Gold stocks offer refuge from major market crash

Flight to quality

An overinflated equities market could be good news for metals and mining stocks. In this interview with The Gold Report, Morning Notes Publisher Michael Berry shares two scenarios that could follow an imminent crash and four gold companies that could be perfectly positioned to take advantage of a reset credit market.

The Gold Report: Mike, you've been watching the stock market and, by extension, the precious metals markets very closely for signs of a larger equity market blow-off that could send gold higher. What makes you think the Dow Jones Industrial Average and the NASDAQ are in a bubble? What are the signs that a crash might be imminent?

Michael Berry: I have been watching bubbles since 1987. In September of that year I correctly predicted the 25% crash of October 19. We have been blowing through mini and maxi bubbles for 30 years; this one is nothing new.

The solution to our macroeconomic issues has been to inflate new bubbles, to inflate asset values to soften the blow from the last bubble, all the while creating the conditions for the next one. That is how we ended up with the current equity market bubble. It is driven solely by the Federal Reserve's liquidity. Always remember that liquidity begets liquidity. I also see a debt market that I consider to be a bubble. These markets are just not sustainable. I can't say when, but we have an equity market decline coming, maybe a severe decline.

TGR: The housing bubble and the tech bubble were, by definition, confined to certain niches initially and then the impact reverberated to other sectors. Are you predicting a market-wide crash where everything falls or will it be confined to certain sectors?

MB: The correction will impact everything. As of April 8 I'm measuring the Dow technically, fundamentally and behaviorally, and I see a clear top by all three measurements. The top is not quite as clear for the Standard & Poor's 500, but it's certainly there. A major event could cause this bubble to burst and the markets turn down. I think it's imminent, probably this year. With the Federal Reserve pulling back on its quantitative easing, I can't see the equity market being able to sustain itself.

TGR: Are there any specific indicators that might tell when a crash is about to happen or will we only know after it happens?

MB: The money multiplier, M1, which is a measure of how well the banking system is working, is at its lowest level ever—0.69, according to the St. Louis Federal Reserve. (It usually has been above 1.0). It has continued to decline for the last five and a half years. That is the sign of a disabled banking system, a coming bear market and a severe recession or worse. There's no doubt about that. The velocity of money has been in a decline for quite some time. These indicators mean our banking system is not working properly. These conditions were last this serious during the Great Depression. Even Milton Freidman acknowledged this when he suggested the Fed's problem will be dealing with its own drastically expanded portfolio. Freidman claimed that the Great Depression was the result of a falling multiplier and the failure to increase the money supply. That has not been the case this time but we are still in serious trouble.

Europeans are now concerned about deflation, the slowing of the economy and the falling of prices. The "D" word is actually spoken. The International Monetary Fund is particularly concerned. We've certainly seen falling prices in the metals markets over the last year and a half. China's tightening and slowing along with the U.S. tapering its quantitative easing mean the economic winds are in our face, not at our back. Those are the things I am concerned about.

TGR: So when this bubble does burst, how might the different metals—gold, silver, copper—respond differently to a market crisis?

MB: That is a good question. The answer is it depends. If we don't fix the broken credit cycle and deal with exploding government debt, we will probably begin to see disinflation and deflation. Then prices will fall. Gold, copper, silver, tin, lead and zinc will decline, but probably less than the valuations in the macroeconomic economy. That will be the time to buy metals because we will recover once we see a new credit cycle. However, it could be a three- to five-year hiatus. The Fed and others will have to deleverage. Only then will the economy be able to recover and break out of it torpor. We'll see a new bull market in the commodities then.

On the other hand, if we were to inflate out of the crisis, which the Fed would prefer, we will see gold achieve very high prices. I wish I could give you a very clear answer. Personally I think deflation is much more likely.

TGR: If we experience inflation, and the gold price goes up, will the equity prices follow?

MB: Absolutely. When we have inflation—and we will as soon as a new credit cycle is in place—then we are going to see gold miners take off. A lot of them are really struggling—Barrick Gold Corp. (ABX:TSX; ABX:NYSE), Newmont Mining Corp. (NEM:NYSE), Goldcorp Inc. (G:TSX; GG:NYSE) are all down 50%. They are reacting to a lower gold price. We will see Goldcorp back up to $50/share, but right now there isn't a bottom on the price of these stocks because if gold goes much below $1,250 an ounce ($1,250/oz), then the cost of producing gold is going to be a problem for the big gold producers. These stocks have been punished and are close to their bottoms now. People interested in precious metals and who are patient ought to be buying these on any declines in their current share prices.

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