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 most.”
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
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 Out”!
Peter Grandich’s Key Fundamental
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 profound.
- 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
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
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 at http://www.grandich.com/docs/alertGL_04-04-06.pdf
. 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.
- 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
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. Dollar!!!”
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 shopping with.
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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email • Peter@Grandich.com
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