Felix Zulauf on gold
The following exchange is from today's Barrons. Zulauf is a Swiss manager and was the best performer in last year's Roundtable.
"But if you want to be a long-term investor, that's probably one of the best areas in which to put your money. But the one really
long-term theme I'm recommending is gold. Historically, it's been a hedge against inflation and fiat currencies.
Q: Mostly, it's been a hedge against capital gains.
Zulauf: That's been true in the past 20 years, but it's changing. The price of gold moves in steps. From 1971 to 1980, the price went
from $35 an ounce to $850. From '80 until the past few years, it fell from $850 to $250. Having put in a bottom around $250 an
ounce, it's now trading $100 higher. We all know the history. Now the central banks in the U.S., Japan and, later, in Europe are
trying to solve our economic problems by throwing money at the system. The end result will be more and more new money, without
a counterbalance in the real economy. They created money out of thin air, which means the value of paper currencies goes down.
That's the history of fiat currencies.
The whole process has been accelerated by the problems in the U.S. Personal consumption has been going up over the past 20
years. Instead of solving the problems of underinvestment and rebalancing the economy, which would be painful for a while, the
central bank just throws money at the system and entices consumers to take on more debt. At best, the U.S. is in for a long period
of stagflation, very low growth or worse. At some point, the world will begin to understand that the U.S. economy is fundamentally
much weaker than generally believed.
Q: Then what?
Zulauf: The U.S. is the largest debtor nation. About $3 trillion are held by foreigners, if calculated at the purchase price, and
foreigners are still buying U.S. assets. Last year they bought about $45 billion of U.S. equities, but that will change at some point.
When people realize there are fundamental problems in the U.S. economy, the dollar will begin to decline in a major way. The
process actually started in 2001. Other central banks will at some point then try to support the dollar, because if it declines too
much, it hurts their exports. They will be forced to adopt the same policy as the U.S. central bank, and you will have the whole world
creating more fiat currencies. That's when gold will really run.
I use a timing model -- gold versus stocks, or the Dow Jones Industrial Average divided by the price of one ounce of gold. In 1929
you bought gold and sold stocks. The ratio was at 15 to 1. In 1942 you sold gold and bought stocks. The ratio was 3 to 1. In 1966
you bought gold again and sold stocks. The ratio was 28 to 1. In 1982 you sold gold and bought stocks because the ratio was 1 to
1. In 2000 you bought gold and sold stocks, because the ratio was 45 to 1. It's now 25 to 1. I don't know exactly how low it will go,
but I'd guess somewhere between 1 to 1 and 1 to 3. We'll see in 10-12 years. That's why gold is my long-term call.
Q: Are you talking about buying gold itself, or futures?
Zulauf: You buy real gold. In real terms, after accounting for inflation, it's about at the level where it sold in the 1930s. In actuality, it's
where it was in the early 1970s. It's dirt-cheap.
Q: But you've got to store it. You've got to pay interest for the storage. You don't get any cash flow from it.
Zulauf: If owning gold is not attractive, you buy gold stocks. But that's a different ballgame because you have corporate risks,
managements that could mess things up, companies with liabilities. There is not much gold around. All the gold mined in the
world equals 143,000 tons. That's a cube of 20 meters. At current prices, that gold is worth $1.5 trillion. Compare this to the U.S.
debt of $31 trillion, and it's tiny. It's peanuts.
Gabelli: The last time gold was at $400 an ounce, the XAU [the Philadelphia Stock Exchange Gold and Silver index] was about 180.
Gold today is $355 an ounce, and the XAU is at 80. The contracts haven't moved.
Zulauf: Well, the XAU is composed of different sorts of gold companies, and the heavyweights are those that hedge. They don't
benefit from the rise in gold prices. Placer Dome and Barrick Gold hedge. They do not move up with the price of gold. Among the
large-cap stocks, Newmont Mining has started taking its hedges off. It wants to go fully unhedged.
Gabelli: The index has changed since 1994 because of mergers.
Black: Isn't there one fallacy in your reasoning, Felix? Let's assume M2 or M3 [measures of money supply] grew by 7% or 8%, which
is what happened in the past year. What happens when you're getting productivity gains of 4% and 5%? Ultimately, you're not going
to have inflation.
Zulauf: The policy of the U.S. central bank is going to destroy the dollar. Confidence in the U.S. currency at some point will collapse,
and you'll have a run on dollars. Money can't go to other currencies, because they have to support the dollar. Gold will act as a
monetary currency -- a currency without the liabilities of ill-guided central bankers. Another way of looking at it is to say the U.S. has
underinvested in capital investment to supply the goods that U.S. consumers are demanding. You have spent your money by
buying on credit instead of investing. The Chinese are investing. They are building an empire.
Samberg: With our money.
Q: Felix, do you like any gold stocks?
Zulauf: I am not a stockpicker in this field. I would just go with names that don't hedge -- for instance, GoldFields, Meridian or
Newmont. Buy them and hold them. They will all be 10-baggers over the next 10 years." |
