In a scenario that will send chills up and down Wall Street and Main Street, not to mention
the sleek crowd dining out this fine day at Carpaccio, O'Higgins declares "it's not
inconceivable" that the Dow and the price of gold could meet around the 6,000 mark, stocks
falling from around 9700 and gold appreciating from around US$300 an ounce.
The two measures were last even around 850 in 1980, he notes. Since then, the Dow hit a
high of 11908 intraday and gold fell as low as US$250, for a stocks-versus-gold
outperformance of 50 times. If gold now has the same performance it did from 1968 to 1980
-- rising 24 times to US$850 from US$35 -- it would bring it to roughly US$6,000.
Under this "inconceivable" scenario, an ounce of gold prevention would indeed be worth a
pound of cure. O'Higgins' ounces of prevention are in five gold stocks: AngloGold Ltd.,
Gold Fields Ltd., Newmont Mining Corp., Goldcorp Inc. and Placer Dome Inc., which he
calls "my dog" among the group.
"Gold was so discredited it was looked upon as a joke -- out of the question. You could buy
the whole industry for US$50-billion. How many things can you buy today at a 65%
discount to what they sold at 22 years ago? We're talking something real."
Which brings us back to the reality check that O'Higgins believes the consumer is only now
beginning to face. The fall in the stock market, where most baby boomers parked the bulk of
their pension investments, will ultimately have an effect on consumption, which in turn will
slow the economy.
"These people can't retire," he says. "They'll have to save more. How much money are they
going to have to save to make up for what they lost in the stock market? Now they can only
count on fixed-income returns of 2% to 5%. You've got to save a lot more money to reach
your retirement goal. I don't know when it's going to start. But reality is going to set in. The
numbers are the numbers.
"If the consumer gets back to reality, he's going to have to cut back. That's the only thing
that's been holding up the economy."
So, O'Higgins concludes that a 40% drop in the stock market would represent fair value
while demand for gold is skyrocketing -- "especially investment demand."
"Anybody can make money in a bull market," he says, looking around Carpaccio. "Very few
people can do it in a bear market."
Of course, that's where Mike O'Higgins believes he comes in. He and the clients who have
entrusted him with more than US$100-million to manage are 20% in gold stocks, 20% short
the stock market and sitting on a 60% pile of cash. Despite returning "only" 5.5% in 2001,
the 71% return in 2000 insured a strong start in this bear market. (More information can be
had by visiting www.ohiggins.com.)
Meanwhile, he is working on his next book, about emerging markets, which he says is "well
along."
Lunch is well along at Café Carpaccio, too, though the crowd has barely thinned out by 3
p.m. We get the cheque -- reasonable despite the 60% northern peso discount -- and make a
mental note to be back next year around the same time to apply a reality check on
O'Higgins' big call to see if it is as good as gold.
finance.canada.com |
