Despite the mauling from the bears...
MANY JUNIOR gold mining investors have run off with their tails between their legs. And who can blame them when even the portfolios of market veterans like Peter Grandich, publisher and editor of The Grandich Letter, have taken a beating? But here's why Grandich still has hope for $2,000/oz gold in this interview with The Gold Report.
The Gold Report: Peter, the last time we talked you said that the success of your marriage was resting on the performance of your junior resource equity portfolio. You are still married, so is your portfolio performing or is your wife an extremely patient woman?
Peter Grandich: Living in the doghouse isn't that bad once you get used to it. It's wise during this horrific bear market not to let your wife see your monthly brokerage statements.
TGR: A reader of yours apparently suggested that you should have a "kennel portfolio" for some of your dog stocks.
Peter Grandich: And that was one of the kinder comments that came in recently. I would be better off running a kennel than speaking about my junior resource clients.
TGR: Tell us about what has happened and what you're expecting for your portfolio.
Peter Grandich: This has been the worst junior resource market in the 30 years that I've been on Wall Street. It may not be the largest percentage decline, but at least there were legitimate reasons for previous bear markets. It's hard to justify the most recent gold takedown. Nevertheless, it happened. I just can't seem to find any particular reasons to justify where we went.
TGR: You're not alone. There are people who took positions in these stocks when they thought the market had bottomed and they're still sitting with them in their portfolio. What are you doing with these stocks?
Peter Grandich: These stocks have sunk way too low. Yet, I believe that this will be like the last dozen or so bear markets. There will be an inevitable bull market rally that will follow. The only justification to be a seller is that the mental stress and anguish has become so acute so that you literally can't take another day of it. In fact, I think that's what we've seen of late.
TGR: Are you still holding?
Peter Grandich: I believe we've gone way past that level. I know inevitably a bull market will be onboard, but I don't know if that bull market will make us whole. This was so devastating and widespread. Prices should eventually rise higher than they are now, but it will take months.
TGR: In early April, gold bears were out in force after a lengthy hibernation. Are you less bullish on gold than you were a year ago?
Peter Grandich: A year ago, the technical picture suggested that the market was coming to a major change that could have been several hundred Dollars up or down. My brain said it could be down, but my heart said up and I stuck with my heart.
Even after this takedown, I still don't believe that the secular bull market that's been ongoing for 12 years has come to an end. I still believe we'll have a two in front of the gold price before it ends. We're going to have to get to $2,000/ounce ($2,000/oz) before there's any decision on my part about the end of the bull run.
TGR: What's your message to gold bears out there?
Peter Grandich: The vast majority of so-called professional advisers and the media simply hate gold. Expecting them to rally around it would be similar to going into a Ford dealer and expecting to be told, "If you really want a good car go down the block to the Chevy dealer."
I would be worried about being a gold bear right now. You have to ask yourself what is it going to take to really crack the market? We had an onslaught of bear forecasts. We had an onslaught of selling in the paper market. Yet, as we speak, much of that decline has already been taken back. There's going to be a reversal and these bears are going to have to run for cover.
TGR: Do you have an anecdote on physical buying that illustrates your point?
Peter Grandich: In a few months' time, I believe that we'll learn that one of the biggest buyers was one or more central banks of significance. That's why I believe the short sellers have a big problem going forward.
TGR: In December, you said you expected to see restructurings, rollbacks and repricing of options in early 2013. "Then we will have all the classic signs that the worst bear market in some time is behind us," you said. We're four months in. Are you seeing those signs?
Peter Grandich: My eyesight has been impaired by the severity of the fall. Those of us still breathing in the junior market are in total shock and frozen in our tracks. It's similar to living in New Jersey after Hurricane Sandy. We're just starting to see the enormity of the damage now that the storm has almost passed. The takedown of the gold price a few weeks ago was the last leg of that storm. Now we should start to see the restructuring, rollbacks and repricing of stock options. I believe we'll all gain momentum between here and the end of the year.
TGR: What do the surviving junior companies do from here?
Peter Grandich: I looked at the exhibitor list of an upcoming mining and gold show and about every company had a share price of $0.10 or less. Share prices are low and share structures are not tightly held—the inevitable has to happen if they're going to continue. But you're not going to see much general financing any time soon.
TGR: In a recent post on Grandich.com you talked about the coming collapse of the bond market. Tell us more about that.
Peter Grandich: US bonds will end up the worst investment for the next decade. The best recommendation I can make is a book that's just been released, "The Coming Bond Market Collapse," by Michael Pento. It clearly foreshadows what's going to happen in the bond market.
TGR: Should the junior resource space forget about the potential for takeovers given that the majors seem to have their hands full with high capital expenditure projects and disgruntled shareholders?
Peter Grandich: It's not a question of if, but when we will see significant mergers and acquisitions (M&A). The bad news is that the prices will add very little premium. Unless the gold price rises, signaling a new leg in the market, junior market share prices won't get much higher.
TGR: What kinds of resource companies are poised to rebound?
Peter Grandich: The higher you go up the food chain the more likely you'll see those rebounds. It's going to be very hard for a pure exploration company that has yet to develop a project to attract significant capital any time soon.
TGR: The top of the food chain is the majors. It's pretty difficult to find a major producer without a lot of warts. Do you still think they're going to bounce back?
Peter Grandich: In 30 years, I've never seen a spread in the valuations of major mining shares and metal prices as there is today. Everything that can go wrong has already been priced into the majors at this point. The expectation is that they're going to do the things that are necessary to get better.
However, part of that will include slowing down on some growth opportunities they thought that they had to take. There won't be as much new gold coming into the market and that will support the gold price.
TGR: What should investors expect during the remainder of this year and into 2014?
Peter Grandich: The US stock market is nearing the end of the single largest bear market rally in history. This is what I predicted in 2009 would occur. There won't be a collapse as soon as it does top out because quantitative easing will create a cushion. With the economy rolling over again, I don't foresee the end of quantitative easing.
There will probably be some more shenanigans by the Federal Reserve to give another kick to the can, but the time will come when the world realizes that we cannot afford to pay back what we owe, much less the interest. That's when the financial markets will be hit hard. That's when there will be a collapse of the bond market and a very sharp decline for general equities.
In the meantime, we will see $2,000/oz gold. The recent gold takedown was not driven by fundamentals. It was not fun living through it, but it was actually something that is going to fortify this secular bull market that's been underway for 12 years and is going to mark the next leg of the bull run for gold.