Natural Resource-Related Stocks Show Promise: Frank
Source: JT Long of
The Gold Report
From gold and silver to energy and oil services, Frank
Barbera, editor of
The Gold Stock Technician Newsletter,
sees a bright future for commodities and their equities. In this
interview, Barbera cites large blue-chip and midtier mining
companies, especially those now paying dividends, as favorites
and suggests that investors looking to protect retirement savings
invest in bond funds outside the U.S.
The Gold Report:
Europe is in the headlines daily: more leftists coming to power,
regional banks suffering, renewed recession appearing to take
hold. What is your take on Europe?
In the headlines, Europe looks like quite the mess. Imagine being
a Greek who saved over a lifetime now facing the possibility of
devaluation or Greece leaving the euro. If Greece pulls out of
the euro and devalues, most of the people will see their life
savings collapse in terms of purchasing power.
In my view, there is a pretty good chance that would spark a
contagion. When people in Spain or Italy see Greece pull out and
return to a devalued drachma, there will be bank runs in other
countries. Money will move out of those banking systems into
perceived safer havens. That is how a contagion gets started.
The situation in Spain also is very serious. It has
chronically high unemployment, in excess of 24%; youth
unemployment is nearly 50%.
All of the leading indicators for Europe are pointing down.
Europe seems to be descending into a major recession; even
Germany is backsliding toward recession. The breakup of the euro
would greatly exacerbate that. Interest rates would shoot up in
bond markets around Europe, spreads would blow out.
If you were an Austrian school economist you would say, let it
unwind, let the debt default and the governments stand back and
do very little. That would be a very severe dose of medicine to
Instead, I think we will get more government intervention, as
we saw in December 2011, when some of the big Italian and French
banks were staring into the abyss of default. The European
Central Bank came in, expanded its balance sheet with a long-term
repo operation and loaned money to the commercial banks that
needed liquidity. At that point, 547 banks asked for help. That
liquidity infusion helped the markets stave off a bearish,
deflationary downturn for a few months.
Politicians will act only when the cost of not acting exceeds
the cost of acting. With markets nearing a panic now, that Minksy
moment demanding a political response to market contagion is
growing very near. As a result, I think we will soon see more
money being printed and more liquidity injections as politicians
attempt to stretch the problem out.
You do not expect a big explosion, but a long, painful, downward
Not quite either one. I think Europe is on the edge, tap dancing
with a deflationary collapse. I do not think the politicians want
it to collapse; there is too much of a vested interest in keeping
the euro together despite it being an inherently flawed
If Europe wants to stay together, it must take steps toward
becoming a real fiscal union. That means buying time by
continuing to create liquidity and infuse money. Essentially, the
politicians will resort to the printing press. The outcome of
that will, over time, be higher inflation rates.
I do not expect an explosion of inflation, but over time there
is a definite risk of an increase in inflation, as more and more
money is created. Higher inflation combined with rather static
"managed" exchange rates will over time amount to an internal
devaluation of debt and paper money purchasing power.
What would that do to commodities?
That is fundamentally very bullish for commodities, especially
the precious metals but to some degree also food and energy.
Commodities are generally scarce. If you exhaust an oil well, you
have to find a new oil well to replace it. Gold is basically very
scarce. Both commodity equities and commodities will probably do
fairly well, especially equities, in the countries with the
And what about China? If China is not growing as much as
predicted, what impact will Asia have on commodity prices?
I think Asia is going to slow down. Europe is one of Asia's
biggest export markets. If Europe slows down to a recession
level, that will naturally trim growth and the inflation rate in
Asia. China has a potential overcapacity problem due to
overinvestment in capital over the last decade. That could take
some time to work through, but it is a state-run economy with a
better chance of navigating it. The Chinese government may be
able to control credit by telling the banks they cannot lend and
having the banks obey. Right now, China has an easing policy in
place, which might help it mitigate some downside risk. I think
China could be heading for a recession, but not for a major
Turning to the U.S. economy, we hear that things are improving:
upticks in construction spending, declines in joblessness claims.
This is an election year. Do we sell in May and go away, or can
the markets continue to make further gains?
There are a couple of interesting points to be made. With respect
to sell in May and go away, the historic data suggest that is not
a bad idea except in an election year. Typically, the few months
in front of the election-May to October-are pretty good.
Seasonally, the stock market has a nice tailwind behind it.
However, that said, I am afraid that the current news trends show
just a steady sequence of bad news coming from Europe and that
implies that markets will likely be hostage to the European debt
crisis for some time to come. In addition, later this year,
around Labor Day, it is estimated that the U.S. will face a
second debt ceiling crisis, which is already looking to become a
major pre-election issue, and could ultimately result in more
credit rating downgrades, so the next few months have several
major wildcards already built into the deck.
Finally, I want to acknowledge that this concept that PIMCO
has stressed, the "New Normal," still seems to be the overriding
theme, which is one of very slow nominal growth and actually flat
to negative real growth. As an example, go back and take a look
at the U.S. economy between 1995 and 2005, you had a little over
a 5% growth rate. In 2008, the U.S. economy slowed to about a 2%
growth rate. I think that is what we will see for quite some time
to come, so one can say that we live in a world where growth
itself is becoming a very scare commodity. In my work, I have
dubbed the current recovery, the "Subdued Recovery" as you need
to look past the headlines about employment improving to see the
devil in the details.
Employment reports have improved, but when you look at the
composition of the jobs that have been created since 2008, most
of them have been in low- to moderate-wage categories. Since
2008, the U.S. has actually shed high-wage jobs. That has big
implications for something like housing. To buy a house, the
first thing you need is a job. The second thing you need is a
high-wage job so you can afford to carry a mortgage. Oversupply
in the housing market and scarcity of new high-wage job creation
is not a recipe for a housing turnaround. To me, that means
housing will stay low and maybe plateau for a long time.
On the average personal balance sheet, the two most important
assets are a house and retirement savings. In a consumer-led
economy, 72% of gross domestic product is consumer spending. If
real estate and housing are going to remain depressed, it becomes
very important to keep a retirement account buoyant because if
any of those asset classes are depressed, a negative wealth
effect is created. This leads to a slowdown in spending and the
U.S. could easily relapse back into recession.
I think that is why we have seen more central banks
intervening. Quantitative easing programs are being enacted every
time the stock markets start to weaken. The idea behind that is
to create asset inflation and keep retirement accounts at least
reasonably buoyant. This way you keep a positive wealth effect
and maintain consumer spending, at least enough to sustain slow
growth. That is how you give the economy time to restructure and
eventually work down and deleverage the big debt load.
Going back to the commodities, gold and silver are way down from
last summer. Are you still bullish on precious metals and other
I am getting very bullish on gold and silver. I think precious
metals as an asset class will do very well and you will see new,
all-time highs in both gold and silver over time.
The equities behind those commodities have not kept up even with
the step-up that happened from last year. What will take those
That is a pretty interesting situation, a one-off anomaly. It
looks as if the mining industry has been negatively affected by
rising costs over the last few years. That, along with the fact
that there has not been much yield for a long time, left the
mining sector and some of the other resource sectors
I think that is starting to change. Looking out two to five
years, if we do see a rising trend in inflation, I think money
will look very favorably at resource-related stocks. Today, the
multiples on some of those stocks are as cheap as they have ever
been. A few years ago, gold mining stocks were selling at 30 to
40 times earnings. They are now down to 6 to 8 times earnings
and, in some cases, 8 to 9 times cash flow. That is something you
see maybe once every two or three decades. That means there are
very cheap stocks and some outstanding values.
In addition, many companies are starting to boost dividends
because, even with rising costs, they are doing very well and are
reporting solid cash flow gains. So now, all of a sudden, you
have a yield kicker. I think that could be the beginning of a
very long, positive trend. Given the large markdown we've seen in
the last few months, it seems that the market perceives a
deflationary threat from Europe and is marking mining stocks
down. I suspect that will turn out to be an over-reaction and you
will find mining stocks at very attractive levels.
You can say the same thing about a lot of other groups:
energy, oil services, large-cap energy, some of the master
limited partnerships (MLPs), some major commodity producers in
the grain market. There are a lot of areas that investors should
be looking at.
What are some of the undervalued stocks you see in the mining
I like all of the large, blue-chip gold miners:
Barrick Gold Corp. (ABX:TSX; ABX:NYSE)
Goldcorp Inc. (G:TSX; GG:NYSE)
Newmont Mining Corp. (NEM:NYSE)
. I probably should disclose that I actually own some of those,
so I'm talking my own book.
These companies are selling at very depressed multiples.
Newmont recently instituted a nice dividend program, where if the
price of gold goes higher, it will automatically boost its
dividend. If gold goes through $2,000/ounce in the next few
months, Newmont yielding a 4-5% dividend would be an attractive
There are some good quality, midtier emerging seniors like
Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE)
Eldorado Gold Corp. (ELD:TSX; EGO:NYSE)
. You have the royalty companies that look attractive, like
Franco-Nevada Corp. (
SteelPath has a very good fund that has MLPs yielding 6-7%. In
the oil services sector, I would name
Schlumberger Ltd. (SLB:NYSE)
and land drillers like
Baker Hughes Inc. (BHI:NYSE)
Nabors Industries Ltd. (NBR:NYSE)
. It may take a little bit more time and may be a little bit
early on some of the land drillers, but as we get closer to the
end of the year, they will have some write-downs coming. Once we
get past that, a lot of the bad news will be up. Some of those
stocks are selling at 7 to 8 times earnings. I definitely see
good value in energy services and even in some of the larger-cap
Murphy Oil Corp. (MUR:NYSE)
Occidental Petroleum Corp. (OXY:NYSE)
Chevron Corporation (CVX:NYSE)
If you want to look outside the U.S., there are the large
Chinese oil companies. In Brazil,
Petrobras (PBR:NYSE; PETR3:BOVESPA)
is selling at some of the cheapest levels in years.
This is a good time to look at the natural resource-related
stocks and look to take a very broad, cross-section approach
where you own a little in different areas.
How do you evaluate a royalty company? Just because it pays a
dividend does not mean it is a good company.
The royalty companies in the mining space are
Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX)
Franco-Nevada is a blue-chip company. It has stellar
leadership in Pierre Lassonde, who built up the company from
nothing years ago. It has an outstanding portfolio and an
enticing balance sheet. Franco-Nevada has resisted this
particular downdraft. Large-cap, senior companies like Barrick,
Newmont or Goldcorp have seen 30-40% declines in the last few
months. Franco-Nevada has basically held even. I believe that
Franco-Nevada today is a truly great growth story on the order of
some of the best growth stocks we have seen in the last few
decades. Royal Gold seems like a pretty well-run company, but in
my opinion, I would not put Royal Gold in the same category as
Assuming that we are facing an inflationary situation over the
years ahead, what is your best suggestion in terms of an asset
class for conservative investors?
That is a major issue for the large number of retirees in the
U.S., people who used to invest in certificates of deposit,
because right now the banks are paying nothing. We have financial
repression coming from the Federal Reserve. The book
This Time is Different
by Carmen Reinhart and Kenneth Rogoff talks about how the Fed
will run negative real rates for years and reduce the value of
Federal Reserve Chairman Ben Bernanke is telling people he
will keep the interest rates low for the next three years. I
would take him at his word. When I look at the U.S. yield curve,
with a 0% short-term rate and negative real yields all the way
out to the 30-year bonds, I think that is a recipe for a
weakening dollar. Of course, we could have a deflationary outcome
in the near term, which could temporarily lift the value of the
dollar, but I think a falling dollar will be a major theme over
the next few years.
It will be really important for U.S. investors to look at
non-dollar bonds. There is a good chance that we will see the
final lows in Treasury bond yields in the next 12 months and
Treasury bonds will move into a bear market. We hear about this
bond bubble a lot. The bonds you have to be worried about are
Treasury bonds, not foreign bonds, not emerging market debt, not
necessarily even junk bonds.
There are a lot of bonds around the world that are negatively
correlated to Treasury bonds. When Treasury bonds move into a
bear market and long-term yields start to back up in the U.S.,
American investors will need to start looking at other income
generating categories including assets like global bond funds and
emerging market debt funds, and even TIPS funds and MLPs. There
are bond categories where you can earn a conservative yield and
generate a relatively safe total return. That is one idea: to
think globally and become globally diversified.
Lastly, what is the best investing advice you ever received,
whether you took it or not?
The best advice I ever received was not to buy and hold anything,
but to maintain a tactical approach and be flexible. Diversify is
another good piece of advice.
In difficult economic times, your biggest single advantage is
the ability to be tactical, to be nimble and to react to changing
market conditions. The one big positive most investors have right
now is that the menu of potential investment vehicles has really
grown in recent years, including a proliferation of
exchange-traded funds (
) and mutual funds.
Ten years ago, the average individual could not access
Australian or South Korean bonds. Today, we can buy Hyundai stock
denominated in South Korean won or South Korean bonds or
Australian bonds. There are even ETFs for things like this. Last
week, PIMCO launched an emerging market debt fund denominated in
local currencies. These are the kinds of products I think will be
very useful over the next few years in helping people tactically
navigate the kind of economic conditions coming our way.
Great advice, Frank. Thank you for your time and insight.
, CMT, is a veteran money manager and is currently the editor
The Gold Stock Technician
) newsletter, published since 1993. He 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 20%
during the last bear market. In his role as a hedge fund manager,
he sought to regularly trade precious metals, energy and
currencies along with the broad stock market indices. In 2006,
Barbera was included in the book
Master Traders: Strategies for Superior Returns from Today's Top
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1) JT Long of
The Gold Report
conducted this interview. She personally and/or her family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Gold Report:
Goldcorp. Inc., Franco-Nevada Corp. and Royal Gold Inc.
Streetwise Reports does not accept stock in exchange for
services. Interviews are edited for clarity.
3) Frank Barbera: I personally and/or my family own shares of the
following companies mentioned in this interview: Newmont Mining
Corp., Franco-Nevada Corp., Yamana Gold Inc., Barrick Gold Corp.
and Goldcorp Inc. I personally and/or my family am paid by the
following companies mentioned in this interview: None. I was not
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