Peter Grandich: Gold Price Volatility Opens Opportunities
Interview

The Gold Report: Peter, in a recent interview you said, "I believe the game is rigged. Not only is the silver market being manipulated, the whole investment world has been rigged." You suggested that Goldman Sachs and Morgan Stanley were tilting the game in their favor. Does that mean that those firms are responsible for driving up commodity prices across the board?

Peter Grandich: I was trying to emphasize that we are playing in a game that is heavily tilted against us. A classic example is that companies like Goldman, Morgan Stanley and others were selling mortgage-related products to clients while at the same time betting against those very products. Ironically, none of those people has gone to jail.

We are not on a level playing field. One of the main reasons I had been bullish on silver was the belief—a very small minority belief—that silver was manipulated for several years. At that point in time, it was actually helping the price. My call to sell silver was influenced by that manipulation because the price had gotten to such a high level.

TGR: You told investors to sell silver at just less than $50.

PG: Yes, $49.25 at the time. At that time, we did not note selling gold, but we did a week later.

TGR: Do you believe large banks are driving up other commodity prices?

PG: I see two types of manipulation. There is fraudulent manipulation like what happened in silver for a lot of years. I also believe the oil market has been manipulated, but not in a centrally controlled way. A group of people with a lot of money bid up the prices—even though there was no oil shortage.

Commodities in general have risen because they have an underlying strength. Increasing world population creates a need for more commodities that are, in some cases, scarce or declining in supply. Of course, the declining dollar has also driven commodity prices up.

TGR: Do you believe resources, or hard assets as they're commonly being referred to now, are morphing into a generally accepted asset class like real estate investment trusts, or is the market there yet?

PG: It's just getting to that point. The legitimization of the sector is deserved and it should have happened years ago. However, it took $1,500/oz. gold and record high silver prices to get investors, money managers and the like to appreciate them as a legitimate asset class.

However, resources may never become popular worldwide. Things like gold and silver are mortal enemies of stocks and bonds over the long term. I don't expect the general investment community to embrace it as a true asset class. That said, investors are realizing that gold and silver aren't just for crazy people who think the end of the world is coming. Commodities are not just cyclical or total speculation. Commodity-related stocks are just as good as other classes of stock.

TGR: What mining commodities have the most near- to medium-term potential for price appreciation?

PG: There's no commodity at this point that could go sharply higher in the near term. But there are some that have washed out and their downside risk should be limited. The first one that comes to mind is uranium. Most of the damage that has come on the heels of Japan is already priced in the stock. There's limited downside risk, but there may not be a lot of upside yet for a while. I just added several uranium stocks to my Tracking List.

The lithium market also fits that description. Lithium shares had a good wash out after a spectacular rare earth metals blowoff and that's turning.

Iron ore is interesting because the price is still extremely strong, but the stocks have come back sharply in recent days.

There is also a metal that a lot of investors don't talk about, but is very strategic: cobalt. In North America, the only pure cobalt mine that will be built this summer is by Formation Metals Inc. (TSX:FCO). Cobalt has become a strategic metal, but we don't have a lot of access to it.

Copper is still quite attractive long term. I think the days of $0.90 or $1.20/oz. copper are gone. While we still see a 10% decline from here, there's a lot of value in copper.

Barrick Gold Corp. (TSX:ABX; NYSE:ABX) recent acquisition of Equinox Minerals Ltd. (TSX:EQN; ASX:EQN) strongly suggests that it was having difficulty as a pure gold company. It's hard to keep finding 5 to 10 million ounces of new gold each year. Copper, while a base metal and more cyclical, is a metal that's going to be in demand for a long time.

TGR: You outlined three strategies in The Grandich Letter for playing gold and silver in the current market. One was a conservative strategy. One was somewhat speculative. The third was basically gambling.

PG: I've always struggled with cookie-cutter advice. Firms advise investors to allocate 30% to this and 20% to that and somehow 100,000 clients all fit into that model? I try to give more choices so individuals can decide where they fit. I gave three ways of approaching what I believed was going to take place for gold and silver.

The most conservative attitude was based on buying gold since it was a little more than $300 and silver was in the low single digits—that's 400% to 500% gains. You don't look a gift horse in the mouth. Take the profits.

The middle-of-the-road strategy recognizes that gold and silver have skyrocketed, but you still think gold's going to $2,000-plus before it's all over, which I still do. I suggested that investors should sell some silver, but hold on to a significant part of their gold using a scale-up or a scale-down selling program. In this particular case, I suggested that investors take profits in gold at certain levels and as it reached a higher level they should sell a little more and so on.

The final approach, which Wall Street likes to call speculative, but I call gambling, is for those who still think gold and silver can go higher to ride it out.

The last category is for investors who are in gold and silver because they have no trust in paper currencies. They can continue holding precious metals because they'd still be better off than owning the U.S. dollar over time.

TGR: Part of your argument for taking profits on silver and, to a lesser extent, gold, was that May to August is traditionally soft for precious metals. However, we're seeing growing levels of inflation. Soon QE2 and the Fed buying U.S. treasuries will end. There is ongoing unrest in the Middle East. The U.S. likely rekindled enemy passions when President Obama sanctioned the killing of Osama bin Laden. Could this be the year when gold and silver don't see an appreciable price decline during the summer months?

PG: Nothing is 100%, but we don't forget that a significant part of gold demand comes from jewelers—about 65% to 70%. Jewelry fabricators tend to limit purchases of gold until after the summer months. All those things that you pointed out are still there. Investors have to decide if they believe they have already been included in the price. Last week, I advised my readers to totally liquidate silver at $49.25 and a portion of gold holdings at $1,575 to realize profits. This past week, I got back into silver at $35.75 and gold at $1,481 while it is a deal. The good news is that even if there is seasonal weakness, we've greatly cushioned ourselves from such a correction.

TGR: How do you think the death of bin Laden will affect gold?

PG: I have no doubt that there's some person out there who thinks his death is going to lead to a tremendous increase in the amount of terrorism. But an equally compelling argument can be made for his elimination actually lessening those chances. It's not a reason for buying or selling gold in my book.

TGR: Can you tell us about some of the more compelling gold and silver stories that you're following?

PG: Investors should not lose sight that the price of metals is extremely high and there's a lot of opportunity to make money in exploring, developing and mining them. Crocodile Gold Corp. (TSX:CRK; OTCQX:CROCF) has had some setbacks, but it also has some interesting assets. The company raised some money to meet its goals and it's at a point where it has to prove to shareholders that it's going to achieve them. The company's assets have always been considered first class. We need to watch to see if there's a true turnaround. If and when that takes place, the share price could be worth substantially more. It's currently trading at $0.90. Over the long term, the stock could double.

TGR: Crocodile has gold operations in Australia, so it has some high cash costs because it's trucking ore over a fair distance. What's your timeframe for solving those problems?

PG: It has run out of time to solve them. Watch the next few quarters to see if the company is on its way to doing that.

TGR: What are some other gold or silver stories you like?

PG: Sunridge Gold Corp. (TSX.V:SGC) has a series of projects in Africa with drill results that are mindboggling—some of the best copper drill results I've ever seen in the world. Right now, the stock is ho-hum because of the projects' location and because this has been a company that historically focused its attention on looking for and developing metals rather than shareholders. It has a wealth of early stage, prefeasibility and feasibility projects. The share price could be worth many times its current price in the next 12 to 24 months.

Another company in Africa that has been better at drilling for ore than investors is Oromin Explorations Ltd. (TSX:OLE; OTCBB:OLEPF). It has numerous deposits that keep getting better and better as they announce drill results. Two majors have bought significant stakes in the company. There's a lot of good news flow out of Oromin.

TGR: Are there any management teams that you particularly like?

PG: Juniors are like burning matches. They're always raising money. The more they can raise at higher prices with less share dilution, the better chance they have of being successful. Management is key. The leadership team can be as important as the project. The best in the world today at the junior to midsize level is the Hunter Dickinson Inc. mining group. Hunter Dickinson is so large that it has deep abilities to finance, as well as provide whatever support companies need.

It has two young companies that have been in its stable for a long time that are having really good results: Heatherdale Resources Ltd. (TSX.V:HTR) and Rathdowney Resources Ltd. (TSX.V:RTH). Hopefully, that will pay off in the share price down the road.

TGR: Hunter Dickinson has been one of the more successful outfits. It has a number of companies under that umbrella. The most successful in recent years is probably Northern Dynasty Minerals Ltd. (TSX:NDM; NYSE.A:NAK).

PG: Taseko Mines Ltd. (TSX:TKO, NYSE.A:TGB) has been a success story, too. Hunter Dickinson took Taseko from pennies when chief executive Russell Hallbauer showed up and made it a $7 stock with a large-scale copper mine.

Hunter Dickinson doesn't do broker placements, so it doesn't get a lot of the coverage from brokerage firms. But I don't know of any company that's bigger or better.

TGR: You've called an iron play on Quebec's north shore, Alderon Resource Corp. (TSX.V:ADV; OTCQX:ALDFF), "the son of Consolidated Thompson." You describe it as "a legitimate takeover target" and say, "I'm hard-pressed to find a reason it can't make a new all-time high this quarter." Why are you so bullish on Alderon?

PG: I'm involved with other companies headed by Alderon Chief Executive Mark Morabito. He could write a book on how to build and develop a junior resource company. The company was born out of his initiative. It's a well run and respected player in the game. Altius Minerals Corp. (TSX.V:ALS) had a large iron ore project that wasn't getting the valuation. Alderon was created to run with it. It's had phenomenal drill results. The key here is that a large part of the management of Consolidated Thompson Iron Mines Ltd. (TSX:CLM), which is probably one of the better-known success stories in the business, left and became part of Alderon.

Once the NI 43-101 is updated, one of the bigger players or a major Asian mining company will be hard pressed to not to come in and take it out. It has the entire infrastructure. It's the way that Consolidated Thompson became a takeover target, but Alderon will reach its peak faster than Consolidated Thompson. That's why I think the stock is compelling.

TGR: It has almost 500 million tons (Mt.) at 30% iron. It has another 120 Mt. in the inferred category.

PG: It could have a billion pounds by the time the year is out.

TGR: There are a number of different companies in the vicinity that could be predators in this case.

PG: It could be one of those, one of the worldwide major mining companies, or it could be one of the end-users that decides the company is too good to pass up. It's a legitimate takeover target.

TGR: You talk about having a defined exit strategy for the current commodity bull market. What are some of the key elements of a dependable and responsible exit strategy?

PG: One of the most common complaints you hear from investors is that experts always tell you when to buy, but they never tell you when to sell. Whether they tell you or not, there are a couple of things investors need to recognize. Investors shouldn't be married to their investments. They should consider selling when they can no longer buy something. Investors shouldn't be flying by the seat of their pants. They need a legitimate exit strategy. Investors need a formal plan with price targets.

TGR: What are your thoughts on the U.S. dollar?

PG: Long term, the U.S. dollar should continue to depreciate. I noted just the other day that we could see a fairly substantial bear market rally on the belief that when the Fed's quantitative easing formally comes to an end, interest rates are going to tick up. Some might consider the dollar a player now, but it's terminally ill. Eventually, the U.S. dollar index should break below 70.

This is one of those occurrences that investors need to plan for long term. They need to have some sort of strategy in place and not just go by how they feel emotionally on a particular day.

TGR: It's been enlightening. Thanks for your time, Peter.

Though he never finished high school, Peter Grandich entered Wall Street in the mid-1980s and within three years was appointed vice president of investment strategy for a leading New York Stock Exchange member firm. He went on to hold positions as a market strategist and a portfolio manager for four hedge funds and a mutual fund that bore his name. Grandich is the founder of Grandich.com and Grandich Publications, and editor of The Grandich Letter, which was first published in 1984.

Grandich is a member of the National Association of Christian Financial Consultants, The New York Society of Security Analysts and The Society of Quantitative Analysts.

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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 and Crocodile Gold.
3) Peter Grandich: I personally and/or my family own shares of the following companies mentioned in this interview: Alderon, Sunridge, Formation Metals, Heatherdale, Rathdowney and Northern Dynasty Minerals. I personally and/or my family am paid by the following companies mentioned in this interview: Alderon, Sunridge, Formation Metals, Heatherdale, Rathdowney, Northern Dynasty Minerals, Crocodile Gold, Taseko and Oromin.