Frank Barbera: Precious Metals Heading to All-Time Highs

by: The Gold Report

Frank Barbera, CMT, is a veteran money manager and currently the editor of The Gold Stock Technician [GST] Newsletter, published since 1993. Barbera uses technical indicators to analyze precious metals and mining stocks, as well as oil and the overall market. Barbera has also managed private equity capital for a number of years, most notably for the Los Angeles-based Caruso Fund, which earned returns in excess of 25% to 30% during the last bear market.

In his role as a hedge fund manager, Frank sought to regularly trade precious metals, energy, and currencies along with the broad stock market indices. Frank's technical work on gold and gold stocks is considered among the best in the industry, building a reputation sufficient to warrant a profile in the 2006 book Master Traders: Strategies for Superior Returns from Today’s Top Traders.

In the following interview, Frank tells The Gold Report why he believes gold, despite the current "major correction low," is headed back up. He says many juniors are incredibly undervalued, and discusses what could power the precious metals to new all-time highs in 2009.

The Gold Report: What’s been going on in the junior market and now in gold? Before this recent downdraft, the juniors were underperforming and the metal was performing much better. Now the metal is correcting and breaking through some technical supports and, of course, the stocks have done even worse.

Frank Barbera: We’re coming to a point where the precious metals are near an important low. For long-term investors, this is another good entry point that’s either at hand or very close at hand. There's a lot of talk in the market these days about how the dollar is beginning a new bull market and that means gold and silver are going to go down for a long period of time. My answer to that is I think that’s extremely unlikely. I think it’s far more likely that what we’re looking at here is a major correction low.

We’re seeing some of the most oversold technical readings on the precious metals that we’ve seen in the last quarter century. You have to go back to March/April 1980 to see readings like this, which is a very good sign. In my opinion, the broad range of support for gold between $760 and $800 will hold. In the case of silver, the price action for silver is also likely to base out in this $12 to $14 area and we’ll probably see silver prices moving right back up towards $16 to $17 in the weeks ahead.

I’m not saying that the recovery is going to be instantaneous —it may take a week or so for prices to base out – maybe even two weeks. But I think when we look at this market four to six weeks from now, we’ll have seen a meaningful improvement on current levels in the precious metals, and probably between now and year end we’ll see a fairly full recovery. I don’t think we’ll see necessarily new all-time highs in either metal this year, but we could be looking at new all-time highs in both metals very early next year. In my view, it’s very clear that the ingredients for a continued bull market in precious metals are still in front of us.

One of the big takeaways is the fact that since the dollar has had a pretty strong rally, this frees up the Federal Reserve to resume lowering interest rates and I think we will see that again the next three to four months.

The next significant move from the Fed will be yet another cut in short-term interest rates, because at the moment the most serious problem in front of global investors is the continued bust in housing prices, which by default, is dragging with it the banking system. A host of different experts are talking about hundreds of banks failing. I’ve heard estimates between 400 and 700 banks could fail in the year ahead.

There’s likely to be a lot more downside pressure on the financial and monetary side and, basically, the government is going to have to pay for this. They’re going to have to print up the digital money to keep the system viable and that means a higher cost of goods for all of us. We’ll see inflation. And that should power the precious metals to new all-time highs in 2009 and well beyond.

Looking out two or three years, I’m confident we’ll see gold prices above $5,000 an ounce. I’m confident we’ll see silver prices above $100 an ounce. So I’d say the best is still in front of us as far as precious metals investing goes. I think right now you’re in about the second or third inning of what is still a nine-inning game and this is an excellent opportunity for long-term capital coming into the market.

TGR: What about the juniors? If there's a crash in the Dow, won’t that take the gold stocks down with it?

FB: There’s a lot of downside pressure and historically mining stocks, especially if you have crash-like conditions, usually have had a hard time bucking that trend. So I would be concerned about the risk in the gold stocks. . . that’s on the negative side. On the positive side, though, it’s interesting to point out that they are historically oversold right now. Sometimes what happens is you get a major correction and then, coming out the other side of the correction, the character and the psychology of a market can change. So maybe there’s a pretty good argument to be made that the gold stocks might have the ability this one time to go the opposite direction.

Maybe we’ll see junior mining stocks springboard off of a bottom here in the weeks ahead with real relative strength and the renewed buying interest that has been absent over the last three to four years.

What I think we can do is recognize it if and when it happens. We need to be on the lookout for a big improvement in volume in the juniors, a nice kickoff with good breadth and high volume in the seniors.

It’s not impossible that the mining stocks could launch into a strong uptrend and end up being a safe haven place within a bear market. Right now it’s a little bit too soon to make that call.

I do think bullion will do well in either circumstance and I also believe that somewhere in the years directly ahead we’re going to have another major leg up in both the mining stocks and in the junior segment of the market. The tricky question is how the mining stocks will handle a really extended, powerful decline in the stock market if that’s indeed what we’re going to get and, at the moment, it’s just a little too soon to tell.

TGR: So do you think a core position today might be some bullion, or an exchange fund?

FB: I think right now the safe bet is to load up on bullion. In my opinion, it’s almost inconceivable how bullion will not do well.

I tend to think that as less foreign capital flows back into the U.S., there’s a very good chance that a housing problem, which has led to a banking problem, is going to lead to a currency and a current account problem. And I think that that’s phase three in a currency crisis. The dollar is going to devalue against commodities because commodities are acting and have been acting as a de facto currency, a currency where you can’t artificially increase supply. You have to go out and actually find more. So there’s a limit on money supply and quantity, if you will, looking at commodities as a currency, especially gold and silver. And I think that’s where the precious metals are really coming into their own.

I’m a dollar bear — I think the dollar’s probably peaking. I think it will make new lows in the next six months vs. the Euro. You want to be as much out of the dollar as you can be and you definitely want to have the physical. Let’s say, for example, that we have a crash, a big crash, and then let’s say that that crash is attended by some kind of a systemic banking problem, where maybe more than one bank fails at one time. Our system was really designed to handle your periodic, every now and then, type of banking failure.

Say something happens that really impairs the basic functioning of the U.S. financial system to the point where the president has to declare a "bank holiday," closing banks for two weeks. When the banks reopen, you may get access to your money, but you may have only a limited ability to withdraw your money. That happened in Argentina a few years ago. You could have domestic hyperinflation that would run wild for a year, maybe longer, and money would be trapped in the banking system and losing purchasing power every day.

So for investors who don’t have any exposure to precious metals, 5% or 10% can protect the greater pot of capital that you own. In my opinion, this is no time to be without that kind of protection, whether you have it in the form of an ETF or physical or some other form.

TGR: Would you say the mining stocks have hit bottom?

FB: As far as the mining stocks, you’ve got tremendous value there. As a value investor, it’s the most incredible mind-bending disconnect to see some of these juniors and the prices that they’re selling at. I think that aberration won't last indefinitely. However, you could get a bear market and a global crash in equity markets where people may be too scared to buy penny stocks, and the bid on these stocks may continue to dribble down. So you could see more erosive destruction in the junior segments and we could go from hideously undervalued to ultra hideously undervalued. But one day that will change.

TGR: But aren’t there always exceptions?

FB: Yes. There are plenty of juniors that as companies are doing just fine. Look at Minera Andes Inc. (OTC:MNEAF), as one example. They have a producing gold mine and a very nicely developing copper mine. The company’s market value, though, is actually less than the prospect they have, which is the Los Azules copper deposit. So you’re getting the gold mine for free and it’s producing positive cash flow. Yes, the company has some debt, but I would say all in all the company’s made fabulous progress over the last few years and is basically sitting at price levels that are ridiculous. There are a lot of companies that continue to do just fine and continue to finance themselves forward and make progress. I guess the point is we haven’t hit that point yet where psychology has really changed and big capital has started chasing money in the ground. I think that day is coming. I’m not sure I know exactly when it’s coming, but I think that’s the kind of thing we can recognize when it happens and we just have to be on top of it.

TGR: Are there any other juniors that you would bring up?

FB: There’s a long list of juniors that I like. Just to mention a few, one of my favorites has been Eastern Platinum Ltd. [ELR:TSX], based in South Africa in the Bushveld. They have a huge reserve base of near-surface high-grade platinum in the ground. The company has done a wonderful job of managing the power crisis in South Africa. They have not been negatively affected. They just reported record earnings. The stock is absurdly undervalued, especially for a company with huge current cash flow.

First Majestic Silver Corp. (OTC:FRMSF), which is a fine silver company in Mexico with three producing silver mines and potentially a nice fourth prospect on the way, is sitting at around $3.45. In my opinion, it’s absolutely incredible that a company with this much going for it is selling near, not a 52-week low, but a multi-year low. It’s bizarre.

Minefinders Corp. (MFN) has a huge mine south of the border, the Dolores mine. It's selling at $8. It’s preposterous to see that kind of value. But you do have to be mindful because if stock prices fall or there’s another intense leg in the credit crisis, it may just scare investors back from doing anything. That’s not to say that somewhere in here we might not see these stocks turn around and begin to just scream off the charts and move straight up. One of these days all of these stocks will be off to the races and that, I think, will be a mania. I think it will make the Internet move that we saw in 2000 look pale because it will be driven by fear.

TGR: All stocks or selected ones?

FB: All juniors. The crazy thing about this market is that we’re looking at great companies that have made a lot of progress over the last four years, and in many cases actually have cash flow or have heavily delineated, well drilled out deposits, where their element of risk has drastically shrunk and, yet, the market is just yawning and ignoring them. If you had asked me candidly a year and a half ago would this scenario happen, with practically all-time highs for a few months this year, then with metal and junior mining companies drifting off to multi-year lows, I would have told you no way.

TGR: In your last newsletter, you talked about backing up a truck in terms of a particular exchange fund that you would buy. You want to make a comment on that?

FB: I like Central Fund of Canada (
AMEX: CEF) quite a bit. It’s a closed end fund that owns physical bullion and they have the gold, they have the silver. They have 50% gold, roughly 50% silver. The mix changes a little bit. But if you go to their website you can see the exact number of ounces and they price out the NAV for you. That’s an outfit that has the goods. They have the physical metal. If you don’t feel like going out to a coin dealer and haggling over Eagles or other various types of coins, this is a great way to own metal and own it where you don’t have to worry about the storage because they take care of that for you. It’s a very convenient way to own precious metals. I think the management is doing a great job and for me I think that’s a core holding. I really think most investors should have some money in CEF and that is one where I would definitely be backing up the truck on this correction.

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