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Expert Interview: Michael Berry Talks About Direction of Gold and Silver Prices

When it comes to investing in precious metals and the companies that operate in the space, understanding the underlying trends that are pushing and pulling the demand and price direction of the

When it comes to investing in precious metals and the companies that operate in the space, understanding the underlying trends that are pushing and pulling the demand and price direction of the assets is critical. While some investors examine each individual opportunity based on the sole potential of a company’s prospects, they may be at risk of missing out on the bigger picture.

So the top-down, macro to micro economic analysis that Michael Berry, Ph.D applies his experience both as an investment professor in academia and from his days as a fund manager on Wall Street. Berry also created the concept of Discovery Investing, which argues that great wealth is established through great discoveries. However, identifying great discoveries doesn’t occur without undertaking some level of risk. That’s why his 10-Point Model for analyzing investments has become so popular for investors that follow him.

Berry is a noted speaker and his thoughts on the economic forces driving the prices of assets such as gold, silver, and the stocks that operate in those industries, is very often cited by high profile investment publications. discussed some of these issues with Michael Berry in a recent interview. Berry will be joining a roster of notable and influential speakers and attendees at the upcoming San Francisco Hard Assets Investment Conference on November 16-17, 2012 at The San Francisco Marriott Marquis.

EQ: Your career in finance and investing spans over both the academic and professional landscapes. How did that shape your approach to the market?

Berry: I earned a Ph.D at the University of Arizona in investment theory, and was a professor at the University of Virginia for many years, then at James Madison University for many years after that. During that time I taught investments and became very interested in natural resources, which not many other people did during that time. I found out that people didn’t really know how to value them. All the kinds of concepts we taught like CAPM and beta didn’t really apply to natural resources. At the same time, I started a case book on Wall Street with finance executives during the 1980s. I met a David Dreman, who founded Dreman Value Management, and he encouraged me to come to Wall Street to work with him. So I left academia and came to Wall Street, and after he sold his firm, I went on to manage a fund at Heartland Advisors, and still had the interest in natural resources.

Come 2000, we started to see this great natural resource boom take off. I left at that point because I thought I had something unique to give. I developed a technique quite different from everything we covered in academia, call Discovery Investing. My thesis is that all great wealth comes from great discoveries, that applies not only to natural resources but in biotech and high tech. However, I focus a lot on natural resources. At the time, everything was cheap. Gold was $250 an ounce and silver was at $2 or $3 an ounce. So I parlayed that into a very significant opportunity. I now have about 10,000 readers worldwide and have been writing for about 10 years, just developing the whole idea of Discovery Investing.

EQ: Can you tell us what readers of your can expect to find in your Discovery Investing notes?

Berry: There are a couple of aspects to it. It’s not just about covering a company and saying, for example, this company has a tremendous hole they drill or whatever. I actually start top-down because I’m very interested in macro economics. I spend at least half my time writing and thinking about government policy. I’m an invited speaker to the Federal Reserve twice a year, and have been for the last eight years. So I think a lot about top-down macro economics because that’s what’s going on in the world. We see a quality of life cycle that, over and above everything else, is driving it. Developing countries in the early phase of that quality of life cycle are going to need all kinds of discovery, including things like infrastructure. I write a lot on that, and I would say that half of my work is about thinking and writing about inflation, deflation, Fed policy and so on, and how that relates to the price of gold, silver, copper, and other resources.

I then follow a number of exploration and development companies and look at how they’re progressing. From there, I advise my clients on  the positives and negatives of those companies. So there are a couple of aspects to Discovery Investing. We have our 10-Point Model for Picking Mining Winners, which is an analysis facility that allows the crowd to score companies based upon those 10-points.

Some of the questions addressed on the 10-points of a company include: Could this be a world-class asset? How is it progressing? How good is the management team? What are the catalysts that are coming? How do they deal with the markets? So on and so forth. So there are 10 separate points that we would grade a company on, and we have 1,100 users of that system, and they form the crowd to score each company that they choose to score on in the system.

We cover all companies in the American, Canadian, Hong Kong and Australian exchanges. Any company from Hecla Mining (HL) to Goldcorp. (GG), to other sectors like biotechs, can be in there. However, I di tend to focus on junior mining, exploration and development companies. These are companies that are either in their incubator phase, or very early in the exploration game, or companies that have matured and have a NI 43-101 Preliminary Economic Assessment, have a feasibility study and they’re ready to actually monetize their discovery. That’s what I focus on, really.

EQ: Are there any particular areas of natural resources that you’re attracted to in terms of opportunities?

Berry: My son, Chris Berry, works with me. He was on Wall Street for many years and came to work with me. We divided up the landscape because you can only be an expert in a few things, and maybe even in some cases just one thing. So I like to follow the precious metals closely, especially gold, silver, and platinum. My son tends to follow things like graphite, rare earth elements, and lithium. We’ve made a lot of money in those areas from personal investments. Right now, I’m following for companies with major gold deposits. Silver is also very interesting to me, and I think that stems primarily from the issue of inflation and the printing of money going on today around the world, and my work with the Federal Reserve.

I believe–and I’m not the only one–that there’s a battle going on right now and that battle is between inflation and deflation. If anything, there’s a very strong deflationary tint to the world because of the de-leveraging that still has to occur. I see QE3 as an all-out attempt to throw everything but the kitchen sink at the capital markets to induce inflation, with the $40 billion to $80 billion of monthly bond purchasing. They haven’t been able to do it with QE1 or QE2, or even with Operation Twist. So the question is will they be able to do it with QE3. I think the Fed, under Chairman Bernanke, will continue to print money and will not make the mistake of Japan in the 1990s where they tightened the supply. They’re either going to inflate or die trying.

I can’t honestly tell you which way it will go now. My sense is even if they can’t increase the job market or growth in the economy through inflation like they’re trying to do, gold and silver will still benefit from this copious amount of paper that is being printed. Remember, it’s not just the U.S. that’s printing money. This is happening around the world now. A lot of emerging countries are doing it as well. It’s essentially become a race to the bottom in terms of mercantilism, trying to protect your export market, and having the cheapest currency out there. They’re reducing the value of the dollar, yuan, euro and so on. So we’re in a tricky situation, and I think it’s going to last for a while. Gold and especially silver will benefit. If they induce growth, silver will benefit because silver is an industrial metal. If they don’t induce growth, then silver will benefit because it will then take on the role of a monetary commodity.

EQ: As we discussed above, you are a very accomplished speaker. Tell us more about your participation as a keynote presenter at the upcoming San Francisco Hard Assets Conference and how these events have helped you as an investor.

Berry: I’m very different than most. Having been a professor, if you boil me down, I’m a researcher and a teacher. I’m not really a professional investor, though I do invest in these stocks and that’s how I make my money. I don’t charge for my notes, so I’m actually giving them away for free and not selling notes. So if you really want to know my character, I’m a very accomplished speaker through 40 years of speaking in various engagements and a very good–though not quite excellent yet-writer. I try to educate people as to what’s going on. For example, I was at the Silver Summit recently, and I talked about my unique vision of QE3 and what that’s going to do for silver. Most of the work I do is original work, and sometimes I call on research of other authors to support my points. So as a teacher when it comes down to it, when I go out to do a presentation, I try and teach people how they can help themselves and how they can prepare themselves for what’s coming.

EQ: The Hard Assets Conference is also a great gathering of the minds for those interested in natural resources. How can investors take advantage of that?

Berry: From my perspective, you have to meet these people. You have to meet the CEOs, the CFOs, the chief geologists, and so on. You have to spend time with them, whether that means having a beer, a coke, an iced tea or lunch with them, you have to get to know them because real wealth is created by people who have great capabilities. Doing that helps me immeasurably, and I’m sure there’s a tremendous value for anybody to go and sit through some seminars that they’re interested in or even just talk to people like me. Pull me aside and ask me what I think about this opportunity or that one, so we can relay what may happen and how they can protect themselves. It used to be a game of wealth creation, but now I think it’s a game of wealth preservation. Discovery Investing, by its very nature, is about great wealth being created by great discovery, and it’s usually created at the front end. So while it’s very risky, we try to de-risk projects as much as possible and teach people about the de-risking process, and hopefully the subsequent wealth creation of it as well.

Stories like Charlie Munger’s inspire me. It shows why you must live life as an optimist.