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Gold & Precious Metals

WORLD’S DUMBEST POLITICIAN & Gold, the Euro and Resource Stock Despair

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Posted by Eric Coffin: HRA Journal

on Friday, 08 June 2012 00:00

"A country that represents less than 2% of the Euro block and a tiny fraction of the world economy continues to be the tail that wags the dog. If it is resolved favourably there should be a fairly strong rally in precious metals prices.   This would translate into gains for juniors though the current level of fear in the market would take time to dissipate."

WORLD’S DUMBEST POLITICIAN

A country that represents less than 2% of the Euro block and a tiny fraction of the world economy continues to be the tail that wags the dog.  We’ll all have to wait until June 17th to see whether Greeks vote with their emotions or with their heads.   Currently it looks like it could be the former, which would not bode well for markets.

 

The US and Germany have both released  decent economic readings but that won’t be enough to overcome fears of yet another debt meltdown unless the Greek vote goes the right way.  Negative news out of Europe pummels the Euro and the correlation between the value of the Euro and commodities is currently very high.  Metals prices aren’t going anywhere until the issue is resolved.

 

If it is resolved favourably there should be a fairly strong rally in precious metals prices.  This would translate into gains for juniors though the current level of fear in the market would take time to dissipate.    If things go well small producers, advanced developers and the occasional strong drill play would get some traction.  Many others will need to rebuild their markets and balance sheets which wouldn’t start until autumn in many cases.

 

Keep an eye on the Euro chart and the polls out of Athens.  It will be a volatile and none too predictable market until the polls close (again).

Everyone has a favorite in this race.  The World’s Dumbest Politician contest never has a lack of entrants and some days it’s tough to choose between all the contenders.   No longer, however.  The events in Greece have lifted one contestant so far above the rest that we simply have to declare him the winner.

You may think this is a reference to Alexis Tsipras, the leader of the left wing Syriza party.  We’ll get to him later.  No, without a doubt the mantle of Dumbest of the Dumb Politicos has to go to Antonis Samaris, the leader of the “winning” New Democracy party in Greece.

You may recall that New Democracy was the party in power in Athens before Pasok which was just voted out.  New Democracy was mainly responsible for cooking the books and hiding deficits (with the help of Goldman Sachs) so that Greece could gain entry into the Eurozone.  

Having been caught out and tossed from office Samaris later agreed to vote with Pasok on the latest bailout agreement. The condition of his agreement was to force an election on the Greek populace rather than have the government of technocrats under the Pasok banner keep running things.

Even though largely responsible for worsening the mess in Greece, New Democracy apparently thought they would get voted back into office with a higher seat count.   Can you say “in denial”?

To give Samaris some credit, he at least has enough sense to understand the repercussions of reneging on the bailout agreement, which is more than can be said for all of the other party leaders other than Pasok. 

Post-election there are now seven parties in parliament and five of them are “anti-bailout” or “anti-austerity” as they would prefer to be called.

The leader of this pack is Tsipras, former communist and student activist who is now the man with the momentum in Greek politics.  This party came in second place on May 6th but more recent polls indicate he’ll be number one in the next election that should take place in mid-June.

In a second vote, Tsipras could leach votes from both minor parties that have little chance of being in government as well as from the two “major” old line parties. Small party leaders eyeing spots in a new coalition after a second vote don’t want to be seen as disagreeing with the probable coalition leader.

Where to from here?   A second election campaign will be dominated by a leader who insists the EU is bluffing when it says Greece could be ejected from the Euro. 

In fact, all anti-austerity parties insist Greece will be keeping the Euro, come what may.  This makes one wonder just how reality challenged these politicians might be.  They seem either incapable of grasping that Euro membership has conditions or are so cynical they are ignoring it.

Canadian readers of a certain age will be familiar with the phrase “sovereignty-association”.  This was the twofaced slogan of the Parti Quebecois during the late 1970’s and early 1980’s. 

The PQ insisted that Quebec would be able to vote for sovereignty and then negotiate an agreement that would give them everything they wanted from Canada.  The wish list included keeping current borders and access to whatever federal programs were advantageous and, of course, continued transfer payments from Ottawa. 

Even those who remember the economic mismanagement of Pierre Trudeau’s administrations appreciate how much of an impact he had on the Quebec sovereignty debate.  As a respected Francophone Quebecer who also happened to be Prime Minister of Canada he was one of the few with the credibility to face down the separatists.  He was able to convince enough Quebecers that the deal PQ followers were dreaming of was just that—a dream. 

It’s unknown if there is someone with similar credibility in Greece, though there seem no obvious candidates.  The Greek electoral system will not allow enough time for someone new to take over either old line party before the next vote.

Polls indicate that 70% of Greeks want the last bailout package to be renegotiated. Ironically, that is exactly the same percentage of respondents that want Athens to do whatever it takes to stay in the Euro.  Clearly, a lot of Greeks hope both of these diametrically opposed agendas can be run in tandem. Is this possible?

An Greek anti-austerity politicians are betting that the last debt workout actually strengthens their hand.  That agreement effectively transferred the bulk of Greek sovereign debt from banks to EU institutions. 

Tispras has alluded to this ownership change but is seriously misreading the situation.  The EU is far more worried about financial system and bond market contagion than it is about taking a write-off itself.  The EU is a large economy.  Writing off $3-400 billion will not be the end of the world as long as the situation is containable. There is more willingness to force Greece out of the EU and take the loss on its debt now than at any time since the crisis erupted.

While the Greeks may still want a free lunch most remember just how much lower the standard of living was before the country joined the Euro block.  Those with even longer memories understand that a return to the Drachma will mean a huge loss of purchasing power and probable bankruptcy for anyone unlucky to have large foreign currency debts. 

All that said, the austerity measures taken by Greece, Spain, Portugal and Ireland are pretty extreme.   It’s easy to watch this unfold from the other side of the Atlantic (or Berlin for that matter) and say “they need to do more”.  To put the situation in perspective, the annual cuts that Athens has pushed through in each of the last two years as a percentage of GDP is five times the level of budget cuts that politicians in Washington could not agree to last August.  It’s true governments in the debtor nations have to do more but you can’t say they aren’t trying. 

Ultimately debtor countries DO need to do more, but cutbacks have reached levels that are extinguishing hope in these countries.  There is real danger a negative growth spiral, which Greece is already in, will make it impossible to balance budgets. 

You can’t fix debt with more debt but it may be time for the creditor countries in Europe to come up with some extra cash for infrastructures programs or something else that generates a bit of hiring.   Money should be focused on the countries that are making structural changes—like Ireland and Spain—in the hopes this lightens the mood some. Getting the debt levels down is obviously critical but making structural changes that make debtor economies more flexible is the only thing that will have a lasting impact.

In the broader Euro Zone, statistics just released indicate that the region scraped by in Q1 with zero growth, avoiding a recession but only just.   That is wholly due to a much stronger performance by Germany which posted 0.5% growth as opposed to the 0.1% consensus estimate.  These figures will sharpen the debate between Germany and France.  Newly elected President Francoise Hollande is demanding a “growth pact” that provide some new spending funded by EU institutions.  

Germans will view today’s figures as a vindication of their fiscal conservatism. There is some truth to that but it’s also arguable that Germany’s success shows the value of an open trading block. Germany is an export powerhouse and the cheap Euro has been a boon to it. Just as the peripheral countries would see their currencies plunge if they went back to pre-Euro days Germany would see its scrip balloon in value. 

This doesn’t belittle Germany’s great strengths when it comes to quality, innovation and its relentless drive for higher productivity.   Those are the long term reasons for its success and qualities other Euro countries need to emulate.  Nonetheless, being in the Euro zone has been very good to Germany and other nation states know this.   Germans have good self-interested reasons to be accommodating, at least to a point.

Gold, the Euro and Resource Stock Despair 

A gold chart would be redundant since the Euro chart on the right says it all.   The next month will be dominated by an unnecessary election in a minor country that represents 2% of the EU economy.

6-7hra

The Euro has been crashing and will swing wildly with every Greek opinion poll until the next election. Yields are rising in Spain and Italy and this trend will continue as long as bond traders expect Greece to be ejected.

Although some European economies are victims of real estate bubbles, many of the region’s troubles are self-inflicted.   The EU has been dithering about how to handle the crises for three years and providing nothing but half measures and stopgap “solutions”.    This has to end or things will continue to get worse before they get better.

As soon as the campaign in Greece restarts the rest of the continent has to make it clear and be unequivocal that the vote is about being inside or outside the Euro zone and nothing else.  Even if there is room to give Greece some breathing space on austerity measures it must be made clear that loosening of conditions will only apply if there is a pro-bailout government.   Even then, Greece may breach some debt covenants before it has time to complete a new vote, assuming that vote results in some sort of coalition.

Many of the debtor nations have been and are making large strides in dealing with their debt overhangs.  The market won’t care about this if bond traders get to play “who’s next?” if there is a Greek exit.   Greece should have been ejected from the EU three years ago. That didn’t happen so northern Europeans and particularly Germans will have to be prepared to do what it takes to hold the zone together or face the consequences.

Most Greek debt is no longer held by banks.  There would be fallout in the swap markets but if the February deal is anything to go by it will be smaller than many fear.   The important thing is to ensure the bond markets for other peripheral countries are protected.   The ECB should be prepared to extend unlimited (and we mean unlimited) buying power in defense of Europe’s bond markets.  It’s far more important t ensure Spanish, Italian and French bonds don’t crash than it is to save Greece.  Tough sledding, but that’s just how things are.

Until there is some visibility in Europe gold and other commodities will track the Euro and resource stocks will continue to see fear and liquidity generating selling.   It’s depressing to see and avoidable problem blow up yet again.  Time really has run out for Greece and for Europe.  Let’s hope cooler heads prevail—very soon.

Ω

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Gold & Precious Metals

“Grandich: Gold Will Take Out Its High From Last Year”

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Posted by Peter Grandich at World Resource Investment Conference

on Thursday, 07 June 2012 00:00

Al Korelin chats with Peter Grandich at the 2012 World Resource Investment Conference in Vancouver BC about the future of gold, the conventional stock markets, and the fed going into a ‘crisis easing mode’.



Gold & Precious Metals

The 88 Yr Old Legend (Bought Below $300) Gold will shoot up to unbelievable prices"

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Posted by Richard Russell - Dow Theory Letters

on Wednesday, 06 June 2012 00:00

"Gold -- I've been thinking more and more about the yellow metal. Price action -- Over the last month gold has had every opportunity to break down below 1500 and undergo a full correction. But it never happened. What the market doesn't do can be as important as what the market does do. Of course, the gold mining stocks underwent a full correction, and many gold "experts" warned that the metal would follow the gold mines down. It never happened, which I took as very bullish for bullion.

In this business, logic and reality usually win out, although sometimes it seems forever before this comes to pass. In the long history of paper fiat money, no fiat currency has ever lasted for long. And this is as it should be. It's illogical, immoral, and against reason that a group of men at a central bank should be able to print or publish wealth at will -- to create wealth out of thin air.

Thus, I am taking it for granted that history will repeat. In due time all of the current fiat money that is being ground out by the various central banks will be footnotes in monetary history. But this won't happen overnight. It may take many months or even years. But while it is happening, intelligent men and women will sense the trend. As the news of the slow death of fiat money becomes accepted, smart investors will be looking for tangible substitutes for the dollars and the euros and the reals that they hold. 

Already this is happening; we can see it in the astounding prices certain works of art are selling for. It's happening in many areas. Babe Ruth's 1934 uniform just sold for $400,000. Diamond prices are up 35% over the last few years. Classic cars are being auctioned off in the millions of fiat dollars. In dozens of areas, tangible items are being purchased at outrageous prices. Munch's pastel work, "The Scream," just sold at auction for $110 million dollars, a record.

I believe that gold is far behind the game. Gold has been recognized as a medium of purchasing power for five thousand years. Most of Asia understands gold, but decades of anti-gold propaganda has turned Americans against bullion. Proof -- try to pay for your next restaurant dinner with a one-ounce gold krugerrand.

This is starting to change. For ten years running, the price of gold has pushed higher. Even this remarkable record has not changed US sentiment towards gold. 

Gold is in a classic bull market. I think gold is in its second psychological phase.The second is the longest phase of a bull market. It's the phase where the public slowly becomes interested in an item.

I believe that the third sentiment phase for gold lies ahead. In the third phase the public finally turns bullish, then more bullish, and finally all-out insanely bullish.

What will be the signs of the third phase of the gold bull market? First, new inflation adjusted highs in the price of gold (gold above $6,200). Next, gold will be the focus of every conversation; it will become THE talk at parties and wherever people gather together. Next, gold coins and bars will disappear. The coin dealers will be out of gold and will start touting silver and platinum (the prices of which will be rocketing higher). Finally, the naysayers will start warning of a "gold bubble." But their warnings will be early. The price of gold will shoot up to unbelievable prices."

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Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron's during the late-'50s through the '90s. Through Barron's and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-'66 bull market. And almost to the day he called the bottom of the great 1972-'74 bear market, and the beginning of the great bull market which started in December 1974.

The Letters, published every three weeks, cover the US stock market, foreign markets, bonds, precious metals, commodities, economics --plus Russell's widely-followed comments and observations and stock market philosophy.

In 1989 Russell took over Julian Snyder's well-known advisory service, "International Moneyline", a service which Mr. Synder ran from Switzerland. Then, in 1998 Russell took over the Zweig Forecast from famed market analyst, Martin Zweig. Russell has written articles and been quoted in such publications as Bloomberg magazine, Barron's, Time, Newsweek, Money Magazine, the Wall Street Journal, the New York Times, Reuters, and others. Subscribers to Dow Theory Letters number over 12,000, hailing from all 50 states and dozens of overseas counties.

A native New Yorker (born in 1924) Russell has lived through depressions and booms, through good times and bad, through war and peace. He was educated at Rutgers and received his BA at NYU. Russell flew as a combat bombardier on B-25 Mitchell Bombers with the 12th Air Force during World War II.

One of the favorite features of the Letter is Russell's daily Primary Trend Index (PTI), which is a proprietary index which has been included in the Letters since 1971. The PTI has been an amazingly accurate and useful guide to the trend of the market, and it often actually differs with Russell's opinions. But Russell always defers to his PTI. Says Russell, "The PTI is a lot smarter than I am. It's a great ego-deflator, as far as I'm concerned, and I've learned never to fight it."

Letters are published and mailed every three weeks. We offer a TRIAL (two consecutive up-to-date issues) for $1.00 (same price that was originally charged in 1958). Trials, please one time only. Mail your $1.00 check to: Dow Theory Letters, PO Box 1759, La Jolla, CA 92038 (annual cost of a subscription is $300, tax deductible if ordered through your business).

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Gold & Precious Metals

Gold and Dow Flash the Same Warning Signal

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Posted by Greg Hunter: USA Watchdog

on Tuesday, 05 June 2012 07:13

On Friday, both gold and the Dow flashed the same warning signal—the economy is in deep trouble.  The Dow plunged nearly 275 points on the news of a weak jobs report, and gold rocketed higher by $66 on speculation global bankers are going to print money to resuscitate a dying financial system.  You do not get this kind of tandem move in opposite directions by coincident.  Last week, both the stock and gold markets appeared to stop pretending and acknowledged the vortex of debt and insolvency that could suck us all into a black hole.

Renowned gold expert Jim Sinclair of JSMineset.com said Friday, “Those popular gold writers calling for much lower gold prices are simply out of their mind and disconnected from reality.” 

....read more HERE

Picture 1



Gold & Precious Metals

The Ultimate Gold Bull vs. The Muted Bear

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Posted by The Gold Report

on Monday, 04 June 2012 08:05

Is gold preparing for another shot up to $2,500/ounce heights or on the way down after being overbought? In this exclusive interview with The Gold Report, two respected names in the investing world share their arguments for what could happen in the coming years and how to profit from it. Financial Adviser Peter Grandich predicts a lot more upside while AlphaNorth Asset Management Chief Investment Officer Steve Palmer has a more cautious outlook on the shiny metal. Where are you putting your money?

The Mother of All Gold Bulls
The Gold ReportPeter, you have called this the mother of all gold bull markets and predicted $2,500/ounce (oz) gold prices. What is driving the price of gold? Is it China's growth? Is it a weak U.S. dollar? Is it global fears? Is it central bank currency printing? What's going on?

Peter Grandich: This mother of all gold bull markets was built on a foundation of dramatic changes in the gold market itself that began in earnest 10 years ago and propelled it up to where it is now. First, two significant negatives turned into positives. The gold market had basically capped due to constant central bank selling and producers being aggressive forward sellers of future gold production. However, starting with the Washington Accord in 1999, the central banks dramatically changed direction and agreed to limit gold sales. In fact, in the last two years the central banks have actually become net buyers. At the same time, gold producers have made hedging a thing of the past. Hedging has really become a four-letter word among investors.

TGR: What convinced companies to stop forward-selling their production?

PG: The gold market finally started to rise and people realized that companies that were hedging were making less money than companies that were not hedging. In the '80s and '90s, the old American Barrick was almost a commodities trading house rather than a gold producer because it used the hedging derivatives to make money. But the great mother bull market made that counterproductive and investors began to shy away from any company that pre-sold gold.

The other factor fueling the bull market for gold is the introduction of exchange traded funds (ETFs). They brought in an enormous amount of new gold buying. In the '80s and '90s, institutional investors found it cumbersome to take a large position in gold. Physical gold purchasing was not only expensive, it involved storage costs and carrying costs. People tried to use mining shares as a proxy until they realized that when the market went down, mining shares went down with it. ETFs allow people to have direct exposure to the gold price. ETFs also offer tremendous liquidity and the ability to sell at reduced costs intraday.

Central bank gold selling, lack of hedging and the creation of ETFs are the main reasons why the gold bull market has done what it has done. The gold permabears who have not recognized these changes have missed out.

TGR: Will those conditions continue?

PG: There is no sign of change. In fact, despite the permabears cries to the contrary, we saw in the first quarter that central banks continued to be net buyers. I suspect that when the second quarter is over, we will see that central banks stepped up again as buyers.

TGR: So, why are you predicting $2,500/oz? Why not $2,000/oz or $5,000/oz or $10,000/oz?

PG: I'm actually not a big fan of a target number. I'm more interested in the direction of the gold price. My feeling during this price rise has been that gold will eventually reach not only a nominal new high in price, but an inflation-adjusted, all-time high. Right now that is somewhere in the $2,300-2,500/oz area depending on what factor you use for an inflation rate. And, that's what I think is the minimum target that we can look for before this great bull market even comes close to an end.

TGR: How do you respond to people who say that gold doesn't really have any value, that it's not an industrial metal and its value is arbitrary?

PG: I give them a very simple answer. I have thousands of years of history on my side. Mankind, for whatever reason, over thousands of years has seen many paper currencies come and go. Regardless of the economic framework, gold was used to buy the things that were important while other means of value went by the wayside.

A hundred years ago an ounce of gold bought a good man's suit and it still does. There isn't really anything else I could point to, financial assets or oil, wheat or any other commodity that has managed to do that. So, I think it's absurd when people say gold doesn't have value.

TGR: What about the people who say it's in a bubble? How will you know when gold is overbought? What are some indicators that you watch?

PG: The definition of a bubble of any kind is when so many people have gotten so involved in something that it has been driven beyond any reasonable price. This gold market has surprised us in how high it has gotten with so few members of the general public and the professional community investing in it, particularly in North America. If this is a bubble, bring more on for me because there just aren't enough people participating in this. The only bubble I see is in the number of people predicting the end of the gold bull market. That is overloaded. Gold is not.

TGR: Well, it sounds like you are definitely bullish on the gold commodity price, but what about equities? Are equity valuations too low or too high based on where the gold price is now and where it could go?

PG: There has been a dramatic change on the equity side with some bearish developments. I'll go through them with you.

The first change as we discussed was the shift to ETFs for exposure to the gold price. The single biggest change, particularly in the junior resource sector, has been the adjustment in the financial industry from a commission-driven business to an asset-gathering business. A decade ago, thousands of so-called financial stockbrokers built their books of business on buying and selling individual stocks. Some of them specialized in mining shares. Each one would have 100 to 500 or 1,000 clients. That created a market for mining and exploration companies to get exposure to the end-user. That is all but gone now. Most people in the financial industry today are asset gatherers. They gather an asset, turn it over to a third party money manager and the individuals no longer buy or sell or recommend individual stocks. That has been the single biggest hit to our market.

The other thing that changed dramatically is the regulatory and compliance environment. In North America, the NI 43-101 rule required companies to follow specific reporting guidelines in order to classify exactly what kind of reserves or potential reserves they may have. Before that went into effect, companies could almost say anything, sizzle their story into looking like steak if you will. While it was a good change in many ways, it also removed all the sizzle. Companies are now very limited to how they can describe their resource, thus limiting some stock price growth.

The regulatory end changed as well. In the United States, it's almost impossible to find a brokerage firm that would allow solicited or even unsolicited orders on stocks that are not trading on the major markets, the New York Stock Exchange or the NASDAQ. Even though the Toronto Stock Exchange may be the fourth or fifth biggest exchange in the world, it's very difficult for U.S. investors and the investment community to buy and sell stocks that trade there because compliance departments don't allow it any more.

The holding time for private placement is something else that has changed. Private placements are the life blood to the junior resource market. It is where companies raise money to continue drilling and exploring. When I first entered the business, placements came with a two-year hold. Then it became a one-year hold and now it is only four months. A four-month hold brings more paper into the public trading market faster than most companies can demonstrate results. Therefore, it has become a depressant because that stock is getting ahead of company growth.

Add to the challenging equity picture the emergence of discount brokerages. Many individuals can literally trade for a penny or two share movement and make money. Before people had to have a 10% or 20% move in the stock before they would even consider taking profits. Now they think nothing of trading multiple times a day.

Throw in the political difficulties that mining companies have around the world, environmental and now even labor shortages, and you can see why there is a disconnect. Those are some of the reasons why even though we have had a three-, five- or even sometimes tenfold increase in underlying metal prices over the last couple of decades, but it is far more difficult now for the typical mining company to realize increased stock prices. It is far more difficult today for the typical mining exploration company than in any other time in the 30 years that I have been around them.

TGR: Do you see that changing? How will the demand for gold be fulfilled if it isn't profitable to pull it out of the ground?

PG: That is going to be a challenge. The bears have predicted that 80% of juniors are going to be wiped out because the gold price is going to go so low. That would mean 80% of the gold that might have been found will not be. That would actually improve the fundamentals for the gold price by decreasing supply.

What will happen is what happens in all cycles. Juniors don't really die. They become born again. They recapitalize. They change names. They may even change properties. But they never truly die.

The world is going to need new cars and electronics and that will require metal and energy and mining companies to find those materials. More than 80% of metals found in the world are found by small companies. If they are not around, who is going to discover the ore to build the world of tomorrow? That is why I still maintain a very bullish attitude toward commodities in general.

Add in the pressure for a store of value safe from increasing world debt and political turmoil and you have a strong argument for gold. So, it's not because I wear a tinfoil hat or sell log cabins or dry food that I'm bullish on gold. I'm bullish on gold because all the fundamentals point toward it still going dramatically higher.

TGR: If the juniors are having trouble finding love in the stock market during these record-high gold commodity prices, what about the producers? Are they reaping the benefits of a higher gold price?

PG: Not to the extent that they should be in the short term, but I know it will be all right long term. My bellwether is Barrick Gold Corp. (ABX:TSX; ABX:NYSE). It has gotten to a single digit price-to-earnings ratio. This was unimaginable when I first entered the business because mining shares traded anywhere from 30 to 50 multiples. When a major producer is below a general market multiple, but continues to do well on the corporate side, that is where the undervalue is in the general market. So, I think we're pretty well done in this corrective/bear market phase for mining shares. People have priced companies to a level where gold might have been 10 or 15 years ago. So, either the gold price has to come way down to match that or these things have been way overdone on the downside. I'm in the latter camp.

TGR: Do you have a bellwether for the juniors if Barrick is your bellwether for the producers?

PG: It is a much more difficult environment for the mining and exploration business than it was 20 years ago, even though the metals themselves have gone up a lot. Throw in all the political risk and the environmental, social, economic and financial challenges and I would have to say, "If I had a child I wouldn't want it to be a junior resource company because it has so many things going against it." So many good juniors like Sunridge Gold Corp. (SGC:TSX.V) have net asset values at multiples of their market cap. But those things happen at the bottoms of markets, not the top. The first focus of the market when it rebounds is on the companies that got way overdone. There will suddenly be a recognition that not only will they survive, but they will prosper because there will be less overall competition.

Sunridge is a classic case. It has positive news with new studies, a feasibility study and lots of new value created. There are lots of Sunridges out there. That is why I believe anyone who thinks there is a lot more to the downside in the junior market is badly mistaken.

Let me be clear: I do not expect a V bottom. I'm looking for an L bottom. We won't go dramatically up and it will take several months for confidence to build again through mergers and recapitalization.

TGR: You started trading more than 30 years ago. You have been through the wild ride of the '80s and '90s. What is the best advice you've ever received?

PG: Hope is a wonderful spiritual personal strategy to have because without it, it's very difficult to live. But, hope is a horrible investment strategy. When all you have is the hope something is going to get better or if I hope I get my money back rather than relying on fundamental and/or technical factors to justify that hope, then it's a very poor investment strategy.

The ultimate crime in investing is not being wrong, it's staying wrong. I had to look at myself in the mirror a couple of weeks ago and say, have I made that mistake? Have things really changed in the metals and mining industry? Have I ignored the facts because I make a living in the market? Do I need to stop being wrong? I made a conscious decision after evaluating everything that this was just another of the corrections that occur. That isn't hope. That is reality.

A Muted View
TGR: Steve, your AlphaNorth Partners Fund is a long-biased, small-cap hedge fund focused on Canadian companies. You've been on the buy side since 1997 and adjust your outlook and portfolio based on fundamental and technical analyses. In the last year, you have shifted to a more bearish outlook on gold and bullish outlook on equities. What changed your mind?

Steve Palmer: I've had a relatively muted view on gold for a couple of years now, not so much anymore though given the underperformance of both bullion and gold equities over the past couple of quarters. I'm not so much negative right now but, rather, I believe that there are better opportunities to invest in. So, in terms of new companies to invest in, the last sector that I would be looking in would be gold.

TGR: Is there some technical indicator on which that conclusion is based?

SP: I noticed that almost all investors had become unanimously bullish on gold, so sentiment was at an extreme. It's not quite as bad now with the underperformance in the last couple of quarters. But everybody you talked to was bullish on gold, and if you didn't think gold was going to multi-thousand dollars per ounce, they stared at you like you were from outer space.

The valuations of gold stocks were way out of line with other resource companies. They have underperformed considerably of late though, so that's more in line now. But it used to be that companies like Goldcorp Inc. (G:TSX; GG:NYSE) and Barrick Gold would trade at 30x earnings while Teck Resources Ltd. (TCK:NYSE; TCK.A:TSX) and Alcan Inc. [purchased by Rio Tinto (RIO:NYSE) in 2008] would trade at 9x earnings. That didn't make any sense to me. That valuation discrepancy has largely been corrected at this point, so I'm not as negative on those anymore.

That leaves two reasons why I remain not bullish on gold. There is still a lot of retail money that believes in gold as something that they need to own to protect against whatever is going to happen—inflation, deflation, death, whatever. It seems to be a cure-all for everything. The supply-demand picture on gold is not favorable. It's the retail money that has basically propped up the gold price, all the ETFs that have been created to hoard gold. I saw some data that investment demand over the last 10 years has increased 17% while total demand for gold is up only 1%. So that implies that fabrication demand, a real end-use demand, for gold is negative, negative 20% over that time. If you took away the investment demand, the picture for gold would be a totally different story. We've seen many times before how retail piles into an asset class, creates a bit of a bubble and when it gets out, it causes significant correction.

TGR: What do you think is a reasonable price for gold?

SP: I don't know. Because there are so many factors and variables, it would just be guesswork. It all depends on what the sentiment of the retail investment does that's going to drag gold. I don't know the timing of that. So I use technical analysis to predict shorter-term swings. I know there will be a big bust in gold at some point, but I don't know when it's going to occur.

I think it will still go up this year along with the other commodities, but it's unclear what will prompt the big downturn in gold. I would imagine at some point, if the equity markets are generating decent returns as I think they will, investors will re-evaluate their portfolios and wonder why they're holding gold, which is only costing them money because it doesn't generate any return like a bond or a stock with a dividend. It just costs money to store it.

TGR: When you say a big bust, how big of a dip could it be?

SP: It could be in half. A few months ago we saw gold drop $100/oz in one day. That just gives you a sampling of what could happen when things unwind.

TGR: What impact will any quantitative easing (QE) 3 or inflation have on your projection?

SP: In the short term, the markets believe that QE3 will be positive for gold. It remains to be seen whether QE3 happens or not. It would be beneficial to gold over the following few months if it were to occur.

TGR: You've called your "muted" view on gold an out-front, lonely maneuver, quoting Army Colonel John Masters: "Only if you are far enough ahead to be at risk do you have a chance for large rewards." How far ahead do you try to go?

SP: Not too far. Time is often the most difficult component to predict. In my mind, there is no question that there will be a big down-move in gold. It's just getting the timing right that is difficult. So I don't put on positions, hoping for something like that, waiting two to three years for it to happen because a lot can happen in the shorter term. On occasion when the technicals looked very unfavorable, we have shorted it.

TGR: Are you short gold now?

SP: Currently, we are not short. I don't think a collapse is going to happen this year.

TGR: You mentioned that one of the signs that gold was overvalued is that everyone was investing in gold. Do you consider yourself a contrarian?

SP: Yes. I try to be whenever possible because that speaks to that quote you just mentioned. If you're always doing the same thing as everyone else, you're not going to stand out in terms of performance. You're just going to generate the same returns as everyone else.

TGR: Has it been working for you?

SP: So far it has been working, yes.

TGR: What were your returns last year?

SP: Last year, we were +2.4% in the AlphaNorth Partners Fund. The Toronto Stock Exchange Venture Index was -35% and most of the small caps were negative for the year, so I consider that a big win.

TGR: In December 2011, you said, "Our strategy of avoiding the precious metals sector has added value over the last couple of quarters as gold and silver remain entrenched in the downtrend. Both of these commodities peaked in the summer and have continued to hit new lows since that time. We prefer to invest in other sectors with more favorable supply-demand fundamentals." It looks as if you've reduced your precious metals holdings from 11% to 6% of your holdings, but you still hold 20% in industrial metals. Are you more upbeat about copper and nickel?

SP: Yes, I am.

TGR: Why is that?

SP: Gold is not really used for any meaningful purpose other than jewelry, which is not a critical item, whereas many of these other commodities are. Once you use oil or copper, it is gone. Gold just sits around.

TGR: So are those industrial metals more dependent on global economic trends?

SP: Yes. The biggest factor would be Chinese growth.

TGR: Are you worried about slower growth in Asia?

SP: I think the concern over Chinese growth rates is overblown in the short term. I find it funny that the concern a few months ago was inflation in China. Inflation was getting out of control, so the government instituted some policies to control the growth and make sure inflation didn't become a problem. It was successful, but now everyone is complaining about the growth slowdown.

TGR: Other than industrial metals, what sectors do you see as more favorable and why?

SP: I have been focusing on the energy sector, the major base metals, specialty metals like graphite—those stocks have all been performing very well lately—iron ore, coal, all those types of commodities. The supply-demand outlook is much more favorable. You don't have a looming potential risk of all of the retail money unwinding out of the ETFs.

TGR: If you were to give our readers some investing advice for the rest of 2012, what would that be?

SP: I view this year as the time to buy on weakness. Don't get whipped by the headlines about the end of the world. There are always problems. When the news is bad is the time you should be adding to positions. Once these positions have a significant move as we saw from October to January, when the Standard & Poor's index was up over 20%, you should take some money off the table.

Financial Adviser and Market Analyst Peter Grandich started publishing The Grandich Letter—now a blog—without a high school diploma or even a day of formal training. His ability to interpret and forecast financial happenings, which once earned him the moniker "Wall Street Whiz Kid," has led to hundreds of media interviews. He is regarded as one of the world's foremost market strategists. He's also published a new book called Confessions of a Wall Street Whiz Kid.

Steve Palmer is a founding partner and chief investment officer of AlphaNorth Asset Management. Prior to founding AlphaNorth in 2007, he was employed at Canadian Equities, one of the world's largest financial institutions, as vice president where he managed the Canadian equity assets of approximately $350 million. Palmer managed a pooled fund, which focused on Canadian small-capitalization companies from its inception to August 2007, achieving returns that were ranked #1 in performance by a major fund ranking service in their small-cap, pooled-fund category. He also managed a large-cap fund, which ranked in the first quartile of performance among other Canadian equity pooled funds. From 1997–1998, Palmer was employed as a portfolio manager at a high-net-worth investment boutique. Palmer earned a bachelor's degree in economics from the University of Western Ontario and is a Chartered Financial Analyst.

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