The "Befuddling" Performance of Gold Mining Stocks

Looking for signs the bear market is over...

ALTHOUGH the fundamentals of many junior Gold Mining companies have improved, their stock prices continue to languish, says market guru Peter Grandich in this interview with The Gold Report. Below, Grandich gives his thoughts on when this may end and where gold is headed in 2013. 

The Gold Report: Peter, when we talked in the spring, you were essentially all in on a number of junior resource equities that were trading at what you believed were at or near their lows. Have you changed your course of action or are you still all in?

Peter Grandich: I am still on course. While 2012 may not have been the worst junior resource market by percentage losses, given the prices of metals now versus other markets and other market conditions compared to last year, it was the worst bear market since I entered Wall Street in 1984. 

I've been in this market since the late 1980s, when it felt that if gold could just get over $400/ounce (oz), all would be well in the junior market. Now gold is at an average price of $1,600-something for the year, yet most companies did not do well. It is befuddling. 

TGR: We are not far from exiting 2012. What is your perspective on the junior precious metals sector heading into 2013?

Peter Grandich: I have believed since midsummer, as much as I would like the market to have a V- or U-shaped recovery, the recovery will look more like an L, at least into the early part of 2013. There are still some excesses in the junior market that have to be worked through. 

I suspect we will see by early 2013 announcements of restructuring, rollbacks, etc., and repricing of options. Then we will have all the classic signs that the worst bear market in some time is behind us. It will take a number of months before the junior market can not only go up, but also stay up.

TGR: Are you more bullish on the higher-beta, high-volatility silver or gold?

Peter Grandich: I still favor gold over silver. Silver is really a base metal, but because it's part of the precious metals family, it gets the tagalong and does not get separated. 

Retail investors tend to like silver over gold because they tend to like quantity over quality. But at the end of the day, gold is money and will eventually be money again. One of the reasons gold has done what it has in recent years is because some investors want real money and not paper currencies.

TGR: You're a quality over quantity guy? 

Peter Grandich: Yes, in terms of the metals themselves. When it came to shares this past year, quality was also better. The further you went up the food chain toward emerging producers, producers and significant producers, the damage was less expensive than it was when you went down the food chain to pure explorers or early-stage explorers where that market was creamed.

TGR: That's owing to the risk-off sentiment on a large scale.

Peter Grandich: I am not the first to say that juniors are burning matches, producers aren't. Producers have the luxury of not only borrowing a substantial amount of money, but also doing secondary offerings and getting cash flow out of assets. Juniors continually have to raise money. 

TGR: Nonetheless, you are still heavily invested in the junior space.

Peter Grandich: It is where my expertise lies. Many juniors have just gone too far on the downside. Many of their total market capitalizations don't come close to their perceived value now. If they are not already off their bottom, they are starting to build substantial bases. That may not thrill people, but share prices have been trading within a fairly tight range now for several months. That is base building. It may not be ready to take off, but it's far too late to be a seller now.

TGR: How would you characterize your approach? You seem to have great faith in these stocks.

Peter Grandich: Since I got involved in the junior resource market, there have been probably 10 or 11 bear markets where there has been a decline of 20% or more. At least half of them were 40%, 50% or more. Each time the market rebounds. Each time many investors think that maybe this time it will be different and it won't rebound. But eventually markets go from one extreme to the other. 

This past year was as extreme as you can get on the negative side. Even the most optimistic bulls were beaten up and have retreated to the safety of hedging their views, if not outright turning bearish. That is just a contrarian investor's dream come true. 

My faith is based on everything in life is like "ferry" investing. People will say the boat is going to sail without you. My response is that there is no such thing as a boat. There are just ferries. When one goes out, eventually another one comes in. It is just a matter of being diligent to stay long enough and be diversified enough. That way even if some stocks don't rebound, the rest of them should more than make up for it. 

It won't be straight back up, but as bad as this bear market has been, we'll eventually have a bull market again. It will probably be in the middle part of next year when we really see it take hold. 

TGR: That is certainly good news. Are you willing to predict a breakout for either silver or gold?

Peter Grandich: For gold, it is only a question of when, not if, it gets to a magical number. That will dramatically ramp up interest in metals as well as in the juniors and producers. The magical number is the $2,000/oz gold price. 

A $2,000/oz gold price will be the same as when the Dow Jones Industrial Average first crossed 10,000 and what that led to—the average person getting deeply involved in the market at that point. It allowed a speculative fever to take hold.

We will see something like that when gold crosses $2,000/oz. That will bring enough players back into the market that we can finally have a speculative run. That is something we have not seen in several years in the junior market. 

It is still amazing that something can go up the percentage that gold has over the last decade and still 99% of North American investors have little or no exposure to it. Every time I hear the gold permabears talk about the end of the bull market, I ask how it could be an end when 99% of people are still not in it.

TGR: Do you think there could be a breakout among juniors in H2/13?

Peter Grandich: Juniors can rebound and stay up but, again, it will not be a V-shaped or a U-shaped recovery. There will continue to be base building into the early part of 2013. The substantial up-move and ability to hold the gains will coincide with gold getting above $2,000/oz.

TGR: Did you read Paul Van Eeden's comments where he said that gold is overvalued right now and that he doesn't see the dire inflation that so many goldbugs are predicting?

Peter Grandich: I have respect for Paul Van Eeden that I don't have for other gold permabears. He's just expressing his honest opinion. Unfortunately, he has had that opinion for as long as I can recall, from maybe $500–600/oz gold. So he has not been on the right side of the market, to my knowledge, for over $1,000 of the gold price increase. 

TGR: Beyond gold and silver, in what subsectors of the junior mining space do you see some value or some opportunity?

Peter Grandich: One of the things that always happens in bear markets is the classic saying, "The baby gets thrown out with the bath water." The iron ore market is one segment that clearly got overdone to the upside, but now is way overdone to the downside. 

While we won't see a rally back to its all-time highs of $180/metric ton (Mt), those who have stated that it won't be able to ever keep itself above $100/Mt again are likely to be sadly mistaken. I already see the early signs of a rebound. Iron ore should stabilize, and many of the shares that have been very hard hit, especially the emerging market group ones, can rebound. 

TGR: Do you have to believe in a global economic recovery to make money in the junior iron ore space?

Peter Grandich: You have to believe in at least a price of $100/Mt or more for iron ore. I believe we can count on that because of what continues to come out of China. 

What I also like about the situation is that most people have discounted any real economic strength anywhere else. People have already built into their minds and their models that economic malaise will still grip most of the world. But if we get a little blip up, if the European economy ends up not being as bad as forecast, then it's only good news for the iron ore plays. The bad news has been priced into them, but not much potential good news has been priced in and, therefore, they have a lot of upside future potential. 

TGR: What are some equities based in South Africa?

Peter Grandich: At the moment, I would look for a fund, an exchange-traded fund or a company that has several plays under its belt in South Africa. That's what I hope to do in the next month. This is certainly not something that needs to be rushed into overnight. But everything I know about it and people whom I've trusted for almost 30 years have, in the last few weeks, started to feel that South Africa has gotten to the point where it needs to be back on the map when we look for gold plays. I am certainly going to target that in the early days of 2013. 

TGR: Since year-end is approaching, how should retail investors handle tax loss selling season?

Peter Grandich: My No. 1 advice on juniors is to realize failure is the norm in the junior resource business. Not realizing that leads to a whole host of difficulties. If we understand that, we won't get as mentally and financially distressed as we do when we overindulge. 

One of the things that I see corporations battle so much is this need on the part of speculators to have constant news, almost on a daily basis, from these companies. Even IBM and Microsoft cannot put out news every day, and people expect far too much and far too soon developments from juniors. They set themselves up for disappointment that should never be there in the first place. So failure is the norm in this business, and it takes a lot longer for the ones that work out to get to where they have to get to. Patience is clearly a virtue. Have a plan for when things don't work out because a lot of them, even some that I've spoken to you about today, may not reach all the goals that we originally thought they could. 

TGR: That sounds great, Peter. 

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