Björn Paffrath, Switzerland-based fund adviser and newsletter writer, is so convinced that we've seen the bottom in the mining sector that he's launching a new gold and silver fund in Europe. He says capital is trickling back into long-forgotten mining equities as the smart money seeks to rotate out of frothier sectors and into real assets. In this interview with The Gold Report, Paffrath also forecasts a broad market correction as he tells us about some promising equity positions.
The Gold Report: Do you expect a broad market correction over the course of the next two years or so?
Björn Paffrath: Since the crisis in 2008, most of the well-known indexes, such as the Dow Jones Industrial Average or the German DAX, have almost doubled, and many individual companies have performed even better. Of course it is all liquidity driven, but it's at a level where we have to ask: Is it still justified or are we already in the next bubble?
On one side, indexes skyrocketed on the liquidity provided by the central banks. But interest rates and bond yields are so low that they are not keeping pace with inflation, so people put their excess cash in the stock market. And more money exited the underperforming mining sector as the general markets went up.
At some point we will have a painful correction of 30% or more. Maybe it started already, but it's tough to say because there is still a lot of liquidity in the market. There is a good chance that after the correction the bull market could run quite a bit longer. But we all know that we only bought time in Europe and the United States. A lot of Western countries have excessive debt. The painful end will definitely come at some point.
Outside events or black swans also could trigger it. Tension rises between Russia and the Ukraine almost daily now. In the Middle East there are uprisings in Turkey and Libya, Israel and Hamas are battling and there is a civil war in Syria. And Iraq is more and more lost to the IS-terrorists. Any of those events getting out of control could trigger further events on the market side.
TGR: Where should investors look for the first signs of problems?
BP: You have to first watch the U.S., then Europe and China. The U.S. made it out of the recession, but how sound is the foundation without the money that the U.S. Federal Reserve is pumping in? That money will probably stop this year, but my guess is that the Fed will find other opportunities to pump more money into the market. We have to watch the U.S. closely.
Europe came late to the bond-buying game and the peripheral countries—Spain, Portugal, Greece—are not in great financial shape. The Portuguese recently used bailout cash to shore up Banco Espirito Santo, and Greece will likely require a third bailout. Europe put a curtain on the debt crisis. Everybody is happy with the stock market, but we didn't solve any problems.
China, the future engine of the world, certainly of the mining industry, also has a problem. The central bank there recently warned about a real estate bubble. We never can really trust the economic numbers from China but if the Chinese volunteer information on some potential problems, we have to watch carefully. China could cause a lot of problems for the global economy.