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Precious Metals Bull Market, We Haven't Seen Anything Yet

Commodities / Gold & Silver 2009 Aug 30, 2009 - 12:41 AM GMT

By: The_Gold_Report


Best Financial Markets Analysis ArticleThe stock market's still on tap for a ferocious fall after Labor Day, claims TraderTracks editor Roger Wiegand—as he told The Gold Report a few months back. The veteran prognosticator doesn't see much to be encouraged about on the global economic front, either, with the engines of growth "melting like snow in July." However, he does see the makings of some "pretty exciting" action in precious metals.

The Gold Report: When we chatted in May, you predicted a major selling event this fall. Is the move that started in mid-August the beginning of that?

Roger Wiegand: No, we're not quite there yet but we see the first glimmerings of an attempted top during this last week of August. I think we have a little more time for the final shares' thrust to the top. There may be room for one more wave up. And, then after Labor Day and moving on into September, we'll hit the spot where we're predicting the big sell. The date we think when markets are going to drop is September 15.

TGR: You also projected that the Dow could rally up to nearly 10,400. Do you still see that happening before September 15?

RW: There's a chance, but I now think 9,800 is more probable. Months ago we said 10,400-10,800, but I give it a 1-in-3 chance for it to rise to 10,400 now.

TGR: When it drops, how low will it go?

RW: In a longer drop, technically on Elliott Wave theory, instead of doing an ABC sideways channel-type correction or going into a continuation triangle; prices can begin selling down in steps and stairs in a full five waves, first on the dailies and then into the weekly. It depends on how severe certain things get—we can't measure that—but technically we could go back to 6,600-7,250 on the Dow this fall.

TGR: What would that mean for worldwide markets?

RW: Well, it's going to be pretty bad. The last time we went through this, the big stock market went down and gold and silver and some of the other markets still had some remaining power and, still earned quite a bit of money. The thing that really irritates me is the fact that people who owned both precious metals and related stocks had to get out of the precious metals. They had to raise cash to cover their other problems. Many have learned from the lesson and this time I don't think they are so far out or so long in a lot of the shares.

The major difference—and this is very important—is the juniors. A handful of juniors are so good that we're almost ready to say, "Just hang on, despite knowing you're going to get hit on the head probably in September-October. You're not going to be able to put your money exactly where you want to, so it may be better to hang on or sell half and keep half and then buy in again after the end of October."

TGR: So you'd be inclined to hold on?

RW: I see three options. You can hold and grit your teeth knowing you might get cut in half. That's pretty typical and I think it could happen. Or you can sell half and keep half, knowing that the half you keep might get cut in half. Or you could sell it all, deal with your tax event if you've had some good gains, and then be careful about when you get back in.

TGR: Either way, you're still expecting a pretty frightful fall?

RW: Yes, traditionally, the stock market has its worst month in September. That's just by the numbers over the years. Now it's a little worse because of what happened last year and fundamental market conditions right now, but those calendar days and cycles still work to some extent. So I think we have a good chance for precious metals shares to take-off and get going again after October 31.

Keep in mind another key date in the fall. The December gold and silver futures for traders usually expire between November 15 and November 25. People sitting with big gains as we approach those dates are probably going to take them, which will knock down both cash prices and December future prices.

TGR: That's pretty dicey timing.

RW: It is a little convoluted going through that period. Probably the safer way to play it is if you're in the shares trading seniors, get out of the way. Especially if you have a lot of premium senior stock; you can exit before the market goes down and park your money in an ETF or cash such as the Canadian dollar—which I like as a longer trade. Then when the stock market comes back, investors and traders can re-enter with the seniors and juniors again. But this September thing looks pretty scary.

TGR: What exactly is making September so scary? And why now after having an incredible rally during summer, which is typically slow?

RW: You know the phrase, "Sell in May, Go Away." Now this year the "Sell in May" thing was tardy. It happened four to six weeks later, which pushed calendar cycles forward.

TGR: How will you know when it's relatively safe to get back into the stock market?

RW: As far as shares are concerned, I would be very guarded about going into anything after Labor Day. The first thing I would work on is an exit strategy. Let's say somebody owned a really top-notch senior stock, made a lot of money and wanted to preserve those gains, but stay in the market—they didn't want to sell. They could either sell half and keep half or keep it all and jam a stop under it really tight, because if a senior stock with big volume starts to go down and hits your stop, at least you'll preserve most of what you've earned. Exit liquidity is strong on the seniors.

The problem lies with the good junior stocks. Their tradability in the middle of a downer is not good. Let's say you pay $1 for a stock and it's now $3. You've made a lot of money. Suppose you put in a stop at $2.80. Come this fall you're liable to get a fill way down lower than what you wanted simply because no one is available to buy those shares. Nobody wants to get in front of a falling knife.

It's difficult, it really is, because we like the juniors for the upside and potential for big gains, so you've got the three choices I mentioned. Quite frankly, if somebody owns a lot of shares in a junior company and has made a lot of money, if I were in those shoes, I'd take the money and be looking immediately to find the re-entry spot for a comeback. Some very, very interesting things are on the table this fall—in the fundamentals, in foreign relations, in government, in credit, in the dollar, in bonds and in international markets. It could get pretty exciting, it really could.

TGR: Many very smart analysts are looking to the BRIC economies to pull the rest of the world out of recession, that these countries' economies will turn first and grow first. Do you share that belief?

RW: I did before, but not now. Things are deteriorating all over the world. The engines of growth are melting like snow in July. Argentina and Brazil have been pretty hot for a time, but they're starting to have problems. Russia is in much worse condition than a lot of people think. Eastern Europe has been very bad during the last four to six months. Many loans they received from Western European banks denominated in Swiss francs are expiring to be recycled and they don't have the credit to recycle them. Most important of all are those massive bubbles we see in Chinese debts, real estate, their shares markets, and severely falling exports to the West.

So if you look around at all these places, where is the engine of growth? Nobody can explain where there's some big power to hold things together. On the other hand, there is some power that can make things move-trade—in the hedge funds and the billions being printed-originated in bonds and dollars in the U.S. Foreigners are getting more skittish but some foreign countries are still investing and trading in New York markets and perhaps the Asian markets. So there's a major divergence between the economy and the stock markets. The stock markets can levitate beyond where the economies are and the economies are sinking.

There are always the exceptions, and the exceptions confuse people. In Brazil, for instance, Ford has a state-of-the-art auto plant that's almost fully automated and running 24/7. It's their finest, most up-to-date factory, but that's an exception as to what's going on in most places. Another exception is that General Motors, despite all their problems and troubles, is selling 150,000 to 180,000 Buicks in China. Since the 1920s, Chinese auto buyers have preferred the American Buick. It's really kind of an anomaly. GM wisely got over there with a factory and built some good Buicks in the '20s. Everybody in China lusted after a Buick. They like the Buicks even better than the Cadillacs. That little paradigm continues today and they're selling Buicks like crazy. I think that's another reason why GM kept the Buick brand. They didn't want to kill that line because they're doing so well with it in China.

TGR: So all of these economies are going to spiral down?

RW: I think they will. It's just degrees and how far they fall. One thing China has in its favor is some organic growth because the economy has grown so quickly. Their standard of living has come up. However, compared to where it was before or compared to the United States, China isn't strong enough to offset all the exported U.S. sales they have lost. The Chinese economy is 25% the size of the U.S. economy. Consider the population of the U.S. at 330 million and China at about 1.4 billion, and that tells you there are still a lot of poor people and unemployed people. Just to stay even, the Chinese have to produce 24 million new jobs a year. It's just impossible. It's just not there.

Bubbles are bubbles; they have a stock market bubble and a real estate bubble, a lot of commercial real estate that's vacant and a lot of overly leveraged projects that aren't going to produce the kind of income stream they expected perhaps three to five years ago.

TGR: On a bit brighter note, let's go back to the precious metals camp. When will gold go above $1,000? And when it does, will it stay?

RW: I think it's important we all watch key numbers for gold. There's pressure at $1,007; that's a hard resistance number. We have to get through there. The next technical number that's very important is $1,032.50. If we can rally past it, it appears we'll start a run-away to the upside. If I see some closes in gold past $1,050, I'm going to be a happy camper. I think at that price we're going to be off and running toward my $1,250–$1,260 forecast for December.

My high call for gold on the December futures has been $1,250–$1,260 for months. I want to stick with that, although some have said it could go into the $1,300s. The pressure is definitely on the upside. You could see it in silver in the last few weeks. Is it selling? Is it correcting? Sure. But we're getting higher lows; we're seeing more pressure toward the buy side in a bias, despite what the calendar is telling us.

TGR: How low would you expect gold to go when we have this market pullback?

RW: Still this month we may see it go as low as $915 to $907. After Labor Day, brokers will come back from the beach and will want to get busy and start buying shares, so things should move up a bit. But I think after a couple of weeks back in the trading saddle, prices are going to hit the wall. When they do, that's the question mark. If the bullion banks don't really crush gold and sell 10,000 or 20,000 short futures contracts when it's at its weak point in the first two weeks of September, chances are it could go into a runaway.

TGR: What do you suppose the bullion banks will do?

RW: If they see gold going to the point where they're going to lose control and they can't stop it, they're going to enter buy positions in front of the rally train because they want to make money. That's when you'd see a quick take-off beyond $1,050. Then somewhere up at around $1,300, $1,400, people are going to say, "We've made enough money." Then price will probably come back to a profit-taking higher low, something like $1,150 or maybe $1,200.

TGR: For those who have cash, how would you play the physical metal versus equities? You mentioned that there are lots of good equities that you'd be inclined to keep and hold.

RW: You want to hold physical, of course. Never mind the prices; just sit and hang on. For this fall event, I have three or four senior companies I like very much, and would hold them to the extent that I could try to get the last nickel out of them, then jam the stops up really tight and then either sell just before they fall down or let the stops take me out. Either way—but that's only on senior stocks. With the junior ones, you've got a different problem, as we discussed.

TGR: What are some of the juniors you like?

RW: We like Bravo Venture Group (TSX.V:BVG), Timmins Gold Corp. (TSX.V:TMM), Eastmain Resources Inc. (TSX:ER), Endeavour Silver Corp. (TSX:EDR) (NYSE.A:EXK), Miranda Gold Corp. (TSX.V:MAD) and then San Gold Corporation (TSX.V:SGR).

We like Hecla Mining Company (NYSE:HL), too. Hecla is a senior, but their price got whacked down so far, it's almost trading like a junior now. I don't know of another similar senior in that kind of a price frame. But Hecla is a big, strong company with a lot of money and they're going to be coming back. That's should be a terrific stock.

TGR: So would you hold Hecla like one of the seniors you like or sell it like a junior that will come back?

RW: I would buy Hecla, hang on, watch it go up some more, push the stop up pretty tight and then see what happens. If you get knocked out, so what? Just wait, let it drop and come back and buy it again. If we see gold up to $1,200 or $1,300, it would not surprise me for Hecla stock to break out beyond $12—to $18, $20, $25. They have an absolutely wonderful gold mine in Mexico in an area where three seniors—Goldcorp (TSX:G) (NYSE:GG), Barrick Gold Corporation (NYSE:ABX) and Newmont Mining Corp. (NYSE:NEM)—and one junior, Canplats Resources Corp. (TSX.V:CPQ), all have strong operations within 50 miles of each other.

And what we like about Canplats is that they located northeast, just beyond these bigger operators, and nailed down some 300 square miles of property adjacent to the region where the big boys are. That's why I think they're going to get picked up. They've got some good things coming.

TGR: Can you summarize your thoughts about Bravo, which you featured in your newsletter a week or so ago?

RW: The company is run by a top-notch smart operator, number one. But, number two, for some reason or other, the stock is very tradable. If you get into a gold rally, Bravo seems to have a trading impetus that goes beyond a lot of the other juniors. Five good juniors may go up a quarter, but then Bravo will rise 50 or 60 cents. They've had some really good rallies, and there's good money to be made in that stock. No question about it.

TGR: You've also featured Miranda quite a few times.

RW: Yes. Miranda is run by a top geologist. They've got small overhead, and they've got money; they're in the right spot. It's one of the real

good ones like Eastmain, but it's going to take a bit of time for it to get a little further down the road. Gold prices are probably going to have to rally beyond $1,050 to really make the stock take off.

But I'll tell you what: If we get a rally in gold and silver beyond these recent highs—say beyond $19 in silver and beyond $1,050 in gold—all these juniors are going to fly. Even some that don't deserve to fly are going to move. Of course, we want to be picky. We want to own three or four senior companies and maybe five to eight juniors, selecting the best and trying to maximize gains.

TGR: You compared Miranda with Eastmain. What makes them "good ones"?

RW: Miranda is in the right spot in Nevada where they should be. Because you can't be everywhere; you might as well try to be in the best places. Canada, Alaska, Northern Mexico and Northeast Nevada are pretty much where we recommend. If you want to be a gold miner, look for the best locations for proven gold mines. Northeast Nevada has had so much gold pulled out of it over the years. So Miranda has the money, the staying power and the geology. The thing that they don't have right now is more partnerships with seniors and a higher price in gold, but we think that's coming.

Eastmain, on the other hand, is a little further along the track in that they have some partnerships with big companies and plenty of cash. They've been very careful with their money, and they're in the really hot spots in Canada. Eastmain will come to a head perhaps even faster than some of the other juniors. It's just really a good company.

TGR: You mentioned Endeavour as well. They are also in silver, too, right?

RW: Yes. We like them. They're somewhat like Eastmain, but they've got different places where they're operating. They've got some good production and are just going to keep adding to what they have.

The key thing we look at with these junior shares is management. If you don't have good management, you don't have anything. They've got to have capital staying power. We prefer a junior that doesn't have to go out and raise a lot of money in this environment to continue operations, and we also like the idea of somebody that's already got a partnership with a big company like Goldcorp.

TGR: Another example?

RW: One of the ones we like is Timmins Gold. That's run by one of the smartest operators I've ever seen. He took an old mine, built it back up, and found secondary and third choice sites that they're expanding into. They rebuilt the whole flagship property for immediate mining operations. That is a junior that's going to turn into a bigger operator. They don't need a partner; they don't need money. They don't need anything from anybody. They're going to pour gold this year. That's going to be a good one, one of the really top-notch companies in the junior field that we think can become an intermediate or larger.

TGR: As far as timing is concerned, what would you suggest if an investor isn't holding these juniors you like now?

RW: If someone came to me with a lot of cash, I would recommend sitting tight for a little while and wait until after September and maybe a few weeks more, then look to buy in and get onto the best part of the forthcoming rally. But historically, the last time this happened, 25 or 30 years ago, if somebody threw darts and picked 20 juniors, as the story goes, they made a 395% gain. Some were complete losers, some made a little bit, and a handful made a bunch—anywhere from 1,000% to 2,000%.

Some people keep screaming diversification and recommend buying several companies. I think it's better to have a small nest and watch the nest. Most of us know who the top two, three or four seniors are. With the juniors, of course, everybody has an opinion, but I've gone through a sifting period for the last five years and think I've got my selection pretty much weeded out. TGR: Any parting words, Roger? RW: One more point I might make. I think 80% of this whole rally in precious metals is ahead of us. It could come this winter, it could be a year from this winter, but we're getting closer and it's going to be very interesting. Everything we have done since 2001 is just opening the door. We haven't seen anything yet.

DISCLOSURE: Roger Wiegand —I personally and/or my family own the following companies mentioned in this interview:I do not own shares in any companies and deliberately trade futures and commodities only to avoid ethical questions.

I personally and/or my family am paid by the following companies mentioned in this interview: None of these companies pay me any fees for recommendations. Some of them do, however, pay a modest one-time fee for reprint rights for using my professional journalist's writings and work.

Roger Wiegand produces the popular Trader Tracks online newsletter, offering investors short-term buy-and-sell recommendations and insights into political and economic factors that drive markets. He has devoted intensive research time to the precious metals, currency, energy and financial markets for more than 17 years. His varied background—a blend of graphics and commercial printing, writing and editing, sales and marketing, consulting and real estate development (from sand and gravel mines to landfills to residential/commercial projects)…and trading—also shapes the views he shares. "TraderRog" also digests various domestic and international publications for economic, political, monetary and market news and commentary that inform his opinions and analyses. Roger is a regular essay contributor to popular websites addressing the commodities markets and is frequently interviewed on radio in the United States and Canada. Roger is a regular speaker at major precious metals and resource conventions in North America.

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    The GOLD Report is Copyright © 2009 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The GOLD Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

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