Gold And Other Hard Assets The Winners, But Short Term Fall...

Gold And Other Hard Assets The Winners, But Short Term Fall Likely
Article Dated: 11th March, 2003




Extracts from The Gloom, Boom & Doom Report dated Feb 28

In the latest "The Gloom, Boom & Doom Report" dated Feb 28, Dr Marc Faber's guest essay writer is Michael B O'Higgins of O'Higgins Asset Management Inc who has written numerous books, including "Beating the Dow" published 1990 and "Beating the Dow with Bonds" published 1999.

Mr O'Higgins said he wrote articles in March 1999 for The Gloom, Boom & Doom Report warning readers about the gross over valuation of US stocks and urging them instead to buy long term US Treasury 0% coupon bonds. Since then, investors in the US equity markets have suffered losses of close to 50% while the holders of long zeros have seen their bonds appreciate over 35% on average.

Mr O'Higgins said that while the vast majority of market strategists, money managers and investors appear quite confident that after three years in a row of stock market losses, the first time for over 60 years, the bear market is over, he says, "Unfortunately, quite the opposite is true. Because the major stock averages remain grossly overvalued and investor sentiment continues at levels of optimism normally coincident with market tops, it is likely that we will need to see much lower equity prices before the preconditions for a new bull market in stocks - that is low levels of valuation and high levels of pessimism - can be said to be in place".

He adds "bond market sentiment has reached extreme levels of optimism, which historically has occurred at bond market tops".

Mr O'Higgins said if he is correct in assuming both stocks and bonds are unattractive, where does one look for satisfactory returns? "In one word, gold! Why gold? Because it is undervalued, under-owned and in a strong uptrend after 20 years in the investment doghouse. Not only that, but gold has historically served as a great hedge against the kind of falling stock market and weak economy that we are likely to experience going forward".

Mr O'Higgins draws parallels with 1980, when gold and the DJIA were both at almost the same level - roughly $US850.

Following the gold price rise of over 40% of late the ratio has dropped to around 22 times. Mr O'Higgins comments, "In other words, the price of gold could more than double and it would still be reasonably valued relative to stocks".

Mr O'Higgins said other catalysts include the equity market being somewhere in the middle of a major secular bear market. Secondly, beginning in November, the US government policy has changed from fighting inflation to preventing deflation.

Dr Marc Faber qualified Mr O'Higgins views and added other comments.
On the Gold and Oil Front

Dr Faber said he agreed with Mr O'Higgins view long term on gold, but he is somewhat concerned about the non confirmation because gold shares have failed to perform. He pointed to the 1970's, when gold's price corrected almost 50% between 1974 and 1976 before soaring again until January 1980.

Similarly, bonds rose sharply between 1981 and 1983 but almost re-tested their 1981 lows in 1984.

He added, "Gold has risen by more than 40% since its low in April 2001 of around $255 and even a decline to around $280 would not alter its long term significant upside potential. I should like to stress that such a decline is not a forecast, but merely a possibility which investors should consider because under such a scenario gold shares would also decline by at least another 30/40%.

The same scenario could exist because of the non confirmation of oil shares.
Cheers
J