-- Posted Thursday, 3 November 2011 | | Disqus

Could a few simple questions help you find winners in the mining space? Dr. Michael Berry, publisher of Morning Notes, thinks so. Berry has taken years of experience picking resource stocks and boiled it down to key questions he asks of every company. Berry turns his high-powered analysis toward the European debt crisis and what it means for gold in this exclusive interview with The Gold Report.

The Gold Report: European leaders agreed on a plan to force the continent's banks to raise new capital to insulate them from potential sovereign debt default. There was little detail on how the Europeans would enlarge the bailout fund to achieve their goal of $1.4 trillion, or €1 trillion. Meanwhile, another part of the deal will see creditors take a 50% loss on Greek sovereign debt. What are your thoughts on this situation?

Michael Berry: It's a bright day because some of the uncertainty has been removed from this issue. And servicing European sovereign debt is a big issue. Originally, the Europeans were going to allow a 21% cut in the Greek sovereign debt. Then 61% was mentioned as necessary. The French and German banks really didn't want to see even a 50% debt haircut. Most of them wanted to use their credit default swaps. It was really pulling teeth to get to this agreement. Remember one thing here: The banks are going to have to write off this amount of debt. There will be an impact; it is not a freebie.

The question is: Is a 50% haircut for Greek debt enough? There is also trouble in Italy waiting in the wings. Italy is a bigger issue because it's a much bigger country with a much bigger gross domestic product than Greece and austerity is anathema to Italians.

I predict that this agreement will not be enough and that Europe will have to do more. I think there will be more printing of money and an even larger attempt to rescue the banks. Still the markets exhaled and went euphoric: I think it is still way too early to declare victory.

TGR: The Dow Jones Industrial Average shot above 12,000 on the news and the gold price was up about $3/ounce (oz). Do you believe the news will continue to be positive for the gold price?

MB: We are still in the early days of gold's run. We have had a good pullback down to $1,575/oz. I wanted to see a pullback from the $1,900/oz level, which we achieved a little too quickly in the summer. I feel pretty confident about gold because one very tangible thing has changed: Many people have lost confidence in paper money. You just can't print this much and not have that happen. I see gold now as a very important asset in portfolios. A few years ago financial planners had no patience for a gold allocation. Now Merrill Lynch will sell you physical gold. I don't think we've even scratched the surface in terms of how many investors are going to own gold in the future. I think it will go much higher.

TGR: Are many American banks breathing a sigh of relief today on this news, given their exposure to European debt?

MB: No doubt. I suspect that bank depositors and investors are also breathing a sigh of relief. The Philadelphia Bank Index, which is made up of 13 major banks, fell 36% between May 1 and Oct. 1. Since then it has recovered 14%. I expected a bounce, but we have to wait and see how this plays out before we become too optimistic. But I'm sure that U.S. banks are pleased with the European accord. Really, though, was there any other choice?

TGR: Even though $1 trillion may not ultimately be enough, the message is that countries are willing to do what it takes to keep it together for the long haul. Is that the message you're receiving?

MB: I think so. There is obviously a strong desire to hold the Eurozone together and the euro as a common currency. Germany, the strongest economy on the continent, has stepped up. There was some question about whether the German parliament would support this accord and it did. It is going to do whatever it takes to move this forward. Of course, it could have done this earlier and headed off much of the uncertainty.

Regarding the long haul, however, it is difficult to see how the European Union can survive without a strong fiscal union as well as a currency union.

TGR: It sounds a little like the U.S. is delaying raising the debt ceiling.

MB: Yes, and what happened then? The U.S. debt was downgraded by Standard and Poor's in August. The U.S. and the European Union officials have not dealt with this the way they should have. You just cannot kick the debt problem down the road. We cannot have a major economic recovery until we have a new credit cycle. We cannot have a new credit cycle until the bad debt is eliminated. It is just that simple.

In the U.S., in particular, there was this hope that we could "inflate out," or grow out, of the problem. That has proven to be false. We have not dealt well with a stagnating, deflating economy because we have not dealt with the debt load. We still have to solve the debt problem in this country. It has gotten more severe over time.

TGR: One aspect of that debt is municipal debt. Harrisburg, Pa., recently declared bankruptcy. Is this one of the first dominos to fall?

MB: Without a doubt. Many of the state and local governments have similar problems. The only entity that can print money is the federal government—states cannot do that, cities and counties cannot do that. We are seeing structural contraction. Unemployment cannot decrease until there is a real recovery and we are not in a real recovery now. There will be more personal bankruptcies and more state and local bankruptcies as well.

TGR: Is that positive for the gold price?

MB: Absolutely. Gold has morphed into a real store of value. The "Minsky Moment" has arrived.

TGR: You recently visited several mining projects in Alaska. Its geology is similar to the Yukon Territory to the east, but Alaska receives far less attention despite several large deposits that have been found over the last decade. Why do you suppose we don't hear as much about Alaskan discoveries?

MB: The Yukon is the new territory that everybody is interested in so there has been a lot of staking up there. It is a result of what we call the mystery/history curve. There was a lot of mystery about the Yukon. It has been relatively underexplored compared to Alaska, for example.

Senator Lisa Murkowski (R-Alaska) has been aggressively introducing critical metals legislation in the U.S. Senate on mining, not only for Alaska but other states as well. I am going to be on the dais with her this week in Washington D.C. There is a lot of renewed interest in Alaska and she's been very helpful in getting some of these mines into operation. There is going to be a lot more interest in Alaskan natural resource development going forward.

TGR: Whenever I hear about companies exploring around a glacier, it sends up a bit of a red flag. These kinds of things catch the attention of non-governmental organizations and environmentalists. Is that a risk with some Alaskan discoveries?

MB: Environmental issues are always challenges. Given the multiple layers of regulations today, exploration and mining companies have to jump through multiple hoops. However, U.S. jobs are trumping the environmentalists almost everywhere on the exploration and mining circuit in the U.S.
Yes, those are common concerns and you must go through the process.

TGR: How does an investor choose a company?

MB: That's a very good question. A few years ago we developed and tested an investing philosophy called Discovery Investing. Its cornerstone is a 10-factor model. We have questions that we research, questions that every investor could ask, in order to grade or rank stocks from best to worst.

For example, the first thing we want to understand is the management. How good is the management track record? How well do they communicate? Do they own the stock? Are they inside buyers? A good management team is a prerequisite. It's mandatory.

Second, what is the nature of the asset? Could it be world class? There are 10 categories of questions like these two that we review.

TGR: Do you have some parting thoughts for us?

MB: In spite of all the chaos in the economy, we will eventually solve these problems. We are going to inflate out at some point in time. I can't tell you when. These stocks, the junior miners in particular, are cheap as a group. They have all been bludgeoned by sellers who fear what is happening, or perhaps what is not. There are a lot of attractive Discovery buys out there right now—very cheap stocks. Perform due diligence on these companies using the discovery grid, now is the time to be looking for these bargains. Some are 50% off their highs and they're very, very cheap.

TGR: Excellent. Thanks.

Editor's Note: This interview was conducted Oct. 27.

Dr. Michael Berry has lived in the U.S. for 38 years, but was reared in Canada. He earned a Bachelor of Mathematics degree at the University of Waterloo in Ontario, a Master of Business Administration at the University of Connecticut and obtained a Ph.D. specializing in quantitative analysis and investment finance from Arizona State University. He has specialized in the study of behavioral strategies for investing and has been published in a number of academic and practitioner journals. His definitive work co-authored on earnings surprise was published in the Financial Analysts Journal. While he was a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia, Dr. Berry spent considerable time with some world-renowned geologists on the Carlin Trend. While a professor, he published a case book, Managing Investments: A Case Approach.

Dr. Berry also held the Wheat First Endowed Chair at James Madison University in Virginia, and managed small- and mid-cap value portfolios for Milwaukee-based Heartland Advisors and Chicago-based Kemper Scudder. His Morning Notes publication, distributed worldwide, provides analyses of emerging geopolitical, technological and economic trends, as well as identifying opportunities for the Discovery Investing strategy he developed. Dr. Berry has presented testimony to a subcommittee of the Natural Resource Committee and U.S. House of Representatives.

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-- Posted Thursday, 3 November 2011 | Digg This Article | Source: GoldSeek.com

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