-- Posted Thursday, 5 April 2012 | | Disqus

The turnaround in precious metals prices and mining shares has been slower in coming than most analysts and investors have expected. This has certainly not deterred Jordan Roy-Byrne, publisher of The Daily Gold Premium, from searching for and uncovering some of the situations he expects to provide winning returns. In this exclusive interview with The Gold Report, Roy-Byrne discusses how junior gold and silver miners are building for a rebound.

The Gold Report: When we last spoke four months ago, gold and silver stocks generally, and the juniors in particular, were in their year-end, tax-loss-selling doldrums. What is your view on where these things are now?

Jordan Roy-Byrne: I think the sector is basically in a bottoming process. It has been in a state of negative sentiment for weeks but has been unable to rally. We thought the market had bottomed last week but it now appears a final washout is beginning, which could be ugly. There has been a lot of technical damage inflicted on the sector. Over the next several months or so, I think we'll see a rebound but a breakout to new highs is now unlikely to happen this year. If you have ample cash then you will be able to take advantage of the coming major bottom.

TGR: Last November you were expecting a breakout in the gold stocks that would start sooner than it has. Metal prices haven't cooperated very well. Do you think it's going to take $1,800/oz gold to get people's attention again for things to move, or something other than that?

JR-B: Well, first of all, the stocks have to lead the metals and that is what will happen eventually. As far as what it's going to take, that's a great question. In the larger view, we see that a lot of money has gone into bonds and also into conventional stocks. Stocks have been doing well, and there's been at least the perception that corporate profits have been growing and there's a statistical economic recovery. That provides competition to the precious metals sector and so money has moved away from precious metals and, secondarily, the resource sector.

Bonds appear to have put in a potentially major peak and now look like they're going to decline in price, which means rates will rise. I think the stock market has more upside, but fairly soon it's going to start to run into some major resistance. At that point I expect a neutral market or mild bear market. So I think the combination of bonds and stocks struggling simultaneously, probably at some point later in the year, is going to be a significant but stealth catalyst for precious metals because that's what's going to make people look at other things, such as precious metals.

TGR: You're a technician and you study charts in great detail. What's your technical work telling you at this point as far as where the metals are headed and when the turnaround is near?

JR-B: It appears that we are near the end of the bottoming process. Sentiment is obviously very negative and that is one of the conditions you need to see for a bottom. The other condition you need is positive price action with bottom building followed by higher highs and higher lows. We have not seen that, but with the market starting a capitulation phase, we are likely to see a V bottom develop. This coming bottom will be the fourth major bottom in the sector following 2000, 2005, and 2008. Again, if you have ample cash you will be able to pick up some major bargains. Most investors are probably despondent now but the professionals will be the ones that are looking for bargains at the bottom, which could rebound 30, 40 or 50% right away.

TGR: Can you see any particular catalysts outside of a higher gold price where people are going to jump on these things and cause them to lead the metals prices, as they would normally do?

JR-B: I do not see any immediate catalysts other than a potential V bottom. Fundamentally, here is what will sustain that bottom and lead to a new bull run. We have had a recovery, but it is a weak recovery that has not improved the financial condition of the government sector in the U.S., Japan and Europe. More monetization of existing and new debt will be required and is imperative to keeping the global economy functioning. Rising interest rates increase the burden of interest payments on the debt. Meanwhile, a stagnant or slowing economy puts pressure on budget deficits. These factors, while not important today, will become very important within the next year and, again, will require new rounds of monetization and quantitative easing.

To conclude, any negative economic news or softening in the U.S. or global economy is a potential catalyst for this sector.

TGR: What are you looking for these days in potential winners, and what kind of characteristics would they have?

JR-B: I'm looking for a strong combination of present value, growth potential, a chart that shows that there's actually some accumulation taking place and potential for near- and long-term gains. I'm looking for growth of a resource that's likely to become a mine. In the case of producers, you want to see production growth. The big winners tend to have projects in the pipeline that are close to production and, therefore, can continue to grow. Our biggest winners in recent years have had mines operating but projects in the pipeline to increase production. The market wants growth. Investors should be looking for companies with multiple mines and/or projects close to production.

TGR: Maybe you can talk a little about your model portfolio and how that's performed since we last spoke.

JR-B: Last year our portfolio was down about 6%. To compare to the overall market, Market Vectors Junior Gold Miners ETF, the junior exchange-traded fund, was down 37%. We have to remember that there was a bottom at the very end of the year that makes 2011 performance look very negative. So far this year, our portfolio is up 7.6% while Market Vectors Junior Gold Miners is down 8.0%. We've been fortunate because, based on what we said in our last interview, we really had expected the gold stocks as a group to perform a lot better. We've been wrong about that, but we haven't been wrong about our favorite companies, which have performed fantastically and really helped overall performance. We also put a hedge on in the last month because we felt the market would be moving down, and that's helped our performance.

TGR: Looking at past market cycles, most of these Canadian juniors would tend to congregate in certain hot areas. For a while there, they were crawling all over Nevada and British Columbia (B.C.). Now, a lot of the action has turned to Mexico, South America and Africa. There are obviously companies that are still exploring those areas because there's still lots of potential there.

JR-B: Yes, there is.

TGR: Is there anything else you'd like to mention?

JR-B: We had a very significant recovery in the sector between the end of 2008 and 2011. It's going to take the market some time to consolidate those gains before the next move higher. At the same time, valuations have come down, which is really a symptom of the "wall-of-worry" phase in a bull market.

After the first big correction in a bull market, it takes the market between four to five years to make its next big breakout and pull away from the first major high. In that extended period, sentiment obviously tends to be neutral to negative. Investors are worried that the bull market's over and not going to make new highs, yet companies continue to add value. That's why you tend to see improved valuations, which in itself is a major catalyst for the sector. Right now the market is likely entering a final washout phase. Looking at the long-term charts, there is nothing that says the bull market is over. The market is soon to make a major bottom and should be in position for a great rebound. I'm actually seeing several similarities between this year and 2005.

There are several things readers should look at. One, they can look at companies that have performed very well yet still have value to offer. You really want to buy them when they're trading 20–30% off their highs, which will happen at least twice a year. Now is obviously one of those times. Established growth-oriented companies are trading well off their highs. At the same time, I'm not against bottom fishing per se, but you have to be careful with those companies. There are fundamental reasons why companies fall 50, 60 or 70%. But if you find the right one, you could certainly double or triple your money very quickly. I'd just be extremely selective there. It will be a few years before those companies come back into favor, universally.

TGR: Thanks for joining us today.

Jordan Roy-Byrne, CMT, 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 TheDailyGold Premium. His work has been featured in CNBC, Barrons, Financial Times, Alphaville, Yahoo Finance, BusinessInsider, 321gold, Gold-Eagle, FinancialSense, GoldSeek and Kitco.

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-- Posted Thursday, 5 April 2012 | Digg This Article | Source: GoldSeek.com

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