The Gold Report: Peter, in a recent interview you said, “I believe the game is rigged. Not only is the silver market being manipulated, the whole investment world has been rigged.” You suggested that Goldman Sachs and Morgan Stanley were tilting the game in their favor. Does that mean that those firms are responsible for driving up commodity prices across the board?
Peter Grandich: I was trying to emphasize that we are playing in a game that is heavily tilted against us. A classic example is that companies like Goldman, Morgan Stanley and others were selling mortgage-related products to clients while at the same time betting against those very products. Ironically, none of those people has gone to jail.
We are not on a level playing field. One of the main reasons I had been bullish on silver was the belief-a very small minority belief-that silver was manipulated for several years. At that point in time, it was actually helping the price. My call to sell silver was influenced by that manipulation because the price had gotten to such a high level.
TGR: You told investors to sell silver at just less than $50.
PG: Yes, $49.25 at the time. At that time, we did not note selling gold, but we did a week later.
TGR: Do you believe large banks are driving up other commodity prices?
PG: I see two types of manipulation. There is fraudulent manipulation like what happened in silver for a lot of years. I also believe the oil market has been manipulated, but not in a centrally controlled way. A group of people with a lot of money bid up the prices-even though there was no oil shortage.
Commodities in general have risen because they have an underlying strength. Increasing world population creates a need for more commodities that are, in some cases, scarce or declining in supply. Of course, the declining dollar has also driven commodity prices up.
TGR: Do you believe resources, or hard assets as they’re commonly being referred to now, are morphing into a generally accepted asset class like real estate investment trusts, or is the market there yet?
PG: It’s just getting to that point. The legitimization of the sector is deserved and it should have happened years ago. However, it took $1,500/oz. gold and record high silver prices to get investors, money managers and the like to appreciate them as a legitimate asset class.
However, resources may never become popular worldwide. Things like gold and silver are mortal enemies of stocks and bonds over the long term. I don’t expect the general investment community to embrace it as a true asset class. That said, investors are realizing that gold and silver aren’t just for crazy people who think the end of the world is coming. Commodities are not just cyclical or total speculation. Commodity-related stocks are just as good as other classes of stock.
TGR: What mining commodities have the most near- to medium-term potential for price appreciation?
PG: There’s no commodity at this point that could go sharply higher in the near term. But there are some that have washed out and their downside risk should be limited. The first one that comes to mind is uranium. Most of the damage that has come on the heels of Japan is already priced in the stock. There’s limited downside risk, but there may not be a lot of upside yet for a while. I just added several uranium stocks to my Tracking List.
The lithium market also fits that description. Lithium shares had a good wash out after a spectacular rare earth metals blowoff and that’s turning.
Iron ore is interesting because the price is still extremely strong, but the stocks have come back sharply in recent days.
There is also a metal that a lot of investors don’t talk about, but is very strategic: cobalt. Cobalt has become a strategic metal, but we don’t have a lot of access to it.
Copper is still quite attractive long term. I think the days of $0.90 or $1.20/oz. copper are gone. While we still see a 10% decline from here, there’s a lot of value in copper. Copper, while a base metal and more cyclical, is a metal that’s going to be in demand for a long time.
TGR: You outlined three strategies in The Grandich Letter for playing gold and silver in the current market. One was a conservative strategy. One was somewhat speculative. The third was basically gambling.
PG: I’ve always struggled with cookie-cutter advice. Firms advise investors to allocate 30% to this and 20% to that and somehow 100,000 clients all fit into that model? I try to give more choices so individuals can decide where they fit. I gave three ways of approaching what I believed was going to take place for gold and silver.
The most conservative attitude was based on buying gold since it was a little more than $300 and silver was in the low single digits-that’s 400% to 500% gains. You don’t look a gift horse in the mouth. Take the profits.
The middle-of-the-road strategy recognizes that gold and silver have skyrocketed, but you still think gold’s going to $2,000-plus before it’s all over, which I still do. I suggested that investors should sell some silver, but hold on to a significant part of their gold using a scale-up or a scale-down selling program. In this particular case, I suggested that investors take profits in gold at certain levels and as it reached a higher level they should sell a little more and so on.
The final approach, which Wall Street likes to call speculative, but I call gambling, is for those who still think gold and silver can go higher to ride it out.
The last category is for investors who are in gold and silver because they have no trust in paper currencies. They can continue holding precious metals because they’d still be better off than owning the U.S. dollar over time.
TGR: Part of your argument for taking profits on silver and, to a lesser extent, gold, was that May to August is traditionally soft for precious metals. However, we’re seeing growing levels of inflation. Soon QE2 and the Fed buying U.S. treasuries will end. There is ongoing unrest in the Middle East. The U.S. likely rekindled enemy passions when President Obama sanctioned the killing of Osama bin Laden. Could this be the year when gold and silver don’t see an appreciable price decline during the summer months?
PG: Nothing is 100%, but we don’t forget that a significant part of gold demand comes from jewelers-about 65% to 70%. Jewelry fabricators tend to limit purchases of gold until after the summer months. All those things that you pointed out are still there. Investors have to decide if they believe they have already been included in the price. Last week, I advised my readers to totally liquidate silver at $49.25 and a portion of gold holdings at $1,575 to realize profits. This past week, I got back into silver at $35.75 and gold at $1,481 while it is a deal. The good news is that even if there is seasonal weakness, we’ve greatly cushioned ourselves from such a correction.
TGR: How do you think the death of bin Laden will affect gold?
PG: I have no doubt that there’s some person out there who thinks his death is going to lead to a tremendous increase in the amount of terrorism. But an equally compelling argument can be made for his elimination actually lessening those chances. It’s not a reason for buying or selling gold in my book.
TGR: You talk about having a defined exit strategy for the current commodity bull market. What are some of the key elements of a dependable and responsible exit strategy?
PG: One of the most common complaints you hear from investors is that experts always tell you when to buy, but they never tell you when to sell. Whether they tell you or not, there are a couple of things investors need to recognize. Investors shouldn’t be married to their investments. They should consider selling when they can no longer buy something. Investors shouldn’t be flying by the seat of their pants. They need a legitimate exit strategy. Investors need a formal plan with price targets.
TGR: What are your thoughts on the U.S. dollar?
PG: Long term, the U.S. dollar should continue to depreciate. I noted just the other day that we could see a fairly substantial bear market rally on the belief that when the Fed’s quantitative easing formally comes to an end, interest rates are going to tick up. Some might consider the dollar a player now, but it’s terminally ill. Eventually, the U.S. dollar index should break below 70.
This is one of those occurrences that investors need to plan for long term. They need to have some sort of strategy in place and not just go by how they feel emotionally on a particular day.
TGR: It’s been enlightening. Thanks for your time, Peter.
Though he never finished high school, Peter Grandich entered Wall Street in the mid-1980s and within three years was appointed vice president of investment strategy for a leading New York Stock Exchange member firm. He went on to hold positions as a market strategist and a portfolio manager for four hedge funds and a mutual fund that bore his name. Grandich is the founder of Grandich.com and Grandich Publications, and editor of The Grandich Letter, which was first published in 1984. Grandich is a member of the National Association of Christian Financial Consultants, The New York Society of Security Analysts and The Society of Quantitative Analysts.
Article published courtesy of The Gold Report – www.theaureport.com