Major Pools of Capital & The Mother of All Bull Markets

Posted by Peter Grandich - Michael Campbell

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Michael Campbell: Lets start with the overview. Everyone’s been waiting, and it’s typical in a bull market, waiting for some sort of major corrective phase in gold to take place and they’re wondering if this past week wasn’t the indicator of that?

Peter Grandich: Well I think we’ve had it from the start of the New Year and I think it ended Friday. It ended based on a news story that there was a hedge fund manager who was caught badly speculating in the COMEX, which helped too why we had almost an 80,000 drop in open interest the other day. I think what people realized on Friday was that all the things that have kept gold strong for almost a decade remain. What we just witnessed was a correction thanks to a trader getting caught on the wrong side and I think as we come into next week we’ll see a resumption of the bull market. Maybe not straight up, but again, I don’t think anything has changed.  I call this the mother of all bull markets and I still believe it won’t end until at least the price has a two in front of it.

Michael: This is such a great example of how financial issues intervene; in this case somebody’s got a margin call. I find fascinating you say it became very clear that there had been a forced liquidation when the open interest dropped on the COMEX. That’s a bit outside of what people think are normal reasons for fluctuations.

Peter: During the decline there was not only not only no drop in visible demand but visible demand was as strong as ever. So we kind of knew it was a paper move. It actually turned out to be a blessing in disguise, because it corrected an over-bought condition. I saw just rampant pessimism this week, even some of the most ardent bulls were questioning gold’s validity of going further. I just think this was healthy, it was good for those of us who remain staunchly bullish.

Michael: As they say a bull market has to climb a wall of worry. Would you take it as an indicator how fast that worry gained momentum?

Peter: I think what was most interesting. Even something like the Hulbert Gold Index, it tracks people’s bullishness, fell to 13% and it had just been  at  80% a couple of months ago. So this was healthy, no violation of any long term trends, and all the things that have been driving gold to go higher fundamentally are not only in place but actually getting better.

Michael: Peter just from your experience, how do you invest or how to trade in bull markets in general?

Peter: Well one of the things I think is a problem is people on my side of the equation present a cookie cutter type of outlook and most people can’t fit into that cookie cutter. People have so many different dynamics that almost no two people are alike. What’s good for me and what I’m saying and my views may not necessarily be good for you. When someone like me says gold is going to $2,000, I’m able to take the risk that comes with it. So I think the first thing you have to identify is what risk you can take.

The second thing is something you brought up at the start of this conversation that I wanted to hone in on, and this is directed at the financial media in general. Each day they need to publish so-called reasons why something did something when in fact sometimes it’s just because there were more sellers than buyers or vice versa. But that isn’t good enough for the financial media so they seek a reason, like Friday’s analogy for gold rallying was that the market was oversold and people were concerned about what was going on in Egypt etc.. The timing of the article broken by the Wallstreet Journal about this low hedge fund trader in the COMEX coincided with the existing rally in that market. So I caution people also to be very careful to assume and be very not concerned with day-to-day news, especially if you are supposed to be investing for the long term.

Michael: We have the decline of the US dollar, and we can start with the US being $1.5 trillion in debt this year. What are those implications going to look like especially with the US moving  in the wrong direction in a pretty serious way with no sign of change. My feeling is that that story isn’t fully discounted as it’s about to play out. I don’t see any sign of the traditional ending of a bull market right now with the kind of action we’re seeing. In fact, I’m seeing the opposite; bull markets give you very difficult entry points once you miss…that’s why I always say keep a core position because if you get out, I’ve found over the years myself making mistakes, that it’s very tough to get back in.  So that’s why I suggest  something so fundamental as a core position and I have since $272 on gold. My suggested a core position was 30%, but a core position that was in gold. In May of ’03 I went to silver also and included that too. But my point being I’m seeing classic bull market signs; every time I want a big correction it doesn’t come and I don’t get another entry point. I remember you doing that going back a few months Peter on this show you said: good luck if you think gold is going to $1,050. It was trading in the $1,100s and you said it’s going to see $1,200 before it sees $1,050 and of course you were right.

Peter: Well Mike, I think there’s three things driving gold, and it’s been driving it for years, it’s driving it right now and it’s never been stronger. The first is what used to be its biggest negative large scale widespread central bank selling; that’s gone. The Washington Accord which begins on September 30th, where they have agreed to sell only 500 tons per year, not only was it not maxed out last year, but reports have been that so far less than ten tons have been sold by central banks. The IMF sale which everybody, all the bears, made a big thing bout a year ago has come and gone and look at the price of gold.

The second thing that used to be a negative was literally the producers of gold cutting their nose and to spite their face by aggressively selling gold forward. Selling forward at this point has become a four letter word for a CEO of a major producer now.  Most don’t and most continue not to.

And the third ties in to what you talked about, and that I think has become even more evident. In fact last night I posted on my own blog an interview by Jim Grant on Bloomberg where basically he termed what the Fed is doing as financial heroin, that’s what we’re calling it. And the heroin is literally destroying the future of America. This money creation by the Fed which is really being created out of thin air is one of the real driving forces behind people looking for an alternative to paper currencies because not only is it destroying the US dollar, and will destroy the US economy, but where do you look and where do you go Mike? Do you go to Europe? Do you feel comfortable with everything that’s happening in the Eurozone, that they’re going to be better any time soon? How about Japan, do you feel good after their sovereign debt has been lowered finally and so soon will be the US? No. The problem is there is no one paper currency big enough. Canada is certainly better off, but there’s isn’t enough currency around for it to even come close to a world reserve currency. So that’s why gold and its lesser kissing cousin silver are becoming monetary assets.  And that is going to continue. There is nothing on the horizon to change that.

And one last thing before I forget Mike, the latest bear argument is: interest rates are going to go up and that’s going to cause gold to be less attractive. Well, interest rates went from 2-3% in ’76 to 20% in 1980, and gold went from less than $100 to $1,000. So that interest rate argument is another just weak argument by the bears. This is the mother of all bull markets, you and I and others that have grey hair we won’t see another one like this in our lifetimes. And like I said all along and I continue to believe there’s no reason to change it. It’s going to have a two in it before it even comes close to ending.

Michael: And if I can just throw in my big thing which is to study currencies first. I’ve be saying it literally for over a decade that the fiat currency problem is real. It’s just become more exacerbated recently with quantitative easing one, quantitative easing two and three as you just described; literally the printing of money. Gold is a small market compared to the monetary size of the bond market, the stock market or the real estate market. Since the Euro, the US and the Yen don’t look that good so I’m going to move into other assets. That’s one of the reasons I believe the stock market has been able to withstand a lot of the negative out there. But the other side is saying: why don’t I move 1% of my assets in gold? Well gold is such a small market that all it takes is a small shift from major pools of capital to create a huge impetus for further up move in gold.

Peter: Mike I believe in the coming months what were going to talk about, what you’re going to hear it in the media, is people who for years have been in the bond market are just going to shift small enough amounts because they’re going to be concerned about inflation and higher rates. And that little shift, that little one or two percent that’s currently in bonds moving into metals is what is going to propel us to these high numbers that I still believe are coming for gold and silver.

Michael: Well as I say and I hope you’ll be kind enough to continue to share your insights with us and take your time with us Peter. I know I’ve interrupted you from something but I really appreciate you joining us live here on the radio.

Peter: You never interrupt me Mike it’s always a pleasure to be on with you. Thanks and have a great day.