Peter Grandich: Incredible Times Coming

Posted by Peter Grandich via Michael Campbell

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Peter Grandich told Michael Campbell he thinks that the consolidation of Gold around the $1,600 level is constructive within the Mother of All Bull Markets and in his opinion the Bull Market continues to be fully intact. After Gold has had a major move for a decade, the constructiveness is that almost a year from the top last September to the lows today of $1,500 and change was not that bad. “We have been making a series of slightly higher lows and it looks like the market is ready to challenge and surpass the resistance at $1,630 – $1,650″.

What Peter found really interesting this past week, “and I just think it was a damaging blow of many that continue for the perma bears in Gold, was the news on George Soros. A year ago the perma bears throughout the world highlighted the fact that Soros said that Gold was in the ultimate asset bubble and was about to collapse. What news comes out? George Soros doubles his position in Gold. I not only find that interesting, I find that most if not all of the bearish arguments get torn up”.

Peter also points out that wiithin the last year we heard about all of the selling that was going to come out, yet what was the net result? Central Banks were net buyers. Tp Peter the Gold market remains very very bullish. Further, it continues to suggest that all of the reasons that you want to own it remain. Central Banks aren’t sellers anymore, producers don’t sell it forward anymore and there is an ever increasing demand. Almost all of the physical buying is done outside America, he calculates that if he walked into any financial institution here in any of the 50 states in America and looked at 100 accounts,  99 of them would not have touched physical Gold. Simply put, that until we see the North American Community at large talking about and buying Gold we are not anywhere close to the highs it is going to strike.

Peter also highlights a very important change in Gold market,  and that change is the seasonality factor. “Almost 65% of Golds demand for Gold is related to Jewelry purchases. Jewelry fabricators basically take the months off July and August, but return in early September to do about 2/3’rds of all  their business in the next 6- 8 weeks. So that seasonal factor now is going to start to turn positive for Gold, and I fully suspect and am anticipating in my own heart that we are going to break about resistance and if you have me on in the next month or two we will have Gold in the $1,700 – $1,800 area”. 

Gold Stocks
 
The senior Golds are 30-40% lower than they were at their  highs when Gold itself is at shouting distance of its highs. There has been two changes:

1. “for whatever reasons, mining shares used to carry a much higher P.E.’s and one of those reasons was that there wasn’t many alternatives to invest in, like we have now with exchanged traded funds, a very common investment especially in the Precious Metals. Now we see some of the producers, take Barrick for example, that are below market multiples. So that’s the first thing that adjusted.”
 
2. The second thing that adjusted “is they incurred dramatically higher costs, despite the rise in Gold prices, their ability to operate has changed for a lot of reasons. We no longer have the high grade easy to get to deposits that were once available in the world. So the combination of the P.E. scenario and the more difficult deposits is one of the reasons they have lagged up until now”. 
 
Junior Miners
 
In the Junior Market we see losses 50-80% from their highs. Its a market that’s been heavily damaged, and he doesn’t expect the market to recover unless Gold should have a major rally in the 4th quarter. Peter likens these Junior Miners to burning matches, in that they are always raising and spending money. Now that their share prices are dramatically down, the financiers know that, so its going to be very difficult to raise capital for the remaining part of the year. Having said that, “we have seen the old classic throwing the baby out with the bathwater, we are seeing many companies whose projects net asset value is many times larger than their current market cap which is kind of ridiculous”. But other than a bounce, and a real drying up of the selling he thinks the worst is over. He just doesn’t see that market able to recover dramatically until we get into the next year. If Gold rallies we could get a 20- 30% bounce from where they are here, but to see them really sustain anything Peter doesn’t think it will happen until at least next year. 
 
Stocks to put on our radar screens. 
 
Peter points out that the big mistake we make, certainly he admits to making, is that sometimes we forget that failure is the norm for Junior Resource market. Despite all of the good efforts by the vast majority of companies trying to bring a deposit in, they are just not going to be able to find a big deposit, and sell it or develop it. He thinks 8 or 9 out of 10, despite all those efforts, will fail over time. In short “to buy and hold for the long term period usually ends up most of the time not working out”.

But in this particular case, and in about 6 or 7 times in the last 10 years, the Junior Market as measured by the TSX Venture Index really gets clobbered and this time is no different. During those times certain companies who are really past the point of failure, where its only a question of how big they are going to be, they get thrown out with the others. They get marked down almost as much, sometimes more percentage wise even though they are going to be one of the survivors. “Those are the situations that make for opportunity, and one thing I can say clearly here, rather than give any individual names, is to say that you are pretty well safe and secure now”,  Peter doesn’t think there is much more downside risk, that the index doesn’t have much more than 5-10% downside. He thinks when this index bounces and gets traction in the 1-2nd Quarter of next year we could look at a 50% or more rally in the index. “So its pretty much secure that if you haven’t sold by now other than for tax loss purposes, there is nothing to be gained because the loses are mostly washed out”. 
 
Peter does think that the safer play is higher up the food chain as many of the Majors have been beaten down. For example American Barrick is selling for a multiple that is less than the S&P 500. He feels much safer knowing that if 10 people were listening and bought Barrick he could look them in the face in the future and not have to explain why they lost money in the last 2-3 years. Simply a better situation than picking some Junior name right now. The right move according to Peter is to err on the Major side and be more cautious as you go down the food chain. “The Junior market is really going to be on its knees to the financiers through here, they don’t have much to bargain with. They have seen their share price come down, many were already at fairly high levels of shares outstanding and are going to be highly diluted, so two things are almost certain to happen:

1.  There is going to be rollbacks especially announced towards the end of the year,

2. There is going to be mergers, acquisitions and consolidations in this business”. 
 
Peter has heard numbers tossed around that maybe 30- 40-50 companies at least will go through that process in the next 6-12 months and Peter thinks that could be a low number.  Peter also thinks that is going to be one of the ways that the industry finds a way to survive another crash like environment and be prepared to prosper again and have a great rally again sometime in the future. 
 

Peter Grandich

Though he never finished high school, Peter Grandich entered Wall Street in the mid-1980s with no formal education or training and within three years was appointed Vice President of Investment Strategy for a leading New York Stock Exchange member firm. He would go on to hold positions as a Market Strategist, portfolio manager for four hedgefunds and a mutual fund that bared his name.

His abilities has resulted in hundreds of media interviews including GMA, Neil Cavuto’s Your World on Fox News, The Kudlow Report on CNBC, Wall Street Journal, Barron’s, Financial Post, Globe and Mail, US News & World Report, New York Times, Business Week, MarketWatch, Business News Network and dozens more. He’s spoken at investment conferences around the globe, edited numerous investment newsletters, and is one of the more sought after commentators.

Grandich is the founder of Grandich.com and Grandich Publications, LLC, and is editor of The Grandich Letter which was first published in 1984. On his internationally-followed blog, he comments daily about the world’s economies and financial markets and posts his views on social and political topics.  He also blogs about a variety of timely subjects of general interest and interweaves his unique brand of humor and every-man “Grandichism” expressions with his experience gained from more than 25 years in and around Wall Street. The result is an insightful and intuitive look at business, finances and the world, set in a vernacular that just about anyone can understand. In his first year, Grandich’s wildly-popular blog had more than one million views. Grandich also provides a variety of services to publicly-held corporations on a compensation basis.

Grandich’s autobiography, Confessions of a Wall Street Whiz Kid, was publiched in fall 2011.