Gold Market Up – Equity Market Up – What gives?

Gold prices held their ground late into trading Tuesday, even in the face of a surge in US equities. Buoyed by a US Federal Reserve pledge to maintain a low interest rate policy until mid 2013, the Dow rose 612 points (5.7%) in the final 90 minutes of trading. Gold held its ground and today is showing signs of strength, trading at $1,756.30/oz up $13.30/oz. Gold in EUR and GBP is trading at 1,224.16/oz and 1,082.26/oz.

A positively correlated move in gold and equities given the unprecedented volatility seen over the past number of trading sessions is indicative of a market that is still on tenter hooks. Large questions of a systemic nature are still weighing down on sentiment and until an increase in confidence levels manifests, the market may continue to show signs of fragility and frenetic trading.

Marc Faber, a respected market commentator and author of the Gloom, Boom & Doom Report, gave an interesting interview on Bloomberg TV yesterday. His perspective is interesting and thought-provoking, giving an interesting perspective on the tectonic market events witnessed over the past two weeks. He echoes our view that the persistent presence of government intervention as a remedy to the problems in the markets has, and will continue to be, the biggest contributing factor to the risk going forward. Transcription provided by Wall Street Pit. 

Marc Faber: The Long-Term Treasury Market is a Bubble, Buy Gold
Excerpts from the interview can be found below, courtesy of Bloomberg Television.

Faber on whether he thinks the Fed did the right thing by keeping rates low:  
“I think they did the right thing that they didn’t allow QE3. They can watch the reaction of assets, whether they will go lower.  I think the market is more likely to move still lower. We are very oversold. We can have a rebound like we did today, maybe we’ll have a rebound next week or so, but in general I think we will test the July lows of last year, the S&P at 1,010.  After that, probably we’ll get probably a QE3 announcement.”

On why he thinks the Fed is waiting on QE3: 
“I think the Fed is underestimating the severity of the coming economic downturn.  Essentially they spent their bullets. It is very difficult to follow through with QE3 right here, because you have gold prices going ballistic, and you have the dollar being very weak, and so there are unintended consequences with implementing QE3 right here.”

On what Faber thinks the Fed should do: 
“The best [the Fed] could do for markets would be to collectively resign…I think sometimes the best is to do nothing. I welcome the decision, at least today, that they aren’t doing anything worse than what they have already done.”

On whether it makes sense to provide any kind of stimulus:
“What has QE1 and QE2 done for the labor markets? Nothing at all. It’s done nothing for the housing markets.  It’s lifted stocks and it created wider wealth inequality in a sense that people who own assets have done very well, and people that are the lower-income recipients groups, they are hurt by rising energy prices and food prices.”

On what should be done for the U.S. economy: 
“From 1981 to 2007, we have an economy that was living beyond its means. As a result of continued debt accumulation, GDP was higher than would otherwise have been the case. Now we have a period of sub-par growth that can last for quite some time now, and like in the case of Japan after 1989, people instead of being encouraged to spend, they should be encouraged to save more, and the U.S. should save more and spend less.  And then capital spending will essentially pick up.”

On the manic behavior in markets: 
“I personally think the Treasury market, the long-dated, are a bubble and it will be one of the worst investments for the longer term if you buy a 10-year, a 30-year U.S. Treasury so I’m a bit puzzled that Treasuries are now yielding, are essentially near record lows. I would rather sell Treasuries.”

“The stock market peaked out on the 2nd of May on the S&P at 1370. So we’re now around 1010. For many stocks we’re down 20% or so. We’re very oversold. I think a rebound is coming but you can forget about a new high. That is out of the question. Because the technical picture is horrible, horrible. ”

On why investors are continuing to move to Treasuries: 
“I’ve been in this business for 40 years and on many occasions, nothing made sense to me….I think the Treasury market is another example of a gigantic bubble. The problem with the Federal Reserve policy of essentially zero interest rates is that they are essentially throwing money at the system, but they don’t control where the money will flow to.  It can flow at some point into commodity-related stocks.  It can flow into gold, oil, treasuries, but it doesn’t  flow evenly into these assets.  In my opinion, the Treasury, the long-dated Treasuries are essentially the short of the century thing here.”

On whether gold is a bubble:
“I don’t think it is a bubble, but I think the gold market has exploded to the upside recently and the correction is overdue. But as I have always maintained for the last 12 years, every responsible adult should gradually accumulate gold, because not owning any gold is the trouble with government. I don’t understand. People of Bloomberg, I hardly know anyone who owns any gold physically. All of the Bloomberg employees are intelligent people. They listen to the news every day. They make the news every day. Hardly anyone owns any gold.”

On what you can do with gold: 
“I disagree [that you can’t do anything with gold.] You give your girlfriend copper rings and I give them gold rings and I keep them longer.”

On how Faber would play the markets right now: 
“I think right now the technical picture is so horrible that I would use a rebound as a lightning up opportunity. I think [equities] will move lower. I mean, some say you should move back into emerging economies because the fundamentals of emerging economies are far better than the fundamentals of European countries and the fundamentals of the United States.  This is something I will consider.”

“The only thing I have to say, basically the market has sold off in such a rapid way and with so much momentum that I am smelling as if something really wrong happens in the next two or three months, because the market is a discounting mechanism.  Like March 2009 the market started to go up and people were baffled why it started to go up. Now it starts to go down, and maybe after three months people will wake up and scratch their heads and say now, we know why it started to go down, because maybe there is geopolitical problems, maybe the Middle East blows up, maybe the economy is horrible."

Mark O'Byrne

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