Exclusive: Barbera On Gold
The Gold Report
July 6, 2006
www.theaureport.com
The Gold Report Talks With Frank Barbera, Editor of Gold Stock Technician
Frank Barbera tells The Gold Report why he believes gold is headed toward the $1,000/oz. mark, and beyond. Barbera is currently the Co. Manager of the $35 Million Caruso Fund based in Los Angeles, California, a hedge fund, which seeks to make gains trading precious metals, stocks and currencies. A technician at heart, Frank began his career in the early 1980s working with John Bollinger, Bill Griffith and Susan Herrera at Financial News Network in Los Angeles. After FNN, Frank did a 10-year stint as the on-air market analyst for KWHY TV in Los Angeles where he presented current commentary on diverse subjects including the economy and all of the global financial markets. Frank exited technology stocks in the 1st week of March 2000, a call which earned him his first money management position at The Kavanaugh Fund in Santa Monica, a hedge fund subsidiary of Goldman Sachs. Frank's technical work on Gold and Gold Stocks is considered among the best in the industry and has appeared since 1993 in his weekly newsletter, the Gold Stock Technician. He has spoken at a number of investment conferences and been quoted widely in the Financial Press.
TGR: In your opinion, Mr. Barbera, have we hit the bottom for this recent correction? If so, where do we go from here?
FB: I do believe that we’ve reached the medium-term bottom in both gold and the gold stocks. However, over the course of the next few weeks, I think we will see a material recovery in prices. My upside target in the near term is $630. We might even get back up to $650 to $660 over the course of the next five to seven weeks.
TGR: Will the mining stocks follow suit?
FB: The gold stocks could actually do a bit better. The XAU could move from its current 130 up to 140 or 150. I think we’ll see a healthy 15% to 20% recovery in the share prices. That said, I believe that in the next few months, we will see a large sideways trading range in the gold price and the gold shares. Prices may come back up toward the highs for a while, then perhaps decline to the lows that we have just seen. However ultimately, when that period comes to an end—probably within a few months— the bull market in both the stocks and the commodities will resume, and they will rise to much, much higher levels.
TGR: I know you take a technical approach to investing. What is fueling your bullish view?
FB: Well, when you look at gold over the past few years, from the bottom in 2001 at around $250 to the recent high of $740, I think you’re looking at the first leg up in a much larger four- to five-year bull market. I would classify that as wave one to the upside in the gold market. What we’ve seen lately is just a correction in some of the excesses that have built up over the last five years of upward movement. We’re correcting that now with a sideways movement.
TGR: So we’ve had a correction, which you believe will be followed for the next few months by overall improvement, but also possibly some ups and downs along the way. What happens next? What’s your long-term view?
FB: I think that over the next two to five years, conservatively speaking, we will see gold prices north of a $1,000 an ounce, possibly much, much higher. In fact, I think a few years from now when gold is trading at $4,000, we’re all going to have a good laugh and say, “I should have bet the farm on gold when it was at $550.” I also think the Dow Jones Industrial average and the S&P will set new all-time highs over the next 12 to 18 months. I think basically that the entire credit liquidity cycle is about to re-inflate to a higher level of liquidity than we even seen so far.
TGR: In your opinion, has gold de-coupled from the dollar? Or as gold prices rise, will we see a weakening dollar?
FB: On the major trend I believe there will be no decoupling. I think the dollar will definitely move lower down the line, and I think gold prices will move considerably higher. However, we have a tricky situation with the Federal Reserve right now, and this situation is complicated by the fact that we’re no longer experiencing what could be considered a routine cycle. Over the last few years, U.S. finances have seriously deteriorated. We have a structural trade deficit that has gone parabolic. We have moved from $300 billion a year deficits in the current account, to $500 billion, to $800 billion. We’re approaching a trillion dollar shortfall in the current account. Typically, that’s very negative for currencies. The U.S. trade gap as a percentage of GDP is approaching 7%. Throughout the centuries, as far back as ancient Rome, a trade gap of 4% or more of GDP has triggered a major currency crisis and broad scale devaluations in money.
TGR: So why aren’t we headed for a crisis now, one that would greatly weaken the dollar?
FB: The U.S occupies a unique position. As Stephen Roach of Morgan Stanley once described it, “We’re the single engine on the airplane” as far as global growth. China, Japan and Europe are all export-led economies. Even though China is developing on its own and industrializing, a lot of China’s capital expenditure investment is actually aimed at meeting final demand emanating from the United States. So, it does not behoove anyone to have the U.S. dollar collapse, because that would have a negative impact on all the export markets in Europe and Asia. I think the Fed is working much closer with other central banks to maintain a stable U.S. dollar. In fact, if I were to hazard a guess, I would say that Hank Paulson (the former chief executive of Goldman Sachs nominated by President George W. Bush as U.S. Treasury secretary) will be charged with coordinating to an even closer degree the central bank policies among Asia, Europe, and the United States.
TGR: So you believe gold will remain strong, but the dollar will stabilize. Wouldn’t that make me think that the dollar and gold have, in fact, de-coupled?
FB: The situation is a little more complex than that. I think people understand there will come a time when the dollar needs to be allowed to move lower. However, let’s look at the U.S. economy, which as we all know is cyclical. Right now we’re dipping into a slow period. It could be a recession. I tend to think it will be more of a slowdown. The Fed is in a very awkward position right now. On the domestic front, we have real trouble in the housing market, which went through a parabolic spike in the last few years as prices ran ahead of income. The Fed knows that housing prices across the board are probably in for a period of retreat. That retreat has to be managed very, very carefully, because if housing prices decline too much, it will negatively impact consumer confidence, which will negatively impact spending. And in the worst case, if all the mortgage debt—and there has been a ton of mortgage debt dumped into the banking system over the last few years — were to turn into non-performing loans, we would experience an epic financial crisis.
TGR: You believe the Fed will be able to prevent this?
FB: I think the Fed needs to keep short-term interest rates fairly high in order to maintain a wide spread over other competing currencies, and will help stabilize the U.S. dollar. At the same time, I think the Fed wants to carefully monitor housing prices, allowing them to pull back a bit, but not too far. The key to achieving this is to get the long rate down. So we will see an inverted yield curve, where long-term rates drop, and hopefully the stock market lifts off to another leg to the upside in the bull market.
A few years ago when the stock market was falling, short-term interest rates were cut many times so that essentially we rekindled a bull market in net assets, net household wealth, by driving up the price of real estate. I think what’s happening now, as real estate begins to pull sideways, net household wealth has to stay somewhat buoyant. I think you will see equity prices moving up. To that end we won’t have the big slowdown in consumer spending that would occur if both housing and at the stock market were to fall at the same time.
In my view, this is a coordinated policy by global central banks, and I think we’re coming out of it—we’re in the very last stages of this monetary cycle. We’re heading into a new monetary cycle where we will see more credit creation, more inflation over time, and I think eventually as stock prices firm and as the economy starts to firm, you will see the dollar be allowed to drop to lower levels. That will be bullish for gold.
TGR: So the long-term picture for gold is strong. Yet, you expect gold to perform well in the interim, despite some intermittent sideways movement?
FB: I think that a certain amount of money is just going to continue to pile into gold because ultimately there’s a lot of money out there that understands the unstable nature of things and the fact that gold is essentially the only hedge. To think of gold as a metal in my opinion is a big mistake.
TGR.: In other words, we shouldn’t view gold as a commodity?
FB: You cannot think of it as a commodity, as a metal. You have to think of it as a currency - the only currency in the world that can’t be debased. Just look at what the central banks have done over the years. The European Central Bank has been printing money way above its target. The Bank of Japan has created trillions of dollars of yen. And, of course, our own Fed and credit system has stepped outside the traditional auspices of the banking system to become its own unwieldy monster that just keeps getting bigger and bigger. I think against all that credit creation, gold is the only money. It is still relatively scarce. And it’s going to become scarcer all the time.
I think the trade-off is going to go something like this: Instead of having a financial collapse and a deflationary episode that may be a bottomless pit in the near term, I think that in another round of credit creation things will re-inflate once again from what are essentially already high levels. And down the line a little bit, 12 to 18 months, you are going to start to see some of that re-inflation move not only into the asset markets but start bleeding from the asset markets into real world prices. And I think we will start to notice appreciably higher prices for everyday goods, and that will also be very bullish for gold.
So I am a definite bull for gold. I think we’re coming into a pause, but I think once that pause is done, we’re really going to be moving. We’re moving in overdrive into an inflationary economy, and an inflationary economy that maybe a cycle or two down the line will become a hyperinflationary economy. And you may see the Dow at 36,000 in the next 5 to 10 years, but I will tell you that prices will also be markedly different than what they are today.
TGR: As long as we don’t have a global recession.
FB: And a global recession I think is what’s being headed off at the pass right now. If you look at Dr. Bernanke’s writing, throughout his career, he’s always talked about deflation and what a mistake it is to allow deflation to get control. Essentially, our system is really a system that is resting on the lynchpin of confidence, and if asset markets start to deflate -- be it the stock market, the dollar market, and the bond market—all three of those markets deflating equals a loss of confidence.
TGR: Isn’t that what we have had in the last 60 days?
FB: We have had something of that on a finer scale. I think we had to have a little dose of it in order to set the stage for the next leg up. But were that to get too far out of hand, you would impair investor confidence. And that would be accompanied by a slew of incalculably negative events. I think you would see the demise of the housing market altogether. I think you would see major financial crises, an abandonment of the dollar, an abandonment of the U.S. Treasury bond market, and a full-blown collapse in the U.S equity market.
I think what’s happened is the situation is being managed, and it’s being managed to produce a new wave of asset inflation in the equity market. All things being equal, money managers want to do what money managers are paid to do -- which is to invest money. I think no one wants to lag a rising market. So, to some degree, I think the situation is being orchestrated to deliver higher prices and to prevent these markets globally from falling over the cliff. Basically, it’s in no one’s best interests.
TGR: In this current environment, what are your thoughts on gold stocks?
FB: I still think investors can make very good money in trading the gold stocks. That’s something I have been very successful at over the past 15 years in writing the Gold Stock Technician. Often you can get 20% to 30% moves just in a span of a few weeks in the gold stocks. Let’s say the gold price averages $600 over the next couple of months. For the average mining company, especially for a smaller junior, a company that’s just developing, that’s an incredible incentive to go out and find gold. The margins are huge in the mining business. If we see energy prices that come down a bit, that could help even further. I think I would focus on some of the smaller development companies, a little beyond exploration stage, a little bit toward development where you have a delineated asset. And I think some of those stocks could perform extremely well over the next few months.
TGR: What about uranium stocks?
FB: That’s an area that I don’t follow closely, although I am familiar with all the better known names. I tend to think that they’re going to follow the general broad trend for energy, and I don’t think those prices will collapse. I see the uranium story has having very solid legs over the next few years.
(June 27, 2006)
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