Grandich Letter Special Alert April 20, 2006 - 8:00 a.m.
The comments I’m about to make are certainly not going to be to everyone’s fancy and some will end up calling me something far worse than a party-pooper. Unfortunately (or fortunately, depending on how important honesty is to you), I think it’s real close to another one of those “steps back” in the “two steps up, one step back” mode I’ve often spoken about in describing the price rise in this secular bull market in metals. In addition to the caution, I’m now going to wave my first red flag (NASCAR fans will understand the difference between a yellow and red flag) on any metal since turning bullish on them back in the spring of 2003. I only hope you will still love and respect me in the morning.
Overview – It’s been nothing short of a sensational ride I’ve enjoyed since returning to the metals arena in the spring of 2003. My history will show that when it comes to precious metals (gold, silver and PGMs) I’ve managed to correctly foresee every major up and down move. The same was true for base metals until a year ago when I first chose to suggest overweighting in precious metals. While that proved to be okay thanks to spectacular rises in the precious metals, the fact is I became far too cautious on copper prematurely. Now, I’m going even one step further in daring to suggest it’s time to be actually bearish (assume prices are actually going to decline over time) on copper.
I’ve operated on the assumption that the great bear market in commodities in the 90s, especially in the metals, allowed a “once-in-a-lifetime” buying opportunity to occur and I think up until now I’ve done a good job in taking advantage of it. The bad news is- the easy money is now gone. The world has finally woken up to the fact and they are all rushing through a rather narrow door to get their share of the “new world order”. This stampede can continue for a period but I’m never happy being in a boat that was once nearly empty and is now standing room only.
Some will view the following as pure sarcasm, some as distaste, but those who know me will realize it’s neither. It’s the truth as I see it: TOUT-TV (CNBC-TV) has once again missed almost an entire move and, during the dramatic rise in commodities, had mostly “bearish” forecasters on the air. A case in point that clearly shows the 180 degree turn around they have now made in order to give the appearance that they are indeed the “world leader in business reporting”, was seen a few days ago. On the “home for lunatics” broadcast they call “Mad Money,” mad man Jim Cramer stated how he now loves base metals and devoted nearly a whole show to it. So why does this mean anything? Well, unlike my neighbors to the north, who are blessed with a “real” balanced and unbiased business network like Canada’s ROB-TV, I only have TOUT-TV for most of the day. And, for what was at least many months, if not more than a year, CNBC ran a commercial for “Mad Money” where you would hear Cramer stated on an actual show “Commodities are Dead.” (Ah, I can hear many readers silently in their hearts recalling this). So, now, after 200%, 500% 1,000% increases, TOUT-TV’s number one Market “Guru” now loves base metals. Makes you warm and comfy, no? What’s worse is the fact that the stocks he mentions are going through the roof. Please, that’s not envy but a realization that when crowds are willing to pay just about anything from someone whose history in that area leaves much to be desired, the froth is clear and the inevitable fall is never too far down the road.
I’m traveling out of the country and upon my return mid next week, I will then be out if the office for a few days in celebration of both making it to the age of 50 and my wife putting up with me for 25 years. Therefore, I’m likely a little early on the caution side but wanted you to at least know what was in my heart and mind.
Gold – The danger in secular bull markets is trying to time and profit from the blips of profit-taking or the corrections to very overbought conditions. If you’re strictly a long-term player (one assumes that means your time horizon is more than the time to boil an egg or even a calendar year), then you shouldn’t be overly concerned about corrections. I do think we will end up substantially higher from here, but before then, a significant correction is likely on the way to $700. It is likely to come out of left field, be vicious, and if the past is any indication, should bring out what’s left of the bears pronouncing the end of the bull market-again! Hopefully, I will once again receive a rash of nervous-nellie emails and even those nasty vulgar ones. They always reassure me I did the right thing. My concern would be total complacency.
Silver – Here too, prices should eventually be substantially higher before it’s all said and done. But even more so than gold, silver is subject to a sharp correction that could scare the weak and faint of heart.
PGMs – I have written often about platinum and palladium being the most balanced of all the metals and that the spread between platinum and palladium should narrow in favor of palladium. It has narrowed by palladium rising over 70% while platinum has risen by about half that. I don’t see any sharp corrections here and I continue to favor the small minority of companies that specialize in exploring, developing and producing these metals.
Copper – At $3 a pound, I can no longer “Not” be bearish longer term. Yes, I recently stated we could see a parabolic rise to as high as $3 but felt it was the end of something, not the beginning. The feeding frenzy could even overshoot $3 but in my heart of hearts, I couldn’t put any new money into copper now. Again, this doesn’t mean sell all your copper stocks, but I myself am going to make sure I’m seriously underweighted going forward. I guess my red flag now makes me a copper bear. Who just shouted “off with his head”?
Uranium – It’s best to just use a phrase I often used to describe my opinion on it – LOVE IT!
Oil – I think oil should be a guest on the show “Fear Factor” as it’s the fear of a disruption of oil supplies, not the current supply-versus-demand factors that are driving prices. The Iraqi situation is a loss now, even if we actually end up achieving what was set out to reach, because the costs of lives and dollars have been far too great. But Iran is the real flash point going forward and as long as sable rattling is in the news on a daily basis, the fact that the current supply of oil is at a nearly-10-year high is not going to have a major impact any time soon. I am by no means an oil bull but since I paid dearly in the past trying to catch a falling sword, I’ll stand aside for now.
U.S. Dollar – Read my recent special alert http://www.grandich.com/docs/alertGL_04-04-06.pdf The King is Dead! The only people who don’t know are the Larry Kudlow’s of the world and the sheep who follow them.
Peter Grandich is the Managing Member of Grandich Publications, LLC (www.grandich.com).
The company publishes The Grandich Letter (first published in 1984) which covers the metals and mining industry, follows world markets and economies, and covers the Canadian markets from an American prospective.
Grandich also provides a variety of corporate finance and development services to publicly-held companies.
Peter Grandich is also the Managing Member of Trinity Financial, Sports & Entertainment Management Company, LLC (www.trinityfsem.com), a Registered Investment Advisor in the State of New Jersey. Trinity provides investment advisory services to individuals, small to mid-size businesses, professional athletes and entertainers.
Peter is a long-standing member of The New York Society of Security Analysts and The Society of Quantitative Analysts.
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