Grandich: King of Metals Will Keep Its Crown


Agoracom market analyst Peter Grandich tells The Gold Report in this exclusive interview that he isn’t among those who expect the world at large to emerge from “this absolutely horrific downturn” by year-end. He sees good opportunities on the horizon for investors who want to “buy things on the cheap” because prices will fall in the equity markets. He also sees bright prospects for gold—particularly gold ETFs and mining companies that are in or near production and have potential for developing additional deposits.

Agoracom market analyst Peter Grandich, who isn’t among those who expect the world at large to emerge from “this absolutely horrific downturn” by year-end, instead sees good opportunities on the horizon for investors who want to “buy things on the cheap” because prices will fall in the equity markets. He also sees bright prospects for gold—particularly gold ETFs and mining companies that are in or near production and have potential for developing additional deposits. At the same time, Peter tells The Gold Report that the “severely wounded” U.S. economy should anticipate rougher and tougher times. Given his penchant for accurate predictions, that’s not a very comforting forecast.

The Gold Report: When we spoke in early February, you said, “Not only do I think that we are we going to retest the November lows, we’re probably going to go through them.” At that point, you expected a bounce that would see the Dow trading somewhere between 7,500 and 9,000. Looking back, that seemed very accurate. Can you give your perspectives on what’s happened since February and what you expect going forward here in Q3?

Peter Grandich: We got involved in what will go down as one of the best bear market rallies the U.S. markets have ever had, but I don’t think it’s anything more than that. The expectation that somehow a normal economic recovery would take place in the second half of this year and things would go back to normal will prove to be a horrific error in judgment.

The market is starting to sense that this is an extraordinary time unlike any other economic period, and any real chance of economic growth after the worst financial disaster perhaps in all of America’s history, is not going to occur. Therefore, we should see the U.S. stock market trend lower, not higher, in the second half of this year and go into a multi-year, if not a multi-decade trading range of somewhere around the lows of 6,500 and potentially as high as 10,000 or so on the Dow, but more realistically somewhere between 6,500 and 8,500.

TGR: Are you expecting that 6,500-8,500 during the second half of the year?

PG: The second half of the year, as well as into the foreseeable future. The reality of how severely America has been wounded economically, socially and politically (now that we have the new administration entrenched) is not going to allow equity prices to rise substantially or stay high at high levels for any length of time.

TGR: That said, why would the Dow go anywhere toward 10,000?

PG: Markets can do the unexpected, and you have to leave room for that possibility. We’re still seeing a group that expects the second half to be much better than the first. Although we ended the first half on a negative note due to a much higher unemployment number, all we’d need is one or two better numbers in the coming days for renewed over-optimism to take hold again.

My concerns are not about the next six months but the next six years. The irony of this forecasting business is that for the first time ever, it’s easier to forecast something out much further than it is closer.

TGR: So the market is still not accepting the reality of the economic situation?

PG: No, because it is still played by a group that is tilted heavily toward the buy side. I call them the “don’t worry, be happy” crowd. Wall Street is always overly optimistic. It always wants a reason to be long, and that’s why it’s been able to turn the green shoots into something much bigger than they really are.

But I think what’s etched in stone is where we’re going several years from now. There won’t be anything anybody can do to change that. That is where the darker side lies, where rougher and tougher economic times are going to be.

TGR: That’s a pretty dismal picture you paint. What else do you see?

PG: Americans in general are not willing to accept that the U.S. dollar may no longer be the world reserve currency. We can no longer sufficiently handle our debt load. The countries that currently hold that debt want to see the dollar not be the world currency because they’re going to lose money owning debt in dollars. We can’t have any strong economic growth if we’re overburdened by debt, and if we can’t have strong economic growth, we’re not going to see great improvement in the employment numbers.

It’s a realization that I think is going to start to grasp Americans as excitement of a new President and a new era melts away and the reality sinks in that this administration’s actions—in fact, some of its inactions—are going to make problems even worse rather than better. Another important point: People don’t understand the political clout a creditor like China can have. I think Jim Rogers has given the best advice when it comes to China. He said the best thing parents can do is to get their kids to learn to speak Chinese because China is where the world’s economic power is going to come from.

TGR: Speaking of the U.S. dollar, investors seem to still be returning to the dollar as a safe haven lately. Why?

PG: I respectfully disagree that there is any return to the U.S. dollar as a safe haven. If we use the U.S. Dollar Index as a measure, we’re not far from the lows of about 18 months ago. It has come down from the 120s; it got to the low 70s, rebounded to the mid-90s, and has since dissipated and fallen back to just below 80 recently. It’s no longer a safe haven because it has really been a poorly performing currency. I suspect that as we get into the latter part of 2009 and the rebound in the U.S. does not take hold, we’re going to be back in the 70s again and then break critical support at 78 on the U.S. Dollar Index. When we close below that, we’re going to have a fairly fast march to new lows in 2010.

TGR: In this situation, how does someone who is now in cash in the U.S. dollar keep value in that cash?

PG: Good question. It’s mandatory now for investors, particularly foreign investors, to hedge against the dollar, to use various tools from exchange traded funds to actual currency positions, depending on how large and sophisticated one’s portfolio is against the U.S. dollar, especially when they own U.S.-based assets.

If you’re going to look to own public companies, you want to look to own a drug company, a manufacturing company, etc. that’s not based in the U.S. The U.S. companies are going to have a very difficult time competing on the world stage due to the horrific condition that America is in.

TGR: So are you making any recommendations in terms of investments in currencies?

PG: Oh, yes, my favorite continues to be the Canadian dollar. I said when the U.S. dollar was in the 70s that we will see parity again. When we get to parity, it will stay. The Canadian dollar has a government whose very conservative fiscal policy prevented it from getting into the problems that many other governments around the world did. It is still driven by commodities, one very important commodity—oil—which over the long term can only go higher. In addition, Canadian investors are more fiscally conservative than those in the U.S., and didn’t get overloaded in debt to the degree that we saw in the U.S.

TGR: So how do people who have cash and no debt play the markets now?

PG: In a very limited and frugally wise way. I am urging my readers not to let their cash burn holes in their pockets. As bad as things look, it can get a lot tougher, so you’re going to have to be really a holder of cash and really wait for even tougher times before putting a lot of it to work.

I have to put one asterisk with that comment: Parts of the world will not remain in this economic malaise. We will see growth again in Asia, China, India, even Canada, because its economy is driven by natural resources. These countries will return to decent economic growth. But Americans and American corporations are going to underperform their peers around the world. So if one is going to invest in equities in general, they need to look at foreign markets versus U.S. markets. The U.S. government is so intertwined with public and private corporations in America that it has forever destroyed capitalism as we knew it. And therefore, large-scale investors around the world will think twice about putting serious money in American companies if the government can just change the rules.

The biggest rule change came when the Obama Administration made General Motors’ creditors get behind unsecured creditors. Some 225 years of case law history fell by the wayside because the government said so. Once you feel that laws can no longer protect your investment, you have to be seriously concerned about putting money in that country.

TGR: Your model portfolio contains a lot of gold companies. Is this a hedge against the U.S. dollar’s decline?

PG: It is. And that is why I am so bullish on gold. First, we have history on our side. For thousands of years, when paper assets and/or economic empires declined, their currencies declined but one asset always held its purchasing power. That’s gold. In addition, the supply and demand scenario for gold itself has improved tremendously. Year after year, we see demand outstripping new supply, despite much higher gold prices. We have not seen a dramatic increase in new gold reserves for a while. The other factor is that former major sellers, most being the world central banks, no longer affect the gold price. It wasn’t too long ago that if a central bank sold gold, the gold price declined tens or hundreds of dollars and stayed there for a year or two. Now, if a decline lasts a few days, it’s a long time. These are all signals that the supply and demand scenario for gold remains very, very bullish.

The only hiccup is what always happens at this time of year. The June-to-September period is the seasonally weakest time period. It is when most jewelry fabricators take off before they return in earnest to purchase gold for their seasonally strong period of sales from Christmas through Valentine’s Day. So I suspect that we won’t get over that $1,000 an ounce magical number until the fall.

But when it comes—it’s not a question of “if”—we are going to see much more money flow into physical bullion, and that will just drive the price higher. When that occurs—again, I obviously believe it’s “when”—most mining companies and a lot of the exploration companies can benefit too.

TGR: A lot of people say that it isn’t jewelry demand, but rather people using gold as a hedge against other assets that’s been keeping the price of gold up.

PG: If we had normal jewelry demand, gold would be several hundred dollars higher than it is. There’s no question that investment demand has more than made up for the decline in jewelry demand, and where that investment demand has grown in earnest is in these gold exchange-traded funds.

TGR: Let’s talk about ETFs for a moment.

PG: When the gold ETFs first came to market, some avid gold bugs were against them because they felt that they didn’t offer true ownership of gold. But the creation of these ETFs absolutely opened the market to investors who were not interested in owning bullion before. ETFs gave them an opportunity for direct exposure to gold. So much money has flowed into these ETFs that they absorbed the gold that was out there, which makes this supply and demand picture even more bullish. So the very thing that many gold bugs opposed actually turned out to be one of the best vehicles created in a long time if you’re bullish on a much higher gold price.

TGR: How do you compare investing in an ETF to actually holding physical gold?

PG: I don’t buy into the idea that we need to own physical bullion because the world is coming to an end. If things got to that level, you wouldn’t be able to hold bullion long anyway because other people would recognize that you’re one of the few who have it and would take it from you. While I am not against owning physical bullion, I don’t want to own it to buy food. I want it because I believe it’s going to go up in value, and some day I will be able to sell it and make money.

ETFs, to me, offer the best of all worlds for most individual investors. They don’t have millions of dollars to diversify, so what ownership they should have is very easy through an ETF. Institutions own ETFs because they are very liquid. It’s very hard to buy gold now and not pay at least 10% premium over the spot price if you want something physical. You don’t have to do that with ETFs.

TGR: Your model portfolio contains a fair number of gold mining equities. How do these stack up against ETFs?

PG: We learned a hard lesson in 2008 that having a mining share or an exploration company share is not exactly like owning bullion itself. To have pure exposure to physical bullion, the first and simplest way is through an ETF. The ETF doesn’t offer leverage, though. The hope in owning a mining or exploration company is that it increases its assets, its deposits, its mine or its potential to grow and to find more metals. In that case, every time the price of the underlying metal rises you get that leverage effect in the price of the stock. I like to try to turn a dollar into two, three or four, and that’s not going to happen to an ETF that owns physical gold. It’s going to happen through mining and exploration companies’ shares.

TGR: What type of equities should speculators consider in terms of juniors versus explorers versus seniors?

PG: Pure exploration companies are going to have a far more difficult time moving forward than operating mining companies. Therefore, majors in general are likely to do better as a group. Best of all for the foreseeable future are emerging producers, companies that have clearly gone past the exploration stage. And they have potential to increase their production because of the size of the deposit, or other deposits.

Those are the companies that I think one has to have at the top of the list. They would come ahead of pure exploration companies that have some very promising drill holes, etc., but aren’t well on their way to defining very big deposits yet.

TGR: Do you have any favorites in the emerging producer sector?

PG: The first would be ATW Gold Corp. (TSX.V:ATW), which has already poured its first gold in Australia. It’s expanding its current deposit and drilling off another deposit that could add more production. Another one is Taseko Mines Ltd. (TSX:TKO) (NYSE.A:TGB), an expanding and growing copper producer in British Columbia that now is attempting to bring on-stream a gold deposit of 10 million ounces plus.

Another one would be Hawthorne Gold Corp. (TSX.V:HGC), also in British Columbia. It is developing and hopes to be in gold production. We need to look at where companies are developing their deposits. This is very important because political risk is more evident now than at any other time since I have been in this business. So Hawthorne Gold would be another of those emerging producers located in a politically stable jurisdiction.

TGR: And they also give you your Canadian dollar play. Are you looking at any plays in Africa?

PG: Oromin Explorations Ltd. (TSX.T:OLE) (OTCBB:OLEPF) comes to mind. IAMGOLD Corporation (TSX:IMG) (NYSE:IAG); has taken a very large position in Oromin. It’s in West Africa, which has not seen the unrest that some other areas have seen. So, yes, there are places in Africa that to look at.

The safest country in the world today to explore and mine, though, is Canada. Mining is just a natural way of life in provinces such as Quebec and Ontario; their governments even pay back part of the money spent on exploration. In contrast, in most of the United States outside of Nevada and Alaska, most people are anti-mining.

TGR: Do you have any favorites in Quebec or Ontario?

PG: Eastmain Resources Inc. (TSX:ER) is developing multiple deposits in Quebec. They have significant partners with majors. As they move forward and up the scale of assets and reserves, you can see one or more of those majors make a move on them.

TGR: Any more thoughts about juniors?

PG: We’re supposed to have an ETF made up of juniors soon. That could be a very, very positive influence for the junior market. What’s been missing for quite a few years now on the junior market is widespread interest. The general public usually avoids it, and has especially avoided it in these tough times. But I think if money flows into it and people could see the returns juniors offer—5:1, 10:1, 20:1 or more—that speculative money could really lift the market. If it does, more money flows into exploration, and eventually more exploration leads to more discoveries, which makes people interested in small exploration companies in general.

TGR: Any other advice in terms of looking at investments?

PG: The longer you can survive and have cash, the stronger that cash will be as time goes on. More things will become more attractive because a lot of people really have been holding on by their fingernails in hopes of this great turnaround that’s been promised. If I’m correct and that turnaround doesn’t occur, their optimism will turn into disgust, and we’re going to see assets devalued even more. So you want to buy things on the cheap, and I think things are going to get cheaper in the general equity markets.

The untold story that isn’t in the media now but will be six months from now, is the impact on the individual states in the United States. California has been in the news, but people are realizing that California isn’t the only basket case. Many states are unable to balance their budgets, and therefore municipal bond funding problems will continue and also will cause interest rates to rise.

So the whole interest rate picture in general is not good. Bonds are not going to be a good place to have money; because you don’t want returns of 2%, 3% or 4% for the next 20 or 30 years.

TGR: California is not only facing the increase in interest rates but also of taxes.

PG: I think the California has the sixth or seventh biggest economy in the world. Here we were six months ago talking about economic peril worldwide, and the sixth or seventh biggest economy in the world can only give out IOUs to continue business. That strongly suggests to me that my fear about things getting a lot worse is going to happen. I don’t think California is the exception to the rule. It may be a bigger story, but other states have as much difficulty. New Jersey, for instance, has the biggest underfunded pension system; state workers who think they’re due certain things when they retire and the state doesn’t have the money to pay for it.

So I think the next big economic issue is going to be not only problems on a federal level but on a state and municipal level. That is where the next big economic crisis will take hold.

TGR: That’s in the U.S. Earlier, you mentioned some of the BRIC countries recovering faster. But are you still looking at recession worldwide for the next couple of years?

PG: Places like China, India, Brazil, even Canada, because of much more conservative fiscal policy, could see flat to limited growth as early as next year. But I don’t think we’re going to see the world at large get out of this absolutely horrific downturn, as many people predicted, by the end of this year. I think the reality is going to hit home fairly soon that that’s just not the case. We could have at least another 12 to 24 months of global slack to negative growth.

DISCLOSURE: Peter Grandich
I personally and/or my family own the following companies mentioned in this interview:
Taseko Mines (TSX.V:TKO)

I personally and/or my family am paid by the following companies mentioned in this interview: Taseko Mines (TSX.V:TKO), ATW Gold Corp. (TSX.V:ATW), Hawthorne Gold Corp. (TSX.V:HGC), Oromin Explorations Ltd. (TSX-T:OLE; OTC/BB: OLEPF)

Peter Grandich, creator and producer of The Grandich Letter for a quarter century, allied himself with Agoracom last October, bringing his well-known and oft-quoted commentaries to a far wider audience than his subscriber base and financial media such as The Wall Street Journal, MarketWatch, CNN, GlobeInvestor, Financial Post and BNN. Peter was dubbed “the Wall Street Whiz Kid” after he forecast the 1987 stock market crash weeks before it happened. He then predicted that the market would reach a new all-time high within two years. It did. He said that 2000 would see the end of great mega bull market of the ’80s and ’90s. It was. Early in the new millennium, he thought U.S. banks had gone “overboard in making loans that required near-perfect economic conditions in order to avoid substantial bankruptcies.” Another bang-on prediction. In October 2007, he warned investors to “man your battle stations” and prepare for the “unprecedented economic tsunami” that would hit America beginning in 2008. Hit it did, and whether it’s even begun to subside is debatable.

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