2009 Gold Bull Market

Safe-haven money is leaving Treasury bonds for the Gold Market...

A NATIVE OF THE BRONX, Peter Grandich hit Wall Street 25 years ago after starting an investors' club while working as a warehouse manager and launching his now-famous publication, The Grandich Letter.

Regularly quoted by the Wall Street Journal, MarketWatch and CNN – and now working with the AgoraCom small-caps tips service – Grandrich recently took a brief break from his blog to tell The Gold Report why he thinks Gold Investment looks good for 2009.

The Gold Report: Judging from opinions you've expressed in recent newsletters and blogs, you clearly believe we will be testing the November lows during the first quarter this year. What is some of the logic behind why you think that will happen?

Peter Grandich: My belief has been that if and when the US stock market bottoms, along with the economy it will be an L-shaped bottom, not the V-shaped recovery that so many on Wall Street keep talking about.

The problems that brought us here persist. In fact, they've gotten worse over time, which gives me even more reason to believe that we're going to bottom eventually but not go far off that bottom once we do. The logical viewpoint for us to take at this point is to look for a market to make at least a double bottom, if you don't believe it's a V bottom. Obviously, if it's a V, you only have one time you're at that low.

Re-testing the November lows in the stock market are, I suspect, not a question of "if" but "when". A strong bounce is likely to come off that because the remaining bulls who aren't totally bloodied would look and hope for that to be an opportunity to get more long if they're not already 100% long.

The view we'll have to take after that is watch the bounce, see what type of volume and breadth it has. The problem with rallies we've had all through this decline is that neither their volume nor breadth has been half as strong as in the declines; that is always an earmark that the bear market is continuing and that rally is a countertrend. So that's another thing to look for when and if we catch those lows.

TGR: You mentioned that maybe we should be looking for a double bottom. If we go back and re-test the November lows, is that our double bottom? Or would you expect to go through the November low?

Peter Grandich: I still suspect we're going to go through it, but we have to be able to change our views as the markets change. The only way bouncing off that bottom and then turning up past 9000 on the Dow – that would be the only technical factor that would suggest to me that the bear market was over. My feeling is that even if we do hold that November low, we are going to have a very long trading range on the Dow of somewhere between 7500 and the 9000 that we rallied to twice the last year but have failed to go through.

Rather than trying to catch a falling sword and usually getting their hands sliced by it, quite frankly I think what's best for investors would be to be certain or fairly certain that a bottom is put in and miss the first 10% or 20% to the upside. I think if and when we do break out above those numbers, we'll also be hearing things on the economic side getting better.

Now, that's not my bet right now, but I think you always have to have a plan to possibly change your view and be set for it if certain things happen. My most likely scenario continues to be that this economy will be very weak throughout 2009, and not just the first half that the bulls keep talking about. And we don't have any real hope of a sustained equity bull market at least until 2010 at the earliest.

TGR: Your writing is bullish on oil, though.

Peter Grandich: Yes. We suggest that people contain any oil purchases between $35 and $40 – not above $40 at this point. Oil longer term is far more likely to be higher than that level than equities looking out the same timeframe. If people are still willing to look out three to five years versus three to five days, I think oil is a better risk-reward at this point than the US equity market.

TGR: Are you talking about buying oil as a commodity or purchasing oil equities?

Peter Grandich: Both. What I do like especially about Exchange Traded Funds now is the ability to have a bunch of oil stocks within them. No-load funds are still a good way to go with equities for those who are very long-term oriented. But ETFs are a better vehicle for investors because you can buy and sell as many times as you want during the day, not just get the end-of-the-day price when you sell your mutual fund. Both are useful. But either way, I think you need to track the actual commodity as well as oil stocks.

TGR: Your blogging suggests that you think precious metals sector also will do well, even in 2009?

Peter Grandich: Yes, I continue to believe that; in fact, I believe the best investment right now is gold. Not because I think the world's coming to an end; quite frankly it won't matter if you have gold if there's truly an end-of-the-world scenario. And I am not a gold bug; I've been bearish on it at times.

Nevertheless, thanks to the credit crisis, which is taking place in all four corners of the world, I do believe people around the globe are realizing that paper money may not be the best safe-haven investment. And although gold did not go up in 2008, it did serve its purpose by being an insurance hedge. Whether they're professionals or just individual investors, no one I know would mind having ended 2008 flat overall, rather than suffering the heavy losses they took.

So gold did its job; those who put money in gold didn't see the losses that everybody else suffered.

But I believe now that we're going to see capital gains opportunities in gold for 2009, and into the foreseeable future. The market has all the fundamentals that one would want right now.

There's a declining supply, which will decline even further because those who normally look for gold, the junior resource stocks, have been so hammered that we're not going to see a lot of new exploration for some time. The few companies that will be going into production will be at a premium. The excess supply that used to come into the market, particularly from central banks, has dried up.

We're also seeing tremendous physical demand; in fact, throughout 2008, it was very difficult for people to acquire physical gold. Gold Coins and bars that used to be readily available were in such demand that there became a shortage. In fact, if you wanted to purchase physical bullion [retail market] you were paying 10% or more above the spot price. People say that should have caused a dramatic rise in the gold price. The paper market is still driven by the Comex, where the US Gold Futures trade.

Unfortunately, some people claim, that the market has been manipulated. I can simply say that the paper market has not mirrored the physical market. I believe the physical demand eventually will overrun what is not happening in the paper derivatives market. Once that occurs and once we're above a $1,000 and stay there for more than a week or a month, I think we're going to see a lot more money pour into gold.

I don't know about $2,000 an ounce for gold, but once that money starts to pour in I still think $1,200 gold and $1,400 gold – even $1,500 – is a very variable, useful and likely target.

TGR: For Gold in 2009?

Peter Grandich: More likely in 2010. The only way I see it happening in 2009 is if we really see worse economic conditions and financial Armageddon. Right now thanks to this historical presidential election in the US, there is a mild – if misplaced – hopefulness that somehow the new administration can magically do something in a week or a month or a couple of months that the group before couldn't do in several months, if not years. Once this hopefulness wears off and people realize they face the same difficulties in fixing a horrendous problem, we could see even more pressure in the credit market and in the equity market. If that's the case, money has to go somewhere.

What's been most interesting, a couple of weeks back, the Treasury-bond market – where most people ran to in the last downturn – actually started selling off, especially on the longer end. I think part of that money is going to find the Gold Market.

TGR: Are you looking at gold as a precious metals purchase as in physical Gold Bullion or ETFs? Or in this case do you see plays to be made in equity shares?

Peter Grandich: There are Gold Mining equity plays to be made. But I think first you want to have some physical bullion. One of the things I learned as a hard lesson – and as many other people did in 2008 – sometimes mining shares, particularly the juniors, don't track gold. During a large-scale liquidity crisis, people sell everything they own, including juniors.

Even so, I think we've seen the industry destroyed as much as it possibly can be. The companies that have managed to stay around, particularly those that are going into production soon or are already in production, will have a big bounce back.

Unfortunately, many of the pure exploration companies that haven't come close to identifying a mine may not survive – but those failures actually enhance the prospects of the survivors. Money will flow into them long before it flows into the small exploration companies.

TGR: In a worldwide recession, given the price of copper, wouldn't the copper component discount the gold? [Ed. Note: Many major gold mines are in fact joint copper-gold deposits...]

Peter Grandich: The beauty of having so many million ounces of gold is that you can sell the copper for whatever you get, and you get the gold for almost nothing. It's such a huge deposit; it's been described as they still will not find the whole deposit by the time our grandchildren are adults. That's how huge it is. We're all living on the expectation that someday things will get better than they are now. If and when they do, the demand for the metal will come back again.

There's an interesting thing about the base metals and even copper. Despite a tremendous slowdown in the world, copper has managed to still be about twice the price it was at the lows of the last big recessions in the '80s and '90s. One of the reasons I think that has happened is that most of the major, highly valued deposits had been discovered and drilled off. So one of the reasons copper is not dropping so much is because the operational costs to develop copper is higher than it was several years ago. We're probably within 10% or 15% of that absolute bottom. It doesn't mean you start buying now, because it may be a while before it can raise its head. But we're closer to the end of the decline in copper than we are in the US stock market.

And I must make the point that even if and when I become bullish on equities again, someone is going to have to be over-weighted in foreign stocks. One of the first things I'm looking to do once I believe markets have bottomed is to buy Canadian banks.

TGR: What is it you like about the Canadian banks?

Peter Grandich: Of all the banking systems around the world, the Canadian banks (outside of Toronto Dominion) is the only group of banks that didn't get heavily involved in all the CDS markets and all these derivatives. So the Canadian banking system is one of the places I think will be fairly safe to enter once the equity market has bottomed. They're on my shopping list right now to eventually look at, but I think they will continue to decline somewhat until the markets themselves bottom.

TGR: One of your blogs suggests that uranium has bottomed out and we're going to see it up in triple digits in 24 to 36 months. What about this year?

Peter Grandich: I don't know so much about the price in 2009. Uranium has seen its worst days in my view. I do believe we've seen the bottom and I believe it can tick up. The real factor will be how much the new US administration is truly going to look at alternative energy. It's one thing to say it during a campaign, but how much will Obama turn to alternative energy? When oil was hitting $140 and $150 and Congress was hauling in the principals of oil companies at $150, they can't haul them in any more at $40. So I don't know if they're going to do what so many other administrations have done – and that is to kick the can down the road and let somebody else worry about energy concerns.

That said, it seems to be a serious concern of the current administration, and I think people will realize when all is said and done that the most efficient and effective and perhaps fastest way to increase abilities of getting energy outside of fossil fuels is nuclear energy. And it's certainly happening around the world. Therefore, I think the uranium price will work its way higher, and I also think it's only a question of when we're going to see more nuclear plants built in the United States. Not so long ago, people thought we'd never see that.