Faber: Buy Gold Every Month

Marc Faber, well-known and respected author of The Gloom, Boom & Doom Report, is adamant that investors should buy gold in small trades every month “forever”. He also said investors could look to emerging market stocks as an alternate to U.S. stocks.

In the report published on CNBC, Faber said, “Gold's quantity cannot increase at the same rate as you can print money, which will eventually weaken the US dollar. I’m not saying that the dollar will go straight away down because other currencies like the euro are even worse at the present time. But eventually if you print money, the purchasing power will lose [value]."

I wrote an article on gold previously, and explained why I think some gold exposure is not a terrible idea for the average investor. However, it has nothing to do with U.S. stocks or emerging markets or sovereign debt. Rather, I advocate gold for those investors who want to buy the ultimate insurance policy against worldwide calamity (and I’m talking of the nuclear sort, not the credit default swap sort, despite their similarities). I also think emerging markets present the conservative investor fantastic opportunities to generate long-term returns�at a lower level of risk. I have an article about that too.

Mohammed El-Erian, co-CEO of PIMCO (the world's largest bond fund), interestingly advocates that investors keep at least 12% of their net worth in emerging economies. "The average investor has two issues today. First, the average investor is too U.S.-centric. There's a reason for that; the behavioral finance people will tell you that we like the familiar, so we tend to invest in names that we know, that give us comfort. The problem is that you don't want to be too U.S.-centric in a globalizing world where the center of gravity is shifting. So the first thing for the average investor to recognize is that the asset allocation of tomorrow is much more global than the asset allocation of yesterday”, says El-Erian in a recent Fortune interview.

But back to Faber – why does he advocate gold? Much of it has to do with the fact that he believes Greece will be bailed out indirectly by the European Central Bank, and that the plan will not succeed. “Other counties like Spain and Portugal will also have to be bailed out eventually, and it will lead to more monetization in Europe, one of the reasons why the euro has been so weak,” he said. “The pain of the austerity will be very burdensome on Greece, and eventually the economy can’t grow with the kind of budget they will have to enact and under these conditions, their currency is way overvalued."

The problem gets worse though (which to be honest if Faber’s style). You don’t associate your research with the words “Gloom” and “Doom” if you have something optimistic to say. It's that pessimistic nature that allows him to say,�"If you compare the Depression years, we didn’t have credit cards and we didn’t have unfunded liabilities from Social Security, Medicare, and Medicade. In other words, in 10 years time, between 30 to 50 percent of tax revenues will be spent on interest payments on the government debt...and that will lead to a weak dollar.” He’s also of the opinion the U.S. Federal Reserve will have to bail out states like California and Illinois which are experiencing serious budget problems.

Despite his pessimistic nature, Faber thinks investors will do better buying stocks in emerging markets, such as India, Malaysia and Vietnam, where economies are growing strongly.

Personally I am of the opinion that the conservative value investor will do well whatever market he chooses to operate in. South Africa is a market that I focus a lot of my attention on and in terms of opportunity to profit it way outclasses the United States market. In saying that, good investors can find value anywhere, as long as they are patient and do their homework. Regardless, if you take a macro-economic view it’s really quite difficult to justify investing in the United States over emerging markets, all else equal.�I do think though that increased global investing and exposure to emerging markets are necessary and sufficient for decent long-term performance.

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  • Faber's a Dope

    March 09, 2010

    This still doesn't explain why he advocates gold. Because of Greece's economic problems? If anything Greece is heading in the reverse direction from a currency collapse. They are enacting an austerity program. Currencies are devalued when economies print money, not when they cut back on spending and reduce debt.

    Gold will be half it's value in 5 years.

  • Sean Riskowitz

    March 22, 2010

    Gold is not an investment, it's an insurance against catastrophe. It's protection against World War III. If you discount this risk then gold is by no means a place to put your money. Faber is good at a few things: being pessimistic, being well-known and getting his opinions to appear as gospel.

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