-- Posted Wednesday, 7 June 2006 | Digg This Article

9:45 a.m. EDT SPECIAL ALERT:

By Peter Grandich

My May 11, 2006 Grandich Letter Special Alert stated,

“…A significant correction is lurking out there. It’s highly likely to come out of left field and at its depth, it should end up giving cause to question if the bull market in gold is over…Any correction in gold is all but certain to carry over into silver, albeit it’s likely to even be more vicious… The easy money is over…” Gold was $720 and silver was $14.94 at the time.

Just four hours later (at 1p.m. on May 11, 2006), I issued another Special Alert that stated,

“…An overbought/oversold indicator of mine that I’ve used since before the 1987 stock market crash, has given the most overbought reading ever for both copper and gold. Knowing that I’m going to trigger the nuts out there to call and email us, I’m going to suggest that risk in gold, silver and copper is now equal to, or much higher than reward in these markets for the near term. The long awaited sharp correction is within hours or days at the most.”

My commentary did trigger the nuts but also dozens of calls and emails thanking me for speaking out!

On May 19, 2006, with gold at $656 and silver at $12.40, I said,

“…We can still see another 10% or so down from here (especially in copper-if not more). We can still move sideways to down through June…”

On May 24, 2006, with gold at $640 and silver $12.55, I said,

“…while a sentiment indicator of mine has turned positive for gold after reaching its most bearish level just two weeks ago, it’s likely going to have to go to very bullish before we get ‘the’ bottom.”

And finally on June 1, 2006, I said,

“I’ve been looking for gold to settle into a $625-$675 trading range before any new significant upside move can occur. We may need to shake out weak longs by testing $575-$600.”

In a business where you’re only as good as your last call and what have you done for me lately, most reading this will now only want to know what does my “crystal ball” see going forward? The late Kennedy Gammage used to say, “Those of us who make a living looking into the crystal ball, end up learning how to eat lots of broken glass.” Translation – we’ll all be wrong enough times to realize we, too, put our pants on one leg of the time!

If there’s just one sentence I want you to remember after reading this alert, it’s the following:

The secular bull market in precious metals is far from over!

At best, we’re in the fourth or fifth inning. It’s a very different story for most base metals, especially copper. There the game ended, only most fans apparently didn’t hear the umpire yell “Strike Three- You’re Out”!

Peter Grandich’s Key Fundamental Factors:

The following are the most critical factors of mine and directly influence my financial markets outlooks:

n   Americans have been robbing Peter to pay Paul, but Peter is tapped out. We’ve been living way beyond our means and the day of reckoning for our economic and financial sins is upon us. The real estate bubble that’s now bursting had allowed us debt junkies to forestall facing paying the piper by literally mortgaging away our future so we can continue living a lifestyle many levels above what realistically we could’ve truly afforded.

n   Our “Uncle Sam” doesn’t have much of a fan club outside of the gold ole’ USA. Most Americans don’t realize how unpopular we’ve become as a nation and as a people in many places of the world (and I’m not just speaking about the places you see on TV where they’re screaming death to America). Most Americans don’t realize that we need to borrow vast sums of money “every day” from foreigners just so we can keep living beyond our means. Those “lenders” are becoming (or have already become) gravely concerned about how we live and our ability to pay it back with interest. Rest assured, they will demand higher interest rates and/or more political influence over us and our affairs.

n   While geopolitical concerns around the world are at least recognized by most Americans, they not only don’t take into account what effect these concerns play into the point I made above about dependence on foreign capital, but are in no way prepared for an even bigger geopolitical uprising right here at home – The Democrats versus the Republicans. I believe what’s about to take place in the battle for Congress this Fall, will make the battle between the Hatfield’s and McCoy’s look like Woodstock. I’ve no doubt we will reach new lows in mud slinging and the effect it will have on foreigners’ beliefs of whether they should continue funding our “debt-devouring” lifestyle will be profound.

n   For all those history buffs who wondered what it must have been like to have witnessed the fall of the Roman Empire, take heart – the fall of the American Empire is upon us. Personally, I can’t wait for someone else to play cop for the world.

With this in mind, let’s look at the metals and mining shares.

Gold –

There’s an old saying that states, “You should look back before you look forward.” I think it’s most appropriate for gold.

As we entered the new millennium, the very survival of the metals and mining industry was in question. Those who still were attempting to eek out a living in it were literally trying just to keep the lights on. This period of time had a profound effect that we still feel today. The lack of substantial exploration has greatly helped the supply versus demand equation in favor of demand even today. While gold bottomed just above $250, it really never received wide attention (outside of our little goldbug world) until it broke above $500. In fact, it wasn’t until it rose above $600 before the world seemingly beat a path to its door. I found it amusing at times, watching individuals and firms who never gave gold much of a thought all the way up to $600, knock each other over trying to get media attention that they were “raising their outlook” for gold. In fact, I pointed out that this very “feeding frenzy” was a key reason why when we broke above $700, I believed a serious correction had to take place. The icing on the cake was when media who normally couldn’t care less about gold, were contacting me and reporting on gold’s performance.

Now today, I find gone is most of the wild speculation that was occurring daily just a few weeks ago. In fact, I’m now seeing reports and commentaries questioning whether a bear market has begun (I love it). We may indeed need to trade between $575-$600 to get that feeling widespread, but most of my technical indicators have now returned to the bullish side or are at least no longer very bearish. Reward now equals or surpasses risk, going forward ($50 lower and up to $500 higher is worth risking being aggressively long again).

What are the main factors I see driving gold higher as we get into the second half of 2006 and beyond?

n   The physical supply versus demand scenario remains bullish. We just haven’t had anywhere near the necessary discoveries of large quantities of gold to satisfy the thirst major mining companies have become accustomed to (more about this in my mining shares commentary). Supply continues to decline while demand remains robust.

n   Like it or not, http://www.gata.org and its major supporters like Bill Murphy, James Turk and John Embry (Sprott) have been far more right than wrong in their predictions that the once believed “overhang” of supply (that so many of their critics constantly predicted) would not materialize. To what level there’s been manipulation or not to me isn’t as important as the “fact” that these gentlemen have been far more right than the very critics who called them nuts for even believing such manipulation was/is occurring. They at least proved (and its much more than this) that it’s better to be right for the wrong reasons than wrong for the right reasons. What’s most crucial about GATA’s work IMHO, is the Central Banks just don’t have the large quantities of gold the Andy Smith’s of the world (I assume this ardent gold bear is still alive somewhere) used to claim will overhang gold forever and thus gold would never see $500. (Now that I think about it, whatever happened to that money manager on ROB-TV who used to claim his grandchildren would never see $500 gold?). I think it’s foolish not to at least value GATA’s work on the same level of all my other work and urge you to make it part of your gold research as well.

n   While I believe geopolitical “safe haven” status is going to continue to benefit gold for the foreseeable future, I think the next up leg is going to be driven by the fall of the U.S. Dollar. Please re-read my April 4th report at

http://www.grandich.com/docs/alertGL_04-04-06.pdf .  If you’re going to value my observations in a serious manner, then I want you to imprint the following on the palm of your hand and look at it every time one of the “Don’t Worry, Be Happy” crowd on Wall Street tells you otherwise –“The only party that doesn’t know the U.S. Dollar is dead, is the U.S. Dollar!!!”

n   One of the best historical factors you can follow for gold is the inverse relationship it has with the U.S. Dollar. About 80%-85% of the time, they move in opposite directions. So, since I believe the U.S. Dollar is dead, dead, dead, dead, dead, dead, dead, dead, dead, dead, dead, dead, dead, I believe history favors my bullish gold stance. Understood?

n   The U.S. stock market has peaked and is going to resume its bearish trend and eventually test and break below its lows made after the dot-com bust. Providing it doesn’t go straight down but instead rolls over, this should also benefit gold. I’ve always said gold’s bull market can’t end until the average American investor stops telling you about how attractive Intel, Microsoft or IBM are and is instead telling you about a mining stock they love but can’t even spell. Likewise, I don’t feel the bull market will be over until TOUT-TV (CNBC-TV) moves the young lady from the oil pits to the Comex floor to cover gold.

Bottomline – Gold can go as low as $575 before we see a major sustained move up but reward has now surpassed risk going forward. Most of the wild speculation is gone. Even the hate emails that would tell me I’m nuts for turning bearish on gold are gone and being replaced with frantic concerns from folks writing asking if they’ve missed the top. All in all, I feel we’re hours or days at the most from “the” bottom.

Silver –

As I suspected, silver has had a very sharp correction. And, while I’m bearish on most base metals, I do think silver can ride gold’s coattail and surpass the highs made not too long ago before the year’s end. Let’s not forget we’re in the midst of gold’s and silver’s weakest seasonal period, but September is now within sight.

Platinum and Palladium –

By far, platinum has the most balanced supply versus demand picture and would need to be considered the best “conservative” metal for the foreseeable future.

Copper –

While I became bearish far too early, I do think the frenzy that drove speculators into it that paid nearly $4, is going to badly hurt these folks as copper is likely to eventually trade between $2-$2.50. The very fact most still can’t envision that tells me we shall see it come to fruition, albeit not in a straight line down. There’s still money to be made in copper stocks but not until we get closer to that range (except in very special situations). I do believe the U.S. economy is going to accelerate to the downside and help cool the world economy as a whole going forward. Therefore, most base metals, IMHO, have seen their cyclical highs (okay, send those emails).

Uranium –

Just continues to grind higher and remains my one no-brainer metal for upside appreciation.

U.S. Dollar Index –

Ha! Ha! Ha! Pardon me for laughing, but I think it’s hysterical to watch the reaction over Bernanke’s comments on Monday. Yes, it crushed another rally by gold and is frustrating to some, but I welcomed it! Why? Last Friday, many people around the world were very concerned about the sharp sell-off in the U.S. Dollar. It was very oversold short-term and Bernanke used his appearance to give it nothing more than a band-aid. More importantly, he used up one of his bullets. You see, eventually, even his comments won’t prevent the inevitable dollar massacre that is going to take place once we break below 80 on the U.S. Dollar Index. Exactly how much did the dollar rally? Peanuts. I bet before the month is out, it’s lower than it was when he spoke. I’ll say it again, “The only party that doesn’t know the U.S. Dollar is dead, is the U.S. Dollar!!!”

Oil –

I remain convinced that oil has seen its cyclical high above $75 barring severe hurricanes in the gulf (since everyone is predicting them, I suspect they won’t happen) and Iran being foolish and not now taking advantage of the U.S. cave in announced this week. Yes, I’m virtually alone in this belief, but what else is new?

Mining Shares –

I will write about our companies after I return from the upcoming Vancouver Resource Show (http://www.goldshow.ca). In the meantime, I would like to become aggressive again on the mining share side for the following reason:

n   I said a year ago that we would see a major increase in mergers and acquisitions in the mining industry as most majors find themselves facing a serious drop-off in reserves in the next few years barring any new major discoveries and/or acquisitions. Sure enough, M&A activities have greatly increased and the Teck/Inco/Falcobridge saga has even made the “good old boy” industry do hostile deals. I think this is a signal to expect merger mania to take hold. Despite some tough times due to high energy and labor costs, mining companies in general saw profits soar and debt levels drop sharply. The market value of the global mining sector rose more than 70 percent in 2005 and has given them a more expensive “currency” (their share price) to go shopping with.

Part of what is running these big firms is ego and no one likes to drop down in the pecking order of giants. I also think mid-size producers are going to see benefits of merging with similar size firms.

-- Posted Wednesday, 7 June 2006 | Digg This Article

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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