-- Posted Monday, 15 January 2007 | Digg This Article

For me, it’s hard to imagine but this will be my 24^th year in and around the financial services arena. So much has changed in the industry and especially on the information flow side. I can recall writing the very first Grandich Letter in October of 1984. We literally typed it up, went over to a printer and ran the issue on blue paper. Just a year later, while working at my second brokerage firm, the owner offered to “upgrade” it by having it done by a professional commercial printer. We would have to have it typeset, printed, folded and then first stuffed in envelopes before mailing it, which some readers didn’t receive until days later. Now, I pen my thoughts, my assistant formulates it in just minutes or an hour or two and presto- it’s distributed to readers around the world in a matter of seconds via the Internet. While I very much appreciate the timeliness and less cost overall, I wonder if the information age has caused an overload in our minds and the thought that we must act so quickly?

It’s also been my firm belief of the existence of a “Don’t Worry, Be Happy” crowd within the financial arena. These folks always, without exception, paint the most optimistic outlook--not because it’s their whole-hearted belief, but because it sells. And certain parts of the financial media are willing conduits. I’m not trying to be sarcastic when I call CNBC-TV “TOUT-TV”.  Once a “fair and balance” news channel that gave both bear and bull equal footing, CNBC has now become virtually one-sided in its reporting. You would sooner find a needle in a haystack than see and hear a bearish stock market/economic forecaster on their broadcast. And, if you do find one, hosts like Mark Haines or Joe Kernen will try to eat his/her lunch before long. These anchormen have openly cheered when the market rose and frown when it was down. If you agree, I encourage you to watch Bloomberg television and better yet, Canada’s financial channel, “Report on Business” Television (ROB-TV). There, you will see and hear fair and balance reporting without any egos. CNBC’s last fair and balance guy was Neal Cavuto (now with FOX News, ironically). ROB-TV has many distinguish reporters and the single best TV financial journalist in North America today, Mr. Jim O’Connell. Not only is Mr. O’Connell brilliant yet humble, but he always asks the questions you would in his position. Sadly, yours truly can’t stomach TOUT-TV for more than a minute or two but thankfully is able to watch ROB-TV live on his computer for a minuscule yearly cost (see home page of www.robtv.com for information.)

One more comment on certain aspects of the financial media from a personal experience that I believe clearly shows the biases against anything that may not fit into the bullish category: This past fall, I was asked to pen an article about gold for a “very” well-known nationally-circulated business magazine. After completing the article, the “Features Editor”, sent me back the edited version. I wrote back and said in part “… I’m sorry but I can’t in good faith put my name to this article. You took virtually all I said in the interview with the reporter and discarded it for a gold story mostly about just one element of the gold outlook-China. Unlike your version, I don’t believe it’s the driving force for gold and the article has nothing about all the other factors I had previously offered. Anyone familiar with my work would question this article knowing it’s not the key reason for my bullishness.”

In the original interview, I spoke mostly about a coming U.S. Dollar crisis and how it would be the key factor for gold in 2007. Here’s what the editor wrote back:

“It is possible to change the part about China, but we would feel irresponsible building the case around the dollar decline where there are also numerous reasons to believe that global geo-political forces will not let the dollar hit rock bottom. So all things considered, we will not run the piece.”

YOU NEED TO APPRECIATE THIS! Because my commentary forecasted a dollar crisis despite my argument being supported by hard facts and solid assumptions, this nationally-read, so-called financial magazine would not allow my comments because they already concluded that certain forces would never allow such a thing to occur. As far as I’m concerned, not only is this unfair and unbalanced reporting, it’s irresponsible…but not surprising. Ironically, the U.S. dollar had its hardest fall of the year just one day after I received the above comments from that magazine that rhymes with "birth."  ...oops!

2007 – It’s Time to Be a Live Chicken Versus Dead Duck

Since 1984, I made two “dire” forecasts. In August 1987, while Head of Investment Policy for New York Stock Exchange Member firm Philips, Appel & Walden, I issued a stock market crash forecast. By October 19, 1987, the day known as “Black Friday,” markets around the world took a big tumble. Ironically, I would state on October 20^th that the worst was over and new highs would be seen within a year. And they were.

There’s an old saying that you’re only as good as your last call and you can live off it for quite awhile. I think I did, as I was more wrong than right for more than a decade until January 2000. It was then that I penned a commentary that said the market was about to have another tumble, making this my second “dire forecast” (1987 was the first). The NASDAQ basically crashed and losses in the stock market were widespread.

I now believe the U.S. stock market is again poised for a major fall, only this time it can be more of an ongoing erosion versus sharp declines. I believe this erosion can be over a multiple of years. My targets are DJIA 7,500 and NASDAQ 1,100. The best scenario is for one more big rally on the back of a change in Fed policy to easing, which the “Don’t Worry, Be Happy” crowd will sell as a sure fire, can’t miss bullish signal. Don’t ask me what date or at what stock market level this will begin because at this time I don’t know. But, I believe it is time to greatly lower one’s exposure to general U.S. equities. Selling rallies versus buying corrections is the new marching order, as far as I’m concerned.

The Three Biggest Lies:

1 – The check is in the mail.

2 – I’ll love you in the morning.

3 – A “Goldilocks’ economy” and “soft landings”.

As noted earlier, the always-bullish forecasters dominate the financial media. Do a Google search on “goldilocks economy” and you will find over 63 thousand sites (not including news or vides searches) – most of which predict such a scenario for the U.S. economy. Yet, history will show that such a scenario has actually happened only once in the modern era. I would sooner forecast a Vancouver Canucks Stanley Cup Championship before a US economic soft landing (Canuck fans have to be the most optimistic sports fans in the world). The chart “Beware the Bears” is a four-week moving average of how many times the words “goldilocks economy” appeared in the financial media. This is one new high that I believe doesn’t bode well for the users.

Where you get most hurt in investing is when consensus is overwhelmingly one-sided and unprepared for any scenario other than the one they all believe in. The “soft landing” scenario is a universal belief. It is endorsed by the US Federal Reserve, numerous central banks around the world and the vast majority of private and public sector forecasters. Such an overwhelming belief was seen in the oil and copper market less than six months ago. Now look at them.

While the Internet bubble caused the last fall, I believe a series of economic, political and social factors will combine to lead the US stock market sharply lower for the balance of this decade. Below are just some of the factors that make me so bearish:

• Love may make the world go around, but there’s no denying enormous amounts of liquidity has driven financial markets worldwide. A measure I like to use for the US economy is corporate net cash flow plus the money US households have on deposit. It’s been growing about 9 percent – far faster than nominal gross domestic product. I can’t recall when liquidity growth became so disconnected from the economy. Even more amazing is that this has occurred while the US Federal Reserve raised the Fed funds rate 17 times.

My concern here is that this dramatic increase in extra liquidity has led to speculative excess. Nowhere is that more evident than in the hedgefund industry. Yes, one should be concerned about their deep foray into commodities and the likes of “carry trades” (borrowing in a low-yielding currency like the Japanese yen and investing in a high-yielding one such as the Australian dollar). However, what most concerns me is their stampede into the credit derivatives. These “products” were supposedly created to make markets more efficient by allowing banks and traders to package default risks and swap them. One of their side benefits has been record low spreads payable for corporate credit risks over low-risk government debt. This, in turn, makes it easier to finance corporate acquisitions. While this has been a big boom to the stock market, I believe this is nearing its end of positives and a whole bunch of negatives await us.

History as shown us that man eventually mis-prices risks, especially in newer markets. The Bank for International Settlements recently reported that the amount of over-the-counter derivatives contracts grew by 25% and the newer credit-related markets saw a nearly 50% increase. History has shown us when a bank’s loan book expands by more than 20% a year, chances are management has taken too much risk and the bank blows up. About half a dozen of the world’s leading banks are on one side – and often both sides – of the majority of these derivatives. A concern of mine is the leverage gain by a small down payment that gives big exposure to price movements. These underwriting banks are doubly leveraged. Corporate defaults and market volatility has been exceptionally low and complacency about systemic risk is real.

• Uncle Sam, Go Home. Once the world’s favorite uncle, Sam has become the estranged uncle no one wants to talk about or be seen with. While I will discuss some of the world geopolitical problems later, it’s been my contention that the 21^st century edition of the Hatfields vs. McCoys is underway here on our shore – the Democrats versus Republicans. I believe the political infighting will create a mud bowl in Washington, D.C. Since we, as a nation, depend on foreigners to support our daily lives (thanks to our continuing deficit spending), the question arises as to how all this bickering and inability to fix numerous economic and social problems of ours will be viewed on the world stage? It’s already gotten off to a bad start as House Democrats prevented Republicans from participating in deliberations as promised in their victory on November 7^th. While the infighting will be bad enough, I believe an even worse scenario is going to become reality. The Democrats are going to bring forth a raft of congressional investigations into the White House’s conduct of policy and its assertions of executive power. Mark my words: we will be reading and seeing this on the front pages in the not-too-distant future. Its been reported that President Bush is already seeking a new chief lawyer with credentials as a proven combatant. It’s coming – trust me!

• U.S. housing market and employment. Once again, the “Don’t Worry, Be Happy” crowd is out in full force, proclaiming the housing slump is already over and taking the latest government farce known as payroll data as a sign to “party on, dudes!” The National Association of Home Builders index of US housing market confidence plunged in 2006 (see chart).

A dead cat bounce is both warranted and likely. The first reflex rally after all bubbles burst is hailed as the worst is over. Go look at the comments made when the NASDAQ hit 4000, then 3000. The housing market is still a long way from the bottom. The “Don’t Worry, Be Happy” crowd would like you to think that all the property values that were inflated by bogus appraisals, borrowers who were allowed to qualify for mortgages far beyond their financial means, income and assets that were rarely verified (especially in the sub-prime lending markets), and all the “shoe-horn financing” tools used to get people in a home on highly creative mortgages are now behind us. The problem is, these factors haven’t even begun to implode. Why? Many who are hanging on by their fingertips are being lulled away from panic that the reported strong job market will make all things well again.

You want a sure-bet (no, not betting against the Canucks)? Put what ever you can on the fact that the December U.S. payroll numbers will be revised – DOWN! Just about every private and independent economic research group was signaling a sharp slowdown in the US job market and then came the latest government report. Who had more reasons to fudge numbers? If you answered the private and independent group, stop reading now and go down and open an account at your local brokerage firm that has a bull or a rock on their front door. They’re waiting for you!

• Graying. I continue to believe the ultimate crisis for America is the aging crisis (no longer coming aging crisis, as the first of the baby boomers have begun to hit the retirement age). In the last six months, former Federal Reserve Chairman Greenspan, the U.S. Comptroller of the Currency and some of the best independent economic minds in the world today, have all made a great effort to warn of the pending disaster America faces on entitlements and matters related to our aging population. The fact that the average financial advisors at those firms with bulls and rocks on their front door are not offering the same warnings, should make the concerns even more alarming because when they finally do, it will be too late (as usual).

The aging crisis is not limited to the United States, although it should be most acute here due to our high levels of debt and little or no real savings.

Our friends to the North face it as well as Asia and Europe. Mr. Joaquin Almunia, the European Union (EU) monetary affairs commissioner, recently stated that the public finances in six EU countries are at “high risk” because of the continent’s aging society. He predicts without policy changes, the average debt to gross domestic product ratio of all EU members will rise from about 60% to almost 200% in 2050.

Bottomline –

There are numerous other bearish factors, some to be discussed shortly. I take no comfort in sounding alarmist and trust me, based on my 1987 and 2000 experiences, it’s a net negative for me. If I’m right (like before), the vast majority of people will not act properly and will not be in a position to become more bullish when the situation presents itself. Also, of the handful that do act, half or more of them will also likely be too afraid to go to the other side as the bad times that took hold will appear to be here for a long time. (That’s what many on Wall Street predicted after the 1987 crash. I will never forget how brokers in my office went from selling stocks to selling zero coupon bonds – those old enough to remember will likely chuckle when remembering this).

North of The Border –

How good was 2006 economically for Canada? Based on an annual index complied by BMO Nesbitt Burns Inc., Canada outpaced the performance of all other G7 countries.  In fact, the report points out that its “Canadian Economic Performance Indicator was recently at one of its highest levels since the early 1960s – only the high-tech boom years of 1999 and 2000 were better.”

While looking in the rear view mirror may help looking back, the look forward via the old crystal ball is still suggesting Canada is in far better shape than its largest trading partner to the south. Like in the U.S., Canada had some surprisingly strong labor reports that showed a 30-year low unemployment rate. The Bank of Canada’s own business outlook survey suggested the economy is still running close to full speed and businesses are confident about the year ahead.

Given the fact that oil prices have peaked for the cycle, one can still expect Alberta and British Columbia to be the leading provinces for growth in 2007. The oil sands are not going away and the sharp sell-off in oil has (and/or should) removed much of the froth on the oil sands stocks. All in all, I suspect economic growth to slow, but not anything like I expect in the U.S.

Gold –

Every once in a while, I have to pinch myself after hearing and reading so much concern about the price of gold. One would think it was $310 versus $618 based on all concerns and outright bearishness. Personally, I’m delighted to see bullish sentiment low yet no important technical indicators violated to the downside. Outside of last spring when seemingly everybody suddenly liked gold and drove it to $735 (the lead reason why I turned bearish back then), the overall bullish sentiment for gold versus financial assets remains quite low despite a 150% increase in the gold price. People always ask me when I see a top? I’ve often answered that a clear signal that the last leg up (as it proved for oil) would be when TOUT-TV moves their girl from the oil pit to the gold pit.

I believe three factors should drive the gold price in 2007 to at least last year’s highs of $735 and possibly an all-time high above $875 if certain conditions worsen. The three factors in order of importance IMHO are:

• Geopolitical Concerns – At the end of the day, gold is not an asset class as so many touted during the commodities craze in 2006, but it’s an alternative to paper money, especially the world’s “current” reserve currency, the U.S. Dollar. The single biggest reason to seek it as an alternative currency is not inflation, as Wall Street likes to tout, but in times of perceived trouble. The world has plenty of trouble these days, none bigger than the mushrooming turmoil in the Middle East.

First let me discuss what most are willing to talk about regarding the Middle East. To begin, let’s fully appreciate what someone who ought to know said recently about the Middle East. Jordan’s King Abdullah, a true American ally among many known and disguised enemies in the region, said the Middle East is on the verge of three civil wars – in Iraq, Lebanon and the Palestinian territories. He said the U.S. must see the “big picture” and pursue a regional solution, indicating his support for American engagement with Iran and Syria in pursuit of an end to worsening violence. He told CNN recently, “They need to do it now, because, obviously, as we are seeing, things are beginning to spiral out of control. We’re juggling with the strong potential of three civil wars in the region.”

Knowing hindsight is always 20-20, the cost to witness Saddam’s Hussein death appears to have been more than we bargained for. It’s hard to imagine (as crazy as it sounds, given that the man was such a horrific criminal to his own people) but some suggest we may have been better off with him alive. More and more people are realizing we opened a can of worms and getting all the worms rounded up will be difficult at best.  I’m not writing this for debate but instead trying to have a realistic analogy and to see how it can play a role in the investment scheme of things.

I like to be proven wrong, but I don’t see Iraq staying one sovereign country as it stands now. In the end, Iraq is all but certain to be split up. The problem is how to share the oil revenue among the different groups? Trust me, if it was just sand there, the U.S. would be long gone.

Then there’s Iran. Its President Mahmoud Ahmadinejad mustn’t be taken lightly (Israel isn’t doing so). I think most of us realize where he’s coming from and its no place most of us want to be or see realized. You can virtually be assured Israel will not live with a nuclear power Iran. That’s why I believe the most recent reports of Israel having drawn up secret plans to destroy Iran uranium enrichment facilities with tactical nuclear weapons is, sadly, real.

This scenario is real and while mind-boggling to even consider, is likely to at least become points of discussion soon and influence financial markets going forward. A growing number of Israelis believe they face a second Holocaust unless somebody – preferably the Americans, but if not, then Israel itself – pre-emptivly bombs into rubble Iran’s nuclear facilities. A kill or be killed attitude is now, or will be, prevalent as reports show Iran closer and closer to a nuclear bomb. In addition (and not discussed on the airwaves), much of Israel has lost hope that it can have a manageable peace with its neighbors. It looks like a question of “when?” not “if?” the fragile Democracy in Lebanon will cave. And Palestine? Well, I don’t think anyone really knows.

A side note to this nuclear issue is the spectre of a nuclear race in the Middle East. The International Atomic Energy Agency says Algeria, Egypt, Morocco, Saudi Arabia, Tunisia and the UAE all say they want to build civilian nuclear energy programs. Do we try to deny them on the pretense they would have hidden agendas?

America has never faced an enemy like the one it has now – Islamic terrorists. While Hitler, Stalin, Castro and the like wanted to rule the world, they didn’t want to die doing it. America’s 21^st century enemy is not only willing to blow everyone up including themselves, but think there’s a great reward waiting for them when they die. Personally, I never understood the thinking of a suicide bomber. If there are indeed 14 virgins waiting for him as soon as he blows himself up, why doesn’t he ask the guy strapping the belt on to him why he, too, isn’t blowing himself up? Makes you wonder, no?

While I expect the Middle East to be the primary geopolitical hotspot, let’s not forget North Korea and Venezuela. I’ve advocated not owning anything in Venezuela. That suggestion has never looked more appropriate.

• U.S. Dollar – Listen up! It’s rare to find an historical factor that proves to work more than 50% of the time, let alone 80%-85%, and that’s about how often the inverse relationship between gold and the U.S. Dollar has worked (they move in opposite directions). That’s why it’s critical for those interested in gold to realize the path of the U.S. Dollar is the single most important factor for determining the path of gold. Despite what the Don’t Worry, Be Happy” crowd is touting of late, the U.S. Dollar has only one long term direction – DOWN!

I have used the phrase “America has been robbing Peter to pay Paul but Peter is broke” to describe where we stand fiscally both on the governmental and consumer level. In order to get through each day, America must take in $2 billion in capital flow from foreigners. Once considered a bastion of stability, offering the most lucrative returns and the highest growth rates, America has now caused foreigners to grow skeptical and have begun limiting or withdrawing their capital. They have come to realize we’re a mess fiscally and heading towards an economic crisis unprecedented in our history.

I’m convinced that Paulson and Company have seen the handwriting on the wall and used their recent trip to China as the first of many actions in hopes of stemming a dollar collapse. I wholeheartedly believe they are resigned to the fact that the dollar is terminally ill, but it’s their hope to engineer an orderly decline versus a collapse. Since this is in the best interest of most Central Banks around the world, I suspect a lot of behind the scenes coordination is going on (including massaging the gold price from time to time). But be warned, the Forex markets can overwhelm intervention and such intervention could end up escalating the decline versus slowing it.

Richard Nixon’s Treasure Secretary, John Connolly, famously remarked that, “the dollar is our currency, but your problem.” The world always wanted a strong U.S. Dollar only now they have concluded the country that once made up that currency is just a shell of its former self. They know we face enormous economic, social and political problems at a time when there’s now no love lost between us and most of them.

How the happy go lucky crowd on Wall Street can be bullish on the long-term aspects of the U.S. Dollar Index is beyond me. After free falling from a double top around 120 in 2001-2002, the dollar could only manage a puny technical rebound to the 92.5 area in 2005. This, despite a major one-year U.S. government amnesty repatriation offer in 2005 that saw U.S. multi-nationals bring back to our shores oodles of dollars that they had overseas and 17 straight interest rate hikes by the Federal Reserve. Knowing that with all this going for it we still find the U.S. Dollar around 85, one should ask these Pied Pipers of Wall Street, “exactly what happens to the dollar if your merry forecasts for a change in Fed policy to easier monetary conditions actually happens?”

The 80-area basis the U.S. Dollar Index is the line in the sand for the whole world. If and when that breaks (yours truly believes it’s only a question of “when?” not “if?”), the world should get a sell signal on the dollar and that can only greatly enhance an already bullish environment for gold. Conversely, we would need to re-think our stance if the U.S. Dollar Index rose above 93.

• Supply versus Demand – While the U.S. Dollar and geopolitical concerns demand our attention, we mustn’t lose sight of one of the purest factors - supply versus demand. To say that the mining industry has made a 180-degree turn since the start of the new millennium would be an understatement. The industry’s very survival was in doubt as those left in the business were thinking “last one out turn out the lights.” Now, while the industry is liquid and making money again, the world landscape where it explores, develops and mines has dramatically changed. Once able to do its thing virtually anywhere in the world, the industry finds itself struggling on several fronts. If social and/or political issues are not preventing and/or making it difficult to operate in many parts of the world now, operational difficulties like skilled labor shortages, parts, drills, drillers and the like are all impacting operations. This, and the fact that enough new deposits are not being found to replace reserves is also paramount. (Also unspoken is how mid- to upper- mining and exploration management is being greatly impacted by the aging population, as well as how few young people have gone into mining and exploration as a career in the last decade or so).

We must also take into account jewelry demand, which is still over 75% of the yearly physical off-take. But keep in mind, part of it is simply for show while others buy it as an investment. A slowing world economy can and will impact jewelry demand but I fully anticipate the other two key factors previously discussed to more than make up for it on the demand side.

Other Important Factors –

• Money Supply - It was no coincidence that our government decided to stop reporting M-3 money supply figures. People in the know have still been able to make a good guess based on what is being reported and they say money supply is growing rapidly despite the many interest rate hikes. We’re also seeing global money supply rising sharply.

• Negative real U.S. interest rates have also been an historical bullish factor for gold. I see little chance of this abating anytime soon.

• Manipulation – While I don’t see the daily manipulation my good friend Bill Murphy of www.gata.org does, I firmly believe the main argument of GATA that past and current manipulation has and is occurring. It’s frustrating at times but in the end, history shows all forms of artificial interference is eventually overcome. One important side note to the manipulation argument of late has been a dispute between Bill Murphy and www.kitco.com analyst Jon Nadler. While I respectively disagree with Jon’s assessment that there has been no manipulation, I’ve found his overall metals assessments quite informative. I hope these two minds can come together and agree to disagree – it will be net beneficial to the gold community.

• Central Bank selling is my wildcard. Forgetting for a moment what they may or may not have done regarding conspiring to suppress the gold price, I think what was once only a major negative overhang, has become net neutral and may be becoming a surprising positive. Central Bank sales, and/or the threat of them, used to crater the gold market for months if not years. Now, the impact is just days or weeks. The pleasant surprise by this time next year could be how much their sales have fallen, plus how some of them were net buyers.

• Gold ETFs – While some goldbugs were (or still are) not in favor of the ETFs, it has been my contention that they were, and are, one of the best things that happened for gold in the modern era. For a very long time, private investors and institutions avoided gold’s lure simply because there was no easy and cost-effected way for them to gain exposure to it – until the birth of ETFs. Just wait until the U.S. stock market peters out and TOUT-TV is reporting for more than an hour a day about new highs in gold. The rush by the American investment community into gold via ETFs should be fun to watch.

• Hedging - Thanks to the combination of lower interest rates (which make contangos unattractive) and the unpopularity of it, hedging has become gold’s “seven” letter word. I don’t anticipate most management teams wanting to be the first kid on the block using it again to any great extent.

• Economic growth is always good for gold. Where it’s occurring now in the world coincides to lands where gold historically has been widely accepted as the best form of money. China’s gold consumption continues to rise, along with India’s. While their economies can be expected to slow at times, I believe their people will look at gold ownership as a means to better their lives like Americans have thought debt is the way. Bet on the Americans ending up with the short end of the stick.

Bottomline –

The next $100 in gold is up. Because the commodity bubble is bursting as we speak (more in a moment), gold has been kept in a trading range and can even dip below $600 but risk appears no worse than $550 while ultimate upside is still a new, all-time high above $875.

Silver –

Mainly because I believe it’s the “kissing cousin” to gold and I remain staunchly bullish on gold, I believe silver should track gold. On occasion it can lead, as it tends to be more volatile than gold.

Platinum and Palladium (PGMs) –

Watching paint dry can at times be more interesting than the trading of PGMs. However, of all the metals other than uranium, they appear to have the least downside risk. Recently, platinum spiked to $1,400. The combination of talk about a new platinum ETF, a belief some market participants had a big position in some now expired options, and a tight physical market that saw one-month lease rates paid by those who borrow the metal top 100%, were all likely reasons for the spike.

I, for one, don’t want to see a platinum ETF. Yes, prices would likely rise sharply, but because this is an overall thin market to begin with, and the fact that valid substitutions like palladium are readily available, any gains would over time evaporate. While new and increased usages of platinum give strong support that any price pullbacks should be moderate, there are also reasons to be concerned that price increases should be limited in the foreseeable future as well. Because platinum is so much more highly priced than gold and palladium, we’ve witnessed a significant decrease in its off-take in the jewelry sector, most notably in China. There, not only have consumers resisted platinum jewelry, but fabrication margins have been pared to the bone.

I continue to like palladium the closer it is to $300 or under and especially if the spread between it and platinum widens by more than 10% from the current levels.

Copper and Oil –

There were two markets I was screaming bearish on in 2006. Taking such a position not only flew in the face of my bullish stance for precious metals and uranium, but it created an awful amount of emails and phone calls, some of which came from the darker side of the human race. Thankfully (because I can only imagine how that dark side would have reacted if I was proven wrong), my extreme bearishness towards copper and oil paid off.

In the May 24, 2006 edition of the Grandich Letter, I wrote of copper:

“Gold Correction Nearing its End -

Copper a Disaster Waiting to Happen

A sentiment indicator of mine has just turned positive for gold after reaching its most bearish level ever just two weeks ago. It is likely going to have to go to very bullish before we get “the” bottom, but it suggests the correction is all but near its end (hours, days or few weeks away at most).

I’m also pleased to see even some of the most vocal bulls turn cautious in their published commentaries this morning. We need gold off the front page, as it was for most of the rise until the New Year.

I continue to “love” the precious metals (gold, silver, platinum and palladium) and especially uranium, but I’m extremely bearish on copper. The International Copper Study Group report yesterday said the global refined copper market is expected to show a modest surplus in 2006 after ending 2005 with an essentially balanced supply versus demand. The copper market has witnessed the biggest short squeeze (combined with speculators running wild) ever! It’s ending is all but certain to be the ugliest. I’m extremely tempted to short copper but my wife already has my bags packed thanks to my Anooraq Resources position.”

In the November 6, 2006 edition of the Grandich Letter, I wrote of copper:

“As the U.S. heads toward recession (second largest user of copper), an overall slowdown worldwide in 2007 is likely. I believe that’s why despite the euphoria for copper, inventories of copper are beginning to rise. Technically, copper has formed an extremely bearish chart formation.

As you can see, copper has been making a series of lower highs since June with the $3.20 area major support. A break below $3.20 on a weekly basis could lead to a rather fast drop back to $2.40, as there’s little support until that level.”

In the June 7, 2006 edition of the Grandich Letter, I wrote of 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?”

In the July 1, 2006 edition of the Grandich Letter, I wrote of oil:

“I think Iran has moved front and center again as it appears not to be prepared to respond in the timeframe the U.N. and key world powers have given it regarding stopping its enrichment of uranium. Refusal to do so or the appearance can only help underpin oil for now. I suspect if we get a hurricane in the Gulf again, we can see oil spike up and test or make new highs. But if this happens, I would want to be a seller into this as I think come Fall, we can begin to see one of the sharpest falls in oil prices in several years back under $60 by Spring of 2007 (okay send those emails).”

In the July 21, 2006 edition of the Grandich Letter, I wrote of oil:

“I remain convinced that oil is topping out for this cycle. The fact that it failed to make much of a new high despite enormous geopolitical events that most would have bet the ranch it should have made, suggests that once hurricane season passes without another Katrina-type event and the Middle East events don’t blow up, we are likely to see oil back in the low’s 60s to high 50s in 2007-2008.”

In the August 15, 2006 edition of the Grandich Letter, I wrote of oil:

“It’s been my contention that the $75 area is likely the top for oil prices in this economic cycle. Despite the occurrence of numerous factors (that, had they know in advance, most people would’ve bet the ranch would have take oil higher), oil has gone nowhere. While it’s still hard to go short in face of all this, I do believe oil’s next $15 move is down, not up.”

In the September 12, 2006 edition of the Grandich Letter, I wrote of oil:

“Has Oil Peaked?

Much has been written the last couple of years about what is commonly known as the “Peak Oil” theory. Simply put, it suggests that oil production has peaked and will decline going forward at a time when demand would remain very strong. This belief allowed for many predictions of $100 oil. My response since oil traded over $75 was that the theory had validity, but it would be one more economic cycle before the theory turns into reality. When oil was hitting new highs just a month or so ago, I said the next $15 move would be down. I never held myself out as an oil expert. The very fact that I seemed among an extremely small group of prognosticators who were bearish gave me media attention ... just so the numerous bullish forecasters could have even a little balance in the media reports.

Barring a major Katrina-like hurricane or a severe, sharp increase in Middle East hostilities that causes actual oil fields to be attacked, I believe the cycle top has been put in. The difference now is traders should look to sell rallies versus buying dips.”

Okay, first, lets all give yours truly a pat on the back. Ah, that felt good. Hey Anooraq holders, was that a pat or a push? Okay, let’s grab my crystal ball but keep in mind, those who live by the crystal ball end up learning how to eat a lot of broken glass.

Copper –

During my bearish drum beating, I noted that a “fair value for copper was three times its cash cost, which is somewhere between $.65 and $.85 a pound.” I noted this and suggested a downside target of $1.95 to $2.55. We hit the $2.55 and while under $2 is still a reasonable target, I suspect we can minimally see a sideways consolidation and/or a countertrend rally to as high as $3. Since such rallies are strictly selling opportunities, the hot air in the copper bubble is all but gone.

Oil –

Don’t throw away those peak oil arguments, although they may get a little dust on them before they are popular reads again. Since I believe the bulk of the retreat is behind us, I think we should start to plan on how to play the long side again. The best scenario is for oil to break below $50 and down toward $45. That would be a no-brainer buy. However, it’s more likely at the moment we hold $50 and even see a few dollars added to the upside. The wildcard in this is if we continue to go down below $50 from here. I would think there would be one or more hedgefund blow-ups and that could get ugly. The good news is by seeing $75 as the top we have a lot of lead way towards our next move. Stay Tuned.

Uranium –

$100 remains a question of “when?” not “if?” to me. However, as noted on my ROB-TV appearance on January 5^th, uranium stocks were showing early signs of froth and a correction would be a good thing. We had a sharp pullback shortly thereafter and I would sooner see more sideways before going back up sharply. The key is always volume. I don’t mind declines, especially in stocks that had parabolic-like rises, providing volume is quite high.

Mining and Exploration Shares –

Like gold itself, the degree of caution and outright pessimism in mining related shares given where their underlying metal prices are now compared to where they were a few years ago, suggests to me that we aren’t close to any long term top. The American investing public is still virtually out of these types of equities. You can see this at the American-based gold shows. Attendance is very low compared to shows in Canada and the age of the average attended is quite old – suggesting they are leftovers from the 1980 craze and not new, young blood.

-- Posted Monday, 15 January 2007 | 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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