Runaway government debts have triggered uncontrolled money printing that in turn will lead to inflation that will decimate portfolios, according to the latest forecast from "Dr. Doom" Marc Faber.
Investors, particularly those in the "well-to-do" category, could lose about half their total wealth in the next few years as the consequences pile up from global government debt problems, Faber, the author of the Gloom Boom & Doom Report, said on CNBC.
Efforts to stem the debt problems have seen the Federal Reserve expand its balance sheet to nearly $3 trillion and other central banks implement aggressive liquidity programs as well, which Faber sees producing devastating inflation as well as other consequences.
"Somewhere down the line we will have a massive wealth destruction that usually happens either through very high inflation or through social unrest or through war or credit market collapse," he said. "Maybe all of it will happen, but at different times."
Noted for his pessimistic forecasts and gold advocacy, Faber nonetheless lately has been telling investors that stocks are a good choice as central bank policies pump up asset prices.
He reiterated both his commitment to stocks and gold, but said investors also can find value in other hard assets, particularly in distressed properties in the U.S. South.
"In Georgia, in Arizona, in Florida their property values will not collapse much more and will stabilize, so I think to own some land and some property, not necessarily in the financial centers but in the secondary cities, these are desirable investments relatively speaking," Faber said.
As for stocks, Faber said Fed Chairman Ben Bernanke's policies will be friendly toward equity investors, at least for now.
The stock market is in the middle of an aggressive bull run that has seen the major indexes rise more than 25 percent from their October lows.
"I think that people should own some gold and I think that people should own some equities, because before the collapse will happen, with Mr. Bernanke at the Fed, they're going to print money and print and print and print," he said. "So what you can get is a bad economy with rising equity prices."
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Gold futures rose to a six-week high on Monday, aided by a lower dollar and a bout of geopolitical concerns after the European Union imposed an oil embargo on Iran.
Gold for February delivery added $14.30, or 0.9%, to settle at $1,678.30 an ounce on the Comex division of the New York Mercantile Exchange.
That was gold’s highest finish since Dec. 9. Other metals tracked gold higher, with silver ending nearly 2% up.
“There seems to be a general groundswell of interest” in gold in recent sessions, said James Moore, an analyst with the bulliondesk.com in the U.K.
News of the oil embargo the European Union imposed on Iran reflected broader issues in geopolitical concerns, helping gold’s run, he said.
In addition, the dollar traded lower, offering support for gold and other dollar-priced commodities.
The euro gained as investors grew more optimistic Greece’s debtors would eventually cut a deal with the embattled euro-zone country, reducing Greece’s debt significantly.
The dollar index, which compares the U.S. unit to a basket of six currencies, traded at 79.678 from 80.148 in late North American trading Friday.
Investor interest in gold, which faltered late last year but has outperformed most assets in the new year, has grown.
Net long positions in gold, or bets prices will go higher, are at a four-week high, analysts at Commerzbank said in a note to clients Monday.
Earlier Monday, Europe imposed an oil embargo against Iran and froze assets of its central bank in an effort to get the Iranian authorities to scale back its nuclear program. The embargo includes a block in all gold trading and other precious metals as well as diamonds.
The embargo pushed oil higher, which provided an extra layer of support for gold and commodities in general. Oil traded 1.3% higher on Monday.
Meanwhile, volume for Asian metals trading was reportedly thin, as many Asian markets, including China’s, the world’s top consuming gold nation, were closed for the Lunar New Year holidays.
Without Asian markets “the floor for prices could be fragile this week,” analysts at Barclays Capital said in a note to clients. The “broader backdrop remains favorable for gold,” however, amid the improved market sentiment and “resilient” physical demand in China and India, they said.
The broader suite of metals tracked gold higher on Monday. March silver added 60 cents, or 1.9% to $32.27 an ounce. March copper ended 5 cents higher, or 1.4%, at $3.80 per pound.
Platinum and palladium also ended higher, with April platinum advancing $28.80, or 1.9%, to $1,561.10 an ounce. March palladium added $13.15, or 2%, to $688.85 an ounce.
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For Chinese shipping executive Ping Bo buying gold is the best way to protect his family's wealth and give his 10-year-old son a headstart into adulthood.
"For my son, the idea is that he will get a nice stash of gold that he can cash out when he turns 21 or when he gets married," said Ping, one of over 2 million people that have opened accounts in the past two years to accumulate gold at the Industrial and Commercial Bank of China (ICBC).
The ICBC launched the accounts in April 2010. The gold that it has bought to back them is only a fraction of total Chinese demand, but the explosive growth in the number of investors that have signed up is a symptom of the wider demand for the precious metal in the world's most populous country.
China, expected to overtake India as the world's top gold consumer in the next few years, accounted for 23 percent of the world's total consumer physical gold demand in the first three quarters of 2011, up from 19 percent in 2010, according to the World Gold Council (WGC).
Growing wealth in a traditional culture that favors gold, economic uncertainty and looser regulations on the domestic gold market together have combined to create rapid growth in China's gold demand.
The accounts are one of a range of methods that China's banks have come up with that allow small investors like Ping access to the gold market.
Investors buy as little as a gram a month through the accounts, a tiny quantity but one that adds up when the middle class of the world's most populous country is involved.
"It's a fantastic way for me to accumulate gold," said Shanghai-based Ping.
ICBC's accounts drew 2.33 million investors by the end of November, according to the bank, just 19 months after the launch, with 22 tons of gold held to back them.
Agricultural Bank of China said that for a similar product launched in September, more than 70,000 clients signed up to buy a minimum of one gram of gold per month.
"The product will retain its vitality as long as the demand for physical gold investment keeps growing," said the bank in a written reply to a Reuters enquiry.
The ability of China's banks to keep money flowing into bullion investments will play a major part in supporting gold prices this year, after spot bullion pulled back to around $1,660 an ounce from a record above $1,920 in September.
"The Chinese really love gold," said Shi Xudong, deputy head of the Administration Office of the Precious Metals Department at ICBC (1398.HK) (601398.SS).
"The fact that the government has started to clean up the gold market is favorable to our business, as investors who have been trading on illegal platforms will need to look for new investment platforms."
He referred to a recent statement from China's central bank on cracking down on informal gold exchanges outside the Shanghai Gold Exchange and Shanghai Futures Exchange.
ICBC, the biggest among the country's commercial banks in precious metals, also offers paper gold, a way for investors to buy and sell without taking physical delivery, and allows retail investors to trade on the Shanghai Gold Exchange through its platform.
In the first 11 months of 2011, the bank's clients traded 295 tons of gold on Shanghai gold forward contracts and 615 tons on paper gold. In 2011, the bank sold 50 tons of physical gold products and 70 tons of silver products, ICBC said.
CHINA GOLD DEMAND TO RETAIN HIGH GROWTH
In the first three quarters of 2011, China's jewellery demand shot up 34 percent on the year to 376.8 tons, while demand for coins and bars surged 89 percent to 204.1 tons, according to the WGC.
Albert Cheng, Managing Director of the WGC, Far East, estimated total jewellery consumption would grow to 500 tons and physical investment demand exceed 250 tons in 2011, which would bring total demand up at least 18 percent from a year earlier.
"In 2012, both investment and jewellery demand will retain growth, albeit at a lower pace," Cheng told Reuters in an interview.
He estimated that investment demand would grow 25-30 percent, and jewellery demand 6-10 percent, in 2012.
Volume on gold derivative trades could be 15 to 20 times physical investment demand, Cheng said.
As a sign of surging demand for bullion, China's gold imports from Hong Kong in the first 11 months of 2011 more than tripled on the year.
China has one of the world's highest saving rates, and the public faces few investment options. A volatile stock market and a property market under government crackdown are driving investors to seek alternative investment choices.
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The global economy is in turmoil. Europe is on the verge of collapse, probably taking the US down with it. As the euro-crisis worsens, we march ever closer to outright monetization of European debt by the ECB and, covertly, by the Federal Reserve. The developed world is perilously close to a monetary deluge that could make the Weimar Republic's hyperinflation look like amateur hour.
Yet, I still talk to Wall Street analysts who clearly misunderstand gold's place in a portfolio. Meanwhile, many people who are part of the world's wealthy class are hoarding gold. What do they know that others don't?
If you ask the common man in the street about investing in gold, most will give you a strange look. After all, they believe investing is about stocks, bonds, and CDs.
If you ask someone with a bit more investing knowledge, they will tell you to buy gold during inflationary periods.
If you ask a relatively sophisticated investor, they will tell you to buy gold during deflationary and inflationary periods. Some may even say to buy gold during periods of uncertainty and instability, or when real interest rates are negative.
However, if you ask the world's wealthy class about gold they will give you a very different answer. At Plan B Economics, we've found that most of the world's wealthy class doesn't view gold as an investment at all! I would argue these folks have it right. Simply put, they consider gold to be a store of wealth and believe that anytime is a good time to own some gold.
With wealth storage (a.k.a. wealth preservation) as their goal, the rich are less fixated on daily fluctuations in gold prices. They aren't trying to earn short-term profits from gold ownership - they are trying to maintain their overall purchasing power. Since the wealthy have large asset bases, losses in purchasing power add up to big dollar figures, but the wealth preservation characteristics of gold are just as beneficial to the middle class.
Gold can protect real wealth because it tends to move in a different direction than other types of assets (i.e. gold is negatively correlated with other assets), making it an effective portfolio diversifier. When gold prices are falling, other forms of wealth are often rising in real terms. When gold is rising, other assets are usually falling in real terms. Gold has an offsetting effect when it is part of an overall asset base - but there are more important reasons the wealthy own gold.
As the world sinks into greater financial and political uncertainty, the wealthy want to protect their families from the unthinkable. Physical gold can store substantial wealth in a compact, universally-accepted form that can be hidden from the prying eyes of governments. So if/when collapse truly occurs, as it has consistently throughout history, the wealthy can escape with a big portion of their assets.
At this point, some of you reading this may be rolling your eyes, thinking such asset positioning is reserved for conspiracy theorists and survivalists, but history and current anecdotal evidence suggest this is how many wealthy people think. In fact, since I began writing on economics, I have encountered many wealthy people who have caches of food, precious metals, and weapons (but rarely admit it). They are acutely aware that if society broke down, they'd be the first scapegoats of the masses and any government rising to fill the power vacuum.
Ask the wealthy and middle class people who escaped Hitler's Germany (or many other similar authoritarian regimes throughout history) about gold. These people left behind houses, businesses, and paper assets to escape their home country. They even left behind savings and securities accounts, the withdrawal of which would have alerted authorities. (Moreover, German currency and securities were worthless in the eyes of non-German financial institutions.) They did, however, take as much gold as was physically possible. To these people, gold wasn't an investment, but a way to smuggle a lifestyle across borders in a suitcase.
I believe gold can provide the same utility to the wealthy and middle-class alike. Everyone should have a portion of their wealth stored in a fungible, highly-concentrated, portable form. The goal here is to prepare, not to predict. After-all, you buy homeowner's insurance but never expect your house to burn down.
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Personal Liberty Digest
Have you ever seen “old people” hold and fondle their paper money? They count it, hide it under the mattress and bury it for safekeeping.
Remember my example of the power of inflation? I said that you could bury your paper money 40 miles deep in a sealed concrete vault, and it still could be inflated or devalued to nothing. There is no way to preserve your paper money. It is up to the money creators to not overprint.
Here’s how we are fooled: People equate fiat paper money like U.S. dollars with wealth. Only if paper money held its purchasing power could it be a store of value. Only then could you bury it and forget it.
For now, the safest currencies are those tied to commodities, such as the Canadian dollar (CAD) or the Norwegian kroner (NOK).
In addition to being commodity currencies, these countries are not reckless with their currencies and national resources. Most people do not understand currency gains (or losses). Right now, with the U.S. dollar and the U.S. economy in big trouble, there is not much risk to be in a foreign currency. We prefer the Canadian dollar, right after the Swiss franc.
The U.S. dollar does rally from time to time, but the long-term trend is down. We must understand this in order to protect our savings and investments.
The only thing that the U.S. government and the Federal Reserve can do under any pretense is to debase the currency. They do this by printing money or massive devaluation. It is not a solution, only a delay.
It’s a cruel hoax! Debasing the currency cannot and will not bring prosperity. It will bring ruin. It always has. It can come only to final default.
Printing money plus big devaluation means default — maybe not suddenly, but default is guaranteed. Understand this today, all people who hold U.S. dollars.
Alan Greenspan is the man who printed more paper money than anyone in history. In a candid moment he said: “Inflation is taxation. Inflation is the hidden confiscation of wealth.”
It is the direct result of government, through the central banking system, expanding (printing money) the money supply. They create new money so they can spend it into circulation to pay for their ever-increasing spending programs. Deficit spending is simply a scheme for the hidden confiscation of wealth.
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The Federal Reserve said some officials last month wanted to keep further asset purchases as an option to boost the economy as policy makers saw “considerable uncertainty” that U.S. growth will pick up.
Most participants favored giving additional information on the central bank’s goals and how they influence the Fed’s decisions, and most “saw advantages” in tying the Fed’s near- zero interest rates to more specific developments in the economy, the Fed said in minutes of the Sept. 20-21 session, released today in Washington. Such changes may be expressed in ways other than the post-meeting statement, the Fed said.
The debate culminated in the Federal Open Market Committee’s decision to replace $400 billion of Treasuries in the central bank’s portfolio with longer-term debt to reduce borrowing costs. Three officials dissented. Chairman Ben S. Bernanke said last week the so-called Operation Twist program is a “significant step but not a game changer” for reviving growth and reducing unemployment stuck near 9 percent.
“A number of participants saw large-scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted,” the minutes said.
Policy makers also decided on Sept. 21 to reinvest maturing housing debt into mortgage-backed securities in part to keep the Fed’s Treasury holdings from getting too large and possibly causing a “deterioration in Treasury market functioning,” the minutes said.
Benchmark Interest Rate
The FOMC left its benchmark rate in a range of zero to 0.25 percent, where it’s been since December 2008, and reiterated its language from its August meeting that the rate is likely to stay very low through at least mid-2013.
The Standard & Poor’s 500 Index of stocks pared gains, rising 1 percent to 1,207.25 at 4:41 p.m. in New York. Yields on 10-year Treasuries climbed 6 basis points, or 0.06 percentage point, to 2.21 percent.
Fed officials also considered a weaker version of Operation Twist that would reinvest principal payments on housing debt exclusively in long-term Treasury securities, the minutes said. Policy makers discussed lowering the 0.25 percent interest rate paid on banks’ reserve deposits with the Fed; many officials expressed concern that such a move “risked costly disruptions to money markets and to the intermediation of credit.”
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The Obama administration's $78 billion cut to US defense spending is a mere "pin-prick" to a behemoth military-industrial complex that must drastically shrink for the good of the republic, a former Reagan administration budget director recently told Raw Story.
"It amounts to a failed opportunity to recognize that we are now at a historical inflection point at which the time has arrived for a classic post-war demobilization of the entire military establishment," David Stockman said in an exclusive interview.
"The Cold War is long over," he continued. "The wars of occupation are almost over and were complete failures -- Afghanistan and Iraq. The American empire is done. There are no real seriously armed enemies left in the world that can possibly justify an $800 billion national defense and security establishment, including Homeland Security."
Short of that, he suggested, the United States has "reached the point of no return" with its artificial creation of wealth, and will eventually face a sharp economic decline.
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