Hold onto your seats, says Swiss money manager and publisher of the Gloom Boom Doom Report, Marc Faber; it’s going to be a rough ride ahead for investors.
In his latest view on the markets, the quintessential contrarian suggested in his October edition of the Gloom Boom Doom Report that the real threat to global markets is China, not the global financial crisis epicenter of Europe.
China, he stated, may be on the verge of economic collapse, stemming from the dreaded one-two punch of rapidly increased capital goods overcapacity to match significant reductions of global demand for its products.
The recent precipitous decline in the price of cooper tells Faber that China’s rapid GDP growth may have been somewhat of a mirage for a spell. What was once thought of as a clever means for China to dump U.S. dollars in favor of ramped-up infrastructure spending in the People’s Republic, with numerous reports streaming into the West of newly-built cities erected in anticipation of millions of soon-to-come inhabitants, may, instead, result in another example of a Mao-like central planning scheme gone bust.
In 2010, at a conference in Russia, hedge fund manager Hugh Hendry of Eclectica Asset Management opined about the very same risk he had seen to the Chinese economy, quipping, at that time, “Confucius say: Though shall not invest in overcapacity.” Hendry proceeded to warn of a surprise economic collapse in China reminiscent of Japan’s meltdown of 1989.
In recent years, massive infrastructure increased as a percent of GDP in China, while consumer spending dropped as a percent of the total output of the Chinese economy, temporarily front-loading stellar growth results that, it appears, now, are unsustainable and at risk of collapsing the Asian juggernaut.
Faber, who’s been spot on, so far, with his prediction for weaker gold prices in the short term (before a next leg up in the metal becomes a play against serial central banking mishaps), stated that this latest correction in gold may last a while longer, still—and might take the precious metal to the $1,100-$1,200 level before the bottom is reached—a la 1974-76.
“We’re now close to bottoming at $1,500, and if that doesn’t hold it could bottom to between $1,100-1,200,” Faber told CNBC’s Steve Sedgwick on Sept. 25. It appears Faber hasn’t backed off his call of the 25th.
As a backdrop to Faber’s thinking at this time, it should be noted, too, legendary currencies strategist John Taylor of FX Concepts suggested a 50% decline from the $1,900 mark was in the cards for gold. But, more impressively, Taylor told Bloomberg during the summer months of 2011 that gold could touch $1,000 after reaching a new high of $1,900. Eerily, Taylor made those calls when gold traded at approximately $1,500 per ounce while the gold market was about to enter the seasonally slowest months of the calendar year of July and August.
Faber suggested in his latest report to subscribers that a drop he envisions for gold to the $1,100-1,200 range would mimic the historical performance of the gold price during the 1970s. In 1974, gold traded as high as $200, up nearly six-fold from the official $35 peg of 1971, then sold off off to $100 by 1976.
But as history shows, the damage to the dollar had already been done following the Nixon Administration’s executive order to decoupled the dollar from its gold backing in 1971. After the 1974-76 decline of 50% in the gold price, from the $200 high of 1974, back down to $100 in 1976, the gold price never looked back, skyrocketing to $850 per ounce by January 1980—a nearly 85% compounded return during that 42-month period.
Could Faber be right again, or has he gone too with in his prediction in the wake of ongoing fat-tail moves in emerging market currencies and European sovereign bonds? Conventional wisdom today is Europe is going down and it’s about to get uglier than the Lehman crisis ever got. But, unlike the Lehman event, everyone’s expecting the worse outcome in Europe this time around. Has the gold market already priced in a catastrophe in Europe, or not? We’ll see.
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