June 19, 2024

“Sentiment on Gold and Bonds Incredibly Negative” – Marc Faber Predicts Endless QE

Liberty-EagleIts hardest to buy at bottoms since you never know where the bottom is.  Equally hard to do is to buy when the sentiment is incredible negative as it was in early 2009 for stocks and 2000  for gold and silver.

Marc Faber, editor of Gloom Boom & Doom Report discussed the current status of the global markets and investment strategies on Bloomberg Television.

Faber said that the sentiment on gold and bonds in incredible negative and that the Fed, regardless of who winds up replacing Bernanke, will be forced to engage in endless monetary stimulus.   According to Faber “as I said already three years ago, we are going to go with the Fed to QE99.”

Faber notes that the cost of living continues to increase  on a global basis and the benefits of QE are mainly benefiting the richest members of society who hold large amounts of assets.  As money printing destroys the purchasing power of the middle class there will be worldwide social unrest which has already erupted in numerous countries.

As to what the price of gold will be at year end, Mr. Faber declined to speculate saying that “I am not a prophet but I will continue to buy gold.”

Reaction to: Gold May Pay Only in Case of Maximum Despair

With the price of gold on the decline, flimsy commentaries have started to appear which characterize gold as a fringe bet of foolish people.  I am admittedly biased in the opposite direction writing gold and silver blog, but if I wrote a commentary, I would at least make some substantive arguments that go beyond cursory and reckless statements.

I found this recent commentary written by Jane Bryant Quinn for Bloomberg particularly egregious, so I would like to examine some of her specific points.

“Gold is for rich guys…  you need a lot of it, stored around the world.”

I’m not even sure what she is trying to say here. Why do you need to be rich to buy gold? It can be purchased in sizes as small as 1/10 ounce, which would have cost about $40 in 2001. There is nothing to prevent “poor guys” from owning gold.

Why do you have to store it around the world? A 400 ounce gold bar worth about $288,000 is  7 x 3 5/8 x 1 3/4 inches. This would fit in an average sized safety deposit box. For the “poor guy,” 1/10 ounce of gold is about the size of a dime. You could store it in your pocket if you want.

“Gold isn’t even a reliable hedge against inflation.”

To prove this argument she quotes the price of gold in January 1980 and states that gold has not yet reattained this peak adjusted for inflation. By that same logic, one could state that stocks never have positive returns by quoting the price of the Nasdaq in January of 2000.

“For the average investor, gold boils down to a speculation on higher prices.”

She seems to mention this with a certain distaste. What investment is not based on speculation of higher prices, whether informed, rational, or otherwise? Would you make an investment if you thought prices were going lower?

“Toward the end of each year, [various world mints] let their inventories run down while gearing up for next year’s run. The surge of buyers left them short of high- quality blanks.”

The US Mint has been experiencing problems fulfilling demand for American Silver Eagles since March and problems fulfilling demand for Gold Eagles since August. The problems have been nearly continuous thoughout the year. The reason seems to be that the US Mint cannot obtain sufficient gold and silver on the open market to meet the physical demand.

“On EBay and the Home Shopping Network, coins sell at fantasy prices. A set of Eagles in four different weights was offered on HSN at $4,999.99.”

She lumps eBay into the same category as the Home Shopping Network. The Home Shopping Network is known for overpricing and overpromoting collectible products. EBay is a relatively well informed community of buyers and sellers whose transactions take place in a liquid market.  In general, transactions will occur at whatever price the forces of supply and demand will bear. When you’re favorite bullion dealer runs out of gold, why not purchase it on eBay?

“Gold, by the way, is taxed as a collectible… Your tax rate on long-term capital gains would be 28 percent, compared with 15 percent on other assets. Only a significant price gain redeems your bet. “

The 15 percent tax rate she mentions applies to long term capital gains. If you sold stock which was held for less than one year, it would be taxed at your marginal rate which could be as high as 35 percent. And perhaps more relevant, not too many people have long term capital gains nowadays. If you’ve been investing in stocks or real estate, I think you would welcome a gain taxed at 28% rather than a big pile of losses.