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Peter Grandich: Gold, the Mother of All Bull Markets

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Peter Grandich Market commentator and investor Peter Grandich of and Grandich Publications tells The Gold Report that certain plays on surging demand and looming commodity shortages are no-brainers for investors, and he shares a few ideas on how to profit from these conditions. He's bullish on China and on base—and especially—precious metals, energy, food and water. Gold and silver are still his big plays.

The Gold Report: With the turmoil going on in Egypt, were you surprised that gold didn't spike up a bit? One might look at this situation and conclude that gold is fully valued for the intermediate term and that perhaps investors should be looking elsewhere.

Peter Grandich: I believe that gold was correcting, and as I noted on Friday, January 28, I think the bottom was put in from where it had basically doubled between the end of 2008 and the end of 2010. I had written about the $1,310/oz. area where I felt it would bottom, and it did so in that range on January 28. I believe it was the bottom, and I believe it is more fortified today than it was.

I think what we've seen is a corrective phase, which has happened periodically over the last decade in gold. We have seen a tremendous amount of bearishness come into the market, which is always healthy for those who remain bullish as I do, and I think now we're going to see a resumption of the trend up. I don't think the issues that are currently underway in the Middle East have brought any big concerns to any of the markets. The stock markets are still up, and the dollar has remained relatively flat. So, I don't think that the impact on gold from what is happening in the Middle East as we speak, is any more questionable than why isn't the stock market going down.

TGR: Do you have an intermediate term target price or forecast for gold?

PG: Yes, in 2009 I forecasted $1,300 for 2010 and +$1,500 in 2011, and I've stated repeatedly for years that what I've called the "mother of all bull markets" won't end, in my opinion, until there's a two in front of it (i.e., +$2,000/oz.). So, my long-term target remains +$2,000.

TGR: Where is the support on gold?

PG: The key support was $1,310, which it held, and major support would be the 200-day moving average, which is around $1,275 now, but that's going to inch up in the coming days. It has clearly held, and while I don't think we're going straight back up, I do think once again this mother of all bull markets has eaten up and spat out all the gold-top callers, the bubbles and the people who are looking for major corrections and who thought they could sell out and somehow get back in much lower.

TGR: If gold were to actually reach the $2,000 level, what effect would that have on earnings of gold equities?

PG: One thing that's been most positive here in 2011 that we have not seen in the last couple years is the relative strength in the mining shares—even down so far as the junior level. Despite the correction of $100 or so on gold, we did not see a substantial correction in the mining shares. This was just another shallow and short-term correction.

In fact, in recent days while gold remained flat, we saw strength in the mining shares. So to answer your question, I think that if those of us who are forecasting a much higher price for gold are right, then we should see a corresponding better percentage gain for the majors. I would feel confident that if we saw a $2,000 gold price, most of the major producers would likely have at least doubled in price, if not more. Now, I think one of the mistakes continuously made is that people think it always trickles down to the juniors. That's not necessarily the case. Juniors are valued more on an individual basis according to the projects they are trying to develop.

TGR: On January 26, you said that you were thinking about going short in the U.S. stock market and looking for that precious metals bottom. How does that look now?

PG: The U.S. stock market has been up on what I call financial heroin. The QE1 and QE2 [quantitative easing 1 and 2] and what the Fed has been doing in the market has really gone way past steroids and is really setting the U.S. stock market up for an eventual fall back to earth. So, I am looking to time that short position, but that has not been implemented yet. It's certainly getting to the point now where going short in the U.S. stock market could be advantageous. In terms of the precious metals market, I believe the next leg up may not be straight up, but will be healthier and work its way up.

TGR: Where should investors be looking now? What countries? What industries?

PG: I think people have to realize that the United States is no longer the economic engine that pulls the whole world around, and therefore one could be neutral to bearish, as I am on it and should look to other areas of the world that can grow. Clearly, China continues to be one of those areas. Brazil, Germany and other parts of Europe and even Canada offer more economic potential than the U.S. does. I think there are clear no-brainer industry plays which should continue to see large-scale interest over time. Three of them are based on things that we're running out of: One is water, two is food and three is general energy.

TGR: Chinese fiscal and monetary policy has worked quite well for China, but it's been very tough on the United States, especially in the last decade.

PG: I borrow a line from the very well-known hedge fund manager Jimmy Rogers, who said the best advice he could give regarding China and America is to make sure your children and grandchildren learn to speak Chinese. It's only a question of time as to when China replaces the United States as the world's largest economic power, and I would hope at that time that we also turn over to them the responsibility of being the world's policeman.

Nevertheless, China, whether they got there by hook or by crook, is certainly in a much more enviable position than the United States as an economic power and is becoming very close to being on the same scale as a military power. In the next 5 or 10 years the better of the two markets would without question be China over the United States.

TGR: How do you play China?

PG: You can play it through ETFs that invest in Chinese stocks, and there are now some limited ways to play the currency. But I think one of the ways you play is to not be aggressively long U.S. equities.

TGR: I have heard Jimmy Rogers say in the past that one reason people have had an aversion to Asian markets, and I guess you could say especially China, is that you might not be able to trust the financial statements.

PG: There is no question about that, but after what has happened in the United States, could you trust Wall Street any more than Chinese companies at this point? I mean if anybody is deserving of not being trusted after what's happened in the last few years, it's certainly Wall Street. Just think about it—two years ago we were told that if we didn't bail them out, the whole world was going to collapse, and now they're making record profits and giving away record salaries and bonuses. Something is wrong there. I believe America has been taken, and it was taken by Wall Street.

TGR: Why do you like iron?

PG: We like iron because outside of the United States we continue to see strong growth in Asia and particularly China. Iron ore is obviously a real necessity for that.

TGR: Your favorite play in iron ore?

PG: It would be a client of mine and one that I own a lot of stock in is Alderon Resource Corp. (TSX.V:ADV; OTCQX:ALDFF). I have called it "son of Consolidated Thompson Iron Mines Ltd. (TSX:CLM)" (CLM recently received a takeover bid.) Many of the management team that made Consolidated Thompson into what it is left and built Alderon with its Kami Iron Ore Project in Newfoundland and Labrador, Canada. I think the company is a prime takeover candidate.

TGR: Probably some other people think that, too, because I note over the past six months the stock is up 185%. What will be the next catalyst to move this stock? Takeover attempt?

PG: I think the next catalyst will be that the drill results from the winter program will prove up even more tonnage and then because of continuing consolidation in that area of the world, they would likely become a takeover candidate.

TGR: You like lithium as well.

PG: Yes, lithium seems to have real legs, and there's a move towards it. It's still speculative, but within that frame are two companies that are clients of mine—Lithium One Inc. (TSX.V:LI) and Rodinia Lithium Inc. (TSX.V:RM; OTCQX:RDNAF). They seem to have advanced-stage exploration projects that the market believes could become producers, and they are not overvalued as some other rare earth metals stocks have become.

TGR: The driver here is batteries for cars. Is the electric car really the wave of the future?

PG: I don't know if it's the wave of the future, but there's no question that the next generation is not going to be able to depend on fossil fuels as we have because it's going to become quite expensive. It's my belief that $100/barrel oil will in the next decade become the bottom price for oil, which will translate into gas prices that will seriously impact most Americans. So, some sort of alternative way—with electrical power being one—where the cost to travel miles can go down versus up with gas is something that a lot of Americans are going to have to look at.

TGR: Even though there are limitations to the battery-powered car?

PG: Yes, I just think that the days where we can just buy gas and drive across America is going to change for many.

TGR: Another?

PG: One metal that doesn't get a lot of comment is cobalt. Formation Metals Inc. (TSX:FCO) is a client of mine and the only pure cobalt play in North America. Cobalt is becoming a very strategic metal used in a lot of different areas, and as people realize that this company is one of the only pure plays on cobalt in North America, I think it's going to become more attractive.

TGR: Gold is still your favorite metal.

PG: I'm still overweight in precious metals—gold and silver versus base metals. You know, when you call something the mother of all bull markets, which I believe gold and silver are in, I still believe you overweight yourself. Base metal companies are still worthy, but you want to be more weighted to the gold and silver market.

TGR: How do you play gold and silver right now?

PG: I think most people should have physical gold and silver. If they're not very large dollar investors or very diversified, gold and silver ETFs is the way. Then, the second way of course is ETFs that diversify themselves through mining shares, and the speculative way to play gold and silver is the junior resource stocks.

TGR: Okay, and do you have some of those you can talk about?

PG: Sure, Crocodile Gold Corp. (TSX:CRK; OTCQX:CROCF) is an emerging producer in Australia and may still have some impact from the unusually bad weather, but I think as 2011 goes on, we will see better production out of it.

TGR: The wet season has caused the company to underperform its forecast, but given how wet it has been, are you satisfied with Croc's performance?

PG: With 20/20 hindsight, I think Crocodile, if it had to do it over, would have stuck to its original production forecast versus the increase it had suggested. It created a sense of disappointment that didn't really have to be there. The share price does not reflect that yet.

TGR: Another gold play?

PG: I think Timmins Gold Corp. (TSX.V:TMM) is a very undervalued situation with my prejudice noted. It's been involved in a potential takeover, and I think that has prevented people from rerating its value based on some of the great drill results, expansion of production and potential new projects.

TGR: You mentioned a potential takeover?

PG: Timmins is trying to make an acquisition, which it still may; however, it wouldn't even surprise me that Timmins becomes a target of a larger producer, particularly one in Mexico, because it has just so greatly advanced its current production mines and has demonstrated large-scale exploration skill potential on several projects.

Also, I do think the Yukon gold rush is going to be even bigger and better this year. Kaminak Gold Corporation (TSX.V:KAM) is not a client, but they're certainly going to be a leading play there. I think an undervalued play also up in the Yukon is a client of mine that I own a large position in called Silver Quest Resources Ltd. (TSX.V:SQI). The reason why I think that the stock is attractive is not only does the company have a large land package in the Yukon, but it also has two advance stage projects in British Columbia, one of which looks like it can have over 1 million ounces (Moz.) of gold and the other almost 2 Moz. of gold equivalent, which clearly support the current market cap and kind of gives you the whole Yukon play for nothing.

One other gold play is Oromin Explorations Ltd. (TSX:OLE; OTCBB:OLEPF), with continuously great drill results out of West Africa. The company just announced yet another discovery. I think the stock is very cheap.

I think copper has been in a stealth bull market despite record prices. It's still not grabbing the attention of the general markets or even within the resource market—everybody keeps looking for it to go down. Now $3.80-$4/lb. is starting to look like the new bottom for copper with the potential to get to $5 on the upside. So, I think copper is very attractive, and there are two companies I like—both clients of mine—Curis Resources Ltd. (TSX.V:CUV; OTCPK:PCCRF) and Excelsior Mining Corp. (TSX.V:MIN). These companies are both developing in situ mining operations just like uranium. Curis is clearly well advanced over Excelsior in terms of the potential to become a producer, but both are clearly undervalued given the price of copper and how much upside both companies seem to have.

Probably the most undervalued exploration company of all my clients is Sunridge Gold (TSX.V:SGC). I call it the son of Bisha. The Bisha Mine is the huge project that Nevsun Resources Ltd. (TSX:NSU; NYSE.A:NSU) has that is pouring its first gold out of the State of Eritrea in Africa. Sunridge has been recently announcing results that I call Mama Mia results because they are showing phenomenally high grade copper over large widths. The company just put out another set of results, and, quite frankly, if the resource market hadn't been down of late, and if these drill results were in Quebec instead of Eritrea, the stock would have doubled. These drill results just can't be passed up by anybody interested in this market.

TGR: You like uranium, right?

PG: My tracking list is seriously overweighted to uranium. I don't think that the companies are cheap any more as a group, but they're certainly not close to overvaluation, and on a select basis I think people can still be purchasing uranium plays. Obviously the single best way to play uranium [as a commodity] is through a company on our list called Uranium Participation Corp. (TSX:U), which is really just a holding company that owns actual uranium. If uranium prices go up, Uranium Participation should go up. The second way would be with the significant players in that industry. There's no question that the blue chip in that industry is Cameco Corp. (TSX:CCO; NYSE:CCJ), and then I think some other plays, particularly Denison Mines Corp. (TSX:DML; NYSE.A:DNN), are attractive. On the exploration end, one is a client of mine, Crosshair Exploration & Mining (TSX:CXX), and then there's a company that used to be a client and with a lot of growth potential and that is Strathmore Minerals Corp. (TSX:STM; OTCQX:STHJF).

TGR: Thank you for your time.

PG: Thank you.

Peter Grandich is the founder of and Grandich Publications and is editor of The Grandich Letter , which was first published in 1984. He blogs and comments daily on 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.

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1) George Mack of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: Alderon, Rodinia Lithium, Crocodile Gold, Timmins and Strathmore.
3) Peter Grandich: I personally and/or my family own shares of the following companies mentioned in this interview: Alderon Resources, Silver Quest, Excelsior and Crosshair Exploration. I personally and/or my family are paid by the following companies: Alderon, Rodinia, Lithium One, Formation Metals, Crocodile Gold, Timmins, Silver Quest, Oromin, Curis, Excelsior, Sunridge and Crosshair Exploration.

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