Marc Faber lectures Abu Dhabi on asset allocation and tips gold

If Marc Faber had to choose one asset class for the next 10 years it woud be gold. Cash and US treasuries would be be his least preferred decennial investment. US equities would be a reasonable choice for wealth protection, though not necessarily grow much when adjusted for inflation.

This was the broad message that the author of The Gloom, Boom and Doom Report delivered to a CPA Institute meeting last night in Abu Dhabi, home of the world’s biggest sovereign wealth fund the Abu Dhabi Investment Authority.

No deflationary bust

He began by explaining why extreme deflation scenarios are extremely unlikely under the Bernanke Fed, comparing the Fed chairman’s commitment to an anti-deflation strategy to Hitler’s Mein Kampf, a book that also clearly stated a policy program in advance but was not widely believed until it was too late.

Likewise Dr Faber believes Mr. Bernanke is committed to printing money and will in any case have very little choice because of entitlements and the US constitution. Thus he could see the S&P 500 dropping back from current levels to say 950 in this autumn but by then Fed monetary policy would be strongly inflationary and bring the market back up.

Dr Faber pointed out that with the US so deep in debt the Fed thinks it cannot allow asset prices to drop below a certain point because that would devastate the balance sheets of the banks with debt deflation. But Dr Faber holds that in the long run this is just rolling up another crisis for the future that will destroy the US dollar and cause an even bigger financial crisis.

Declaring himself the ‘most pessimistic of forecasters, nobody is more pessimistic than me’ Dr Faber outlined a scenario in which the dollar has to be replaced by another unit after a future inflation, and holders of cash and bonds lose virtually everything in the process.

Mexican parallel

He drew an interesting parallel with the fate of the Mexican Peso in the 1980s and how the value of that currency was destroyed, while equities priced in Pesos at least held their value in real terms because they represented real assets. Bond and cash holders in Mexico lost almost everything.

Therefore he advises long-term investors – and he is still talking well within his own lifetime and he is 63 years old – to buy gold and equities, and particularly gold and resource stocks, although the timing to do so may not be exactly right now, and to do so on a globally diversified basis.

Despite being in Abu Dhabi his presentation did not mention the UAE and nobody from the audience asked a single question about the outlook here. Some readers might take that as a contrarian indicator of a market bottom in the UAE, as nobody is even asking questions any more.

But Dr Faber did say that emerging and frontier markets like the UAE have much better growth prospects over the next 20 years than the developed markets, not that he thought developed markets would cease to grow entirely.

China crisis coming

Indeed, his lecture noted that China now exports more to emerging markets than developed markets, and that this decoupling trend will continue. He also highlighted the growing dependence of China on oil imported from the Middle East, which is supportive of higher oil prices.

That said he saw trouble ahead for China in the immediate future with a ‘possible crash’ on the horizon after recent over expansion and excessive lending to maintain growth during the financial crisis. This would clearly be bad news for resource economies dependent on China.

Abu Dhabi is probably the world’s biggest long-term investor, with its sovereign wealth funds worth anything up to $1 trillion on some estimates, and a highly dieversified investor in global equities and also a big holder of US treasuries. Yet strangely the UAE Central Bank has no gold reserves. Perhaps that will change. Dr Faber would certainly advise the holding of more gold.