Marc Faber makes his Case: Gold is “Inexpensive”

Speaking with King World News (KWN) earlier this week, Marc Faber said when compared to the Federal Reserve’s monetary base, today’s gold is “inexpensive.”

As physical buyers of the yellow metal trounced the paper shorts in yesterday’s option expiration trading, taking the gold price to $1,620 at the close, the typical price smack down, followed by a rally, and then, a subsequent smack down wasn’t evident throughout the day.  If Asian buyers were stepping in to pick up the new shorts, the operation went off seamlessly.

It appears that something very different is going on in the flow to safe haven buying this month.

The ponytailed, Swiss-born, eccentric money manager, who calls Thailand and Hong Kong his stomping grounds, sees the simultaneous fiscal woes in Europe and the United States leaving investors little choice in the duck-and-cover maneuvers since the collapse of Bear Stearns in March 2008.

“Well I think investors are gradually realizing that it’s unusual, with all of the problems in Europe that the euro is actually relatively strong against the U.S. dollar,” said Faber.  “They are realizing U.S. holders don’t want to hold euros because they don’t trust the euro and the Europeans don’t want to hold dollars because they don’t trust the dollar.”

At the open of European trading at 3 a.m. EST, significant dollar weakness could be seen across a broad range of currencies.  In earlier Asia trading, the Aussie dollar broke through 1.10, the Swiss franc cracked 1.25, the NZ dollar reached 86.6, and the Canadian dollar as well as the Malaysian ringgit both trounced the greenback to finish strongly at the close.

Traders fleeing the dollar have been diversifying into “Canadian dollars, Australian dollars, New Zealand dollars, Singapore dollars and so forth,” said Faber.  “But, basically, the ultimate currency and the ultimate safe asset,” he said, “is gold and silver.”

At the open of trading in New York, the Dow-to-gold ratio had breached the 20-year support at 7.8 ounces of gold to buy the Dow.  Except for a brief breakout (to the downside) in the Dow-to-gold ratio during the panic of March 2009, the 7.8 level has been a base of long-term support since 1991.

In 1992, the U.S. economy emerged from recession and simultaneously reinvigorated the bull market in stocks and resumption of the bear market in gold until the peak in the ratio of above 43 was achieved in the second half of 1999—the year the NASDAQ popped.

Since 1999, the Dow-to-gold ratio has moved in a downward trend, with many analysts forecasting a 1:1 ratio when the gold bull market ends.

Investors fearing they missed the boat on the gold trade may take solace in that Faber believes the rally in the gold price is actually still in the early innings.  In fact, when calculated in terms of the Fed’s balance sheet (monetary base), today’s gold price is a comparative bargain.

“I just calculated if we take an average gold price of say around $350 in the 1980s and then we compare that to the average monetary base in the 1980s, and to the average U.S. government debt in the 1980s,” explained Faber.  “But if I compare this to the price of gold to these government debts and monetary base, then gold hasn’t gone up at all.  It’s gone actually against these monetary aggregates and against debt it has actually gone down.  So I could make the case that probably gold is today very inexpensive.”

According to St. Louis Fed statistics, the Fed’s balance sheet stood at approximately $150 billion, compared with the latest report which shows that the Fed’s balance sheet has reached $2.7 trillion, or an expansion of 18 times in 31 years.  If gold topped out at $850 in 1980, a rough estimate of gold’s potential climb in terms of the Fed’s balance sheet could take the world’s ultimate currency to more than $10,000—a number, by the way, that jibes with Jim Sinclair’s $12,500 gold price prediction.

Advice from 60-year Market Veteran Richard Russell

What is the man who publishes the longest running investment newsletter thinking right now?  In his June 30 missive, Richard Russell of Dow Theory Letters offered his overview of the equities markets, and isn’t too sanguine on the idea of jumping aboard.

At this time, the stock market has been giving clues about the dollar’s next move, while the dollar has been giving clues about the next likely move in stocks, recons Russell.

The La Jolla, Calif-based octogenarian is no fan of the U.S. dollar in the long run, and has repeatedly opined of its progressive failure as the world’s reserve currency.

Russell watches stocks for a heads up to any impending doom for the dollar.  We can surmise from Russell’s latest letter that he’s bullish on stocks as the dollar devalues, but is bearish on equities if the dollar is expected to fall too far, too fast.  So far, nothing he sees in stocks has him concerned about the dollar.

“Currently, the Averages had every opportunity to break below their last secondary lows,” wrote Russell.  “The Averages refused to break down — instead both Industrials and Transports rallied above their preceding June highs. I took this action to be bullish, and with a bow to the advertisers of ‘The dollar crash’  I can say that a dollar crash is not going to occur any time in the near future. If the crash was near, the D-J Averages, in their uncanny wisdom, would have sensed it and given us the news by breaking below their June lows.”

According to Dow Theory, Russell believes stocks are in a bull market, but he doesn’t want to buy any for reasons of valuation.  Analysts citing historically cheap stock valuations relative to bond prices (going back to 1958) don’t fool Russell.  He was busy writing his first newsletters in 1958, but doesn’t remember a Fed buying 70% of newly issued Treasuries to artificially lower interest rates during Ike’s second term.

Instead, Russell looks to the dividend yield of the markets 30 bellwethers.  The current dividend rate of under 3% in the Dow “is far away from the bargain counter” in his assessment.

“So is it really a bull market? I think it is,” added Russell.  “Then shouldn’t we be up to our necks in stocks? I choose not to be, mainly because I don’t like the values. Dividend yields are low in my estimate, and I’m in no hurry to rush into the arms of an anxious and waiting Wall Street.”

Like a salesman who senses a deal is closing too easily to be true, Russell smells something foul from Bernanke’s scripted economic outlook for the remainder of the year.  The WWII veteran has seen too much to be lulled into “some believable fairy tale” told by the Fed and the perma-bulls on Wall Street.

“It bothers me that it’s all so pat and so widely accepted. So far, the Treasuries are acting according to script and so is gold,” mused Russell.  “The stock market is acting as if something better is riding on the winds of the future. Could something be amiss with the accepted scenario? Could Bennie Bernanke have it right? And why is Treasury Secretary Geithner ready to say ‘bye’ to the administration? What can he see ahead that he doesn’t like? Geithner’s been Obama’s leading economic confidant. Certainly, an unusual time to exit.”

When Russell is convinced of a low-risk/high return trade, he states it flat out.  But today’s market prevents him from giving the green light on stocks.  Instead, he’s on the sidelines with his gold and cash until the stock market true fundamentals match the technicals.

With debt levels in the West remaining at record levels as percent of GDPs, Europe still in a quandary with the PIIGS, and a deadline for raising of the U.S. debt ceiling still a month away, a game-changing event could be just around the corner.

“June went out like a lion and today another powerful 90% up day,” wrote Russell. “As the old song goes, ‘Who could ask for anything more.’ Hopefully, today’s [June 30] verdict of the Averages are a forecast of better times ahead. But in this business, it’s always wise to stay alert. With the planet staggering under the greatest load of debt ever seen in human history, anything can happen and probably will.”

Jim Rogers’ Top Two Commodities

In an after-the-bell interview with CNBC’s Maria Bartiromo, Wednesday, commodities king Jim Rogers said he’s a bull on all commodities now, but especially likes silver and rice.

The 68-year-old Rogers, known for his partnership with George Soros at Quantum Fund, spelled out what he expects of Ben Bernanke and other central bankers as the financial crisis plays out—that is: print money.

Strong demand from Asia’s growing middle class from a pool of a 3-billion-plus population as well as an anticipated continuation of loose monetary policies by central banks worldwide will lift commodities prices, he said.

“It [print money] is all they know to do in Washington, Tokyo and a few places,” said Rogers.  “They’ll print more money.  And if they print money, you should own silver and rice and real assets.”

If the world economy grows, Rogers likes commodities.  If the world economy goes back into recession, Rogers likes commodities.  It’s a heads you win, tails you win play, he explained.

What happens after QE2 expires at the end of June?  Rogers didn’t venture a guess on the effects on the equities markets as the end of June approaches, but he expects more money printing from the Fed, especially in front of an election year.

“QE2 definitely will go away.  Now it may come back with a different name,” he speculated.  “They may call it cupcakes.  Who knows what they’ll call it, if it comes back.  But they’re going to bring it back, because he’ll be terrified and Washington will be terrified.  There’s an election coming up in 2012.  Washington’s going to print more money.”

On the subject of the debt ceiling impasse in Washington, Rogers doesn’t expect a U.S. government shutdown.  But if the U.S. government didn’t raise the debt ceiling, he surmises that “the dollar would go up,” he quipped.

But a shutdown of the U.S. government won’t happen, he said.  Governments throughout history have all opted to try to inflate out of burdensome debt levels, and this time the response by today’s governments won’t play out any differently, Rogers has repeated stated in the past.

But at some point, the currency crisis comes, and we may be coming close to that tipping point.  “The markets won’t put up with this much longer,” said Rogers.

The billionaire investor’s portfolio is long some currencies (likes the Chinese renminbi) and commodities.  He has no long positions in the U.S., and is short emerging markets and U.S. technology stocks—with the latter, he believes, are in the midst of a bubble, mentioning Facebook (presumably referring to valuation estimates of the social network leader) in particular.

Rogers is also short a U.S. bank stock, but refused to state the name of the bank on two separate occasions during the Bartiromo interview.  Since Rogers initially mentioned more than a month ago that he’s short a U.S. bank, rumors have spread throughout the Web that the bank in question is Bank America (NYSE: BAC).