Not all juniors will rise when the tide turns - Roy-Byrne
In this interview with The Gold Report, Jordan Roy-Byrne explains why bottom-fishing is a bad idea and why the savvy investors look for those that will do more than just survive.
Author: Kevin Michael Grace
Posted: Tuesday , 29 Oct 2013
PETALUMA, CA (The Gold Report) -
The bear market in precious metals equities will end soon, says Jordan Roy-Byrne, editor and publisher of The Daily Gold Premium, perhaps even by the end of the year. But the rising tide will not lift all juniors equally. In this interview with The Gold Report, Roy-Byrne explains why bottom-fishing is a bad idea and why the savvy investor must find players that will not just survive but thrive when the bears become bulls.
The Gold Report: The managing director of the International Monetary Fund, Christine Lagarde, worries about the world sliding back into recession. What are the chances of that?
Jordan Roy-Byrne: We tend to have recessions every four or five years, on average. In the last 30 or 40 years, however, recessions have been less frequent than the average, due to extremely expansionary monetary policy. But another recession is almost a certainty in the next couple of years. I expect it will be milder than the 2008 recession. Typically, after such a severe recession or financial crisis the next recession is quite mild in comparison.
TGR: We seem to have permanent quantitative easing in the U.S. Do you think there's a point when the country will hit a debt wall?
JRB: I don't know if the U.S. will ever hit a debt wall. We have the world's reserve currency, and that's not going to change any time soon. We have the ability to print a lot of money, and there's always going to be demand for our bonds. If that demand wanes, I think we will see central banks increase their buying. They will buy every bond if they have to in order to prevent interest rates from rising.
Looking out over the next five years, I see similarities to the 1940s after World War II when there was essentially huge quantitative easing and interest rate price fixing. This was done to lower the debt-to-GDP ratio. There were a couple of recessions, but when the economy grew, it grew very strongly. There was quite a bit of inflation, that was the negative consequence, but the debt-to-GDP ratio did begin to decline.
The problem with debt is not the nominal amount. The problem is when the economy doesn't grow fast enough to service the debt. One way to deal with that problem is to keep interest rates extremely low so there is very high nominal growth. The drawback to this is inflation. Commodity prices in the mid-to-late 1940s escalated substantially. I think we could see similarities in the next five years.
TGR: We've seen for some time an inverse relationship between precious metal stocks and equities in general. Do you think this will continue? Must equities fall before gold and silver stocks rise?
JRB: I do think this relationship will continue. Historically, gold stocks have performed fantastically at times when equities are in a bear market. The two best examples are 1972–1974 and 2000–2003. Because the gold bugs have lost a lot of money and don't have the firepower to drive the market higher right now, outside money is going to have to come in. I think once conventional investments weaken, which I expect to happen in the next three to six months, asset managers will look to precious metals. For example, there were quite a few generalists and international fund managers at the recent Denver Gold Forum.
TGR: How long will this bear market in precious metal stocks last?
JRB: It could already be over. Gold and gold stocks have been in a bear market for two years and two months but silver, silver stocks and juniors peaked in April 2011 and have been in a bear market for 2.5 years. History shows that bear markets in the gold stocks tend to average 65%, while the two worst were 72%. At the June low the NYSE Arca Gold BUGS Index (HUI) was down 67%. That tells us the market is likely very close to a low or has already bottomed.
The market is retesting its summer low. Some stocks have already bottomed. Some will make double bottoms, and the worst will make new lows. That's just how a bottom is—disjointed. The major bottoms in 2000 and 2008 occurred in October–November, so we are right on schedule.
TGR: How strong will the recovery be?
JRB: The recovery will be fantastic because that's what always happens in this sector. Looking at recoveries from major bottoms starting from 1960, the average recovery for large gold stocks was 58% over the first four months and 75% over the first seven months. My guess is that the next recovery will be stronger than average, but the problem is we don't know when it will start. It could be late November or even January. It could have started already. In the summer rally, Market Vectors Junior Gold Miners ETF (GDXJ) rebounded 59% from its low in only two months. Odds are, many stocks could be up 40–50% before most realize a bottom is in.
TGR: Could you talk about relative strength analysis and its importance to the valuation of precious metal stocks?
JRB: Relative strength analysis is a type of technical analysis that compares one security or market to another. We use this analysis to spot market leaders and market laggards. We want to own the leaders and avoid the laggards, obviously. You don't necessarily want to chase the strongest stocks. There's an art to it. My view is you want to identify what the strongest stocks are when the sector is correcting, and you want to buy them when they are correcting.
For example, the market has been correcting for the last several weeks, and this may continue for another week or two. So, if you happen to like a stock that has performed really well and you haven't bought it yet, maybe in the next week or two that stock will come down another 5%, 10% or 15%, and that gives you the opportunity to buy it.
TGR: You've written that buying a weak stock on the dip is not a good idea. In a time of bottoming stocks, however, there is a great temptation to go bottom fishing. How do investors distinguish between stocks that are truly undervalued and those that have fallen for good reason?
JRB: Mining companies—95% of them, anyway—are not like blue chip stocks. A lot of these companies that have declined 80% can end up declining 99%. Relative strength analysis should be used in conjunction with fundamental analysis. For example, you may really like a company, but if it's badly underperforming the sector, that is a warning sign.
TGR: Regarding mining in Mexico, a couple of people I've interviewed in the last month have said that they are not happy with the talk of a new Mexican royalty regime. What do you make of this?
JRB: First, nothing has gone through. Second, the mining lobby in Mexico is very powerful, so I would be surprised if it does go through at that level. We're talking about a 7% tax. If we get back into a bull market for precious metals, I don't think 7% is really going to matter. I'm not an expert on this issue, but maybe we'll see a 3% or 4% tax go through. It's just a random guess.
Based on the charts of how companies operating in Mexico are performing, this potential tax is not an issue. However, if companies in Mexico start to underperform the sector it could be because of the new tax regime.
TGR: Peru was regarded as toxic just a few years ago, but its reputation has improved a fair bit. I'm told that each company operating in Peru has to be considered individually based on its ability to come to a modus vivendi with the government and local communities. Do you agree?
JRB: I think that's accurate. Let's step back and remember that Peru is one of the world's leading producers of commodities. Peru is economically dependent on the mining industry. It's a case-by-case situation. Investors have to look at where the project is located and the attitudes of the local community.
TGR: Maynard Keynes said famously that the market can remain irrational longer than an investor can remain solvent. Many investors in gold and silver companies are close to their limits in this regard. What advice do you have for them?
JRB: Well, everyone's personal financial situation is different. Everyone has different goals and tolerance of risk and time objectives. Therefore, it's difficult to give blanket advice, but if investors are in companies that have been market laggards, companies that don't have much potential, they have got to sell them. They should do research and get into companies with the potential to be market leaders, companies that will not just survive but thrive when we do get a recovery.
TGR: Jordan, thank you for your time and your insights.
Jordan Roy-Byrne is a Chartered Market Technician, a member of the Market Technicians Association and a former official contributor to the CME Group, the largest futures exchange in the world. He is the editor of The Daily Gold Premium, and his work has been featured in CNBC, Barron's, the Financial Times,Alphaville, Yahoo Finance, Business Insider, 321Gold, Gold-Eagle, FinancialSense, GoldSeek and Kitco.
This interview is an edited version of the original and is republished here courtesy of The Gold Report