For the Fed it is the second Great Depression and in a financial sense Wall Street has been over-run by lions and tigers.

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Clive Maund returns to The Gold Report to provide some keen insight into the U.S. dollar’s recent surge. “Be patient,” he says, “because once the dollar rally is over, an excellent buying opportunity will be in the offing.” Clive says the Fed is doing all it can to get investors out of commodities and into Treasuries before it unleashes QE3, and with it a new round of inflationary pressure.

The Gold Report: Clive, in a recent note on your website you said, “The general investing public are sheep, they like to move together in large groups, have a kind of vacant stare, are routinely fleeced and eventually slaughtered. That’s why when they are very confident, it’s time to get scared, and vice versa.” Further to the point, you suggested that the investing public is confident in gold and bearish on the dollar, and that those two factors could result in a rebound in the greenback and a fall for gold. Please expound upon your theory.

Clive Maund: The main basis of my theory is sentiment, during the first week of May, before the dollar started rallying, only about 16% of the public was bullish on the dollar—almost a record low. Sentiment hasn’t been this bad since 2003. An article pointing this out was posted on my site on April 28. It also pointed out the danger posed by this to commodity stocks, especially to silver. Adam Hamilton, of Zeal Research, picked up on this too, and also is calling for a big dollar-countertrend rally. The papers have been full of stories about how the dollar is set to collapse, and when that happens we are usually on the verge of a rally. The dollar index rose sharply from the 5th of May and has broken out of its downtrend in force from the start of the year and could get as high as 79 on this move. While this is certainly not good news for commodities, we should be presented with a major buying opportunity once the dollar rally has run its course.

TGR: You believe that the Federal Reserve ultimately will unleash quantitative easing (QE3) to help prop up the dollar. Will that be the buying opportunity you’re talking about, or will it come sooner than that?

CM: Right now, it’s in the Fed’s interests to encourage investors to believe there will be no QE3 in order to panic them out of commodities and stocks and into the dollar and Treasuries. This will buy it time and help reduce inflationary pressures. After the Fed has achieved this result, it will need to backpedal quickly, do QE3 anyway to prevent the economy stopping dead in its tracks and continue ringfencing the derivatives problem.

TGR: How far off is this buying opportunity?

CM: I believe that the corrective phase in commodities is likely to take the form of a 3-wave zigzag. Gold and silver, and copper too, look to be shaping up for a tradable short-term relief rally soon, which will be driven by bargain hunting combined with oversold technicals. This should be followed by a more sedate decline than that of early May to a lower low than that which occurred about a week ago, which may see silver drop as low as $28, with seasonal factors suggesting that this low may occur about late July, give or take a few weeks. I believe such a low will present a major buying opportunity.

TGR: In a previous interview with The Gold Report, you said, “As long as inflation has the upper hand, which the recent action of the commercial banks and institutions in scaling back their short positions demonstrates to be the case, investors can look forward to advancing commodity and stock markets. The big danger for investors is deflation.” Are we any closer to deflation now?

CM: I don’t believe we are. The fundamental reason for this is that the consequences of deflation in a debt-saturated world would be so catastrophic—especially for business leaders and politicians—that the Fed will move heaven and earth to prevent it and will even choose hyperinflation above deflation because it buys the Fed more time. The plunge in silver during the first two weeks of May was largely due to the successive raising of margin requirements, which was a deliberate and successful tactical move by the powers that be to pop the silver bubble that was shining a revealing spotlight on its inflationary policies, though the drop in silver also is thought to have been partly due to the market anticipating a dollar rally.

TGR: Let’s talk more about silver. A note on your site said, “After last week’s devastating plunge, the silver battlefield is littered with the corpses of silver longs with those who are still breathing being exhorted to “put their shoulder to the wheel” again by the undismayed silver cheerleaders hailing a ‘fantastic buying opportunity’ for the ride of a lifetime.” Is it still a fantastic buying opportunity?

CM: Although a significant and tradable relief rally is to be expected after silver’s brutal plunge in early May, silver is not thought to have completed its corrective phase yet. This is because a substantial dollar rally is believed to have already started; so if you wait a little while, you should be presented with a better buying opportunity. More aggressive traders may want to play the relief rally expected soon, but average investors may want to wait for the expected lower low later.

Silver could drop back to the high $20s before this dollar rally is done and that should present a great buying opportunity, higher margin requirements or not. This is because inflation is expected to continue to build in the direction of hyperinflation, as QE is the only way out due to the massive debt and derivatives overhang. The game plan is to inflate away the debt and backstop the big Wall Street banks to whatever extent necessary because they are, as we have been told repeatedly, “too big to fail.” This means gold and silver are eventually set to go much, much higher.

TGR: How should investors mitigate risk in their portfolios when the possible outcomes of our economic situation are quite dramatically different?

CM: The two methods that we use are traded options and inverse ETFs. For example, we used ProShares Ultrashort Silver ETF (NYSE:ZSL) during the early May plunge to insulate ourselves from the drop in silver and actually gained by also buying calls in this ETF, which we later sold. A word of caution about leveraged ETFs—they should only be employed where the potential is thought to exist for a big move contrary to your open positions. The reason for this is because they have an options component, they are prone to price erosion in a flat market. So, most of the time, it is better to use non-leveraged ETFs, which are held for only a short time until the danger has passed. Options are a simple, fair and cheap way to buy protection and thus favored—a great thing about them is that even when trading is thin, market makers have to both make a market and honor the intrinsic value of the option; this is what is meant by fair. Used in this capacity, they are not speculative at all. On the contrary, they should be viewed as insurance.

TGR: A lot of your investment decisions seem to rely on charts and technical analysis. A) Where do you get your charts? B) Which ones are you most partial to?

CM: I get my charts from stockcharts.com where I have a subscription. It provides a good free service, but the subscription service is even better with many options. Bigcharts.com’s charts are good for quick reference, and they show volume to advantage. A key point to remember with all these services is that, while they provide a vast amount of data, it’s how you use it and what you do with it that counts.

TGR: What sort of patterns are you looking at in these charts? Are there some basic things our readers can look for that will help them find companies that are about to break out?

CM: There certainly are. The main thing you want to see is the price rising away from a clear basing pattern and the longer and more definite the base pattern, within reason, the better, and you also want to see a favorable moving average alignment. You should seldom invest against the direction of the long-term 200-day moving average—when you have this on your side your odds of failure are greatly reduced. There are various patterns that we employ to advantage, such as Ascending Triangles, Double and Triple Bottoms, Fan Corrections, Falling Wedges etc. and we pay close attention to trading volume and volume indicators, principally the Accumulation-Distribution and On-balance Volume lines. Never forget that volume is the lifeblood of the market so studying volume patterns can help you gauge whether money is flowing into or out of a stock, especially as volume action precedes price movement. Knowing this enables us to position ourselves AHEAD of breakout moves.

TGR: In a recent research note, you said, “I have been in this business more years than I care to mention. . .in all that time, I have very seldom come across a chart that looks more bullish than that of Alix Resources Corp. (TSX.V:AIX).” What are your charts telling you about Alix?

CM: Alix is at about the same price as when it was recommended on the site back in March, and its technical condition remains about the same—it looks very bullish. Even as it dropped with the sector in early May, its accumulation/distribution line rose so sharply that this indicator is at about the same level it was when Alix was priced at CAD$2.60 back in spring of 2009. Looks attractive here, though it may be held back for a while longer if the sector drops on the building dollar rally, as expected.

TGR: You operate out of Chile. Please tell us about that country and the investment climate for mined commodities there.

CM: Chile is generally a pleasant place to live. Politically, it is stable and liberal. Housing and land is cheap compared to countries like Canada and the U.S. The income tax rate is low, though taxes are collected in other ways like a high vehicle road tax and high taxes on gasoline and other purchase taxes. The food is abundant and cheap, especially in the south of the country, and wine also is cheap and excellent. There are limitless beaches and mountains because, of course, the country is sandwiched between the mountains and the sea. There are good air and bus services up and down the country but hardly any railroads. Internet coverage is good now, too.

TGR: What about the Chilean economy, especially as it pertains to mining?

CM: Chile is actually a far more fiscally prudent country than the U.S. It does not have careening deficits, and the workforce is obliged to contribute to a private pension scheme that has in fact grown in value far more than government schemes in countries like the U.S. That means the Chilean government is not on the hook for massive pension obligations, as many other governments around the world are. Those governments will probably renege on these obligations, at least in part, by a combination of inflation and fiddling the inflation statistics.

Chile is very mining friendly and has a sophisticated infrastructure to support mining companies conducting operations. In addition, environmental factors are not such a concern here as most of the mining operations and prospects are located in northern Chile. The north is a rather sparsely populated desert but with towns dotted around to provide amenities, logistical support and a skilled workforce. It is still not widely appreciated that there is a line of hills or low mountains between the Andes and the coast that harbor massive as-yet-undiscovered copper-gold deposits that will be relatively easy to mine and much less complicated and expensive than Barrick Gold Corp.’s (TSX:ABX; NYSE:ABX) massive Pascua-Lama operation. That project is perched on Chile’s border with Argentina, high in the Andes. To get an idea of the potential of these deposits located in this line of hills, you need only look at Codelco’s (Corporacion Nacional del Cobre de Chile) massive Chuquicamata open-pit copper mine near Calama, which is the biggest open-pit copper mine in the world, or Freeport-McMoRan Copper & Gold Inc.’s (NYSE:FCX) giant Candelaria open-pit and underground mine near Copiapo.

TGR: You have an on-the-ground view of what’s happening in Chile. Are there some small-cap names with favorable projects in Chile?

CM: One that is coming along very nicely and continues to look most promising is Samex Mining Corp. (TSX.V:SXG; OTCBB:SMXMF). I have personally inspected its properties north and south of Copiapo with the company’s chief geologist. I started the current bull market in this stock by recommending it to subscribers at $0.12 almost two years ago and, after a steady advance, it spiked for about a month on positive drilling results. Samex has tied up two nice parcels of excellent properties on that line of hills I mentioned earlier, which are actually very close to Freeport’s Candelaria operation. These properties have huge potential, so there’s a lot more upside for this stock with the company now undertaking a drilling program to define the potential of the properties.

TGR: Thank you for talking with us today, Clive. This has been very informative.

Clive Maund has been president of http://www.clivemaund.com, a successful resource sector website, since its inception in 2003 early in the sector bull market. He has 30 years’ experience in technical analysis and has worked for banks, commodity brokers and stockbrokers in the City of London and holds a diploma in technical analysis from the UK Society of Technical Analysts. Clive now lives in southern Chile.

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The confirmation of George Soros’ ETF gold sale.

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The herding impulse impulse determines man’s social mood and is independent of outside influence.

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Over the next two decades, liquid and natural gas shales could release a treasure trove of new energy production. But even given this extraordinary new resource, FBR Capital Markets Head of Energy and Natural Resources Research Rehan Rashid expects demand to stay ahead of supply. Rehans’s long-term bullish scenario favors a few select names that he shares.

The Energy Report: Your coverage universe is mid-cap to very large, and I even see a couple of companies under a billion dollars in market cap. Could you tell me your basic investment theory?

Rehan Rashid: We believe an energy supercycle is redefining how we look for oil and gas, thus driving reserve and production growth the likes of which we have already seen in natural gas and are now seeing unfold on the liquids and oil side. And yes, this is applicable to small cap names, perhaps sometimes more dramatically like we’re seeing in Rosetta Resources Inc. (NASDAQ:ROSE) today.

TER: Your list looks to be largely tied to commodity price and perhaps M&A activity.

RR: I’m kind of a commodity agnostic. Instead, we are margin-driven. It’s all about margins and what’s currently priced into the stock. It could be oil, gas or something in between. We are more focused on the platform—the acreage position or the capital structure that goes into a good bottom up thought process.

TER: You just mentioned your supercycle thesis. We’ve already gotten the low-hanging fruit from conventional drilling, but you believe we’re getting this new supercycle of energy from the shales? Is that correct?

RR: Yes. U.S. natural gas production quadrupled from 15 billion cubic feet per day (Bcf/d) in 1950 to more than 60 Bcf/d of dry gas by 1970. That’s kind of when the last paradigm shift finally played itself out and we discovered a lot of what was then known as conventional gas. So, it’s our estimation that yes, history is repeating itself under a different name.

TER: And this momentum is driven by new technology.

RR: Absolutely. The question in the investor’s mind is no longer whether this new reserve or production growth is really happening, but rather what is its magnitude and what is the path that it might take? Also, how fast will this technology facilitate the harder stuff, such as oil shales or liquids development, including processing and all the other above ground infrastructure issues?

TER: How long can this supercycle last?

RR: The answer to that question is probably two-fold. First, we need to know how long it will take for growth to play out. Second, we need to know how quickly the market will recognize the value. Natural gas production took 20 years to quadruple from 15 Bcf/d to 60 Bcf/d in the last go-round, right? So, physically speaking, it may take a long time—a decade, two decades—to get the appropriate volume of oil and gas out of the ground. But the market will stay multiple years in front of that. The market typically likes to stay 6–12 months ahead, but in a growth cycle, it probably goes out 24–36 months. So, in my opinion, the overall evolution of the trajectory of the growth is going to peak 10–15 years from now, and the stocks will price in 12–36 months going forward at any given time.

TER: Okay, in light of that, you’ve lowered your full-year price forecast on natural gas from $5/mcf to $4.80/mcf, but you’re maintaining your 2012 forecast at $5.50/mcf. Why wouldn’t this price drop?

RR: I presume you’re alluding to the idea that the existing supply of natural gas may result in pressures at these levels or even lower?

TER: That’s my question, yes.

RR: That’s a complicated question with a lot of inputs that will drive gas prices higher going forward. In the middle of 2008 and early 2009, we were the first ones to lower the long-term price to $4.50/mcf. We saw what was happening two years ago and said that gas prices would have to correct to these levels before we can talk about any change in direction. We saw that two years ago, but now we’re trying to look further out.

What we’re seeing slowly but steadily now is that the market is responding. Chemical companies are coming back and power generation companies are favoring more and more natural gas. Plus, environmental regulations are making it more difficult to burn coal. So, consumption factors are shifting to favor more demand. In addition, what people forget is that yes, while shale is going through a massive growth cycle, almost 40 Bcf/d of existing supply is old, conventional assets that are seeing no capital investment and is going to decline. I think between improving demand, continued shale growth and declining conventional supply, we will see a balance of supply and demand leading $5.50/mcf gas.

TER: What is your oil forecast?

RR: Well, oil is a much tougher beast because of global drivers. It’s not lost on us that global spare productive capacity is too low. We also see that global geopolitics are for real and manifest themselves in a whole host of different ways. The future of the dollar is under question. So, we will let the broader futures market aggregate all that and come up with a pricing forecast. We will take a 10% haircut off that and build it into our models. In other words, we don’t actively forecast oil prices, but we understand the broader dynamics, and that’s why we’re okay with letting the market set the direction.

TER: From your perspective, is the price of oil U.S. dollar-dependent?

RR: It is dependent on the U.S. dollar, geopolitics, tight spare capacity and, of course, the continued globalization and urbanization growth stories that come of out of China, India and BRIC countries [Brazil, Russia, India, China] in general. It’s dollar; it’s geopolitics; and it’s economy.

TER: We’ve seen some recent pull back in nearly all commodities. Could this be a trend, or is it a normal part of the cycle?

RR: Well, we went from $85/bbl oil to $112/bbl or so. At $4-plus a gallon gasoline at the retail level, demand could be affected. The market is going to react with a correction. The direction of the price will be dependent upon the ability of the world to absorb the higher oil prices, and the U.S. dollar.

TER: Rehan, you have said that the primary risk in investing in oil and gas producing companies is depressed commodity prices. How does the investor manage these risks?

RR: It may be difficult in the near term to be agnostic to commodity prices, but over time, margins, asset growth and production growth should really drive value creation. If oil prices drop, cost structures will also come down and margins will improve again. But you have to endure that yin and yang over time.

TER: Should investors be adding more exploration and development to their portfolio weightings?

RR: Yes, they should because in our opinion at the beginning stages of this supercycle, the risk-adjusted returns are much higher.

TER: How should the companies protect themselves? Is this the time to have capital structure fixed for the future?

RR: It is always prudent to have a reasonable portion of your commodity portfolio hedged in the financial markets. The value proposition for companies is not simply in commodity exposure, but also in value creation from their technical competence. So, yes, we like companies that have cash flows to execute the program.

TER: For equity investors, where are you telling them they should be today?

RR: To be name-specific, we like Pioneer Natural Resources Co. (NYSE:PXD) quite a bit. We like Newfield Exploration Co. (NYSE:NFX). We like Southwestern Energy Co. (NYSE:SWN). We like Endeavour International Corp. (NYSE.A:END). All these companies offer some margin of valuation or asset growth, or they’re not fully appreciated in terms of their platform.

TER: You have Pioneer rated outperform and you said earlier in the spring that the flow rates from its horizontal Wolfcamp drilling would set the price direction for the rest of this year. How is that looking?

RR: Well, the results are mixed so far, but I am probably repeating what the market is thinking. Our opinion is that it’s just the beginning, but there’s so much oil in place and technology will ultimately resolve the gap of where their productivity is today and where it’s going to go tomorrow. EOG Resources Inc. (NYSE:EOG) validated that recently in its earnings call that Wolfcamp and Permian horizontals looked good, and they’ll get better. So initially, Pioneer may be mixed, but the industry’s saying this will get tremendously better.

TER: You mentioned Newfield; your target price is $85, which is an implied return of 20% from current levels. I realize you don’t worry about commodity prices too much, but this is an oil-driven play. If oil settles at current prices, can Newfield achieve your target price?

RR: Yes, we use $90/bbl oil long term in our metrics and we have not adjusted the numbers higher for $110/bbl or anything like that. Our underlying presumption right now is $90/bbl oil long term and Newfield can very well achieve those objectives.

TER: You mentioned Southwestern. What’s the long-term driver here?

RR: Transition to liquids and how successful it will be.

TER: Is there any news on the company’s new stealth play?

RR: Not yet, but we’re expecting it in the third quarter.

TER: You also threw in a small-cap, Endeavour International. Your target price implies a 50% upside. Are there any misconceptions about the risk in this play?

RR: Well, yeah, we think so. We think that the production of the company from its discovered projects alone could be up seven- or eight-fold in the next two years. But the asset base is in the U.K., and the market for small-cap reasons and international-asset reasons has chosen not to give it the appropriate credit. It’s also pursuing a central-Montana heat oil shale play and an Alabama shale play that the company believes looks like the Marcellus. So, yes, to us the risk/reward profile is very attractive given the material development-driven growth and a domestic program that could be a game changer with very minimal capital required.

TER: At current levels, do you think of Endeavour as being value priced?

RR: Yes, very much so.

TER: Okay, so those are your four favorite plays. Did you recommend any others?

RR: No, these are our top four names to think about along with a lot of different things that can happen in the sector at any given day, but we are focused on these four.

TER: I enjoyed meeting you very much.

RR: Thank you.

Rehan Rashid is managing director and head of energy and natural resources research at FBR Capital Markets. He joined FBR in September 1998 as a vice president, covering the oil and gas E&P sector and most recently initiated coverage of the liquefied natural gas (LNG) sector. Prior to joining FBR, he was an associate analyst at PaineWebber, covering E&P and spent two years at Jefferies Inc. He received his BS in accounting and an MBA in finance and accounting from the University of Houston.

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