Saturday, May 21, 2011

The Dollar And Gold: A 20-Year Perspective

Gold continued its upward march in a time of global financial tumult, closing above $1,500 an ounce Thursday for the first time as investors seek safe haven in the metal....
The reason for gold's ability to do well in any market lies in its recent role as a haven from concerns about the dollar, inflation and shocks in Europe, the Middle East and Japan.

Today the WSJ observes that the Dollar's Decline Speeds Up, With Risks for U.S.

The U.S. dollar's downward slide is accelerating as low interest rates, inflation concerns and the massive federal budget deficit undermine the currency.
With no relief in sight for the dollar on any of those fronts, the downward pressure on the dollar is widely expected to continue.

With these two WSJ articles as a context for the recent behavior of the Dollar and Gold, let's take a look at the highly inverse correlation between the two over the past twenty years.

Barry Ritholz, who occasionally warns of main-stream media contrarian indicators, commented yesterday on the WSJ gold article: "Front page stories are not great usually for investments — although this is the WSJ, not Time or Newsweek. It has much less of a contrarian indication."

I'm inclined to agree with Barry, and I have the same opinion of the Dollar article. A short-term reversal is certainly possible for either of these assets. But the looming battle over the U.S. budget, with a particular focus on the debt ceiling, underscore the potential for an even weaker Dollar and increased demand for Gold.

Faber: Bulls to Get Slaughtered as Stocks Plunge

Contrarian investor Marc Faber says stocks will fall sharply in May, turning the recent breakout in stocks into a trap for the bulls.
The markets are due for a correction and the technicals point to a weak market, Faber tells Wall Street Pit. In particular, he points to the decline in new 52-week highs as evidence of an unhealthy internal market.

Right now, Faber advises investors determined to buy stocks to stay away from cyclicals, tech stocks, and banks, sticking with safer plays such as consumer staples.

Marc Faber, publisher of The Gloom, Boom and Doom report, likes gold as a long-term investment.

He’s more cautious when it comes to silver because of its recent runup in the price, and expects a 20-percent-plus correction in the metals complex because the inflation trade has become too crowded.

Faber says copper and the S&P 500 are highly correlated, and finds he fact that the stock index reached a new high while the metal didn't is another signal that stocks could follow commodities lower in the short-term.

Faber says the U.S. housing market has another 10 percent to fall, but valuations are now attractive and housing hasn’t been this cheap since the early 1980s. In a serious inflation environment, Faber would rather own housing than paper dollars.

Faber also expects the United States will run trillion-dollar budget deficits for the next 10 years and the Federal Reserve will have to at least partially monetize this debt to keep interest rates low.

But not everyone agrees with Faber. Another notorious equities bear now says he's bullish. David Rosenberg, senior strategist and economist at Gluskin Sheff in Toronto, is telling clients that the stock market isn't headed for a crash.

The market has been rallying since March 2009, yet Rosenberg has been wary of the trend, defending bonds against "inflationistas" and warning that deflation remains the far greater danger, CNBC reports.

Skies seem bluer. "This is not about throwing in the towel," Rosenberg writes in a letter to clients.

"It is an acknowledgment of what the market internals are flashing at the current time from a purely tactical and technical standpoint."

Faber: Do Like a Central Bank and Buy Gold

John Paulson has done it, George Soros has done it, and you should do it too, says Marc Faber, publisher of The Gloom, Boom & Doom Report – buy gold.
Investors "should be their own central banks and gradually accumulate gold reserves as a currency," rather than just buying gold as a speculative position, he tells CNBC.

Once the Federal Reserve’s latest quantitative easing operation (QE2) ends in June, pressure will build on the central bank to implement QE3. While that may produce a temporary rally for the dollar, the long-term outlook for our currency isn’t pretty, Faber says.

"The value of the U.S. dollar will be precisely its intrinsic value — namely zero, precisely zero," he says. That means full steam ahead for the precious metals.

Gold has hit $1,500. Rising interest rates in emerging markets also will buoy gold and silver, Faber says. Both India and China have been lifting rates, with China ordering its banks to boost reserves Monday.

Faber recommends holding physical gold over exchange-traded funds (ETFs) and stocks of gold miners.

Others are bullish too. The latest supportive news for gold is that Standard & Poor’s has shifted its outlook on the U.S. credit rating to negative.

“The perception that a downgrade would even be possible for the U.S. is driving the gold market,” Frank McGhee, head dealer at Integrated Brokerage Services tells Bloomberg.

Gold futures for June delivery rose $2.20, or 0.1 percent, to settle at $1,495.10 at 1:38 p.m. on the Comex in New York. Earlier, the price climbed as much as 0.5 percent to the record. Gold for immediately delivery was little changed at $1,495.35 at 2:33 p.m. New York time. Earlier, the price rose as much as 0.3 percent to an all-time high of $1,499.32.

Can Doctor Doom call the ups as well as the downs?

The high profile investment analyst and economist Marc Faber earned the ‘Doctor Doom’ soubriquet after being one of the few investors to foresee the financial crisis and the extent of the ensuing fallout.

The Swiss national is a long-standing and regular commentator in the media having initially rose to prominence back in 1987 when he told his clients to sell out of equities a week before October crash.

Although he is sanguine about the difficulty of timing the market- he branded his call that year ‘accidental’- he has cemented his reputation over the last decade by also accurately calling the rise of Asia, the decline of the dollar and the commodity boom. Here we put the recent predictions of the founder of Marc Faber Ltd and author of the Gloom, Boom & Doom Report newletter to the test.

Retail spending to drop off a cliff

‘Short retailers except Walmart, perhaps using the consumer discretionary SPDR ETF- [expect a 10% correction by the year end].’

Verdict: In keeping with his negative overall view on the economy, Faber expected non-essential consumer spending to plummet as the housing market dive gathered momentum and equity markets started to roll over. The consumer discretionary ETF was close to an all-time high when he made his call and it subsequently fell from $40.17 to $30.84 by the year end, far higher than his anticipated 10% correction and troughed at $17.53 the following February. Walmart meanwhile fell by 10% over the following two months before ending the year just under 5% down and rallying by over 40% overall in the 12 months following his call.

Sell risk assets and beware inflation

‘In the next few months we could get a severe correction in all asset markets. In a selling panic you should buy, but in the buying mania that we have now the wisest course of action is to liquidate. I am not a great buyer of assets now. We might be in a situation where consumer price inflation comes back and will have a negative impact on the valuation of assets.’

Verdict: The S&P actually rose by a further 8% over the next two months, but then began the precipitous slide that saw the market more than halve from 1,561.8 to 683.38 the following March. Although interest rates began their downward spiral, investors backing Faber’s calls would have preserved capital well as the financial crisis began to take hold.

Back silver, gold and other hard assets

‘You want to be in gold, silver, platinum and also oil. If you believe in a recovery of asset prices as a result of money printing, you should be in hard assets, particularly precious metals. If you want to own shares, I would own some resource companies- I would also own some Asian shares.’

Friday, May 20, 2011

Marc Faber: Dollar to turn zero; invest in gold and silver

Global investment guru and commodities expert Marc Faber says the best and most enduring currency in the world is gold and silver. He also said that the value of the US dollar will fall to zero in some years.

Beware the False Breakout in Stocks

Swiss investor Marc Faber has just released his latest issue of the Gloom, Boom, and Doom Report where he discussed his outlook for the stock market, gold, emerging markets, and other financial topics. Here are a few highlights from the report:

1. Equity Markets – The markets may be giddy about stocks hitting new highs, but contrarian investor Marc Faber is having nothing of this. He is concerned that stocks will fall sharply in May and that the recent breakout in stocks will prove to be trap for the bulls. The markets are due for a correction and the technicals point to a weak market. In particular, Faber points to the decline in new 52 week highs as evidence of an unhealthy internal market. Right now, Faber would stay away from cyclicals, tech stocks, and banks. If you have to own stocks make sure it is something safe like consumer staples (MO, JNJ, PEP, KO, etc).

2. Gold & Silver – Still likes gold as a long-term investment and recommends dollar cost averaging every month regardless of the price. However, when it comes to silver, Faber is more cautious, noting the recent run-up in the price. He expects a 20%+ correction in the metals complex because the inflation trade has become too crowded.