Bonds & Interest Rates
For the next 10 years, I predict there will be little to no gain in the broader market. Instead, I think something else will account for ALL of the market’s return for the next decade.
My Stunning Prediction For The Next Decade
In just a moment, I’m going to show you a chart that every investor needs to see.
Every analyst already knows about it. Most experienced investors know it too. But it seems like no one is willing to admit exactly what it means.
Frankly, I don’t think most investors are prepared for what I’m about to tell you. I want to make sure you aren’t one of them.
I think dividends will account for ALL of the market’s return for the next decade.
Sound impossible? Not only is it possible, but it’s already happened before… and it’s happening right now.
Since 1931, dividends have accounted for 40% of the market’s total return, according to bond-king PIMCO. That means for every $100 returned by the stock market, $40 of that amount was paid in dividends. (Given that, it’s amazing how many investors still ignore dividends.)
And since that time, two entire decades — the 1930s and the 2000s — have seen ALL of their returns come from dividends.
Just look at the market’s recent history. The S&P 500 has lost 4% in capital gains during the past five years. But when you add in the dividends paid during that time, investors actually gained 7%.
In other words, we’re already in the middle of another “dividend decade” and yet you barely hear a word about it.
Let me show you why I’m convinced we’ll be stuck in this pattern for years to come. It all starts with that chart I mentioned at the start of today’s article…
The past three decades have been the absolute best time in history to invest — and that’s despite the ’87 crash, the popping tech bubble, the housing crash, the United States’ credit downgrade and dozens of other negative events. Just $10,000 invested in the S&P in 1982 would be worth $259,000 today.
But all those gains come with a dirty little secret… debt.
Debt is like jet fuel for economic growth. And never in the history of mankind has a group of people taken on more debt than Americans have in the past three decades.
In the mid-1980s, America’s household debt (just household debt, not government debt) stood at a little more than $2 trillion. Today, it’s $12 trillion — six times as much.
That debt binge has been the most important factor in the unprecedented returns in the stock market for nearly three decades. Debt has fueled purchases of everything from homes to cars to televisions to iPads. It’s helped millions of families live beyond their means… to the benefit of thousands of companies.
The chart below shows the direct relationship between soaring household debt and the rise of the stock market:
This chart also shows why the United States can’t escape the recent downturn, despite trillions of dollars in stimulus and record-low interest rates.
Consumer spending is 70% of the United States’ economy. Debt has fueled increased spending for decades. Now we’ve reached a point where the average American can’t easily take on any more debt. In fact, since the recession, the trend among U.S. households has been toward reducing debt. The bill is coming due on the largest segment of the American economy.
Keep in mind that everything I’ve just told you has nothing to do with government debt. The government has added trillions in debt to bail out banks and carmakers, fund stimulus projects, and backstop government enterprises like Fannie Mae. (It’s largely responsible for the market’s surge in the past few years, despite falling household debt.)
Government debt has risen from 50% of GDP three decades ago to 100% today.
But just like the rise in consumer debt, government debt can’t rise forever either.
On top of all of this, the United States economy faces the law of large numbers. The U.S. is a large, extremely developed market. Our GDP sits at $16 trillion annually. In 1982, GDP was $3.2 trillion (in today’s dollars). During the “debt boom” of the past 30 years, GDP increased 400%.
Say we saw the same 400% growth for the next 30 years. That means in three decades U.S. GDP would measure $80 trillion — more than the entire planet’s GDP today. It doesn’t take an economist to understand that’s highly unlikely, especially given that we can’t continue tapping into debt to fuel that growth.
We’re already seeing signs of a slowdown. From 1983 through 2000 — a period of 18 years — U.S. annual GDP grew at 4% or better nine times.
Fast forward to today, and the U.S. economy hasn’t grown at a rate of 4% or better for 12 straight years. At its current size, squeezing out growth of more than a few percent from our giant economy is a monumental task.
So does all this mean the stock market will crash and you’re better off stuffing your money under a mattress?
Absolutely not.
My point is this: For decades the U.S. economy has been the economic engine of the entire world. Never in history has so much wealth been created. During that time the stock market has soared, but dividends have still made up an enormous percentage of total returns.
Now we are almost sure to see slower growth for years… or even decades to come. In this type of environment, it’s obvious that dividends will account for an even larger share of the market’s returns.
Again, over the last 80 years dividends have accounted for 40% of the stock market’s returns. But going forward, I predict they’ll account for 100% — literally ALL — of the market’s returns. That’s exactly what we’ve seen for the past decade, and I expect that trend to continue throughout the next decade.
In this new environment, there is still an enormous opportunity to make money. You just have to position your portfolio to take advantage of this new reality.
[Note: As I mentioned earlier, the “dividend decade” isn’t just a myth… It’s already becoming a reality. In my recent report, The Top Ten Stocks For 2013, I’ve identified 10 stocks that are already benefiting from this new trend, and could continue to do so if my prediction proves to be true. One of these stocks has returned 137% in three years — more than triple the S&P’s 39% gain. Another has raised its dividend 463% since 2004… and another has over $9.21 per share in cash (49% of its share price).
To learn more about these top picks for the coming year — and possibly the decade — visit this link here.]
All the best,
Paul Tracy
StreetAuthority Co-founder, Chief Investment Strategist — Top 10 Stocks
P.S. — Don’t miss a single issue! Add our address, Research@DividendOpportunities.com, to your Address Book or Safe List. For instructions, go here.
Disclosure: In accordance with company policies, StreetAuthority always provides readers with at least 48 hours advance notice before buying or selling any securities in any “real money” model portfolio. Members of our staff are restricted from buying or selling any securities for two weeks after being featured in our advisories or on our website, as monitored by our compliance officer.
Richard Russell has been bullish Gold since $250. He is also 88 years of age and has an enormous amount of experience with both Bull and Bear Markets, and how they unfold. He has been analysing, writing and advising his subscribers about markets in his Dow Theory Letters every business day for more than 50 years:
“Where’s gold going? — As you can see on the chart below, gold has formed an almost perfect rectangle. The top of the rectangle has been tested three times, and each time gold was turned back.”
“Obviously, there are some powerful groups (the shorts) that do not want to see gold move into and above the 1800s. At the bottom of the rectangle, gold has found support at approximately 1575.
For the last two weeks, gold and the dollar have moved in unison, which is most unusual. At the bottom of the chart we see the slow stochastics, which are in the neutral or middle zone. Since the bull market in gold is still in force, I would expect gold, ultimately, to break up and into the 1800 + zone.
One caveat — After rising for 12 years in a row, I expect the bull market in gold to produce a final upside blow-off. Bull markets don’t usually die with a whisper and a snore. Often prior to a final upward explosion, we will see a sharp correction, and I have expected something like that for gold. The final correction serves to clear the air and readies the market for a climactic rise.
One reason why we may not see the usual correction in gold is that most of the world’s central banks are now accumulaters of gold on any weakness. Both China and Russia are now eager buyers of gold — both have a small percentage of gold in their reserves.
It’s also significant that most Americans are afraid of gold, even though it has risen year after year for twelve years. Imagine the following a stock would enjoy if a given stock had risen twelve years in a row.
Since when does making money make one a sage? Ever since Warren Buffett bought a chunk of the Washington Post, he’s turned himself (or the media has turned him) into an oracle. Buffett says, yes, we should “tax the rich.” That doesn’t concern Buffett, who could drop a few billion and not know it.
Buffett may be a great company-picker, but when it comes to taxes and government, he’s no oracle in my eyes. Of course, I’m bitter. I bought ten shares of Berkshire at $250 a share and sold them when the stock hit $500. Who knew? Who ever knows? Actually, I bought the shares of Berkshire so I could read Warren’s annual report.
In the 1974 bear market, Berkshire’s shares dropped in half. I wonder how many BRK followers held their stock through the 1974 disaster?
Question –Why is gold the ultimate safe-haven investment?
Answer — Because gold is the only item that can’t go bankrupt. For thousands of years, gold has been treated as pure wealth.
Irony — The lust for gold opened up the American West. In 1849 men left their wives and families and homes and headed West in the hope of finding gold. Yet today, most Americans would not swap their intangible, unbacked dollars (Federal notes) for gold.
For a dozen years, Americans have turned their backs on an item that has risen to new highs each and every year. The stage is set for a huge reversal in sentiment. My intuition says the turn will come between now and 2015.”
To subscribe to Richard Russell’s Dow Theory Letters CLICK HERE.
Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.
Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron’s during the late-’50s through the ’90s. Through Barron’s and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-’66 bull market. And almost to the day he called the bottom of the great 1972-’74 bear market, and the beginning of the great bull market which started in December 1974.
The Letters, published every three weeks, cover the US stock market, foreign markets, bonds, precious metals, commodities, economics –plus Russell’s widely-followed comments and observations and stock market philosophy.
In 1989 Russell took over Julian Snyder’s well-known advisory service, “International Moneyline”, a service which Mr. Synder ran from Switzerland. Then, in 1998 Russell took over the Zweig Forecast from famed market analyst, Martin Zweig. Russell has written articles and been quoted in such publications as Bloomberg magazine, Barron’s, Time, Newsweek, Money Magazine, the Wall Street Journal, the New York Times, Reuters, and others. Subscribers to Dow Theory Letters number over 12,000, hailing from all 50 states and dozens of overseas counties.
A native New Yorker (born in 1924) Russell has lived through depressions and booms, through good times and bad, through war and peace. He was educated at Rutgers and received his BA at NYU. Russell flew as a combat bombardier on B-25 Mitchell Bombers with the 12th Air Force during World War II.
One of the favorite features of the Letter is Russell’s daily Primary Trend Index (PTI), which is a proprietary index which has been included in the Letters since 1971. The PTI has been an amazingly accurate and useful guide to the trend of the market, and it often actually differs with Russell’s opinions. But Russell always defers to his PTI. Says Russell, “The PTI is a lot smarter than I am. It’s a great ego-deflator, as far as I’m concerned, and I’ve learned never to fight it.”
Letters are published and mailed every three weeks. We offer a TRIAL (two consecutive up-to-date issues) for $1.00 (same price that was originally charged in 1958). Trials, please one time only. Mail your $1.00 check to: Dow Theory Letters, PO Box 1759, La Jolla, CA 92038 (annual cost of a subscription is $300, tax deductible if ordered through your business).
IMPORTANT: As an added plus for subscribers, the latest Primary Trend Index (PTI) figure for the day will be posted on our web site — posting will take place a few hours after the close of the market. Also included will be Russell’s comments and observations on the day’s action along with critical market data. Each subscriber will be issued a private user name and password for entrance to the members area of the website.
Investors Intelligence is the organization that monitors almost ALL market letters and then releases their widely-followed “percentage of bullish or bearish advisory services.” This is what Investors Intelligence says about Richard Russell’s Dow Theory Letters: “Richard Russell is by far the most interesting writer of all the services we get.” Feb. 19, 1999.
Below are two of the most widely read articles published by Dow Theory Letters over the past 40 years. Request for these pieces have been received from dozens of organizations. Click on the titles to read the articles.
The world today looks almost identical to the world of the 1960s because there have been very few important innovations since then. But you will leap to reply — the internet! Alas, electronic technology does not seem to noticeably increase output of stuff. The Internet affects our quality of life in many ways, but not our standard of living.
The Internet was more or less fully built out in the US in the year 2000. All of a sudden, knowledge from all over the world…and from all of history…was available. Information could be accessed and questions could be answered at the speed of light. People could collaborate on a global scale, across borders and time zones, innovating, creating, critiquing, and elaborating new ideas of breathtaking scope.
In the 1990s, many people believed that this electronic hyperactivity would eliminate the “speed limits” on growth. Analysts advised investors that they could pay almost an infinite price for start-up Internet companies. Growth would be fast. And it would not require capital inputs, they said.
And certainly, there are many Mercedes 500 automobiles on California highways that owe their existence to the Internet. Many entrepreneurs, software developers and “app” creators have gotten very rich. But based on growth rates, wages and household incomes, the Internet does not seem to have led to a general uptick in prosperity. Since 2000, household income in the US has actually fallen. So have wages. And stripping out government expenses and redistributed income shows negligible real growth in the private sector economy over that period. GDP minus government spending was $9.314 trillion in 2001 and only $9.721 trillion in 2010. At that rate, it would take 167 years for the GDP to double. By comparison, GDP doubled twice between 1929 and 1988.
Over the last 20 years, the top 10% of earners are the only ones to have added to their wealth. Everyone else is even…or worse. At the bottom, among the lowest quarter of the population, people are poorer now than they were 20 years ago.
What went wrong? Why didn’t the Internet make us richer?
According to The Financial Times the world spends 300 million minutes a day on a single computer game: Angry Birds. Millions more are spent looking at videos of puppies or kittens. People spend 700 billion minutes per month on Facebook. The typical user spends 15 hours and 33 minutes on the site each month. The YouTube viewer spends 2.9 billion hours per month on the site.
You get the idea. You don’t need the government to waste time; you can do it yourself!
Even when you’re not using the Internet to waste time, you’re rarely using it to add to GDP. Instead of going out to shop, you can shop on the worldwide web. You will find much greater selection at generally lower prices. You save the time and energy of going shopping at a mall. Likewise, entertainment is much easier and more convenient. Instead of going to a strip club, you can watch as much pornography as you want in the comfort of your own home.
In industry too, the Internet is primarily a cost-cutting, efficiency-enhancing technology. It permits better fleet management for trucking companies. It helps retailers avoid unnecessary inventories. It allows you to save time and energy in countless ways, such as checking in for flights on-line…reading widely without going to the library…sending massive files, graphics and reports with the press of a button. These things make life more fluid, and perhaps more easy and agreeable, but they do not add significantly to GDP.
The Internet cannot create GDP growth.
Growth is what you get when you use more energy, or use the energy you have better. Growth — more GDP…more jobs…more revenue…more people — is also what every government in the developed world desperately needs. Without it, their deficit spending (all are running in the red) leads to growing debt and eventual disaster.
Not only is the rate of growth in the developed world declining, so is the speed of recoveries. Here’s Harvard professor Clayton M. Christensen:
In the seven recoveries from recession between 1948 and 1981, according to the McKinsey Global Institute, the economy returned to its prerecession employment peak in about six months, like clockwork — as if a spray of economic WD-40 had reset the balance on the three types of innovation, prompting a recovery.
In the last three recoveries, however, America’s economic engine has emitted sounds we’d never heard before. The 1990 recovery took 15 months, not the typical six, to reach the prerecession peaks of economic performance. After the 2001 recession, it took 39 months to get out of the valley. And now our machine has been grinding for 60 months, trying to hit its prerecession levels — and it’s not clear whether, when or how we’re going to get there. The economic machine is out of balance and losing its horsepower. But why?
Why? The obvious reason: we’ve reached the point of diminishing returns on energy inputs. I use the word ‘energy’ in a broad sense — to include our intellectual energy, and our time and attention, as well the energy you get from fossil fuels. Returns on investment have gone down to marginal levels.
In 2012, the Congressional Budget Office helpfully looked ahead and saw an on-coming train. If federal spending remains on its present course, the US would add another $10 trillion in debt over the next 10 years. Congress, reacting to the emergency, passed a law which, if left unchanged, would reduce the additional debt to $8.7 trillion. The downside train kept coming.
But the train is far bigger and more powerful than the CBO thinks. The real federal deficit for 2012 is not $1.1 trillion as widely reported. Include unfunded Medicare and Social Security obligations and it is more than $7 trillion. GDP increased during the same period by about $320 billion. In other words, debt is going up 21 times faster than the economy that supports it. Already, if you reported the liabilities of the US government correctly, according to GAAP rules, such as every corporation is required to do, it would show a hole $86 trillion deep. And at the rate deficits accumulate, it will get twice as deep in the next ten years — to more than $150 trillion, or nearly 10 times the size of the economy.
Another way to look at this is to think again about how modern democracies finance themselves. Since the days of Bismarck, they take in money from citizens and pay much of it back, in the form of various social spending programs. The successful politician allows spending to outstrip revenues as much as possible, but not so much that he appears irresponsible. The more benefits he can plausibly promise to the voters, the more likely he is to gain power…and the more resources he can also shift to favored groups.
Growth over the last hundred years — in population, GDP, wages, prices — made it possible to expand government spending greatly, anticipating larger, richer generations that would support their smaller, poorer parents.
The mathematics of this system held up fairly well — until recently. Now, population growth rates are falling everywhere in the developed world — including the US, with a huge bulge of baby boomers preparing to retire and voting themselves the most lavish benefits in history. Without growth, this system of public financing is doomed to spectacular failure. More spending will not be better; it will be calamitous. The more dry debt tinder on the ground, the bigger the blaze.
Regards,
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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The fundamentals at many junior mining companies have improved, yet their stock prices continue to languish. In this interview with The Gold Report, market guru Peter Grandich gives his thoughts on when this may end and where gold is headed in 2013, and names some of his picks in unlikely jurisdictions.
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?
PG: 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?
PG: 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?
PG: 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.
PG: 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.
PG: 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.
PG: 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?
PG: 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?
PG: 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?
PG: 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?
PG: 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: What are some iron ore juniors you’re following?
PG: My second largest personal holding is in an iron ore play, Alderon Iron Ore Corp. (ADV:TSX; AXX:NYSE.MKT). As a soon-to-be producer, it’s a bellwether stock of North America.
Management has delivered on everything promised, but was caught in this downdraft. There was a tremendous, overdone reaction to a very slight delay in a crucial report. Management is not delaying it because of a problem, but to actually maximize shareholder value. Alderon Iron Ore is a leading candidate in the sector if you believe that iron ore-related issues have seen their worst days and will rebound.
TGR: Kami is Alderon’s project. It has over 1 billion tons iron ore. There are a number of small iron ore plays out there with significant iron deposits. Why did you choose Alderon over some others?
PG: I have met dozens and dozens of top executives in the junior resource or even the major producer segment of mining in almost 30 years in this business. I can literally count on my hands the number of them that I would entrust my family’s fortune to.
One of those is the executive chairman of Alderon, Mark Morabito. Management is so critical in the junior area as it greatly influences the potential success or failure of a company. When you look at the entire management team at Alderon, it is nothing but a who’s who of success in the industry. It’s a group of people who not only come from the iron ore business but also from major mining. That is one of the reasons I feel I can make a major bet on it and not have it spread out among others.
Within the iron ore group, there are more speculative plays that have been beaten down including Cap-Ex Ventures Ltd. (CEV:TSX.V) and Ridgemont Iron Ore Corp. (RDG:TSX.V). Even the Labrador Trough itself and many of the players there have come to a point where their stocks are very appealing for speculators who envision a stabilization in the iron ore price. That stabilization should come from the ever-increasing demand for steel, not only in China, but also in the inevitable rebound that should come worldwide, maybe not in 2013, but certainly in the foreseeable future.
TGR: Do you have to believe in a global economic recovery to make money in the junior iron ore space?
PG: 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: In a recent post on www.grandich.com, you took issue with a Raymond James report on Geologix Explorations Inc. (GIX:TSX; GIXEF:OTCQX). Why did you feel compelled to challenge the analysis done by Raymond James?
PG: I felt that the report was not as accurate as it could be and misinterpreted a lot of things. Therefore, I felt the need to respond and not just because it’s a client.
I saw a similar story like this with another client of mine, Timmins Gold Corp. (TMM:TSX; TGD:NYSE.MKT), which got impacted negatively in its share price by an analyst with whom I and others, including Timmins, strongly disagreed with. I was scoffed at for responding and was told the only reason I was responding was because it’s a client.
Yet Timmins ended up proving how wrong that analyst was and recently traded at an all-time high. Timmins Gold started its road to riches during the worst financial crisis ever and is near an all-time share price high in a market where most companies have gone the opposite direction. It continues to come out with good news of advancing resources and higher production.
I see similar traits in the Geologix story, and that’s why I took the time to respond to the analyst report.
TGR: Geologix has meandered around sub-$0.40/share for a while. What’s going to bring Geologix back and allow shareholders to make money on this stock?
PG: Geologix is not much different from a lot of other companies that continue to have success on the corporate side but have seen their share prices languish and/or deteriorate.
The company has made great progress with advancing its resource projects. The analyst’s report ignored a very large deposit and when the company releases an economic report soon, that can demonstrate it is a very viable project.
That’s one of the things that can eventually lift the juniors market; majors are in great need of replenishing resources. Many deposits like the ones that Geologix has, which are well advanced, are likely to be taken over. They may not be taken over at prices that people paid a year or two ago, but they should be at a decent premium to where they are now. That’s a reason why I continue to hold my position in Geologix.
TGR: What did you make of the recent drill results from prospect drilling at Tepal?
PG: The results weren’t barn burners, but I’ve never owned it for just those drill results, but for the many more to come. What was lost in the news is how its results have moved from raw to Measured and Indicated and how much closer to viable the deposit has come.
TGR: Mike Bandrowski at Clarus Securities said, “Geologix could see a rerating once it publishes its prefeasibility study.” Do you share that opinion?
PG: That’s more of a realistic view by an analyst. I would hope that if such a report demonstrates the true viability of this project, people will pay up for the stock. But one of the things we’ll see next year is the Geologixes of the world, and a lot of these mid-development-moving-into-production type companies, merge and be acquired. They’ve moved so far along in achieving their corporate goals, but their share prices have gone in the other direction.
TGR: The companies have derisked, but their share prices haven’t really shown that. You now have a lower risk at a great price.
PG: Right. That stinks for those who are already all in, but for anybody who isn’t, Geologix is a classic example of where the share price hasn’t represented the advancement that the company has seen in the last year.
TGR: In another post on www.grandich.com, you talk about your accumulation of shares of Oromin Explorations Ltd. (OLE:TSX; OLEPF:OTCBB). You pull up a technical chart to help make your case. You strongly believe it will receive a takeover offer. Why is that a reasonable thesis?
PG: It’s my single largest holding ever in any company, period. Oromin has the footprint of a company that’s heading in that direction. To begin with, the company has made it known multiple times for almost a year now that it has engaged an investment banker to explore all sorts of strategic potential factors, including being taken over.
Second, the country in which it operates, Senegal, has been actively promoting that district as the next up-and-coming gold district in Africa and the world.
Third, for another public company that has a substantial position already in Oromin, that has built a mill near Oromin’s projects and that will be forced sooner or later to look for resources elsewhere, it makes a lot of sense for it to look at Oromin as an acquisition. The combination of both of them coming together could then pose a very attractive takeover and another bump up by someone even larger in the area.
It’s a combination of all of these factors, plus Oromin has been around a long time. It’s been a story that’s been in development for years. Managements of these types of companies like to get to this point and be taken out because they would like to start over somewhere else.
TGR: What are some other compelling stories in the junior mining space?
PG: As I said earlier, we are at the point where a lot of companies that greatly advanced their projects and their share prices may have not gone in that same direction. Sunridge Gold Corp. (SGC:TSX.V) is one that fits that mold as is Spanish Mountain Gold Ltd. (SPA:TSX.V). Donner Metals Ltd. (DON:TSX.V) is another classic example.
My surprise pick for 2013, something I have not spoken about publicly before, is South Africa. It may be wise for speculators to look at South Africa again for gold plays for a lot of reasons. One reason is the rand, South Africa’s currency, is finally going down in value, which is a critical point. Second, the necessary changes that needed to happen politically, economically and on the labor front are ongoing and advanced.
In South Africa, a particular company that I happen to represent is Wits Gold Ltd. (WGR:TSX; WGR:JSE). But really, South African mining in general could be a very interesting speculative play for 2013.
TGR: What are some equities based in South Africa?
PG: 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: You mentioned Sunridge Gold, which we have talked about it in previous interviews with The Gold Report. Sunridge recently announced that it’s going to publish its full feasibility study for its Asmara project in Q2/13. It plans to lower its capital expenditures and mine direct-shipping ore first to generate more cash flow off the top. What were your initial impressions from that news release?
PG: If Sunridge Gold were suddenly lifted up by a gust of wind and fell anywhere on the map in North America, its stock price would be 5 to 10 times higher than where it is, everything else remaining the same. It has been punished for being in a perceived not-great place, Eritrea. But in fact management attests, and we can see also from the results of Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT), that it’s been a good place to work in. But the world’s perception of Eritrea still remains, and people tremendously discount values of companies operating there.
I believe that both Sunridge and Nevsun can be acquired, most likely by a Chinese-led company. The Chinese have been building their position in Africa. To me, it’s only a question of which one receives the bid first, Nevsun or Sunridge.
There is still the chance that Nevsun—which has much in common with Sunridge—may buy it, concluding that based on where Sunridge’s price is, it can only enhance Nevsun’s value.
TGR: Any copper projects you want to talk about?
PG: Excelsior Mining Corp. (MIN:TSX.V) has a copper project in Arizona that is very viable. But it’s another company that many have perceived as being further down the road than it was and had hiccups early this year, which seemingly have regressed, that impacted Excelsior. If that ends and people look back to that area positively again, Excelsior can turn around. Mark Morabito is chairman of the board. In the past, he has managed to bring major investment parties into his projects. That’s something we can hope can happen with Excelsior.
TGR: Since year-end is approaching, how should retail investors handle tax loss selling season?
PG: 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.
Financial adviser and market analyst Peter Grandich started publishing The Grandich Letter—now a blog—without a high school diploma or even a day of formal training. His ability to interpret and forecast financial happenings, which once earned him the moniker “Wall Street Whiz Kid,” has led to hundreds of media interviews. He is regarded as one of the world’s foremost market strategists.
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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Alderon Iron Ore Corp., Geologix Explorations Inc., Timmins Gold Corp. and Sunridge Gold Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Peter Grandich: Disclosure information is available here. Peter Grandich was not paid by Streetwise Reports for participating in this interview.
Unemployment, US Dollar, Palladium Aluminum & Gold:
We note commentary from President Obama’s Chief Economic Advisor Alan Krueger, a wildly accomplished academic-economist, following Friday’s release of the BLS Employment Situation Report for November …
— “Today’s employment report provides further evidence that the US is continuing to heal. It is critical that we continue the policies that are building an economy that works for the middle class. The types of programs that the President has been proposing to support the economy in the short-run, get us on a sustainable fiscal path in the long-run, and protect the middle class. We are going to continue to see progress in this economy.”
Indeed, appearing on radio following the report, Krueger specifically singled out one data point, one which could have easily been gleaned from watching television, as a ‘major positive’. Mister Krueger focused solely on the sizable single-month increase in hiring by the Retail sector posted in November. Alan even stated how this headline figure defined a resurrection in consumer confidence within the middle-class.
Confidence, linked to this labor report ???
Why, because the Unemployment Rate declined and retailers hired more people during their busiest season ???
Try selling that thought to the MILLIONS of CHRONICALLY UNEMPLOYED.
Try selling that thought, to those who once represented the middle-class.
Indeed, we would quickly point out that the rise in Retail Employees posted for November was NOT as large as the rise posted in November of 2007, during a period immediately preceding the biggest collapse in the US labor market in decades.
In fact, an even larger rise in Retail Employment, posted in November of 2007, marks what is still the all-time peak in Retail employment in the US. The simple fact is, that the total number of people employed in the Retail Industry fell to a new multi-decade low in December of 2009, and has only managed to climb back to the SECULAR LOW set in 2003.
This is a sign of building confidence ???
Moreover, we note that Retail Employment has regained ONLY 44.8% of the jobs lost during 2008-09 … and … despite the sizable single-month gain in November, hiring in this macro-sensitive sector continues to LAG the overall, still-feeble and sub-par, ‘recovery’ in total employment.
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Michael offers easy reading, honest, common sense information that anyone can use in a practical manner.
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A sane voice in a scrambled investment world.
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