Contrarian investment advisor Marc Faber is at his incredulous best when the markets are in a bull frenzy. Gold prices surged recently to record levels. T. Surendar asks him if he sees a bubble round the corner
Recently, you said that gold, as an asset class, will surpass the Dow Jones Industrial Average. What factors can influence such a performance?
The worse the economy becomes, the more money will be printed. Therefore, inflation will at some point follow. Moreover, should the economy recover sometime in future — in my opinion, not for a long time — it is unlikely that the Fed will increase interest rates above nominal GDP growth. Consumer price inflation will therefore follow. Consequently, I expect a further loss in the purchasing power of paper money and a continuation of the outperformance of gold compared to the Dow Jones as has been the case since 1999. However, if money printing and fiscal deficits fail to lift asset markets and stimulate the economy, it is likely that the Dow could decline to 4,000 points. This would entail a strongly deflationary environment in which many financial institutions and companies would fail. In this condition, I would expect investors to push up the price of gold in a flight to safety.
(This story appears in the 05 June, 2009 issue of Forbes India. To visit our Archives, click here.)