Last October, while the shock waves of the largest bankruptcy filing in U.S. history still reverberated around the world, Trader Tracks Editor Roger Wiegand shared some thoughts with The Gold Report. In what has turned out to be an eerie understatement, he told us, “The American public herd is moving beyond being just nervous. Now they are getting scared. There is real fear in the air with inflation, massive job cuts and a drumbeat of bad news.” Not quite six months later—when many of his peers say the worst is behind us after all, the Dow regained 11% in roughly three days last week—Roger is among those waiting for the other proverbial shoe(s) to drop. He expects a spring meltdown (and maybe a gold price up to $1,260) on the heels of the much-delayed Obama bounce. While he says so many factors are at play that it’s too soon to call a summer rally, the beleaguered markets will take a beating again in September. Tiptoeing and sifting through the chaos and rubble, though, he suggests that watchful, careful, savvy investors can pick profitable buys at rock-bottom prices.
The Gold Report: You are among those who have been predicting another major downside correction in the market before May. Are we ready for that?
Roger Wiegand: First we sold-off, now we see the Obama Bounce underway. The bounce we expected a few of weeks ago did not occur quite on time but its beginnings are shining through. It’s been pretty bad. It’s been all selling, everything sinking. We’ve been waiting for that much-delayed rally to begin and perhaps last as long as two to eight weeks. The final duration is difficult to determine due to a number of other problems in the markets. But, then after a rally, which could continue from mid-March until early May, we are looking for a very large sell-off in most of the markets.
TGR: What will trigger this rally? We’ve had no good economic news.
RW: We have two ideas about what might create the rally. (1) A change in the Up-Tick Rule (2) A change in the Mark-To-Market Rule. Both of these ideas were openly suggested and hinted at last week. I think those hints were a public relations test for the public. The reactions were positive and those in charge of changing those rules, in my view, are busy, rewriting rule changes for implementation. Keep in mind rate-cutting is done and is not working anyway.
Despite a continuous stream of negative news, we think the rule changes will work to promote a rally. It seems like every time the market tries to pick up, another problem hits. Another thing that might cause a rally is the market’s extremely oversold position. Even as bad as this one is, markets can rebound and rebound with a larger bounce. When they get over-stretched—either on the long side or the short side—they want to spring back like a rubber band and go back toward the middle. We are expecting this enhanced rebound on those anticipated rule changes.
TGR: Where do you expect the Dow price to go on a recovery?
RW: We’ve said previously we expected the stock market to come back on Mr. Dow at least as high as 10,400 to 10,800. With our latest pronounced weakness, we’re pretty sure it won’t rally that far, but, in fact, could go as high as 8,400 to 8,800. Lately we’ve heard news saying they’re looking for a major summer rally. I’m not looking that far ahead. I have to see what happens between now and the middle of May before forecasting anything next summer.
The overriding factor through this whole period is the fact the President’s new extreme budget is going to Congress for a big fight. Where this will go, we don’t know. Some Democrats think it’s too far-out and want to vote against it, or modify it greatly. We think they’ll find middle ground somewhere on some things, but that’s just a guess. Most of it is waste in our view.
One of the analysts I was reading—one of the very good ones—made note that P/E ratios were at 23. That surprised me; I thought they were recently more like 16 or 17. In the long pull—say three to five years, or as early as 18 months—we are forecasting a P/E ratio of 7. That’s a huge drop from 23. If this happens, we think the market’s going to be at Dow 3,000 or 4,000. Many were saying if the S&P broke 700 and held lower, we would sell even faster. That’s not happened and it surprised me, too. We were clinging to 685 and those two potential rally points (listed above) were tested providing firmer footing. Now we are not only above 700 but above 728 with major support touching 762 on the March E-Mini futures contract March 16, at 10am.
TGR: With this budget fight brewing, the on-going stream of bad news, more banks begging for more bailout money, AIG still having problems—can this larger rally materialize at all? Or should we just expect to continue a downward slide that still ends up at the same place at the end of the summer?
RW: No question, there’s a chance that could happen. If things are bad enough long enough and there’s no holding support on some of these technicals, we could slide steadily right through to the end of the summer and even into fall. There’s always a return somehow where price comes back on a relief rally, but that’s just a dead cat bouncing. There could be several of those. Our next question is can the Dow hold above 7,250 support? The S&P’s look better.
What you’re suggesting is that there may be no rally at all; might well happen. If that’s true, I would be wrong on my trend, which is the first time I’ve been wrong on trend. I’ve been wrong on prices and extremes in either direction, but I’ve always been right on trend. I just have a feeling that somehow they’re going to find a way to stop the selling, pull it back together for a base, and we’re going to take-off. This dead-cat bounce could have a life of three to eight weeks on the widest time cycle, in my view.
The dollar index has produced a wide and pronounced chart pattern double-top and started to sell. Some say it’s going to keep climbing to 90-92. We disagree. The reason the dollar was recently climbing was because other currencies are significantly weaker. What’s happening is people are selling out of major foreign currencies and buying dollars, or using dollars to pay off debts. The yen has topped out and is ready to drop, as it’s been in a long rally. The Swiss Franc and Canadian dollar and Euro have had rallies. We like to trade the Euro, the Swiss Franc and the Canadian dollar. I don’t like to trade the U.S. dollar because volume is too thin. I believe the dollar has peaked and other currencies might rise. Today (March 16), the Swiss, Canadian and Euro are all in rallies with the dollar selling. The UK pound Sterling is weakest.
TGR: Last fall, when the first big drops caught everyone’s attention—after the Lehman Brothers collapse in September—everything went down. Equities went down, the precious metals went down. Oil has since gone down and hasn’t recovered. Will this next drop you’re projecting take everything down again?
RW: I think that it will temporarily. The ferocity of the drop that could hit anywhere after mid-April until the end of May could trigger a big sell-down in global stock markets. Two negative factors behind that will be a second round of residential mortgage foreclosures, which is based strictly on time and cycles, but also the first round of selling REITs. Those are new daily news.
This sell-off includes office buildings and malls. Many of those loans are going bad. We’ll actually see giant shopping malls in America closing up. Three weeks ago, some 73,000 retail stores had closed so far this year; Howard Davidowitz, the retail analyst, is projecting another 273,000 more. That’s shocking. There’s no money. It broke my heart to see the Reader’s Digest file bankruptcy. Several old-time, very strong companies around forever are falling by the wayside. Auditors are saying that General Motors is not going to make it.
TGR: Your points suggest that investors may have two conflicted thoughts. One is to put some money on the sidelines for the rest of 2009 while all of this works itself out, because it doesn’t sound as if anybody really knows what’s going to happen. The second is that some short-term profits could be made by watching some of these bounces as they kind of rubber-band back up, but ultimately go down. What’s your take on that?
RW: We’re taking the tone we’ll recommend some buying for a shorter-term gain with the idea that, when things peak, we’re out the door just for the spring exit. At this time, we have open recommendations on November soybean spreads with a short time projected for exit. We recommended gold spreads for December. By using spreads, we’re capped top and bottom, and confident we’ll find our price in the middle, make some money, and then leave. By using spreads, you can’t get knocked out. These are for futures and commodities traders.
We recommended a long Canadian futures trade today. On other ideas, we’ll have some short-term currency trades if we can find the right spot. We nearly bought Swiss Francs (a couple of weeks ago) when we got news nearly $200 billion in Swiss Francs had been loaned by other European banks to Eastern Europe. The loans can’t be paid nor rolled over. This has nasty implications for the Swiss Franc according to a report, so we didn’t take that trade.
So to answer your question, we think there are opportunities if you watch and pick your spots carefully. Obviously, it’s more dangerous than normal considering what’s going on out there, due to uncertainty and extended volatility. However, if we get continued support on the big U.S. shares markets and European markets, we’ll have confidence to recommend senior and junior mining shares for our newsletter traders in gold and silver. These ideas are now underway.
TGR: Which of the precious metals companies do you like? Any juniors in there?
RW: We have 19 recommended shares trades open in Trader Tracks. We’re looking at Endeavour Silver Corp. (TSX:EDR) (NYSE.A:EXK). We have Eastmain Resources Inc. (TSX:ER), San Gold Corporation (TSX.V:SGR), Clifton Star Resources Inc. (TSX.V:CFO), and Canplats Resources Corp. (TSX.V:CPQ). Those are current and newer recommendations. We like to trade GLD and SLV as if we are trading pure gold and silver metal, but within the shares venue. There are other trading opportunities.
The problem with juniors is they’re easy to buy and difficult to exit. If you try to sell a junior after it’s peaked and is moving on the ABC correction selling side, where is your buyer? You can put in a price or say, “Sell the market,” and might get a bad fill. You could give back half or most of the profit that you just earned. To exit juniors you must sell them into buying strength.
TGR: So what’s an investor to do?
RW: To deal with that, you have three choices. (1) Don’t buy and wait. (2) Buy and stay with it, selling into strength—but you have to understand technicals to do that. (3) Just buy and hold, enduring a selling period while waiting for a rebound. You might have to hold for two to three years.
From our point of view, from what we can see today and from what Bob McHugh (Main Line Investors) and other good analysts say, we see an active rally for gold and silver shares. We expect these PM rallies to follow and trade with the Dow, S&P and others.
TGR: If PMs are coupled with the Dow and S&P, will they be coupled on the downside as well?
RW: It’s hard to say. I think they will, because shocks from negative events could be strong enough to pull everything down. I’m going to recommend choices when I can see we’re nearing a peak; and that’s coming in a matter of weeks, not several months.
For the first five months last year, we were up 220% in our futures and commodities—at least I was personally—and I held on and lost it all, then went under water -70% on my original capital. I managed to end the year in the green plus 1%. Big deal. I went through the whole machination last year and made +1%. But at least I wasn’t burned-off the way many traders were. For now, I’m vacillating between +7% and +15% in the green. But as gold trades higher, silver and some other commodities and currencies should rally, too. We have very high goals.
TGR: You mentioned Endeavour Silver, SanGold, Canplats and Clifton Star. Are you favoring any others?
RW: Eastmain is a new one we’ve just recommended. Eastmain has no debt, $20 million cash and 12 partnerships and joint ventures. Goldcorp (TSX:G) (NYSE:GG) owns 9% of their stock; and they’re in mining-friendly Quebec, which is expanding. I think they’ll be a good choice. In addition, Eastmain’s price has been sold-off like many others, so there’s room for a price rebound.The only one on my list right now that has me a little worried is Hecla Mining Company (NYSE:HL), but I still think it’ll come back.
TGR: What’s the problem there?
RW: They had a very expensive partnership buyout at Greens Creek in Alaska. It cost $750 million in cash and stock. They bought out Rio Tinto (NYSE:RTP) on that asset. Hecla owned half for years; now they own it all. They got out of Venezuela with some pain and expenses. Their Northern Mexico project is doing exceedingly well, and they have other good things happening. The Lucky Friday silver mine in Idaho is expanding. Hecla was oversold on temporary bad news and has been hovering around $1.50 to $2 per share. We think it can rally to $5 or $6 rather quickly.
Keep in mind, the first thing that happens on a rally-rebound in gold and silver shares can be the influx of big New York money. The NYSE and large stock indexed companies usually get the first initial load of cash on a new cycle. That would include Hecla, Pan American Silver Corp. (TSX:PAA) (Nasdaq:PAAS), Silver Standard Resources Inc. (TSX.:SSO) (Nasdaq:SSRI), GG, Agnico-Eagle Mines (TSX:AEM), Yamana Gold Inc. (NYSE:AUY), Kinross Gold Corporation (K.TO) (NYSE:KGC)—some of the bigger operators. So that would be the group most likely to get a first substantial investment from New York for our proposed rally.
TGR: But wouldn’t they also be the first to be hammered if the market really takes a nosedive?
RW: It can happen in one day, believe me. Things are moving more swiftly now. Money moves quickly. On those types of shares, we’ll let reality get started, make sure we see solid rally legs and then recommend more of that kind of trade. These are solid producers. We expect growth.
What happens after the end of this year will depend greatly upon how markets, investors and traders worldwide can deal with what’s coming in May and the end of September. In those two cycles, I’m expecting hard selling and lots of bad news—not only this year, but on the same dates next year, too. After that, the worst of this mess might be over, and we can settle down. The subsequent aftermath and restart can begin from much lower prices on most everything.
TGR: Including gold stocks?
RW: No. Shares will have more cyclic ups and downs. Gold the metal, I think, is just going to continue a longer-term rally. It’ll rest for sure. But, somewhere along the line, gold will have a rather heavy recovery, followed by a selling event. That’s because when things get overbought, people take profits and back down it goes. However, it seesaws and comes back maybe half of the way, and then turns around and goes right back up again in the next rally to new and higher highs. Somewhere in years ahead, a few gold stocks could find the stratosphere.
I produced some new prices on gold this morning. Until now, I haven’t offered any forecast prices higher this year than $1,260. I was on a panel with my friend David Morgan (The Morgan Report) at a recent conference in New Jersey, and they asked us to forecast gold’s high this year. David responded just before I did, and said $1,250. I was kidding him, and said, “Well, you must be reading my letter because mine’s $1,260.” Dave and I read the same work.
We all do technical analysis and the numbers point in the same direction, so that’s where we are. On cycles on the calendar, we have room between now and the spring selling for one more 46-day rally cycle, which is bottom to top to bottom again. If, in fact, we go back down to the bottom again in May, where price goes in the summer will depend upon how severe our May selling event is in all of these markets.
I can’t imagine traders will have a lot of money available to buy gold this summer. We expect them to be loaded-up with gold. But, we’re looking for a nice rally during the next 46 days. That can take gold to $965 to $985 and then to $1,040-near the old high. If we break that, we see $1,260. That, I wasn’t expecting until December. There’s an outside chance we can see $1,250 or $1,260 in April.
TGR: And after it hits that level?
RW: Just on the basis of some preliminary work I’ve done, for April 2010 I’m forecasting a gold price of $1,375 to $1,468. Those are new numbers for me. I’ve not put them in writing nor said it before. As I recall, Jim Sinclair (MineSet) had something similar around $1,400 as well. This gives me great comfort because he’s been one of the best ever in gold trading.
TGR: Is that higher than you’ve had the gold price before?
RW: Yes, $1,260 was my highest forecast up to this point with one exception. In 2004 or, 2005, just for an exercise, I worked for a week and a half to figure how high gold could go on pure techncials; being conservative and fairly modest. I think $2,960 was my price and six months later, Richard Russell (Dow Theory Letters) said the Dow and gold will cross at $3,000. I found that interesting. When offering prices, please be aware of inflation adjustments.
But $1,468 is as high as I’m going to go on gold for this time, and I think we’ll achieve that. How soon we get there is difficult to predict, but it’s going to be sooner rather than later.
TGR: What’s your feeling about silver prices?
RW: Silver was oversold in its relationship to gold during the last quarter of 2008. It went to a $21.50 high and fell back to $8 plus change. Meanwhile gold was up much higher and didn’t fall nearly as far. During the last couple of months, silver has been playing catch-up in a faster rally buying mode than gold. It rose to the $13 to $14 range. There’s price congestion at $16 and $17 and there’s an obvious hard resistance at $21.50, where it was before.
We had recommended silver spreads in our letter for March 2009 last year, way before the September 2009 event and, obviously, they expired worthless. Had we achieved a price anywhere near those spreads, it would have been a much more successful year for us. But by using strong risk control and spreads, we’ve been able to retain capital, hang-on and move to the next market cycle without personal 2008 losses.
For 2009, we must first achieve $21.50 and then see what happens. I don’t expect we can make $21.50 this spring. However, you could see $16 or $17. I’m looking for silver at $21.50 and perhaps something higher in the last quarter of 2009. Presuming we have no more Lehman events, silver might touch $25 to a potential $30 for a 2009 high.
TGR: Can we make $30?
RW: A lot of people say we can. I’m not sure. But if we can’t make $30, we can get to $25 or $26. There’s a lot of price congestion around that price, as well. With all the coin demand from retail people, I project silver has a stronger market underpinning. Even when silver was $10, people were willing to pay $20 for coins. That’s pretty extreme in my view, but for now price has consolidated and is doing a bit better. And yes, there’s silver available; but yes, they’re also having problems keeping up with demand. Delivery has been restricted by the ability of the mints (Canadian and American Mints) to manufacture coins and keep up with amazing sales. Their production limitations were market-demand short but are improving.
TGR: Have you seen the premiums come down at all in the coins?
RW: Yes, but it’s so scattered I can’t give you quotes. Some are more available than others. Bars are easier to buy, because for the most part, folks would rather have coins than bars. There are more problems in buying and selling bars—assay, insurance, delivery, storage. It’s simply easier to trade coins. Personally, I have silver coins; but in the next rally go-round, in the next year or so, I would like to buy gold coins. Then, of course, you can use Kitco, Goldmoney.com, the Central Banks and CEF in Canada. The Perth Mint has availability. You can trade GLD and SLV, but I would not be a long-term ETF holder. Trade them, but be very wary.
TGR: Why is that?
RW: I think if we get into a nasty situation regarding delivery and some other problems, you could be out in the wind on ETF delivery. You are holding paper with a claim. I wouldn’t do it.
TGR: So what do you suggest for investors?
RW: Small traders should start with a good coin program buying steadily from a reputable dealer. By small accounts, I mean somewhere between a few thousand dollars up to maybe $100,000 or $150,000. These traders should have maybe 10% in coins. For larger account sizes, you can only hold so many coins in personal possession. Then we recommend buying bullion in depository storage.
Here’s another thought, too. I’ve asked the investment advisors at GG if it is possible for an American to buy the shares directly from their company in Toronto and hold them in escrow. This would accomplish two or three things if, in fact, you could do it. As an American, you would own one of the premier gold companies, which is probably going to be in position for the long pull to make a lot of money. Your money is out of the U.S. It’s not in a New York brokerage, it’s not in your personal possession; it’s in Canada. There’s been talk, of course, of gold confiscation. I don’t know where that’s going to go. I can’t really say one way or the other. But if, in fact, you’re holding GG shares in Toronto, I would think you’re pretty safe. That’s something with a lot of merit in this environment. People wonder how they can have some resources that are unattachable, shall we say, in the United States. Buying directly in Canada might provide the answer. There may be rules that prohibit that, but we’ll find out.
TGR: You’re suggesting buying shares directly from Goldcorp?
RW: Yes. Most people don’t know it’s possible. If you want to buy GE stock from GE without a broker, you can do it. The domestic versus foreign share buying has yet to be addressed.
TGR: To summarize, you’re suggesting investors should own gold shares and you see a rally ending somewhere between mid-April and the end of May. What will signal the music has stopped, telling us to run for a chair or get out the door?
RW: You have got to be very careful. On any news out of Washington, you trade the opposite. A lot of traders say that when Tim Geithner starts making a speech, they hit the sell button. The point is that we can forecast selling time within a few days. Most importantly, I would rather be premature on an exit than too late. I can evaluate the technicals using several indicators. There are important interrelationships between different markets, not only domestic but also foreign. I am very fortunate I’m able to see several institutional reports most people never do. One of the best traders in the United States—in fact, she won the trading championship the last four years in a row—is Louise Yamada. Louise said that this Dow is going to 4,000. She won’t put timeframes on it, but she is correct almost all the time. Bob McHugh is extremely correct with his technicals. I read his daily reports and we exchange newsletters.
TGR: He’s a newsletter writer?
RW: Yes, and he’s a gentleman; just a fine person and he has a fantastic technical letter. Some people prefer a straight recommendation: “Buy this, sell this, put a stop here” and that’s as far as they want to go with it. But if you’re into charts and numbers, subscribe to Bob’s letter. It’s 50 pages and like a continuous price chart that just keeps going and going. He covers the U.S. and Australia and more. We very much appreciate what Bob does because his numbers are accurate and technical. I am a technical analyst and rely on seven other pros to back-check my work. Bob McHugh is one of my seven selected.
TGR: What do you foresee after the spring meltdown?
RW: I expect it shall be quite tricky to find new entry dates. June, July and August are usually not good times to trade. But, anything can happen. If things get crazy enough in May and June, there may be unusual trading opportunities in July and August. I don’t know. Normally there are not and it’s not a good time of year to be fiddling around. Usually the best cycle time is from September until April. That’s it pretty much right on through.
So May is a sell; the June, July and August period is choppy flat; and in September, you’re getting ready to go. Normally traders get serious and back to work after Labor Day. Last fall, because of unpleasant credit things, that cycle was delayed, too. When Lehman hit, everything went down the drain. Do not be afraid to be in the markets. Just understand your risk, and plan your trades very carefully.
Using the nom de plume “Traderrog,” Roger Wiegand produces the popular Trader Tracks e newsletter, providing investors with short-term buy-and-sell recommendations and insights into the political and economic factors that drive markets. An insatiable reader, he digests a variety of domestic and international publications, with the economic, political, monetary and market news and commentary woven into his opinions and analyses. For more than 17 years, Roger has devoted intensive research time to the precious metals, currency, energy and financial markets. But his varied background—which includes graphics, writing, editing, sales, marketing, commercial printing, consulting and real estate development (from sand and gravel mines to landfills to residential/commercial projects)…and trading—also shapes the view he shares. In addition to Trader Tracks, Roger also pounds out a weekly “Rog’s Corner-After The Bell “column for Jay Taylor’s Gold, Energy & Tech Stocks newsletter. For other essays, visit websites such as Kitco.com and, of course, The Gold Letter. Roger is a frequent speaker at The Cambridge House Resource Conferences. Visit Roger and Jay’s website at webeatthestreet.com. Tel: 718-457-1426 Claudio Bassi, Manager firstname.lastname@example.org
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