Investors hear a lot of messages from investing gurus. Some are insightful, some are interesting, and some are downright depressing. It takes just one good, high-quality guru to cut through the clutter and deliver plain-spoken insight, and when it's done with a little humor and a healthy dose of "that makes perfect sense", so much the better.
Recently we spoke with Peter Grandich, who writes on the economy, the metals industry, precious metals, junior mining companies, and more. He had a lot to say and investors would do well to pay close attention to Mr. Grandich's wisdom.
Peter Grandich has a rich history in the investing world. As he pointed out, "I have over 25 years experience on all facets on Wall Street. The first half of my [professional] life was mostly in brokerage and money management and the last ten (or so) years has been in publishing." He has published The Grandich Letter since 1984, a newsletter with tens of thousands of subscribers.
Mr Grandich is well-known and well-respected in the investment community for his clear and thoughtful approach to market commentary. He has called market lows and market highs when others didn't see them coming and he's a quoted authority by the financial media.
He joined Agoracom.com (a site that delivers information and commentary on Small Cap investments) in 2008 as their Chief Commentator and his prolific, insightful blog is available there.
We asked him what metals he was following and he told us: "I follow all the metals but I focus on gold. Platinum and palladium are really thin markets and you have to be selective and an aggressive investor. I'm pleased that an ETF has come out that gives small and mid-size investors exposure to them. My main focus is on silver, gold, and the base metals." And when we pressed him further for information about which particular metals he likes, he told us, "I've been overweight for quite some time on precious metals over base metals. It's not that I'm bearish on base metals but I believe gold and silver have more upside potential than copper and zinc. But I do follow them all."
Gold is in everyone's mind right now so we asked him what he thought about gold, as an investment and its current and future impact on the market. Mr. Grandich responded: "In 2009 our target was $1200 [an ounce] and when it hit that price in December we noted a correction with the downside risk to $1050; we saw that take place. We've turned as bullish as one can get – and we're extremely bullish this week. Last [week]'s IMF scare made us reiterate our enthusiasm for gold. I believe we're in THE secular gold bull market since it's been free trading. I don't know if it's possible to be more bullish. I don't think someone could be more bullish than I am on gold."
In a recent blog posting, he offered to bet someone $100,000 that gold would close above $1,200 without closing below $1,000. We asked why he did so and he responded by saying "That was a humorous/snide response to the gold 'perma-bears' who in some media circles are constantly quoted." This group of constantly bearish experts are rarely, if ever, correct, Mr. Grandich said. "Even with the broken clock rule, they haven't been right twice a day! [These perma-bears] have been banging the table in their latest rants about a gold bubble and a top. But the problem is, they're never asked to point to a time when they were constructive on gold… I don't mind if someone is bearish if they've been bullish in the past, but just as there are gold bugs who always like gold no matter what happens, there are these perma-bears who constantly dislike it."
The ubiquity of these perma-bears in the media is an interesting concept and Mr. Grandich explained further why these naysayers are so popular: "The public can never expect to hear the financial service industry, and the media that surrounds it, embracing gold because to do so would be against what really drives the financial industry and that is financial assets. Stocks and bonds make the world go 'round (at least in the financial service industry and in the media) and gold really is an 'enemy' to that. So, general acceptance of gold in the media is never going to take place because it goes against the flow of [the financial services industry]." That's a strong indictment against mainstream media and the financial services industry and yet, his point seems to ring true.
As for how investors can get involved in gold, many gurus are suggesting physical gold – like gold bars and gold coins – in anticipation of an impending global economic collapse. But Mr. Grandich doesn't subscribe to that theory. Here's his take on how first time investors can put their money into gold: "I believe the Exchange Traded Funds (ETFs) are a very good vehicle for the small investor. The argument that they don't actually own the physical gold and can't take delivery is moot. If the world ever got to a point where we had to take delivery of gold to live our lives, I don't want to live in that world and you won't be able to hold onto the bullion much longer than the people who don't have it."
Indeed, a catastrophic worldwide financial collapse is at the top of mind for several investors and many of them promote the buying of physical gold, but Mr. Grandich disagrees: "The main arguments of [holding] physical bullion is supposedly the safety of it and what it can deliver for you in really tough times. I just don't believe that, if those tough times ever come, having physical ownership will not be very useful… unless you have enough of it to hire an army. I don't envision, nor do I want to be living in, a world where I need gold to get some water or food. And, since the vast majority of people who will be living [when this financial apocalypse occurs] won't have gold, if you have it and use it to get something you need, they will eventually realize that you have something they need and they will take it from you. I don't sleep with my gold bars [under the mattress] but I do think it's a good investment at this time."
After talking about gold, the topic of conversation very often goes to inflation, which it did in our interview with Mr. Grandich. We asked him what he thought would happen. Would we see inflation or deflation or an extreme version of one of those? He said: "In the end, governments will take inflation versus deflation. It's an evil but it's the lesser of two evils. It's more palpable to live with inevitably high inflation and monetizing of currencies is going to be a key part to the indebtedness of nations, particularly the United States. It's just like weight. You can keep ignoring it and you will keep putting on more weight but eventually you'll get to a point where you have to pay the piper. The way heavily indebted nations will pay the piper is through reflation, monetization [of currencies]. In 2011 and beyond, I think we'll see something we haven't seen since the 1970's and that's stagflation where we'll have higher rates of inflation and a slow-to-even recessionary economy."
We asked him how he had drawn that conclusion. He pointed to the bond market: "I think we're starting to get hints of that in the bond market: The spread between the 2-year and 10-year bonds went to a record price. The bond market is starting to sniff the seriousness of the situation and they are suspecting higher rates down the road."
This sounds scary so we asked about something we'd heard regarding the US economy and its stability or potential bankruptcy. In fact, US national bankruptcy is a rising topic that more and more people are talking about. Mr. Grandich made some good points: "Technically we are [bankrupt]. The US has approximately $17 trillion to $20 trillion of actual debt on the books. And then we have $37 trillion to $47 trillion in what is called 'unfunded liabilities', which is mostly Medicare and Social Security. Businesses are required by law to account for unfunded liabilities [in financial statements] but the United States government isn't. So if the US was a business, we would be broke. The sheriff would have to sell the business. The US is bankrupt because it owes more than it has. If Americans sold every asset they had, we would still have debt."
It's a serious problem and there aren't a lot of clear solutions, which is why Mr. Grandich is so bullish on gold: "The debt problem is not just limited to the United States, and therefore there is no single paper currency that someone could say 'this is good.' Canada is the one Western world economy that is in very good fiscal shape but it's not big enough nor does it have enough of a currency flow where people around the world could use it as a reserve currency." Since China is big enough but doesn’t have a free-flowing currency, the only other option is gold. "We're seeing gold rally in all currencies: In the dollar and in major foreign currencies. They're breaking out. The technical picture for gold has never been better because it's not just rallying against the dollar like it did in 2009. That's an extremely bullish scenario that you see very rarely in the history of the free trading of gold."
National gold policy is sometimes a concern for some – from gold investors to those who are concerned about an economic collapse – but here's what Mr. Grandich had to say: "The two dramatic changes in the gold market in recent years used to be the two biggest negatives in gold. Until the Washington Accord was struck at the end of last decade, central banks were just aggressive net sellers and that kept gold under pressure. On top of that, people who made a living on producing gold were dramatically aggressive hedgers. The combination of central bank sales and hedging suppressed gold and kept it from rising rapidly. Both of those groups are no longer the way they were ten years ago. These revolutionized the gold market. As a result, gold is up 4 times is price in a period of ten years. Yet, it's still panned and looked at as a relic."
There is a lot of talk about whether gold is in a bubble but Mr. Grandich doesn't think so. In a bubble, everyone is lining up to buy gold but right now, everyone is trying to sell gold. He referenced the confusion around whether George Soros' was selling and or buying gold. Want more proof that there's not a gold bubble? Mr. Grandich pointed to money manager John Paulson. "John Paulson says he is putting $250 million of his own money into a gold fund and a couple of weeks ago announced that he has only managed to raise $90 million for his new fund. If there's a gold bubble, people would have been knocking themselves over to get into John Paulson's fund."
So why are so many people talking so much about the bubble? "I think it's because of gold's price appreciation," said Mr. Grandich. "But the situation is very similar to the early 1980's and the equity market. There was such a bear market in equities from 1973 to 1982 that a magazine announced that equities were dead. The US stock market had traded between 700 and 1,000 and there was this perception that that's what stocks were worth. Then a young man named Robert Prechter came along with the Elliot Wave theory, which almost no one knew about, and he said that the Dow was going to 3,000. I can recall vividly that people were saying 'that's impossible!' And even when it hit 1,300, they were saying it was overvalued. Well, we all know what happened over the next 20 or more years. Gold is in a similar situation: It traded for a long time between 300 at the bottom and about 600 at the top [with an 800 ceiling]… and when it broke through, people thought that it's never really traded at this level so it shouldn't be here and it's over-valued."
So, if we're not in a bubble and things could potentially go even higher, what can we expect? "China has set up systems for its citizens to buy gold in the same way that the American government has set up systems like 401(k)s and IRAs. Only the Chinese are encouraging their citizens to buy gold instead of paper assets. Since Hong Kong is a mirror of what China is going to look like in ten to twenty years, there are statistics showing that the average Hong Kong citizen has [approximately] 2 or 3 grams of gold ownership per GDP capita while in China it's one-tenth. But if China is going to look more and more like Hong Kong and the Chinese government has systems to encourage citizens to buy gold, then that's another dynamic to the ownership equation that makes supply-versus-demand very favorable."
That leads naturally to the next question, which is very relevant to investors: How should we be investing? Mr. Grandich replied: "My advice has been to have no ownership of US stocks not related to precious and base metals. In my model portfolio, there is no equities except those related to precious and base metals. I think you need to own the producers first. Juniors are almost always owned most by the people who can least afford to own them. Your ownership needs to be concentrated in major mining companies who have stood the test of time. Then, take the capital you are prepared to lose all of and invest it in juniors. Then the junior market offers a lot of opportunity. There are several ETFs that have juniors in them. Many of those ETFs will be advanced stage juniors and emerging producers. Market Vectors Gold Minors (NYSE:GDX) is one and iShares CDN S&P/TSX Gold Index (TSX: XGD) is another."
From our interview, it became very clear that Mr. Grandich feels we are at a crossroads and a lot could happen in the near future that could cause a fundamental shift one way or the other. "We're in a transition period. America stared at the abyss over a year ago. While we have moved away from the abyss, virtually all of the problems that led us to the abyss still remain. So it appears more of a question of when not if that we will visit the abyss again. And when we do, are in a better state to handle it or a worst state? Well, I believe that we're in a worse state. There is one twist to all of the markets that I don't think is priced into the market but there's no active talk about it; if there's one thing that happen in 2010 that can change all of the markets including the metals markets, and that is an event in the Middle East. From everything I can read and hear, we are moving towards a period of potential serious conflict in the Middle East [among many countries]. Conflict is coming – it's another case of when, not if – and it will impact the markets."
The Middle East is, without a doubt, a complex scenario that we have little control over and, unfortunately, the mainstream media does not often report the full picture. Mr. Grandich referenced one site – Debka – as a site that gives him broader insight into the Middle Eastern situation.
What's the bottom line for investors? According to Mr. Grandich, there are a lot of potential changes ahead and wise investors will consider owning precious metals – at least in the form of ETFs – and will watch carefully to see what happens in global politics to inform their decisions.
References
http://grandich.agoracom.com/
http://blog.agoracom.com/
http://www.debka.com/