Grandich on 2011

A December 16 interview

By Kevin Michael Grace

Q: So tell me, to what do you attribute the hammering gold took the last week?

A: I think we saw technical selling which was exaggerated by year-end trading, where when people looked around there weren’t a lot of things they could sell that had profits, and gold was one of them. The physical market remained very strong. In fact, a lot of people spoke about premiums expanding on purchase. There’s people talking about central banking intervention and all that; that’s just more sour grapes than anything else.

Q: Everyone is talking about the 200-day moving average being breached.

A: The thing about that, Kevin, is that that it is an important issue for a pure technician. The problem is that it’s been broken at least a half a dozen times in this bull run starting at $400, and that didn’t end up stopping the market from driving much higher later on. I think it’s an important thing to look at for the short term and even intermediate, but I don’t think it’s something that overrides the bullish fundamentals in that market. I won’t lose sleep over it.

Q: How low could gold go in the short term?

A: I think support is about $1,530 in gold and $26 in silver. They can still be tested and maybe be broken briefly, but I think that’s the downside risk for the short term.

Q: I keep hearing about this liquidity problem, but the Dow has done pretty well. Where do these losses come from?

A: I think there’s been an over-exaggeration of how dire things were. I think it was more fluctuating positioning than an enormous number of people suffering dramatic losses. That’s why the US stock market wasn’t shorted.

Q: We’ve heard prophecies of doom with regard to Europe for several months now. Have the markets discounted this already?

A: People do get conditioned to it. That doesn’t mean that if the dire things happen, that it’s all going to be well and good. I am not one of those anticipating a total collapse of the markets.

Q: The US dollar is now the “safe haven.” But if you take the American federal debt and add it to the State and municipal debt, it would seem the US is worse off than Europe.

A: It’s worse. Europe is just the opening act; the real problem will come when it hits the shores in America. In terms of a safe haven, the lows on the US dollar index was around 70, we’re at 80; so we’re talking about a market that’s about only 15% up from its multi-decade lows. I don’t know how you consider that a safe haven. I just think the acuteness of the moment has made the Euro very weak versus the dollar. I don’t consider it a safe haven at all.

Q: Do you think that in the future physical trading of gold could become more important in determining price than paper trading?

A: I like to hope that would be the case because I do concur that there’s two distinct markets and that the paper market has not truly represented what takes place in physical. The good news has been that the manipulation and pressures from the paper market would last for sometimes months or even years, but now they have a diminishing effect that sometimes only lasts for hours or days, and the physical market and its internal strength reverses these negative influences.

Q: It seems like everything I learned as a young man about capitalism is no longer true. For instance, how it is possible to determine the price of gold when paper trades are leveraged at 100:1, and we don’t know how much gold exists?

A: That’s part of Jim Sinclair’s argument. I think you have to look at the whole financial arena. When you think of what just happened a few years ago [in 2008], expecting anything to be fair or reasonable is foolhardy. The financial industry effectively sold tens of billions of dollars of bad cars they knew were going to crash, and then bought life insurance on the drivers. That industry is around and still leading. These people are doing things that are unimaginable in the history of finance. I know the mainstream media doesn’t like hearing that, but they’ve been the goats and the patsies. I don’t know anybody that’s gone to jail over this.

Q: Why isn’t Jon Corzine, as the English expression has it, “assisting police with their inquiries”?

A: Where is the uproar over this? Where are the press conferences demanding there be a special prosecutor looking into this thing? That’s the sadness of where we are today. Believe it or not that’s one of the reasons the most dire goldbugs have predicted $5,000, $10,000 dollars an ounce. When it all comes unglued, nothing on paper is going to be worth anything, in their view.

Q: After 2008, we were told there was more than $10 trillion in counter-party obligations. Three years later, nothing has been done about this.

A: There was a determination we’re not going to look at it. We’re just kicking the can. CNBC and all the rest of the media are just not going to cover this. Thankfully, with the Internet people can learn about this and have a voice.

Q: Perhaps I’m a terribly cynical person, but I no longer believe government statistics. For example, where I live, the price of a loaf of bread has increased 60% in seven years. Yet, supposedly, inflation isn’t a problem.

A: Most people don’t believe the claim of 2% inflation, but they can’t do much about it; they can just try and live with it. As consumers we can look at all our bills; our food and clothing is much more than that. That’s why bonds are the most horrific investment anyone can make, worse than stocks right now. To give our money away at 2% for 10 years or 3% to 4% for 30 years when we all know that it’s costing us already that much more… The people that make the laws, it’s in their interest not to have the real truth come out.

Q: I wonder if that’s a problem with democracy. Bloomberg reported that the US government fought against revealing that it gave $13 billion in secret loans to the banks, but it seems that people would rather watch the Kardashians instead of thinking about the implications of this.

A: Reality television is a great symbol of how bad things have gotten. People don’t want to face reality, so they watch TV shows and dream that their lives can be that way. There are shows now where people are benefiting from other people’s misfortunes, like Storage Wars. Or these shows about pawn shops; this is the whole unravelling of the fabric of how life used to be lived.

Q: Tell me about your $1-million offer. [Grandich put $1 million in a bank to backstop an open bet that gold would reach $2,000 before it reached $1,000.]

A: The media just loves to wheel out the bearish viewers of gold any chance it gets, and of course during the height of the decline they were all brought ought, including the worst forecaster of them all, Jon Nadler. I said enough is enough, and we really need to put our money where our mouth is. I was pleasantly surprised at the manner in which Dennis Gartman conducted himself with me. He took the high road, but I wasn’t surprised to see Nadler and Jeff Christian’s comments. For Nadler to say at MarketWatch that he’s been an advocate of gold, urging as a core holding and has only tried to temper people when they’ve gotten overly bullish is the biggest lie I’ve heard stated in the gold market. We’ll see now if the gold market recovers, whether some of the appeal of Nadler, Gartman and Christian as commentators will be lost.

Q: Gold producers have this year been making a profit of $800 to $1,000 dollars per ounce. I look at their share prices and find them inexplicable.

A: Probably in a few weeks I will write something saying this is the year for juniors. And I’ll have to cross out the numbers 2006, 2007, 2008, 2009, etc, because every year I’ve said the same thing. It is unfathomable to look at metal prices, even after this correction, and then look at the valuations that have been placed on mining shares. It is unthinkable that 10 or 15 years ago, when metals were one-fifth or one-tenth of where they are now, that we would have thought that prices would increase to this level, and the shares would not come remotely close to reflecting that.

Q: If, as it appears, you can actually make money with a gold grade of 0.2 grams per tonne, you kind of think gold would sell itself.

A: You would, but we must remember that even to this day if you take the total market cap of all the major producers they don’t equal things like IBM. It’s still a rather small part of the overall investment portfolios for people around the world. We live it and breathe it each day, but to the bottom line of people in general it isn’t as critical. For Canadians, it’s frustrating because it’s really second nature for you. Here in America, the only thing people know about natural resources is they wonder if there enough gas so I can drive my car around.

Q: Do you think there any particular stocks that will do well in 2012?

A: I don’t think people have recognized yet how strong this developing iron-ore play in Quebec is. There are companies I work with like Alderon TSX:ADV and Cap-Ex Ventures TSX:CEV that are really advancing up the corporate ladder and had tremendous years in 2011. Then there are companies that make no sense in terms of how advanced their projects are versus their market caps. I can think of no better story that meets that criterion than Sunridge Gold TSX:SGC. In the next three to six months, we’re going to see prefeasibilities and final feasibilities on multiple projects of theirs that are going to make their net asset value multiple times more than their total market cap. If I had to pick one stock whose price is totally out of whack, that’s Sunridge. Why is that? A significant part is where they operate, in Eritrea. Despite it being actually a very good place to operate, the perception is still very bad. If that starts to change a little, and they continue to have great success as they have on the corporate front, we could see a dramatic re-evaluation of their stock.

Q: I’m very interested in this because the Canadian media has been very hostile to Eritrea.

A: What happened was this little country, Gabon, which is on the other side of Africa, was about to lose its seat on the Security Council, and they leaked this story they were about to force everything to stop in Eritrea. One of the things that’s going to change this story is you’re going to see the Chinese announce an acquisition in Eritrea. There’s a current company out there that won’t say who it’s involved with, but it’s in talks with a major partner. The Chinese have been in Eritrea sniffing around; they’ve looked at Nevsun TSX:NSU and Sunridge and others. Once the Chinese take a foothold in the country, all that crap in the UN will come to a halt, because they’re the next big thing economically. The worst in Eritrea is going to be behind us.

Peter Grandich is the founder of Grandich.com and Grandich Publications, LLC, and is editor of The Grandich Letter, first published in 1984. Grandich Publications, Inc. provides research, analysis, and investor relation services for certain of the companies featured in the articles appearing in its publications. Grandich is the author of Confessions of a Wall Street Whiz Kid, which Kevin Michael Grace reviewed here.