2012-05-10 – John Stepek
Why Europe Will Ditch Green Energy
2012-05-09 – Kris Sayce
Why It’s Time to Buy Gold
2012-05-08 – Dr. Alex Cowie
Why You Should Be Watching Japan’s Economy
2012-04-07 – Dan Denning