With the astonishing recent price rise in gold, many investors are asking themselves: Is now the time to move capital into mining stocks?
Frank Barbera, respected precious metal mining stock expert and editor of the Gold Stock Technician newsletter, has a viewpoint that will likely surprise many. While extremely bullish in the longer term, Frank sees too many risks in the near term and advises smart money to wait.
"I’ve been watching the mining stocks since 1983, so a fair amount of time that I spent watching the group. I have a wide variety of unique technical indicators on the sector, and as I started to see the stock market topping out over the last two to three weeks, I wrote my readers a note to say the mining stocks are also very overbought. Mid-July we saw one of the second most overbought readings on the XAU in five years. And that kind of reading is a big warning, and so I’m not surprised to see them going down. The last letter I put out, I told subscribers that I thought the mining stocks could get cut in half in here, and I’m going to stick with that. I think we’re looking at a 30 to 50 percent decline over the next six months. The XAU, which recently peaked out at around 220, I think you could see that close to 110 before this decline is complete.
So, now, why is that? Really, the truth seems to be that a lot of these assets have been very, very highly correlated and that mining stocks are a "risk on" asset. Now, there are a lot of very competent analysts out there that have been strongly recommending them, pointing to the idea that the stocks are, quote, "cheap." When you look at Barrick Gold or Newmont Mining, you see 13, 12 times earnings, multiples relative to cash flow that are near multi-decade lows. I don’t disagree with any of that. I think that the mining stocks are a great value on the fundamentals.
On the other hand, the equity market looks like it could be heading for a very substantial decline, and I think that mining stocks – they have not shown the ability, at least not yet, to decouple from the equity market. Now, clearly nothing is cast in stone, and I sort of evaluate this day to day, but, you know, if you look at the past data, it really suggests that they’re going to get hit if the market goes down.
And at some point, I think what you’ll see is I’m looking for a bear market in equities over a period of a couple of months. I think during that period of time, you will see gold go through the roof, the physical metal. I also think you’ll see some nice upward progress in silver. I’m in the camp where I think silver is going to act like a monetary metal. Sure, they may pull back here in the short term, but I think there’s a real opportunity there for silver to turn the corner, especially if we get another Jackson Hole special come the end of August with Dr. Bernanke and more QE. I think silver will light up like a firecracker. But, the mining stocks, they need to simply fall to a bigger discount to the underlying metal. And, at some point, then, if we end up getting into a really strong dollar movement of the downside, I think that’s when you might — down the line, a bit — see the mining stocks turn.
Now I also want to make another point that’s very important. I think that ultimately this shakeout in the mining stocks, we don’t have to put numbers on it, but let’s call it a substantial decline. Once that decline is over, I think they will reach a low, probably into the first quarter of next year in 2012. And from that point, I think you’ll see a multi-year bold market in the mining stocks, where they play catch up to where they should be, and then to where metal prices will be. So I think that it’s going to be very volatile, and right now they’re decoupling, and that decoupling may stretch out dramatically, but then they’ll eventually catch up. So I still see an enormous opportunity there, but I think that mining stock investors may have to wait awhile to capitalize on that opportunity."
Also in this interview:
- How the technical charts for the dollar are signaling increasing risk of a dramatic downside breakdown in the second half of 2011
- The growing risk of the European crisis to further roil the currency markets
- Multi-currency strategies for the individual investor
Click the play button below to listen to Chris' interview with Frank Barbera (runtime 40m:45s):[swf file="http://media.PeakProsperity.com/audio/frank-barbera-2011-08-08.mp3"]
Or start reading the transcript below:
Chris Martenson: Welcome to another PeakProsperity.com podcast. I am, of course, Chris Martenson, and today we are talking with Frank Barbera, one of the top experts on precious metal mining companies and editor of the very well-respected Gold Stock Technician newsletter. In his analysis for investors, Frank overlays a macro outlook on top of a highly rigorous technical analysis and employs a market-timing approach to reduce the inherent volatility within this very high beta sector. So for many years now, Frank has also managed private equity capital, most notably for the Caruso Fund, with particular focus on precious metals, energy, currencies, all things of, I know, intense interest to our listeners here.
Frank, we’re delighted to have you here. With all the recent action in gold, we have a lot to talk about.
Frank Barbera: You bet, Chris. Thank you for having me.
Chris Martenson: Oh, my pleasure. Now, you know, gold’s up 180 dollars an ounce since early July. What do you see as some of the key drivers behind this? You know, how much momentum does this run up have, in your estimation?
Frank Barbera: Well, strangely enough, you know, I know there are a lot of people out there who are saying that gold could be a bubble and that maybe it’s going to come down sharply. Right now, I would strongly disagree with that. I think when you take a survey of what’s going on in the world and you look at Europe, Europe is in the midst of a major banking crisis, a banking crisis that could have widespread contagion from not only Europe but back to the United States through the credit default markets. And the U.S. also has, as we’ve seen now, major debt problems and a very difficult situation in terms of an economy that seems to be relapsing back into recession. And that, once again, is putting massive pressure on the Federal Reserve to try and do something to ameliorate what looks like is shaping up to be another hard landing. You look at all of these factors, and what it adds up to is gigantic uncertainty. And it is that uncertainty which is under-painting the move higher in precious metals. Another important point which your listeners should really take into consideration is the fact that this is a climate where, because global growth is slowing, short-term interest rates, especially here in the United States, are really locked at zero.
Now, depending on what metric of consumer prices you want to look at – let’s say we take this fairly horrible CPI that’s constructed at 2% inflation. Right now you have negative real rates in the United States. And if you go back over a historic period of time and you look at negative real rates and the price returns on gold, gold does very, very well — as long as short term rates are in negative territory. Now, when short term rates are normalized and they move above the rate of inflation, that at that point can become a problem for gold.
I don’t see any way that that’s going to happen for the longest period of time, especially when you start to look at some of the recent economic data that’s coming out of the States. We see very weak employment. We see GDP backward revisions as far as 2003; they went back just recently to downwardly revise the GDP data, the recent quarter coming in at about 0.38 with final demand at around 0.08. So you have a comatose growth situation here in the United States. No growth, chronically high structural employment — that is a situation where it’s impossible to see how short-term interest rates are going to start to move up. So I think negative real rates are here to stay, and gold will continue to surge.
Right now, Chris, the other thing that’s really amazing about all this is like you said, we’ve had this strong move up in precious metals prices, in gold prices. But remarkably, from a technical point of view, we really have not seen any kind of bullish enthusiasm. It’s slowly starting to creep into the market over the last day or two, but I look at dollar-weighted call-to-put options data each day, and that tells me a lot about how much money is flowing into calls and how much money is flowing into puts.
And right now, even though we’ve gone to $1660 on the gold price, we have not seen those call-to-put ratios move up to readings near two and a half or three to one, which would typically tell us we’re getting into a frothy market. They’ve been hovering around 160, 170, and that tells me that there’s still plenty of room to go.
Also, on a momentum basis, if you look at moving average convergence/divergence, which is called MACD or RSI, we’re seeing strong momentum confirmation by the move up in the precious metals — outstanding relative strength. To me, this tells me that gold could easily surge in coming weeks towards the $1800 level, and I have really very little doubt in my mind that we’ll see 2000 over the next two to three months. So I think the price is going sharply higher from here.
Chris Martenson: So against that, though, we see that the USD is up about a full tick today, up almost 1.4% at 75. It looks like a decent pop for the day, but it seems almost maybe stuck in a range. How are you looking at the dollar now, which is the anti-gold?
Frank Barbera: Well, that’s a good point, and I’m glad you brought that up. The one caveat I would have with gold in the short term is that you could see a very short-lived pullback. So this is not something that I think investors should really be terribly worried about, but I could see something, for example, like the GLD pulling back towards, maybe, the 155 to 160. We’re at 160 right now, but about the 155 to 156 area.
So you could have a couple more days of strength in the dollar, and you might get a few more days of short-term weakness in the gold price, but I think within a couple of days were going to make another low in the gold market, and then from there the price will turn higher and begin another large trending move to the upside. So in the very short term, I do think we’re going to see a little bit more dollar strength. The dollar index is at about 75.02 as we speak here on a Thursday morning, up about a buck. I think you could see a push up towards about 77.5, maybe 78, over the next four to five days.
And, now there’s one other little caveat. The dollar is showing a very, very weak pattern. When we talk about poor-quality rallies, this is really the textbook definition of a poor-quality rally. So I’m not really that sure that we’ll even make a move to 77, but I’m allowing for the possibility that it could do that over maybe the next week or so. That could correlate to some kind of a short-term period of weakness in the gold price, and at that point, then, I think we’ll probably start to see signs of a reversal back to the downsize in the dollar and a reversal back to the upside in gold.
So, you know, one of the things I would really recommend to listeners is to not worry too much about short-term moves. This is one of those times you really have to think big-picture. If you’re very concerned about getting the best price, break up the capital that you have into smaller increments and dollar-cost your way into the market in stage tranches, because trying to put too fine a point on any of these markets right now is not the greatest idea. But, for what it’s worth, I do think we’ll see a little more bounce in the dollar and short-term pullback in gold, and then I think gold will reverse higher.
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Note: Listeners interested in the conclusions expressed within this interview will also want to read Chris' recent report on The Screaming Fundamentals For Owning Gold And Silver, which takes a deep dive into the data behind the supply and demand imbalances in the bullion markets.
Frank Barbera is one of the top experts on precious metal mining companies and editor of the respected Gold Stock Technician newsletter. In his analysis for investors, Frank overlays a macro outlook on top of highly-rigorous technical analysis, and employs a market-timing based approach to reduce the inherent volatility within this high-beta sector. For many years Frank has also managed private equity capital, most notably for the Caruso Fund, with particular focus on precious metals, energy and currencies.
Our series of podcast interviews with notable minds includes:
- Frank Barbera
- Nate Hagens
- David Morgan
- James Turk
- Eric Sprott
- John Rubino
- Addison Wiggin
- Simon Black
- Axel Merk
- Paul Tustain
- Francis Koster
- Bud Conrad
- John Williams
- Robert McFarlane
- David Collum
- Joe Saluzzi
- Jim Rogers
- Bill Fleckenstein
- Marc Faber
- Willet Kempton
- Dan Ariely
- Ted Butler