Brien Lundin, founder of Jefferson Financial, producer of the New Orleans Investment Conference and Gold Newsletter, believes at least a small amount of the massive liquidity produced by loose monetary policy in Western economies will find its way into mining equities following a summer pullback in equity prices—but don’t wait long. Lundin expects the “buying opportunity” to last for two, maybe three weeks before seasonal gold demand pushes prices higher. In this exclusive interview with The Gold Report, Lundin discusses a select group of gold and precious metals equities that he expects to perform well as near-term news reaches the market.
The Gold Report: On July 30, you sent out a Gold Newsletter alert that forecast a pullback in the midsummer bull market. The next day the Dow dropped 317 points, while the NASDAQ fell about 93 points. Since then the Dow has climbed back above 17,000, the NASDAQ above 4,600. Should investors dismiss that drop or do you believe it was akin to a tremor preceding an earthquake?
Brien Lundin: That particular call made me look like a genius at the time, but right after that drop the stock market took off and reached new highs. The stock sell-off in late July was a sign that investors were nervous because we haven’t had a meaningful correction during this bull market. However, there are potential pitfalls ahead for the economy—we still have to navigate the U.S. Federal Reserve’s ending of quantitative easing and its first interest rate hikes. There’s nothing directly ahead that indicates a major correction will occur, yet these things happen when you’re least expecting them.
TGR: You’ve been warning investors in Gold Newsletterabout the erosion of the foundation of the U.S. equity market. Please give our readers a few points to underpin your thesis.
BL: When I put forth that thesis, Q1/14 gross domestic product (GDP) had missed consensus estimates by 3.3%. The consensus going into that report was for 1.2% growth but it turned out to be just 0.1%—only to be subsequently revised further down to -2.1%. The miss for the consensus estimate was remarkable.
I posited that these reports had possibly captured some underlying weakness in the economy. I expected a rebound in Q2/14 because a lot of economic activity was put off due to the unusually cold winter weather. But Q2/14 GDP was over 4%. I certainly wasn’t expecting anything like that, and neither was anyone else.
So, the idea of a major stock market decline stemming from a weakening U.S. economy has become more remote, at least for the time being.
TGR: What are you seeing now?
BL: The massive amount of money created in developed economies since the 2008 credit crisis really has not resulted in significant retail price inflation. If anything, there has been disinflation in major economies, such as in Europe where the European Central Bank is now turning to quantitative easing. The real result of quantitative easing in the U.S. and loose money policy throughout the Western economies is a virtual flood of liquidity looking for places to land. It’s why we have U.S. Treasuries being bid down to their lowest rates ever, while the U.S. stock market is hitting record highs. Those two asset classes should be at opposite sides of the seesaw, but there’s so much money looking for a home that both are soaring simultaneously.
TGR: The Market Vectors Junior Gold Miners ETF (GDXJ:NYSEArca) has been trading lower since mid-July. In fact, the Dow Jones Industrial Average has outperformed that ETF over the last month or so. Is that a buying opportunity?
BL: I think so. The timing is critical, though. While I don’t see a near-term, fundamental driver to push the market higher in the very near future, there are some factors that I think will push the junior resource stocks and the metals higher this fall. So your real buying opportunity is probably over the next couple of weeks.
All of the liquidity that I referred to earlier has to go somewhere. There’s a broad consensus that gold is going lower and a lot of money is shorting gold. At some point over the next month or so—at the first sign that gold is not going lower—we’re going to see some short positions get covered, and that ocean of money is going to start sloshing into gold and silver. At that point we should also see stronger seasonal demand for gold and that also will help power the gold equities market forward.