Worldwide Markets at Crossroads
trouble with most people is that they think with their hopes
or fears or wishes rather than with their minds."
- William James "Will" Durant
I’m penning this alert with one foot out
the door, as my first summer vacation in seven years looms
large. I’m mentally exhausted as both of my companies
have never been busier (thank God) and my ministry work has
kicked into a higher gear. So please forgive me for not writing
a long dissertation on the subjects at hand. I will however,
endure to make it abundantly clear how I see things.
The financial markets worldwide are at major
crossroads. I do believe we’re on the threshold of social,
economic and political changes that only happen once every
few centuries. The impact is likely to go beyond most bearish
assessments in both scope and time. The very fact that most
financial institutions and mainstream media don’t share
such a view is actually supportive, as history has demonstrated
most of civilization was caught unprepared at key points of
history. The next 5 to 10 years is going to be one of those
With regard to the financial markets, there’s
a gigantic monster whose actions are about to rock the financial
world like never before. Move over boogeyman and say hello
to Mr. Hedgefunds. No matter at what area of the markets you
look, the footprint of the behemoth is evident. For now, most
aren’t complaining as their slash-and-burn way of investing
has been overall beneficial to the “Don’t Worry,
Be Happy” crowd’s way of thinking. But I believe
we’re about to see the monster exposed and what we’ll
find is widespread misdeeds and over-leveraging unlike anything
ever seen or imaginable on Wall Street. Stay Tuned.
Back in the early to mid 90s when I was a legend
in my own mind, I actually thought I could predict market
movements on a regular basis. And when a market went against
my prediction, it was the market that got it wrong and not
I. Therefore, while my flesh would like to gloat about another
good call on gold, I’m going to move on after a very
short pause… Ah, that felt good-lol.
Seriously, it was very fortunate to sidestep
yet another of the sharp, but short, corrections gold has
gone through since I returned to the bullish camp in 2003.
While it’s not my intention to be portrayed as a market
timer (because it’s a losing proposition, IMHO), avoiding
these corrections for the most part and getting back on board
as the renewed uptrend took hold, has given both a financial
and mental comfort zone from which to operate. The corrections
so far have been classical secular bull market corrections
and are a necessary evil on the march to a new, all-time high
for gold above $875 (adjusted for inflation, we’ll need
to hit $2,200).
It’s very important for you to have a
plan of action for all possibilities and not be left to make
decisions during the emotionally-torn moments when markets
are cratering. For me, I know when we’re at extremes
by what people write and call about, especially after I have
made a commentary. When I dare suggested we’re at the
most overbought level ever, numerous people voiced opinions
otherwise, and some in a manner that leads you to end up asking
yourself, “What happen to these folks when they were
The last correction went a long way in setting
the stage for us to not only get back above the recent highs
around $735, but gave us a better base from which to challenge
the all-time highs. Just before the correction began (and
we stepped aside), there were people literally knocking each
other over to exclaim their new or updated bullishness for
the precious yellow. And the media, especially the ones who
don’t normally even give gold a quote, were issuing
one glowing article after another. Sure enough, the correction
takes hold and before you can say, “Oh my God”,
tirades about how the end-of-the-gold-bull-market-world are
I’m not going to publish the quotes or
the names of these folks who went from bulls to bears literally
overnight because I’ve made enough erroneous forecasts
to last a lifetime myself. But it is critical to recognize
how fast we went from severely overbought to oversold, yet
gold didn’t violate any long-term uptrends or see any
significant changes in the bullish fundamentals that remain
intact. The good news is (for those of us on the long side),
that most of these folks now bearish will not have the intestinal
fortitude to reverse their positions again or anytime soon.
This can help prevent us getting frothy again too soon.
It’s usually more volatile than gold
and recent history has been no exception. But thanks to its
“kissing-cousins” relationship with gold, one
can’t see new all-time highs for gold and not think
that silver will at least track gold up percentage-wise. (In
fact, it can lead at times).
Platinum and Palladium
I’ve noted that these metals have the
best overall balanced supply and demand picture and therefore
offered the least risk of serious losses for the foreseeable
future. This also meant they wouldn’t see anywhere near
the upside percentage move gold and silver can (and should).
Two things have happened that make me even more bullish on
the PGMs. First, palladium has corrected back to the $300
area and now offers at least a 30% up move over the next 12
months. And second, the sharp sell-off finally in the overvalued
South African Rand has made the South African PGM producers
attractive as a group.
It’s critical for you to separate precious
metals from base metals. It may seem like poor advice at the
moment, but I believe hindsight will end up showing us that
as inflation hedges, those investors who chose to lump base
metals with precious metals don’t understand the cyclical
nature of commodities in general. (And to those who say this
time its different- good luck). Many of the bullish base metal
forecasters are also predicting a stagflation type overall
world economy – a slowing down while inflation rises.
Unfortunately, there’s no economic history to support
such a stance. Base metals benefit from sustained non or low
inflationary economic growth which gives them pricing power
because their products aren’t collectively major components
of overall consumer price inflation like oil and gas.
The bullish argument (and it’s a good
one) is that China and India devour all base metals production
and therefore prices can only go higher. The bearish argument
contends that the combination of a slowing U.S. and world
economy as a whole more than offset the strength from China
and India. The other part of the bearish argument is not one
being discussed at any great length and is often hard for
the novice investor to grasp, but it’s the core of my
bearish stance. I mentioned earlier that hedgefunds have been
moving in and out of markets in a slash and burn style. They
have become the absolute single biggest force ever in the
history of world financial markets. They’re not dumb,
and I believe as a group have correctly recognized and taken
advantage of the three bubbles we’ve had since the 1990s.
The first was in their infancy as the new King
– the general stock market of the 1990s. But like all
bubbles, that one burst. They then saw real estate as a path
to riches and it, too, became a bubble that’s now bursting
as we speak. Last year, they grasped the bullish argument
for commodities and have now caused a metal like copper to
reach bubble status. (Remember, bubbles usually last longer
and go higher than most first imagined.) The problem is that
most speculators come on board when the bubble is evident
and don’t get out before it blows up. The very fact
that it is harder to find a needle in a haystack than find
a base metals bear among our industry and investors that play
it, worries me to near-death. (The numerous emails that this
commentary will generate is also an indication).
I believe 2006 should signal the cyclical highs
for metals like copper, zinc, nickle and the like. It doesn’t
mean they collapse, but their upside is limited if not already
fulfilled while precious metals and uranium have clear sailing
ahead (outside of the secular bull market corrections we’ve
endured so far).
Because it’s the one base metal I speak
of in all commentaries, I would like to note that we’re
seeing evidence that the supply shortage that helped drive
prices up is waning. The International Copper Study Group
showed copper production topped consumption by 64,000 tons
in the first quarter. The difference now is to sell rallies
in copper versus buy dips.
THE ONLY PARTY THAT
DOES NOT KNOW THE U.S. DOLLAR IS DEAD IS THE U.S. DOLLAR.
It had a recent reprieve because of the emerging market stock
market and currencies meltdowns. It also managed to pause
in its retreat on the back of the misguided thoughts that
a dramatic rise in U.S. interest rates would be the tonic
it needed to regain its King status again. Let me say again,
THE ONLY PARTY THAT DOESN’T KNOW
THE U.S. DOLLAR IS DEAD IS THE U.S. DOLLAR
I think Iran has moved front and center again
as it appears not to be prepared to respond in the timeframe
the U.N. and key world powers have given it regarding stopping
its enrichment of uranium. Refusal to do so or the appearance
can only help underpin oil for now. I suspect if we get a
hurricane in the Gulf again, we can see oil spike up and test
or make new highs. But if this happens, I would want to be
a seller into this as I think come Fall, we can begin to see
one of the sharpest falls in oil prices in several years back
under $60 by Spring of 2007 (okay send those emails).
If all markets were so easy – going up!
Let’s first remember to separate actual
producers (and emerging producers) from exploration companies
(“Hopes and Dreams, Inc.”).
The good news is that despite several factors
that have hindered mining companies as a whole (more in a
moment), producers as a group have benefited from the boon
in commodities and investors’ quest to be a part of
the action. The market value of the global mining sector rose
more than 70 percent in 2005. This has helped lead to a marked
increase in mergers and acquisitions (I wrote about this happening
this time last year). This has occurred not only because of
the key factor that most mining companies can’t replenish
reserves fast enough but also due to the fact that profits
rose sharply while debt levels tumbled.
Before anyone breaks out the caviar and champagne
for the good old boys, just look at some of the factors facing
them going forward:
- You wouldn’t know it after you walk
the floor of a typical metals and mining show, but there still
are not enough big discoveries to make up for the fall in
mine supply while demand grows.
- Miners are facing increased desires for more of the pie
from stakeholders such as governments, contractors and employees.
The government angle is especially scary. I believe only Canada
and the U.S. states of Nevada and Alaska offer mining companies
real peace. Yes, some areas of the world look dangerous now
like Venezuela, Bolivia, Indonesia and the like, but even
the upcoming vote in Mexico could change one of the best and
most miner-friendly countries into a place of concern (we
need to see the results of the Mexican election before even
becoming remotely concerned).
- Equipment and labor shortages still affect the mining industry.
While mining trucks are coming off the production line as
fast as they can be built, shortages still linger. I’ve
seen mine production impacted by a shortage of truck tires.
Be careful when a company says they plan on drilling because
getting an actual drill is no easy task nor having skilled
labor to drill, develop and produce ore.
- While the mining sector has started talks with social and
environmental activists on a “green” code for
the industry, make no mistake about it, the two sides fiercely
oppose each other. I would sooner cheer for the opposing team
at a Philadelphia Eagles game and believe no arguments or
fighter would break out, than count on the environmentalists
to be warm and fuzzy to miners.
- Hedgefunds have also impacted the mining industry and could
make my bearish argument for base metals a poor one. Phelps
Dodge is an example: they use what is called “risk minimizing
hedges” at prices of $1.20 or less. Hedgefunds used
this as a free shot to bid up copper prices without fear of
being swamped by producers selling aggressively into the market
because they had enough production to back up their forward
sales. This overwhelmed all speculators who stood in their
way. Phelps Dodge took a $250 million hit by mark-to-market
Rule 133. At a recent meeting of the Society of Economic Geologists,
the mining industry was outspoken about their fears of what
hedgefunds may be doing to their financial operations.
Don’t assume that a metal price going
up automatically translates into a mining company stock doing
better. There are many factors influencing the miners that
weren’t around (or weren’t acute) in the past
It’s been my feeling that the junior resource
market is likely to have a good run in the second half of
2006. I think the next 30-60 days is a period of accumulation
and a good run up in the juniors should unfold as Fall arrives.
But as always, selectivity will be key (more on this in future
Our subscriber base has more than doubled in
the last 90 days. I’m honored that so many people feel
I’m worthy of their precious time. Unfortunately, there
is a very small minority of you who feel some sort of loyalty
or obligation to engage posters on the Internet who choose
to speak of me and what I do in an unfavorable light. I very
much appreciate your gestures to defend me but again ask you
not to take such a role. I’m truly not concerned in
the least of what these people have to say. I try to leave
my spiritual life out of Grandich Publications because people
want to read about my market thoughts, not religious. However,
it must be told that I truly only care what my Lord and Savior,
Jesus Christ, thinks about me. I’m not implying in any
way a need for you to be a believer in Christ – just
want to emphasize that HIS is the only opinions I care about.
PLEASE don’t engage yourself on the Internet regarding
me with some party or parties who in your mind are speaking
ill if me. These folks never make their claims to me directly
despite every opportunity to do so.
I want to end this discussion on these Internet
posters by sharing with you two real-life experiences I was
a part of that help me realize never to engage these people.
In my other business, I’m very involved with professional
athletes and their personal lives. In one instance, I was
sitting in the stadium next to a “fan” who was
“mouthing off” to a player in a rather nasty fashion.
I knew this player personally but remained mostly silent because
there’s nothing you can really do that is going to change
such a person’s actions. Ironically, the player’s
team hosted a gathering later that evening where my friend
the player was part of the meet and greet team to the invited
guests. And who do I see on the line to meet the players and
get stuff signed but this fan that was bad-mouthing the player.
I was able to tell the player about it and point out the fan
before he approached. When he arrived, he began to tell the
player how great he was and then asked for an autograph. Earlier
in the stands, this person repeatedly yelled a particular
adjective to describe the player. The player signed the autograph
with that adjective. When the “fan” looked down
and saw what he wrote, he turned white, embarrassed and couldn’t
get down the line fast enough.
I tell you that story to point out that these
“fans” of mine on the Internet have never in my
more than 22 years made their claims and accusations directly
to me, other than on the Internet or in an email that never
identifies them. However, I know in my heart they are among
the crowd at shows but linger in the back versus at least
giving me a chance to face my so-called accusers. Those who
won’t back up their words with at least a name or face
are not worthy of my concern.
The other quick professional athlete story is
about the great gift and honor I have to be around household
names in the sports world. At a recent Bible study with some
members of a team known around the world, we began to discuss
some of the things fans say and do. I asked one of the team’s
marquee players how he handles the abuse. His response is
now etched in my mind whenever someone writes or calls to
tell me about some negative comment made about me. He said,
“I realize I’m on the playing field and the other
party is in the stands. I also realize that ‘but by
the Grace of God go I’.” I’ve adopted that
attitude so don’t worry about me from now on –
One more note on our increased readership: As
a result of the huge increase in subscribers, I can’t
possibly response to individual phone calls anymore and most
emails so please don’t be offended. I’m not avoiding
it and I try to take into consideration your questions when
I publish alerts and newsletters.
I will be on my first summer vacation
in seven years. I will return on July 17th .
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email • Peter@Grandich.com
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