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Thursday, January 07, 2010

Marc Faber: Gold at $1150 today is cheaper than when it was $300

”Gold remains the best bet as a currency these days because of the fact that the yellow metal supply is extremely limited. Gold at the current price of $1,110 per ounce is less expensive than it was sold for less than $300 per ounce years back,” Faber said batting for the bullish run that the yellow metal is in during 2010.

Faber explained that gold price should be treated in the same way that a company’s stock is being treated by investors. “A company’s stock could be less expensive at $100 than when it was selling for $10, because earnings growth has outpaced the appreciation of the shares and therefore its P/E has declined, gold could be cheaper at the current price than when it was at less than $300 because of the explosion of foreign exchange reserves in the world, zero interest rates, the huge debt overhang, and the expectation of further money printing,” he said.

According to Faber, global reserves of gold have grown from about $1 trillion in 1995 to over $7 trillion.

”Therefore, the share of gold in the world’s official reserves has declined from 32.7 per cent in 1989 to a current record low of 10.3 per cent,” he pointed out.

Faber said that he is still puzzled by the deflationists, who cannot understand that the explosion in foreign exchange reserves over the last 15 years is a symptom of a massive monetary inflation. “Ergo, I could argue that gold is now actually less expensive than when it sold for around $300 per ounce,” he said.

Faber said that central banks in emerging economies keep only a tiny fraction of their reserves in gold. “Eventually, I would expect them to follow the example of the Reserve Bank of India (RBI), which recently bought 200 tonnes from the IMF for $6.7 billion,” Faber pointed out.

”Now, just consider what the impact would be if China were to increase its gold holdings from presently less than 2 per cent of its $2.2 trillion reserves to 6 per cent or 10 per cent. Each 1 per cent increase in gold weighting would mean gold purchases of more than $20 billion, or nearly 600 tonnes,” he said.

Faber said that gold’s value may go from $1,100 per fine ounce to $1,500 or $5,000.

But he added that he “would not invest more than a sliver” of his wealth “into something without intrinsic value, something whose positive value is based on nothing more than a set of self-confirming beliefs”.

Faber said that he is not a perennial gold bug. “But, when governments spend far more than they collect in taxes (large fiscal deficits), and when central bankers engage in reckless monetary policies and, instead of treating the causes of the problems (excessive debt growth), treat the symptoms (deflationary forces), gold as a currency does make a lot of sense,” he added.
--from "Gold is cheap to buy at $1,100/oz: Marc Faber" (January 3, 2010) by Commodity Online

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