Dr. Doom is Calling for an Economic Crash - How Will Precious Metals be Affected?

Apocalyptic predictions are usually the stuff of TV shows like “The Walking Dead,” but last week Marc Faber, a noted contrarian investor and publisher of the Gloom, Boom & Doom Report, made one of his own. 

Faber, often not-so-affectionately called “Doctor Doom,” said Thursday on CNBC’s Futures Now program that the stock market is headed for a crash worse than the one seen in 1987. “I think it’s very likely that we’re seeing, in the next 12 months, an ’87-type of crash,” he commented. “And I suspect it will be even worse.”

CNBC notes that Faber called for growth stocks to decline earlier this year; however, during last week’s talk he specified that “the pain is just getting started” in the internet and biotechnology sectors. Explaining, he said, “there are some groups of stocks that are highly vulnerable because they’re in cuckoo land in terms of valuations. They have no earnings. They’re valued at price-to-sales. And this is not a good metric in the long run.”

He also called out the US Federal Reserve, which he believes the market is slowly coming to view as a “clueless organization.” Commenting further, he noted, “[t]hey have no idea what they’re doing. And so the confidence level of investors is diminishing, in my view.”

Allies and detractors

As The Sydney Morning Herald points out, Faber isn’t the only one who thinks a major crash is coming. Another is high-profile investor Jeremy Grantham; he said in March that the Fed is failing to stimulate the US economy, meaning that “the next bust will be unlike any other.” That’s because “the Fed and other central banks around the world have taken on all this leverage that was out there and put it on their balance sheets”

Adding further clout to Faber’s statements is the fact that the night after the CNBC video went up, the NASDAQ dropped 3.1 percent, its largest single-day drop since 2011, according to The Sydney Morning Herald. That drop, states the news outlet, was caused by a sell off in biotechnology and “momentum names,” and has increased fears that a wider sell off — like the one predicted by Faber — will occur.

Of course, two men’s prediction does not a reality make. CNBC notes that “legendary stockpicker” Bill Miller thinks that “conditions for a bad market simply don’t exist.” Similarly, The Sydney Morning Herald quotes Ivor Ries, a senior analyst at Morgans, as saying, “[t]he problem with the meltdown theory is world economic growth is picking up. The US is improving, Europe is improving, south-east Asia is improving. It’s not a scenario where earnings are under any pressure. Earnings are going up, not down.”

What about precious metals?

If an economic crash does come, one important point to consider is what will happen to precious metals. Faber didn’t mention the resource sector in last week’s prediction, but he has spoken in the recent past about how gold and silver are likely to be affected by a stock market crash.

For instance, in a March episode of Casey Research’s Sound Money, Faber said that once economic collapse occurs, “we’ll probably go back to some kind of a gold and silver standard.” Further, “the power of central banks will be curtailed greatly because people will realize who brought along first the NASDAQ bubble in 1999: the Federal Reserve. Who brought about the housing bubble between 2001 and 2007? The Federal Reserve. And who is bringing now along another great credit bubble and asset bubble? The Federal Reserve.” That, he said, is why we need to “tie money to some kind of an anchor, such as gold and silver.”

However, he cautioned that investors interested in buying gold and silver to protect themselves against a crash should be aware that everything, including commodities, is currently at a high level of valuation, though “gold and silver [are] relatively inexpensive because they have had big corrections already.” More importantly, potential buyers should consider how to protect themselves from government efforts to take precious metals. “I wouldn’t keep gold and silver in the US, I would put it somewhere else,” he concluded.

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

Related reading: 

Marc Faber: The World Is a Mess, But Junior Mining Stocks Could Double