Archive for the ‘Marc Faber’ Category
All eyes will be on the Federal Reserve interest rate statement tonight, and whether or not the rate actually rises there can be no doubt that ultra-low interest rates are not going to last forever, even if financial markets sometime seem to behave as though this was the case.
So what will happen to the gold price as interest rates go up? The most superficial analysis is to say that gold does not pay interest so investors will take their money out of gold and put it into cash.
But this is a complete nonsense. Investors will also look at why interest rates are going up. Is it because money printing by the Fed now threatens a deluge of inflation? Is it because the bond market looks unstable and investors are demanding a higher risk premium?
Indeed, you have to consider the underlying security of cash as an asset in such circumstances. Will the dollar devalue as inflation erodes its buying power? And how do you hedge against that?
George Soros got it right recently when he said that gold was the ‘ultimate bubble’, that is to say the last asset class in the chain to become a bubble before the whole cycle starts again. For in past financial crises the clear pattern has been bank failures then a bond market crash and a rush into precious metals.
Government intervention on a historic scale has mitigated the bank failures but led to an even greater issuance of government paper, and merely delayed the inevitable bond market crash that will come as – wait for it – interest rates go up.
Gold then becomes the final safe haven asset and the limited supply of gold means that its value will surge to unheard of levels. Dr Marc Faber recently suggested that $1,000 gold might be seen as similar to the Dow crossing 1,000 in 1982.
Arabianmoney.net editor and publisher Peter Cooper explains in far more detail how gold price could pass $5,000 and head even higher over the next few years in his latest book published on Amazon.com this week. (click on this link to buy a copy)
The combined stock markets of the six Gulf Cooperation Countries are worth around $690 billion, about the same size as Hong Kong.
But the oil and gas reserves of the GCC are worth $30 trillion at current prices, not far short of the market capitalization of all the stock markets of the world. This is a considerable mismatch between paper and hard assets, and ought one day to be important.
Poor immediate prospects
However, the immediate outlook for Gulf equities is not good, according to Nomura whose distinguished local forecasting record includes spotting and warning about the bubble in Arabian equities in 2005 which nobody else did, apart from Marc Faber.
Executive director Tarek Fadlallah went immediately for the jugular in his presentation to a conference at the Dubai International Financial Centre this morning, and pointed out that 70 per cent of corporate profit growth in the recent boom came from credit-related sectors where business prospects are now lousy.
All the same, with oil prices relatively strong he saw a moderate recovery in corporate earnings. But credit conditions remain challenging, local investors have been bruised and foreign investors scared by the Dubai debt crisis.
His view is that GCC stock markets will remain range bound over the next 12 months. They have not bounced back to the same degree as other emerging markets, but then Mr. Fadlallah was even less confident about the immediate outlook for those markets.
Aside from the real estate crash and its trail of bad debts, he worried about the impact of growing competition on traditionally high Gulf profit margins, and a failure to make progress in improving middle management, transparency in corporate governance and market reforms.
By way of an historical parallel Nomura offers the Nasdaq crash in 2000 and subsequent market performance compared with the post 2005 performance of Gulf stock markets.
The Nasdaq crash can be seen as like an emerging market cycle. But it is arguable that the Gulf stock markets could be close to a bottom, or at least base building for their next manic phase, doubtless when oil prices next take off.
The 1998 Gulf stock market crash was every bit as dramatic as 2005, and what goes around will come around again. If it is another seven year cycle then sat here in 2010 that might not be so far off, 2012 in fact.
So at some point in the not too distant future there will be a great time to buy Gulf stocks. They are real asset backed to a unique degree, and as inflation picks up in the forthcoming global recovery that is likely to be a great strength.