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.
He cautions:
“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
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.
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