Transcript

Announcer: You're listening to "Ask the Expert" on Sprott Money News.

Craig: Welcome back to Sprott Money News. This is your "Ask the Expert" segment for April. I'm your host, Craig Hemke, and our guest this month is Dr. Marc Faber, internationally known money manager, and publisher of the widely read "Gloom, Boom, and Doom Report." Dr. Faber, thank you very much for spending some time with us today.

Dr. Faber: It's my pleasure, thank you.

Craig: Okay well let's just dive right into the questions. We've been collecting questions from Sprott Money customers for the last couple of weeks, and they've got a nice wide range for you. Let's start right in your wheelhouse I suppose, it has to do with central bank monetary policy. The central banks have been able to manipulate asset prices higher since 2009 through quantitative easing and interest rates. What's going to stop them from keeping this process going almost indefinitely?

Dr. Faber: Well this is a very good question, because if they were able to increase their balance sheets by 20 times since 1998 up to now, who is to say that they won't increase it another 20 times. So, in principle, a central bank can print money, and they can control the flow of credit to some extent, not 100%, but to some extent. And so in principle, they could keep on buying assets. They can buy the whole government bond market, they can buy mortgage-backed securities, and I suppose that they also intervene in equities, as some foreign central banks have already done. Whether the Fed does it on a regular basis or occasionally, who knows.

But I wouldn't be surprised if they also manipulated equity prices, and so we don't know how far they will go. As you know, in some countries, the central banks have instituted negative interest rates, which are an anomaly historically, since in the 5000 years of recorded human history, we never had negative interest rates. So this is a novelty. It's basically a hidden expropriation that is, in my view, very unfair. And in my view, it will not help the economy much.

But the central banks are basically so deep into trouble that they will continue with their policies of printing money. And in the U.S., the Fed, as you know, they slashed the Fed fund rate to next to zero in December 2008, and they had many opportunities to increase interest rates when the economy was actually expanding, 2010, 2011, but they didn't. But precisely as the global economy was weakening, in December 2015, they increased the Fed fund rate marginally, not significantly. But from what I hear them saying at the present time, it is most unlikely, and I repeat, most unlikely that they will continue to increase interest rates. And so the question, to answer the question, it's we don't know.

The future is unknown to us, but it is especially unknown to us if they are massive market manipulations. But, they can go very far, and we had countries where they printed money, where stocks kept on going up and up and up, but the currencies weakened. Now, in the case of today's world, we have essentially a few major currencies, the U.S. Dollar, the Euro, the Yen, the Pound Sterling, and the Yuan, and if they all print money at the same time, or for six months this bank prints money, and then over the next six months that central bank prints money as it were, the currencies may all depreciate, in which case I suppose that these currency depreciations will occur against assets, including obviously precious metals. I'm always telling people if you have this kind of policy in place, and many individuals, they have most of their money in cash, to hold cash under these conditions of money printing is actually very dangerous.

Craig: Can you expand on that? The dangerous quality of owning cash? Where there certainly are...

Dr. Faber: Well basically, cash, you have no interest on cash, and it depreciates against assets, not all assets, because when you print money, not everything goes up at the same rate. So maybe for a few years, you have a housing boom, and then for a few years you have a stock market boom, and for a few years you have precious metals boom, for a few years, people stuck their money in art, and in collectibles, in Ferraris, and so forth and so on. You never know exactly where the money will flow. But to hold cash in this environment, historically seen, has been dangerous.

Craig: We received several questions regarding the supply and demand of physical precious metal. One has to do with gold, there are a lot of anecdotal stories out there about gold, and refiners that are running 24/7 shifts, trying to keep up with demand. Several readers just wanted to know if you had any stories or any details that you could provide in that regard.

Dr. Faber: I understand the investors' concern with demand and supply. But I just like to make one point very clear. In the case of wheat, corn, soybeans, coffee, cocoa, demand and supply is very important, because essentially these are perishable commodities, and every year, the supply is essentially taken up. And so whether the demand is strong, and usually these commodities, they fluctuate according to supplies. If there is a bad crop, then prices tend to go up, because the demand is relatively steady but rising, in the long run.

In the case of gold, silver, and probably to a lesser extent in the case of platinum, there is huge inventories of gold in the hands of investors. So let's say we have in the world, I don't know, 150,000 tons of gold, of existing gold supplies of existing gold. And the supply is I think 2000 tons a year, or something like this. And so whether the supply is large or small, in comparison to the existing gold holdings, it's not meaningful. So the demand-supply equation, in the case of silver and gold, I suppose in the very long run, it has an impact.

But not on a yearly basis. What impacts the gold price and the silver price, platinum, to some extent also palladium, is what investors want to do. Are they accumulating, or are they selling? Plus, some of these metals may be manipulated, who knows.

Craig: Let me lead you then from there to the folks that dig the stuff out of the ground. There has been a significant rally over the last 90 days in the mining shares. So we received several thoughts, or questions, wondering about your thoughts on that sector going forward.

Dr. Faber: Well as you know, the mining sector has been a disaster compared to the S&P since 2011. And starting the fourth quarter of last year, the shares began to bottom out, and started to appreciate, not just against the S&P, but also on their own. In other words, say you look at the various gold ETFs, they're up between 50 and 60 and close to 70% from the lows. So they have begun to outperform the S&P. I think they are overbought in the near term, but when I look at the whole investment community in the world, and I travel extensively to Japan, and to Europe, and Middle East, and everywhere, hardly anybody really owns gold and precious metals shares.

So my sense is that once the investment community, that is by and large not very smart, the professional money managers, once these professional money managers understand that the money printing is likely to continue, I don't see it stopping. I don't believe there is a currency war. I believe the central banks coordinate their monetary policies. And we know that Yellen talks regularly to Draghi and so forth. In this environment, I think eventually, even the fund managers will realize that it may be a good idea to keep maybe 5 to 10% of their assets in precious metals.

And by then, obviously precious metals will be on fire, as well as the shares of the underlying companies that produce precious metals. My sense is that we've seen a low in precious metals prices, we had a very powerful rally, very few people actually believe in the rally. There is probably a correction occurring now, or about to happen. And then we'll go, in my view, significantly higher.

Craig: Sounds good to me. And I think most folks listening would take you up on that.

Dr. Faber: Yes, I think most people at Sprott, they would love to see significantly higher precious metals prices. I'm not saying this because I'm a board member of Sprott. I'm saying this because for me, the difficulty is to understand that in this money printing environment, precious metals are not yet significantly higher. This is something I don't quite understand. Because let's say, if you look at all the wealth in the world, all the sovereign funds, all the pension funds and so forth, very few own any precious metals. But in my view, they should.

Craig: Exactly. And we're waiting for that to happen. Perhaps negative interest rates will help drive that too. That's a very good segue, actually, to another string of questions that we received, and it has to do with pension plans, and the retirees that are either living off of pension income, or expecting to, when so many pension plans are either underfunded, or they're chasing returns by investing in risky assets. How do you think future monthly pension income will be affected when so few pension funds actually own good hedges and investments like precious metals?

Dr. Faber: Well, it's a good question, but you and I and nobody knows whether precious metals really will be the best performing asset. In theory, in a money printing environment, stocks could go up, and actually as they have between 2011 and December 2015, stocks could outperform precious metals. But my view is that because of the manipulation I referred to by central banks, answering the first question, because of that, we all don't know how the world will look like in five years. I cannot envision any scenario, and I repeat, any scenario, under which there will not be significant pain for investors. Something will give at some point, and it will be very painful for asset holders.

Exactly when and how it will happen, I don't know. It could first, people could continue to make a lot of money in assets, like real estate, stocks, bonds, and precious metals, and one day the music stops, and then losses will occur. But under this scenario, I would say a responsible investor, who really thinks it through, needs to be diversified. He needs to have some real estate, he needs to have some equities and bonds and cash, and obviously some precious metals. Each person is his own master, has to decide for himself how he wants to allocate it.

I usually allocate roughly, as a guideline, 25% real estate, 25% equities, 25% precious metals, and 25% say, bonds and cash. I think Eric Sprott would disagree with me, and he would have a much higher allocation to precious metals than I have. Equally, my friend who runs NovaGold, he would also have a much larger allocation to precious metals than I have. And so we're so...different people have different views. For me to have about a 25% allocation to precious metals is probably much more than typical investors will have.

You understand? So you already overweight with that. Say if you look at the S&P, what is the weight of precious metals shares in the S&P? It's very low. It's nowhere near 25%. So a fund manager, he will be reluctant to go to 25%, because he's measured according to a benchmark which is say the S&P or the Russell 2000 or the Dow Jones, whatever it is. But I think that the pension funds, the whole industry thinks, as you said, they are grossly underfunded, but they don't tell the public that they're so underfunded.

And they think that they can maintain their returns. The return expectations are around seven percent. I think this is fantasy land. In a world where, say U.S. treasuries, bonds, the 10 year yields 1.78% tonight, the 30 year, around 2.67% and so forth.

So in that world, and zero interest rates, how they're going to make seven percent per year in returns, it's out of the question. And then they go, as you said, in risky assets, like private equity and so forth. But private equity depends on a buoyant stock market, so that the companies, the private equity firms, they buy assets, and then to make money, they will have to sell them to the public. In other words, they go and sell them into the share market. And that only works when the stock market is up, hasn't worked in the first quarter of this year, when the markets performed poorly.

So they couldn't sell. And so a lot of private equity firms will actually have large losses. Equally, as you know, hedge funds haven't performed well. So I think these return expectations are a mirage. And I would tell retirees, "Don't rely on your pensions." If they come, be pleasantly surprised, and hope for the best, but I wouldn't rely entirely on it.

Craig: Yep I think that most folk are starting to think of it that way. You're right. Just two more quick questions for you, Marc. One of them has to do with a gold standard. A lot of folks are talking about sound money, and returning back to some type of sound money on a gold standard.

But governments are already now so fiscally irresponsible. Why would a gold standard change their behavior? And then as a follow up to that, do you think, or you even expect, a government around the world, maybe the Chinese or the Russians, or maybe a combination regionally would, do you expect a return to some hard asset backed currency as an alternative to the U.S. Dollar?

Dr. Faber: The issue here is really at the present time, and we have in the history of mankind we had monarchies, and we had oligarchies, and we had all kinds of systems. At the present time, it seems that the world is ruled by a bunch of incompetent academics at central banks, who can manipulate the entire global monetary system, and with it, asset prices and currencies. I think this regime will fail. Again, and as I said earlier, I don't know when it will fail. It could fail in a year's time, it could fail in five year's time.

But it's likely to completely fail. And when it fails, central bankers will have lost their prestige. People will be really fed up, both the financial service industry, and individual investors, and actually responsible government officials, if there are such around. That is a big question, but if there are still some responsible people around, they will probably get rid of the power of central banks. And then they will scratch their heads and say, "Well, how could central banks get into a position of so much power?" That will be then the question that will be asked, and then they'll find all kinds of documents that show how the central banks essentially manipulated markets and so forth.

So they will say, "Well, the best is to introduce some discipline." And the gold standard was not a perfect system. But it was a system that maintained some discipline until one country abandoned this discipline, and which country was it? Of course, the U.S. Because the U.S. has this American Exceptionalism. For everybody, a rule applies, except for the U.S.

And so they broke away essentially from the gold standard, and since then we have money printing, we have higher volatility in the economy, higher volatility in asset markets, and I believe that we will go back to some kind of a discipline system and hard currency system. But again, when it comes about, I don't know. And I also believe that when it happens, things will have to be very bad before it can happen. Because as long as the central banks in the western world ... Japan do that, you know there's western Europe, the U.S., Japan, as long as they can print, they'll do that. And probably the Chinese may also do it at some point, they also print money.

But they have a more vibrant economy than other people have, although it may also go into recession now. So I think that the mix will be such that governments may sit together and say, "Well, we have to curtail the power of these central banks." The problem I have with this view is that if things really get bad, and before the whole system really breaks down, certainly in the U.S., in western Europe, they may introduce legislation, and they could introduce emergency legislation whereby they would say, "You know why the economy is performing badly? It's because some people, like Eric Sprott and Marc Faber hold physical gold, and the money doesn't flow back into the economy. So the first thing that we need to do is to take the gold away from Eric Sprott and Marc Faber and company." This is my concern.

Craig: Let's hope it doesn't come to that, but I know that's on a lot of folks' minds too. One last question for you, Marc, and it has to do with platinum, which historically has traded near the gold price, about the same, maybe within a couple of percentage points, but at present is down about 25% below the gold price. Why is that?

Dr. Faber: Usually it trades at a premium.

Craig: Yes. Why is it now at a discount? Can you address that? Is that an opportunity?

Dr. Faber: You ask me, "Why?" I should ask you. I don't know why. But I suppose that it's a less liquid type of market than the gold market, and it's more volatile. But historically seen, when the discount to the gold price was this high, platinum was a better buy than gold. So if someone is really keen to make capital gains, right now I think platinum and also silver are maybe more desirable than gold. I hold most of my precious metals in gold, but I have some platinum as well.

Craig: Yes. And I think a lot of folks are interested to hear your views on silver, yes, it hasn't quite kept up so far this year with gold, but do you like silver as well?

Dr. Faber: Yes, I think, let's put it this way. Technically, it looks very attractive, and it could have a big move. But I believe that both platinum and silver are more perceived as industrials, or depending on industrial demand than gold. Gold has not much, I mean it has use in industry. But it's not perceived as being driven by industrial demand, whereas silver and platinum are to some extent driven by industrial demand.

But I think that investors, again, because of what I said, that we don't know how the world will look like, that maybe they should also diversify out of gold, and own some platinum and silver.

Craig: Sounds like it's always a good strategy. Dr. Faber, thank you so much for spending some time with us at Sprott Money News.

Dr. Faber: My pleasure.

Craig: Can you just take one moment and tell everybody about the "Gloom, Boom, and Doom Report," and how they can subscribe?

Dr. Faber: Well I have two reports. One is the "Gloom, Boom, and Doom Report," which is a printed edition of a monthly report, and then I have a website report, the monthly report, and people who are interested, they can go to www.gloomboomdoom.com.

Craig: Thank you so much for your time.

Dr. Faber: Well, it's my pleasure.

Craig: And hopefully we'll visit again sometime soon.

Dr. Faber: Yes, I hope so too. Thank you very much. Bye-bye.

Craig: From Sprott Money News, thank you for listening, and we'll see you again next month.