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Peter Grandich Hunts for Treasures Beyond Gold's Glare
Source: Brian Sylvester of The Gold Report (6/30/10)
Financial Commentator and Market Analyst Peter Grandich sees no end in sight to the "mother of all gold bull markets." But while gold has been riding high, its glitter isn't blinding Peter to other opportunities. In this exclusive Gold Report interview, he shares some of his favorite gold juniors, as well as a mix of players in the cobalt, lithium, uranium and iron ore niches.
Peter Grandich: I've been looking for over a year for a countertrend bear market rally to end in the June–July period around 11,000. I think we are getting very close to that. There's still an argument to make that the market could rally a bit longer into late summer, early fall. But after that, the next part of my forecast was that the U.S. stock market would enter a long period—several years if not a decade or longer—similar to Japanese market trading after it peaked in 1989; and for 20 years, literally, went nowhere but had major bear market rallies and declines. That's what I'm looking for in the U.S. stock market.
TGR: How long do you think that could last?
PG: Years. It could be many years. I clearly believe that the U.S. equity market will underperform most other Western world markets. In other words, both could go down—but the U.S. market will go down more. After this summer and early fall, one of the last places people would want to invest will be the U.S. market. As much as it used to be the world's leading market, I think it's quickly becoming the market you least want to be involved with.
TGR: Is another market poised as an attractive alternative?
PG: I don't know if we'll have real bull markets in major markets in the coming years because, while acute in the U.S., the debt problem, obviously, exists in many other parts of the world, including Europe. We're living through that now. In the end, look at who the creditors are. Which economies are still able to lend to all these indebted areas of the world? They are likely the economies that also will do well.
TGR: Such as China?
PG: Yes, places like China, and to a lesser extent, Brazil. But I also want to point out that, while the U.S. and Canada are still somewhat joined at the hip as the world's two largest trading partners, Canada is fiscally light years ahead in terms of its balance sheet. Canada remains a very favorable place of mine and has a strong currency. It's the one currency outside of gold that I would have no problems holding.
TGR: And the Russians just bought some loonies.
PG: That's correct. Russia has diversified. I think we're going to see more of that. It's interesting about Canada; Canada was really a basket case in the early '80s. It was looked upon poorly in the Western world at that time. Now, of all the Western world economies, none is in as remotely good shape as Canada from a federal level. They'll suffer a little bit because they'll still be big trading partners with the U.S., but Canada will stand out. Its natural resources will continue to do well and there's no denying the fact that Canada has been far more fiscally responsible than the U.S. I certainly would be invested in Canada markets before I'd be invested in the U.S. market.
TGR: So you're pretty bearish on the U.S.
PG: Actually, since January, many people have emailed and sometimes called to say I've made an error by not turning outright bearish again as I did at the top of 2007. I parted ways with the bearish camp on what turned out to be, literally, one day before the bottom in March of 2009. Unlike many bears who stood in the way of this tremendous countertrend bear rally, I did not suggest putting my bear suit back on yet.
I have noted certain support levels. If they were broken I would put my bear suit back on but we haven't reached that. As we speak, a formation is starting to take place technically on the Dow, a head-and-shoulders pattern. If you can envision a picture of someone's head and their two shoulders, we've had the left shoulder drawn. We've had the head. Now, we would form the right shoulder if we rally back to that 10,800–11,000. I would be much more comfortable turning bearish not only because fundamentally I'm bearish, but also get because of what I believe would be a very bearish technical signal. That's what this reverse head and shoulders would be in my mind. So I wanted to alert my readers to watch for this potential formation.
People always think you have to bet either on a major decline or a big rally. Since the bottom in March of 2009, my argument has been that the market would enjoy the eye of the storm, during which we would have a tremendous countertrend bear market rally. Those who are bullish are bullish because they think the 2009 bottom signaled a new bull market. My argument has never changed. This is what's known technically as a "countertrend rally" in an overall cyclical bear market—a bear market that actually began back in 2007.
So all I've been looking for is a countertrend rally tied into a fundamental argument that we will go back into a double dip recession, etc., being lead fundamentally by two factors. 1) What's going to happen politically come November?; and 2) What's taking place and developing in the Middle East?
TGR: So you did not turn from a bear to a bull?
PG: I would never say that I've been a bull. I just removed my bear suit. I wasn't one of those people who made gains in the decline only to see them given back by staying short during the rally. I don't consider myself a bear until I actually say: "It's time to sell the market again." I haven't done that yet.
TGR: When do you think you will?
PG: I don't believe it will go past late summer or early fall. This time last year, I was in a very small camp to argue—and now and it's becoming more popular—that as we approach mid-term elections, there would be a revolt against incumbents in general—and Democrats, in particular. That will create a political nightmare in Washington, with what many will perceive after the election a lame duck one-term president who was swept into power and within two years turned out to be one of the least popular presidents. I think whatever political processes that might have been in place to take care of America's numerous problems will grind to a complete halt after the election. That will just add a log to the fire of how the world perceives the U.S. as a country totally in a mess. So that's been my argument and I still see that developing.
TGR: With that in mind, do you believe that now is a good time to get into the market?
PG: First of all, I don't believe in trading. I don't believe there's any reason to try to trade a few percentage point gains in the Dow or the S&P. I also have to say that Wall Street developed "speculating" as a replacement word so it wouldn't have to use the word "gambling." Those who trade might as well go to a casino because so much is up against you these days.
What's more important, and what we spoke about earlier, is the longer-term bigger picture for a bunch of reasons. You probably don't have time enough to write them all down; the U.S. is deep in serious fundamental problems—economic, social, even spiritual. It's going to be one of the least attractive places, globally, that people would want to be seriously invested in.
TGR: Having said that, the 200-day moving average seems to be one of the tools you put a lot of stock in to determine where the market is going. What appeals to you about it?
PG: First, let me clarify that I think of technical analysis as a good accessory. I don't believe in using it strictly as the only thing on which to base a decision. I have a lot of respect for some great technicians out there. But in my opinion, at the end of the day, fundamental analysis overrides technical analysis. I like technical analysis when I'm uncertain or not absolutely clear on a fundamental direction. If I'm leaning one way or another and my technical analysis supports that argument, the combination of the two determines my decision. Within technical analysis, moving averages are important.
Very short-term moving averages have no real significance to me because, as I said earlier, I don't believe in trading. But the 200-day moving average—the granddaddy of all moving averages—is something I look at. I also know it's important to look at, because the world at large looks at it. A lot of things that happen in the markets are borne out as self-fulfilling prophecies. If enough people report and comment on something and it starts to develop, it begins to feed on itself. So it's a very important technical tool and one of the few that I rely on a lot.
TGR: Is that primarily what you used to determine the crash in '87 and the peak in '07?
PG: No, it was always fundamental argument, but the technicals always supported it. Technical analysis has come a long way since the '87 crash. Back then, there weren't many people using it. I really didn't use it much either, but it helped in 2000 and, of course, getting out. Also when we took off our so-called bear suit on March 8, 2009, the main reason was because we'd become so oversold. All of the technical indicators I was using suggested that at the bare minimum, it was going to be a major relief rally. So I think technical analysis is a good aid, but I don't believe in using it as my sole compass.
TGR: You talked about gold hitting $1,300 an ounce in what you've called the "mother of all gold bull markets."
PG: The foundation of my bullishness on gold has been a few key points I've hammered home. Two of the main ones used to be big negatives for gold. It wasn't that many years ago that central banks were net sellers of gold. After the Washington Agreement, they started to measure their sales, and they've actually become net buyers in recent years. So one key bullish factor was the fact that a group that had been a major seller no longer was.
TGR: What else shifted from a negative to a positive?
PG: I used to argue that the mining industry was cutting off its nose to spite its face by hedging so much of future production. But the same hedging that had been so widespread has become like a four-letter word for mining executives. Even the mere thought of speaking about it brings the ire of institutional and retail investors. That's the second key point, and the second bearish factor that's become bullish.
The third thing that's accelerated the gold price beyond $1,000 is the realization that gold is simply the best alternative to paper currencies. About 6 or 12 months ago, I said the U.S. dollar was going to rally and that gold would rally in the face of that. Even gold bugs questioned that; they'd been weaned on the theory that a rising dollar was bearish for gold. My argument simply was that, for a while, the Dow would rally just because the world would concentrate on other bad currencies until coming back to the USD. I said the fact is that no one currency anywhere in the world—euro, USD, what have you—would do anywhere near as well as gold itself; therefore, look for gold to rise in most major currencies. That's exactly what's happening now.
None of those three bullish factors are even remotely close to changing direction. We don't see any sign of a central bank pickup in net sales. We certainly don't see the industry hedging. We definitely see the money flows into gold, and we see more and more counties and people of influence noting that gold is the only true money. That's why I still call this the mother of all bull markets.
TGR: Are you willing to put a timeframe on a price higher than $1,300?
PG: Our target for 2010 was $1,300 as a low end, and it could go as high as $1,500 if certain events unfold in the Middle East—which, realistically, are closer today than ever before. So even though we haven't printed it yet, $1,300 is a "gimme," and there's still the potential to run as high as $1,500.
Gold will never shine or look positive to many investors because to support it and to believe in it would be detrimental to the financial assets the world revolves around. The mistake people make is in waiting for world confirmation that everybody's on board on gold. It's never going to happen. And in my opinion, and that's a good thing.
TGR: A good thing?
PG: Yes. The day that it even remotely looks as though everyone's on board, we'll know we're very, very close to whatever the run is on the gold market. But my personal opinion is that the gold run won't end until at least it has a "two handle."
TGR: A two handle?
PG: That means gold will get to $2,000+ before this great bull market ends. That time is not yet in sight.
TGR: You've been a big believer in gold equities and hold a number of them. Could you give us updates on some of the companies you mentioned in your last Gold Report interview?
PG: Well, as I've said before, Evolving Gold Corp. (TSX.V:EVG; Fkft:EV7) is the most perplexing junior I've ever dealt with. Failure is the norm in the junior resource business; for each company that finds a significant deposit and is able to develop or sell it for a handsome profit, nine others don't. So it's impressive enough when a junior finds one world-class potential deposit. Evolving Gold has managed to find two. Yet the stock has been hammered and beaten up. The company has not done a great job on the corporate communication side in recent months, and it's depressed the price of the stock to a level that doesn't represent the real potential of these two projects. Either could be world-class and as things look now, both are still moving towards that. Given my prejudices and the fact that 99% of Evolving Gold's peer group would kill to have just one of those projects, I deemed it an extremely undervalued situation and personally bought 1.3 million shares.
TGR: Any other junior golds you'd like to talk about?
PG: Yes. Crocodile Gold Corp. (TSX:CRK; OTCQX:CROCF) and Timmins Gold Corp. (TSX.V:TMM) are two clients of mine, as well. People love the excitement of drilling and hoping an explorer finds something; they somehow lose sight once the company goes into production, and then miss out when these emerging producers still have a lot of exploration potential. That fits both Crocodile Gold and Timmins Gold. They're emerging producers. I think one of the areas that retail investors don't concentrate on enough would be in emerging producers; probably if they did they would have fewer losses. Both Crocodile Gold and Timmins Gold are going to produce 80,000–100,000 ounces a year, and those figures can increase. Yet they still have enormous upside potential as explorers. Their share prices don't seem to be reflecting that at the moment.
TGR: Are there any other juniors you're following?
PG: I'm looking in some areas that have been cast aside. One in particular is the uranium market. As exciting as it was a few years ago when many so-called experts were hammering home triple-digit uranium prices, a lot of those forecasters seem to have selective amnesia and forgot about that. I fell on my face and thought that uranium prices would have gone much higher and stayed there, too. They didn't, and the market continues to beat down anything related to uranium.
However, I think some companies in that space will be more than survivors. One is Strathmore Minerals Corp. (TSX.V:STM;OTC.PK SHEETS:STHJF)—again, a client—which is developing some key assets. This one, in particular, in the U.S. looks more and more like it's going to be a producer. Another is Crosshair Exploration & Mining Corp. (TSX:CXX; NYSE.A:CXZ). I think you have to look at uranium now. It's pretty well at its bottom. The market looks like it's groping for a bottom.
TGR: What else has been cast aside?
PG: One segment in the rare metals that doesn't get much attention because not many are involved in it is cobalt, which is also demonstrating a real need for strategic investing. Cobalt is among the minerals that the European Commission recently identified as having high supply risks, with potential shortages resulting from limited production and high demand. Cobalt is a component of our renewable and sustainable energies, from batteries to solar elements to powering turbines for wind generation. The U.S. consumes about 60% of the world's cobalt, yet produces none of it. Formation Metals Inc. (TSX:FCO), based in Idaho, is really developing the only pure-cobalt play in North America. Like many have in these tough times, Formation Metals has struggled to bring the mine into production—but they keep taking steps forward.
TGR: Speaking of batteries, you're no stranger to the lithium space. I see you've just signed on to help Lithium One Inc. (TSX.V:LI) with communications and investor and public relations—congratulations. You've also been close to Rodinia Minerals Inc. (TSX.V:RM; OTCQX: RDNAF).
PG: Thank you. I'm looking forward to working with Lithium One. It's a great company with two major lithium projects at this time: the brownfields Sal de Vida lithium brine project in Argentina and the James Bay bulk tonnage spodumene project in Quebec. As for Rodinia, I bought into that company primarily because lithium has all the markings to be a major part of the budding world revolution in rare metals and alternative energy. Rodinia is an exploration and development company with two projects, either of which could become very substantial.
TGR: Shareholders just approved a name change to Rodinia Lithium, right?
PG: They did. The change reflects the company's singular focus on developing its flagship lithium projects in North and South America. Its Clayton Valley project in Nevada surrounds the only lithium-brine producer in North America, and it's exploring four properties in Argentina. Three of them are in Salta Province, where the Salar de Diablillos is significant because Rodinia does not share that salar with any other operators or developer. This spring, the company completed the first tranche of a private placement to continue work on these projects and brought in Farhad Abasov as executive chairman. His expertise in the potash business should prove useful as Rodinia develops its lithium brine projects, because potash will be a substantial economic byproduct of extraction. All things considered, I believe that, based on the end-use market for lithium and what we now know from Rodinia's sampling initiatives in Nevada and Argentina, the stock is cheaper today than before this team got involved.
TGR: Do you have an eye on any more hidden treasures?
PG: Sometimes you'll find opportunities in the junior market by following people who've been successful and watching them when they set up shop again in something similar. In this particular case, Alderon Resource Corp. (TSX.V:ADV) is an iron ore play with many from the management team that was behind Consolidated Thompson Iron Mines Ltd. (TSX:CLM), which was a tremendous winner in Canada. Alderon Resource is currently drilling an iron ore project in Newfoundland and Labrador. When you see management people like that who have been very successful in one deal setting up shop down the road a piece, you really should be alert to that and take interest in it.
TGR: Any other juniors that appeal to you?
PG: Another large personal holding is Silver Quest Resources Ltd. (TSX.V:SQI), a gold and silver exploration company that became one of the largest land holders in the Dawson Range last year. That makes Silver Quest a key player in the big, budding gold rush—we haven't had one in years—in the Yukon. Kinross Gold Corporation (TSX:K; NYSE:KGC) now owns the majority of Underworld Resources Ltd. (TSX.V:UW), whose White Gold property is in an area where significant placer gold has been mined. Kaminak Gold Corporation (TSX.V:KAM) made a nice discovery.
As we speak, Silver Quest is drilling a very, very attractive project in the Yukon; that's its Boulevard Project, just 10 km. southwest of Kaminak's recent Coffee property discovery. But unlike a lot of the other Yukon players, Silver Quest it has real resources in other projects. I believe the share price doesn't even reflect that, let alone the potential for their Yukon play.
TGR: So you like Canada's currency and fiscal responsibility, as you said earlier, but also a lot of the projects you see there. Quite a number of the companies you've mentioned have a strong presence in Canada.
PG: It's funny. When I started in this business, you could count on one hand the countries that people in exploration and mining avoided because they could present problems. Now 20, 30 years later—people count on their hands the places to go without having a problem and Canada is one of them. The one area people could take exception to that statement would have been British Columbia; but, in recent years, the somewhat anti-mining stance there has changed. So there's a lot of focus now on Canada's natural resources, as well as the fact that Canada isn't facing some of political and social issues that are in other areas of the world now.
TGR: Such as those we're facing south of the Canadian border?
PG: People have been searching for the solution to the United States' problem. It may sound too simplistic, but it really is simple. Americans have too much stuff. You can't drive many roads in America without running into a public-storage facility. Our parents and grandparents never needed public storage. Until America realizes it has too much stuff and has to lower its living standard—and that it can't borrow against what it can't afford—all these other arguments and bailouts and so on will never get to the root of the problem.
It's like putting on too much weight; you can't take it off in six months. You can't take decades of overspending and being unproductive and fix it in six months, either. Unfortunately, I still see a very dark period ahead in the U.S. because there really isn't any movement yet to take those steps. Until America changes its attitude, nothing can be fixed.
Proud of his humble beginnings, Financial Adviser and Market Analyst Peter Grandich started publishing The Grandich Letter without either a high school diploma or even a day's worth of formal training. His widely read investment newsletter, in which Peter analyzed the metals and mining sectors within global stock and bond markets, morphed into a blog about 18 months ago. Peter's ability to interpret and forecast financial happenings—which earned him the moniker "Wall Street Whiz Kid" back in the day—has led to hundreds of media interviews including Good Morning America, The Kudlow Report, Fox News' "Your World with Neil Cavuto," BNN, The Wall Street Journal, Barron's, The New York Times, MarketWatch and dozens more. He's spoken at investment conferences around the globe and is regarded as one of the world's foremost market strategists. Gold, Energy & Technology Stocks newsletter publisher Jay Taylor considers Peter "most remarkable for a successful Wall Street pro. . .unashamedly independent and outspoken about his views, which frequently are anything but politically correct."
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1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Crocodile, Evolving Gold, Alderon, Rodinia, Strathmore and Timmins.
3) Peter Grandich: I personally and/or my family own shares of the following companies mentioned in this interview: Evolving Gold, Silver Quest Resources and Alderon. I personally and/or my family am paid by the following companies mentioned in this interview: All.