It's Time To Jump Back in Precious
Metals and Mining Shares With Both Feet Again
My May 11, 2006 Grandich Letter Special Alert
“…A significant correction is lurking out there.
It’s highly likely to come out of left field and at
its depth, it should end up giving cause to question if the
bull market in gold is over…Any correction in gold is
all but certain to carry over into silver, albeit it’s
likely to even be more vicious… The easy money is over…”
Gold was $720 and silver was $14.94 at the time.
Just four hours later (at 1p.m. on May 11, 2006),
I issued another Special Alert that stated,
“…An overbought/oversold indicator of mine that
I’ve used since before the 1987 stock market crash,
has given the most overbought reading ever for both copper
and gold. Knowing that I’m going to trigger the nuts
out there to call and email us, I’m going to suggest
that risk in gold, silver and copper is now equal to, or much
higher than reward in these markets for the near term. The
long awaited sharp correction is within hours or days at the
My commentary did trigger the nuts but also
dozens of calls and emails thanking me for speaking out!
On May 19, 2006, with gold at $656 and silver
at $12.40, I said,
“…We can still see another 10% or so down from
here (especially in copper-if not more). We can still move
sideways to down through June…”
On May 24, 2006, with gold at $640 and silver
$12.55, I said,
“…while a sentiment indicator of mine has turned
positive for gold after reaching its most bearish level just
two weeks ago, it’s likely going
to have to go to very bullish before we get ‘the’
And finally on June 1, 2006, I said,
“I’ve been looking for gold to settle into a $625-$675
trading range before any new significant upside move can occur.
We may need to shake out weak longs
by testing $575-$600.”
In a business where you’re
only as good as your last call and what have you done for
me lately, most reading this will now only want to know what
does my “crystal ball” see going forward?
The late Kennedy Gammage used to say, “Those of us who
make a living looking into the crystal ball, end up learning
how to eat lots of broken glass.” Translation –
we’ll all be wrong enough times to realize we, too,
put our pants on one leg of the time!
If there’s just one sentence I want you
to remember after reading this alert, it’s the following:
The secular bull market in precious metals
is far from over!
At best, we’re in the fourth or fifth
inning. It’s a very different story for most base metals,
especially copper. There the game ended, only most fans apparently
didn’t hear the umpire yell “Strike Three- You’re
Peter Grandich’s Key Fundamental Factors:
The following are the most critical factors
of mine and directly influence my financial markets outlooks:
- Americans have been robbing Peter to pay Paul,
but Peter is tapped out. We’ve been living way beyond
our means and the day of reckoning for our economic and financial
sins is upon us. The real estate bubble that’s now bursting
had allowed us debt junkies to forestall facing paying the
piper by literally mortgaging away our future so we can continue
living a lifestyle many levels above what realistically we
could’ve truly afforded.
- Our “Uncle Sam” doesn’t
have much of a fan club outside of the gold ole’ USA.
Most Americans don’t realize how unpopular we’ve
become as a nation and as a people in many places of the world
(and I’m not just speaking about the places you see
on TV where they’re screaming death to America). Most
Americans don’t realize that we need to borrow vast
sums of money “every day” from foreigners just
so we can keep living beyond our means. Those “lenders”
are becoming (or have already become) gravely concerned about
how we live and our ability to pay it back with interest.
Rest assured, they will demand higher interest rates and/or
more political influence over us and our affairs.
- While geopolitical concerns around the world
are at least recognized by most Americans, they not only don’t
take into account what effect these concerns play into the
point I made above about dependence on foreign capital, but
are in no way prepared for an even bigger geopolitical uprising
right here at home – The Democrats versus the Republicans.
I believe what’s about to take place in the battle for
Congress this Fall, will make the battle between the Hatfield’s
and McCoy’s look like Woodstock. I’ve no doubt
we will reach new lows in mud slinging and the effect it will
have on foreigners’ beliefs of whether they should continue
funding our “debt-devouring” lifestyle will be
- For all those history buffs who wondered what
it must have been like to have witnessed the fall of the Roman
Empire, take heart – the fall of the American Empire
is upon us. Personally, I can’t wait for someone else
to play cop for the world.
With this in mind, let’s look at the
metals and mining shares.
There’s an old saying that states, “You
should look back before you look forward.” I think it’s
most appropriate for gold.
As we entered the new millennium, the very survival
of the metals and mining industry was in question. Those who
still were attempting to eek out a living in it were literally
trying just to keep the lights on. This period of time had
a profound effect that we still feel today. The lack of substantial
exploration has greatly helped the supply versus demand equation
in favor of demand even today. While gold bottomed just above
$250, it really never received wide attention (outside of
our little goldbug world) until it broke above $500. In fact,
it wasn’t until it rose above $600 before the world
seemingly beat a path to its door. I found it amusing at times,
watching individuals and firms who never gave gold much of
a thought all the way up to $600, knock each other over trying
to get media attention that they were “raising their
outlook” for gold. In fact, I pointed out that this
very “feeding frenzy” was a key reason why when
we broke above $700, I believed a serious correction had to
take place. The icing on the cake was when media who normally
couldn’t care less about gold, were contacting me and
reporting on gold’s performance.
Now today, I find gone is most of the wild speculation
that was occurring daily just a few weeks ago. In fact, I’m
now seeing reports and commentaries questioning whether a
bear market has begun (I love it). We may indeed need to trade
between $575-$600 to get that feeling widespread, but most
of my technical indicators have now returned to the bullish
side or are at least no longer very bearish. Reward now equals
or surpasses risk, going forward ($50 lower and up to $500
higher is worth risking being aggressively long again).
What are the main factors I see driving
gold higher as we get into the second half of 2006 and beyond?
- The physical supply versus demand scenario
remains bullish. We just haven’t had anywhere near the
necessary discoveries of large quantities of gold to satisfy
the thirst major mining companies have become accustomed to
(more about this in my mining shares commentary). Supply continues
to decline while demand remains robust.
- Like it or not, http://www.gata.org
and its major supporters like Bill Murphy, James Turk and
John Embry (Sprott) have been far more right than wrong in
their predictions that the once believed “overhang”
of supply (that so many of their critics constantly predicted)
would not materialize. To what level there’s been manipulation
or not to me isn’t as important as the “fact”
that these gentlemen have been far more right than the very
critics who called them nuts for even believing such manipulation
was/is occurring. They at least proved (and its much more
than this) that it’s better to be right for the wrong
reasons than wrong for the right reasons. What’s most
crucial about GATA’s work IMHO, is the Central Banks
just don’t have the large quantities of gold the Andy
Smith’s of the world (I assume this ardent gold bear
is still alive somewhere) used to claim will overhang gold
forever and thus gold would never see $500. (Now that I think
about it, whatever happened to that money manager on ROB-TV
who used to claim his grandchildren would never see $500 gold?).
I think it’s foolish not to at least value GATA’s
work on the same level of all my other work and urge you to
make it part of your gold research as well.
- While I believe geopolitical “safe haven”
status is going to continue to benefit gold for the foreseeable
future, I think the next up leg is going to be driven by the
fall of the U.S. Dollar. Please re-read my April 4th report
. If you’re going to value my observations in a serious
manner, then I want you to imprint the following on the palm
of your hand and look at it every time one of the “Don’t
Worry, Be Happy” crowd on Wall Street tells you otherwise
–“The only party that doesn’t
know the U.S. Dollar is dead, is the U.S. Dollar!!!”
- One of the best historical factors you can
follow for gold is the inverse relationship it has with the
U.S. Dollar. About 80%-85% of the time, they move in opposite
directions. So, since I believe the U.S. Dollar is dead, dead,
dead, dead, dead, dead, dead, dead, dead, dead, dead, dead,
dead, I believe history favors my bullish gold stance. Understood?
- The U.S. stock market has peaked and is going
to resume its bearish trend and eventually test and break
below its lows made after the dot-com bust. Providing it doesn’t
go straight down but instead rolls over, this should also
benefit gold. I’ve always said gold’s bull market
can’t end until the average American investor stops
telling you about how attractive Intel, Microsoft or IBM are
and is instead telling you about a mining stock they love
but can’t even spell. Likewise, I don’t feel the
bull market will be over until TOUT-TV (CNBC-TV) moves the
young lady from the oil pits to the Comex floor to cover gold.
Gold can go as low as $575 before we see a major sustained
move up but reward has now surpassed risk going forward. Most
of the wild speculation is gone. Even the hate emails that
would tell me I’m nuts for turning bearish on gold are
gone and being replaced with frantic concerns from folks writing
asking if they’ve missed the top. All in all, I feel
we’re hours or days at the most from “the”
As I suspected, silver has had a very sharp
correction. And, while I’m bearish on most base metals,
I do think silver can ride gold’s coattail and surpass
the highs made not too long ago before the year’s end.
Let’s not forget we’re in the midst of gold’s
and silver’s weakest seasonal period, but September
is now within sight.
Platinum and Palladium
By far, platinum has the most balanced supply
versus demand picture and would need to be considered the
best “conservative” metal for the foreseeable
While I became bearish far too early, I do
think the frenzy that drove speculators into it that paid
nearly $4, is going to badly hurt these folks as copper is
likely to eventually trade between $2-$2.50. The very fact
most still can’t envision that tells me we shall see
it come to fruition, albeit not in a straight line down. There’s
still money to be made in copper stocks but not until we get
closer to that range (except in very special situations).
I do believe the U.S. economy is going to accelerate to the
downside and help cool the world economy as a whole going
forward. Therefore, most base metals, IMHO, have seen their
cyclical highs (okay, send those emails).
Just continues to grind higher and remains
my one no-brainer metal for upside appreciation.
U.S. Dollar Index
Ha! Ha! Ha! Pardon me for laughing, but I think
it’s hysterical to watch the reaction over Bernanke’s
comments on Monday. Yes, it crushed another rally by gold
and is frustrating to some, but I welcomed it! Why? Last Friday,
many people around the world were very concerned about the
sharp sell-off in the U.S. Dollar. It was very oversold short-term
and Bernanke used his appearance to give it nothing more than
a band-aid. More importantly, he used up one of his bullets.
You see, eventually, even his comments won’t prevent
the inevitable dollar massacre that is going to take place
once we break below 80 on the U.S. Dollar Index. Exactly how
much did the dollar rally? Peanuts. I bet before the month
is out, it’s lower than it was when he spoke. I’ll
say it again, “The only party
that doesn’t know the U.S. Dollar is dead, is the U.S.
I remain convinced that oil has seen its cyclical
high above $75 barring severe hurricanes in the gulf (since
everyone is predicting them, I suspect they won’t happen)
and Iran being foolish and not now taking advantage of the
U.S. cave in announced this week. Yes, I’m virtually
alone in this belief, but what else is new?
I will write about our companies after I return
from the upcoming Vancouver Resource Show (http://www.goldshow.ca).
In the meantime, I would like to become aggressive again on
the mining share side for the following reason:
- I said a year ago that we would see a major
increase in mergers and acquisitions in the mining industry
as most majors find themselves facing a serious drop-off in
reserves in the next few years barring any new major discoveries
and/or acquisitions. Sure enough, M&A activities have
greatly increased and the Teck/Inco/Falcobridge saga has even
made the “good old boy” industry do hostile deals.
I think this is a signal to expect merger mania to take hold.
Despite some tough times due to high energy and labor costs,
mining companies in general saw profits soar and debt levels
drop sharply. The market value of the global mining sector
rose more than 70 percent in 2005 and has given them a more
expensive “currency” (their share price) to go
Part of what is running these big firms
is ego and no one likes to drop down in the pecking order
of giants. I also think mid-size producers are going to see
benefits of merging with similar size firms.
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