By Andrew Mickey, Q1 Publishing

They call it “burying” in Washington, D.C.

It’s when you release politically unsavory news on Friday evening. Most folks just aren’t paying attention on Fridays and by the time next week’s news cycle comes around, the mainstream media has already moved onto something new.

The ultimate “burying” days are just before holidays. This past Christmas Eve was no different.

While millions of Americans were traveling, getting together with their families, or crossing off the final names on their shopping list, the U.S. Treasury “buried” its latest addition to the unpopular bailouts for Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE).

On Christmas Eve the Treasury announced it would cover an unlimited amount of mortgage losses at Fannie and Freddie through 2012.

The real bad news, which nobody really talked about, is they’re going to need it and there are a small group of investors turning the bailout bonanza into their own gain (and you can to, more below).

This Trend is not Your Friend

The Treasury’s cap was originally set at $400 billion. Considering the Treasury has pumped $111 billion into Fannie and Freddie so far, there was still $289 left in the till.

That would seem like enough at this point, given the “recovery” and all. But it probably won’t be.

Take a look at the 10-year chart of Fannie Mae delinquency rates from Calculated Risk:

The chart, which would make even the most creative global warming climate change alarmist envious, shows there are a lot more losses ahead for Fannie and Freddie.

Almost 5% of Fannie Mae’s single family mortgages were officially delinquent at last report. The problem is the trend is still up. And it’s likely to keep going up because once all the government assistance - tax rebates, artificially depressed interest rates, and guarantees on 9 out of 10 mortgages – housing prices should be back on their natural course. And after such a tremendous bubble, the natural course would be much lower.

However, all is not lost. Government intervention always has unintended consequences. This time is no different.

The Winners and the Losers

One of the biggest reasons for removing the cap on the Fannie and Freddie loan losses was to appease the largest buyers of Fannie and Freddie bonds – China and Japan.

The government wants them to keep buying the bonds to help keep interest rates down and housing prices up. And removing the cap was a signal all would be ok for bondholders, regardless of the eventual cost to the taxpayer.

The thing is though Fannie and Freddie bonds, although backed by the U.S. Treasury, are still paying more than Treasuries. As I write, the yield on a 10-year agency bonds is 4.31%. That’s 0.61% more than the yield on the 10-year Treasury bond of 3.8%.

That may not sound like much, but a few entrepreneurial companies have found ways to exploit the difference between the yields. And they’re paying shareholders as much as 16% per year.

In a low interest rate, low economic growth environment, there aren’t many opportunities. But a 16% yield all backed by the U.S. government is a definite opportunity.

That’s why with the Treasury now fully behind Fannie and Freddie, whatever the costs, we see a genuine opportunity in the high yield stocks which are taking government meddling in stride and turning it all into hefty dividends for their shareholders.

The government may try to “bury” all sorts of news, but they’ll never get it past everyone.

Good investing,

 

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

By Andrew Mickey, Q1 Publishing

The much anticipated gold correction hit faster than most expected.

After weeks of eerily consistent gains, gold is now shedding anywhere from $20 to $50 on the down days and struggling to post $10 upticks on short-lived rebounds.

On top of that, the U.S. dollar is showing its first signs of strength in months.

The new trend in gold is down. And as you might expect, the short-sighted “hot money” is finding all the reasons they can to justify selling gold.

But as you’ll see in a moment, there’s one real reason it’s still way too early to be betting against gold.

The Mainstream Goes With the Flow

All the warnings signs were there. Gold just got too hot. A healthy correction was imminent.

As of right now, gold at $1100 an ounce has done just that – corrected. It’s down 10%.

Here’s the thing though. Since gold prices have fallen, almost everyone is jumping on board to find reasons why gold is going down.

One of the “best” cases against gold came from a recent report from everyone’s favorite, nearly-nationalized lender, Citigroup (NYSE:C).

In a recent research report, Citigroup proposes, “There is no obvious relationship between the gold price and inflation.”

The firm points to the chart below as evidence:

OK, the chart does show a poor correlation between the ultimate inflation hedge and inflation. Of course, the chart conveniently starts in 1987 and the biggest divergence comes from the credit crunch, when forced selling caused all sorts of market anomolies.

Forget about inflation though. It’s only one piece of the gold puzzle.

There’s something else at work in the gold market, something most investors will miss, but is crucially important.

The “Real” Reason for Gold’s Rise

The main driver for gold prices is real interest rates.

Real interest rates are calculated by taking the nominal rate of interest (what is actually paid) and subtracting inflation.

Right now real interest rates are negative. They’re below zero. And the impact of negative real interest rates is always the same, asset bubble.

You see, when real interest rates are below zero, cash and short-term investments lose money. In this environment it’s nearly impossible to find decent yields. That’s why savings accounts, CDs, and bonds are paying next to nothing. As a result, savers and investors are forced to turn to other assets which offer return above inflation.

Historically, when real interest rates are negative, they turn to gold.

As you can see, there is a strong relationship between real interest rates and gold prices.

When real interest rates are negative, gold goes up. When real interest rates are positive, gold goes down.

The key thing is though, how long real interest rates can stay negative. Because, as long as real rates are negative, more and more investors will turn to gold.

For instance, in the 70s gold boom, gold’s ultimate high was determined not necessarily by how low real interest rates fell, but how long they stayed there. And the big gold correction in the mid-70s came when real interest rates were trending back towards positive territory.

That’s what’s going on right now. There’s a real expectation the Fed will raise rates next year which would push real rates higher.

That makes sense on paper, but only if you forget the wave of adjustable rate mortgage (ARM) resets, stubbornly high unemployment, and the most important variable the Fed is watching most closely.

Bernanke’s Hands are Tied

At this point, there’s no way the Fed can raise rates. Sure, it could take them up a quarter or a half point, but it will not do much more than that.

Over the past two years we’ve watched natural deflationary forces in action. The Fed’s response has been to slash short-term interest rates to zero and depress long-term interest rates as much as it can. Meanwhile, the official inflation rate is starting to increase and, depending on the source, the actual rate of inflation is much higher.

Basically, we’re going to be in a negative interest rate environment for the foreseeable future. And extended periods of low and/or negative real interest rates have always led to asset bubbles. Recently, low rates were key drivers of the tech bubble and the real estate bubble. Now, with little economic opportunity, more and more investors will probably find the luster of gold too enticing.

So while the mainstream focuses on inflation, they’re missing the real catalyst for gold’s recent correction to be looked back upon as exactly that – a correction and a buying opportunity.

Good investing,

 

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

By Andrew Mickey, Q1 Publishing

True contrarians should have employment on their minds.

Right now everyone is calling for unemployment to stay high for a long time. Bloomberg’s latest survey economist puts the median forecast for unemployment to stay above 10% for 2010. 

I’m sure if Irving Fisher were alive today, he’d say unemployment has “reached a permanently high plateau.”

But over the weekend, Larry Summers, the Director of the National Economic Council, made a bold prediction on unemployment. He said, “By spring employment growth will start to turn positive.”

Now, the call seems like a bold one only a contrarian could seriously consider, but in actuality it is near certain the employment numbers are about to get a lot better very quickly.

You see, 2010 is a census year and that means lots of jobs. Temporary jobs, granted, but they will reduce the unemployment rolls.

According to the Census Bureau, approximately 1.4 million people will be hired to conduct the 2010 Census. About 700,000 of them will be classified as enumerators – the people who actually do the counting.

Considering census questionnaires need to be mailed in by April and the enumerators start hitting the pavement to count the folks who didn’t mail in their questionnaire, there’s still a lot of “positive job growth” to come from the Census Bureau in the months to come.

That’s why, even if the real economy fails to create any job growth, it will appear that is has on the surface as the Census bureau ramps up its staff.

In the end, the unemployment situation will not improve until businesses get some certainty over what their costs will be (healthcare, energy, taxes, etc.).

Over the near-term, however, we expect a noticeable increase in employment (and one that’s excessively pointed to by politicians).

That’s why, in our free contrarian investing newsletter, the Prosperity Dispatch, we foresee the combination of everyone expecting the unemployment to stay and the Census Bureau’s hiring spree are clear catalysts for a surprising turn in the short-term.

Good investing,

 

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

By Julian Phillips

This is a snippet from a recent issue of the Gold Forecaster with

 Subscriber-only parts excluded. We will not disclose our forecasts on the gold price except to Subscribers.

A change of market - Understanding fundamentals

We have talked about a complete change of tone and shape in the market place in the last few weeks that has altered the future of gold.   It has taken 10 years for this to happen, but it is here at last.  

Conditions when gold last peaked

When gold was floated off from the $ and the U.S. refused to exchange U.S. dollars for gold, gold was considered to be money, still.   The message didn’t sink in to the public for some years.   The gold price rose from $42.35 to $850 in a series of neat moves.   But all Central Banks had subscribed to the U.S. inspired change in the monetary scene before it hit $100..   No, they didn’t accept the Special Drawing Right of the I.M.F., but they did accept the $ as the sole global reserve currency when it became apparent that this was the only currency they could use to buy oil with.  

First the U.S. sold gold, then the I.M.F. both sales failing to discourage investors, but the campaign was then changed to accelerated sales of gold from producers to overwhelm keen buyers, which it did successfully [through a scheme to lend producers gold ahead of new production of gold, with which they repaid the loan.    Quite a time before the gold priced peaked at $850 investors became wary of buying gold shares, letting the bullion price run by itself, to the peak.   Gold shares and bullion were considered very acceptable institutional investments by all ahead of this change.

Gold itself gradually went off investor’s screens and into the shadows as a barbarous relic.   It took years before the world accepted the fact that central bankers, including European ones, were against gold and were following policies that undermined the gold price.   Even gold shares were treated with disdain.   For the next 15 years gold from around 1985 gold was sidelined.

Conditions now

The negative perception and undercurrent of potential central bank sales militated against a rise in the gold price. This situation lasted right up until 1999 and the announcement of the “Washington Agreement”.   Oddly enough this was an Agreement to sell gold by European Bankers [they had not done this before] but turned the gold price around to the positive side.   At the time the gold price was at $275.   From there it slowly rose.   What changed the scene?  

It was the statement that gold was a valued reserve asset in the eyes of central banks and that the sales were limited to specific quantities.   This immediately removed the perception that gold sales would continue until all central bank held gold would be sold into the ‘open market’.   Supply could then be measured accurately.  

It was clear that demand could now overcome supply eventually.   Producers slowly realized that the days of falling gold price were over and they were vulnerable to losses, [through the scheme that accelerated gold production] if gold prices rose above the proceeds they hoped to achieve over years from their previously hedged positions.   They started buying gold to cover their exposures.

But just as the market took a very long time to realize gold prices were going to go down, again the market has taken nearly 10 years to realize that gold was coming back onto investor’s screens.   With the three central bank gold agreements still in front of us, the common perception still remains that central bank’s are sellers.   It has taken most of this year for the market to accept that central banks have stopped selling and are now net buyers.  

Institutional acceptance from central banks through Sovereign Wealth funds through the many types of funds down to individuals, is now gold’s path into the future.   The implications of this for the gold price are enormous.   These changes must form the foundation of our approach to gold from now on, with all other factors affecting gold subordinated to this.    Right now Asia is leading the way in this appreciation.

Adjustments to ratios influencing the gold price.

The Oil price

Some analysts in the past took the performance of the oil price as a direct guide to coming gold prices.   We have believed that at best its influence was and still is indirect.   It pointed a general direction when growth and speculation, prior to August 2007 was such that the oil price rocketed to $145 a barrel.   As the bubble popped the oil price fell back to $35 a barrel, but gold didn’t fall.   Now with Russia trying to sell as much as it can and O.P.E.C. keen to hold prices around $80 the oil price is ‘under the control’ of oil producers.   In time, once the global economic recovery is established, growth in Asia together with the recovery maturing in the West will see demand outpace supply, taking the oil price up to new territory.   But, until then its function as an indicator of future gold prices has been undermined.

The $: € Exchange rate

For most of this year and years before, the $: € exchange rate was taken particularly by short-term traders as a direction finder for the gold price with, at times the gold price cleaving to the rate.   Many times the gold price decoupled from the € as it rose against both, but on a day to day basis the $ still triggers moves in the gold price.   Why?   Inside the U.S. speculators and traders see this rate as being a measure of the value of the $.   It harps back to when currencies were complete measures of value.   When the $ weakened, it was seen in isolation to other currencies, particularly the only other really major currency, the €.   But now the true picture that the $ is the trunk of the tree that all currencies stem from is becoming clear.   Consequently gold now has a record of moving up against all currencies.   This is symptomatic of the structural faults in the monetary/currency systems.   At the turn of the century the € price of gold was well below €300 and took some years to rise through this level, but now it has just broken through €800.

With China rising from insignificance to growing prominence the tensions rising from a $-pegged Yuan and greater trade tensions on the way the time for another global currency to barge into the world scene has come.   This promises some ruptures and ructions to the extent that it is now prudent to retain and or buy gold for national reserves and for investment protection against currency swings.    A future of uncertainty and lack of global cooperation is on the horizon.   So what relevance does the $: € exchange rate, have on this scene?   Why should the gold price move with the €?  

The breaking away from this ratio is more significant than gold’s relationship with oil.   This break takes gold away from all currencies and places it as a measure of the entire system.  

While we do expect the markets, particularly in the short-term, to take time to be weaned off this relationship, it has, is and will happen.  

Changed Direction

This leaves gold in a new world.   This was what drove the gold price up to $850 the first time.   This time those central banks, which control the world of money are now turning back to gold.   Where will they be happy to see gold?   And in what role?   We will have to wait and see.

It is incumbent on all of us who follow the gold price and its influences to re-address these changes in the gold market and to adjust to this new shape and new future.

Impact on the Gold Price Long-term & Short-term

For Subscribers only!   We sent out a review of the gold market to Subscribers only, which reveals why the gold price is being held well above $1,000, where it will go next and how the gold market has changed shape due to the changes in overall central bank policies, from selling gold to buying gold.   Potential Subscribers should ask for this report and it will be forwarded to them.

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

 

Not that there's a link between the two, but as the legendary Peter Grandich celebrates his silver anniversary as a market commentator, he tells The Gold Report in this exclusive interview that having been left behind in the big run-up in gold, silver's time has come to steal the limelight for a while. Peter, who started publishing The Grandich Letter 25 years ago and this month celebrates his first anniversary as Agoracom's market analyst too, also considers the current stock market rally as a gift delivered in the eye of the storm. Longer term, he expects America's underlying economic problems to result in prolonged sagging trading performance such as Japan has experienced over the past 20 years. Accordingly, he's alerting investors "to remove their bullish hats if they're still wearing them." As Peter's motto goes, "It's better to be a live chicken versus a dead duck."

The Gold Report: When he was in China, President Obama said "It's important to recognize if we keep on adding to the debt, even in the midst of this recovery, at some point people could lose confidence in the U.S. economy in a way that could actually lead to a double-digit recession." He went on to indicate that Congress or he would be considering some tax cuts, but also some fiscal spending to counteract the unemployment. Other than preparing the populace for another potential downturn, what's wrong with this approach?

Peter Grandich: You can't have your cake and eat it, too. So I think it was rhetoric and I think the market realized that he was speaking out of both sides of his mouth. If you're going to use stimulus, someone has to pay for that stimulus and that stimulus will be paid for with higher taxes. The government, just like a company, can look to cut expenses, but they're not; they're spending more. They could work on entitlements and they are working on the healthcare side, but it's evident, at least to me, that in the end we're looking at a much higher cost.

TGR: If it's rhetoric, why would he say there's a potential second leg to this downturn?

PG: Political cover. You could argue that he's saying what could happen down the road if people don't support his agenda.

TGR: Wouldn't that increase caution, when people are already cutting back because they fear there's more to come?

PG: The problem is that there is no easy solution. Some of us felt a year ago that the best solution, although far more painful initially, would be just let the markets decide. Even if it meant a depression-like state, let the markets adjust for assets that are too expensive and for debt. That seemed better than throwing sand at the ocean, thinking that if you somehow hold the economy together—even though you create a whole lot of new money—you can magically take that money out of the system once things turn around. All we've really done is kick the can down the road and the can is much, much heavier to kick when the next time to kick it comes further down the road.

TGR: In the context of your kicking-the-can metaphor, you recently said that future historians will blame Alan Greenspan for the downfall of the U.S. economy, due to policies that led to the bubble of all bubbles. Can you elaborate on that?

PG: I think history will show that he was really a driving force in what led to the enormous problems that the United States now faces. Not more than three or five years ago, and certainly for 10 years before that, Alan Greenspan was hailed as the great financial and economic savior. He received many accolades for supposedly keeping the U.S. economic engine going and creating all sorts of growth. It's become abundantly clear now that people have found what was swept under the carpet, that he really created the worst of all worlds by a monetary policy that was way over-stimulated. In fact, in the aftermath of the mortgage crisis in testimony before Congress, he basically admitted that he didn't realize how severe the mortgage problem was. Imagine what would have happened to the market if he had said that when he was in office.

TGR: Will historians put some blame on Bernanke and Paulson, too, for increasing debt in reaction to the bubble's bursting?

PG: I think all of them will share in the blame. The latest group in charge gets most of the flak, but this is not just an Obama administration problem. It was well under way during the Bush administration and probably as far back as the Clinton administration, where a hands-off policy towards the Fed took hold and Alan Greenspan effectively became the economic ruler of the United States.

TGR: Do you think most Americans realize there really is no longer any easy money?

PG: Because the stock market has rallied and we've clearly backed away from the abyss, many people feel that somehow the economy will get better and better, jobs will eventually come back, and we'll return to the way it was during the '80s and '90s. They think the worst has passed, when in fact the problem is probably more acute now than a year ago. We've pushed it off and have managed to avoid it. That put us where we are right now—in the eye of the storm. Just like a hurricane, we've been through phase one, we're in the eye, and phase two is about to hit.

TGR: You've stated that you're expecting the Dow to go to 10,500 or 11,000, but then when do you think we'll emerge from the eye and the market will start turning bearish again?

PG: After several months and some thousands of points lower, we're finally reaching the target that I thought this bear market rally could reach. I've alerted my readers to prepare to remove their bullish hats if they're still wearing them. I don't think we'll go straight down like as we did in the first leg. But I do think the bulk of the rally is coming to an end. As we get into 2010, I think the market is going to go into a very long Japanese-like trading range. Japan peaked in 1989 at 41,000 and although it had several rallies over the next 20 years, it worked its way lower down to 7,000 or 8,000. I think that's the kind of performance we're going to see over the next five to 10 years in the U.S. stock market.

TGR: What signs should those wearing bull hats look for that tell them it's time to take money off the table?

PG: The bulk of the corporate growth that's aided the market rally has come from corporations becoming lean and cutting back as much as they can. From a fundamental standpoint, with consumers trapped, overburdened with debt and with employment such a big concern, you have to wonder how corporate earnings can grow further. If you're like me and you don't see that, why would you want large exposure to equities? From a technical standpoint, there are a lot of reasons to turn bearish as well, so both technically and fundamentally, I think we're coming to an area where there won't be reason to warrant expectation of much higher prices.

TGR: Why do you see the something like a long-term Japanese downward trend as opposed to a crash like last year?

PG: Last year it was a liquidity crisis, with rugs being pulled out from underneath everybody. Albeit we have to pay a dear price for it, enough money has been put into the system where we're just not going to wake up one day and nothing's running. Growth in other areas of the world will continue and the eternal optimism that Wall Street tends to breed among the "don't worry, be happy" crowd will keep enough people thinking somehow it can filter over to us. But like Japan, which greatly underperformed world markets and economies for almost 20 years despite being the second biggest economy in the world, so will be the case for the United States. Investors who want equities ownership outside of metals need to look in the areas of the world where growth should continue—places such as China, India and Brazil.

TGR: If we're looking at the peak of this rally and then a Japanese-style long-term downtrend, should we expect gold to continue on its rise?

PG: Very good point. My expectations have basically been almost fulfilled now. I've looked for a $1,200 price target. There's a correction coming here somewhere; there always is. But the fundamental factors that have driven the gold price since the bottom have only gotten better. So despite a correction or consolidation, there's absolutely no sign of any significant long-term top in the price of gold at this point.

TGR: What do you consider those fundamental factors?

PG: First and foremost, gold has become an asset class. Even though jewelry demand has declined, purchasing of physical gold as an asset has offset that decline and then some. Part of that comes from the fact that people look at gold as the ultimate money. Even the most ardent economic bulls will agree that the U.S. dollar is certainly in trouble. Where do we look if the world reserve currency fails?

The second thing that's probably more bullish for gold now than any time since it has been free trading is the dramatic change in how central banks view gold. For years they were not only net sellers, just always sellers. In the last few years we started to see some select buying, and now central banks are net buyers. And finally, what for many years was the "cut your nose to spite your face" act of gold companies hedging future production has become a no-no. We no longer see that supply of forward sales by gold producers in the market.

TGR: Your last remark about gold companies makes me wonder whether you would put them up there as an intellectual barometer of world economic trends.

PG: No. Our business is minuscule. The total market cap of all the major gold producers probably doesn't equal the market cap of Coca Cola or IBM. We're a small industry compared to other types of industry worldwide. If you think about it, what's interesting about the mining companies is that their earnings don't track to the metals prices. We've seen gold basically double or triple from areas where it's traded over the years—$300, $400, $500 an ounce, which it did for a lot of years. But we've not seen the doubling and tripling in gold company earnings over those years. In fact, there should be even more leverage, because normally expenses don't go up a lot so most of that increase in metal prices should flow to the bottom line. But we're not seeing that. Given what metal prices are doing, it's somewhat puzzling, but we're certainly not seeing it in share performance in most of the major mining companies.

TGR: How should investors prepare for when we emerge from the eye of the storm you were talking about earlier?

PG: This rally has been a gift for those who are heavily exposed to U.S. equities. When I look at people's portfolios in the United States, I still find that if they have equity ownership outside of metals, it's almost exclusively in U.S. equities. They would concur that we have one big world economy, yet most Americans still don't have much exposure to companies outside the U.S. If you're going to have exposure to equities, you have to go to the areas of the world that are clearly going to perform better. And as I've said, that's China, that's India, that's Brazil.

TGR: So one way investors should start preparing for this downturn is to look at international equities because that's where the growth will be?

PG: Right. But let me clarify—it's not so much a downturn that I'm expecting as I'm looking for a peak after which there won't be much equity growth going forward. We could stay within a fairly tight trading range for a few years. It's not that we're going right back down to 6,600, but equities will no longer look as if they have a lot of upside potential or are worth buying based on corporate earnings, growth opportunity and so forth.

TGR: That's a good clarification. Can you compare investment in metals and mining stocks to international equities?

PG: I think most portfolios should have some equity exposure that isn't related to metals because you don't want 80% of your portfolio in an industry that makes up only 2% of industrial growth worldwide. And again, if you're going to have that industry exposure worldwide, you have to be where the growth is.

TGR: Your model portfolio includes a lot of various ways to play the metals market, but recent additions have been mostly junior mining equities. Can you tell us a bit how you came to bring them into your portfolio?

PG: The more you go down the food chain, the more profoundly the metals companies have underperformed given what we've seen in the large-scale price increases in the metals they're going after. The junior resource market has not come close to returning to what it once was. I like to take us back to the last decade when they saw the last major boom. We don't have the same amount of institutional interests now, partly because institutional investors with excess cash that were doing real well in general equities worldwide got killed a couple of years ago and are no longer throwing money at junior resource stocks.

The second difficulty is the retail investors, the lifeline to junior resource stocks, aren't in the same position that they once were to play the junior resource market either. And third, while financings are certainly back, we still don't have an excess of money chasing junior companies. So it has been more difficult for them to enhance shareholder value from expansion on the marketing side because their audience has shrunk.

Another difficulty is that it has become harder to get to retail investors. At one time, stockbrokers were very active in the junior resource sector, and great marketers for junior companies. Brokers who liked your company would gather 200 or 300 of their clients and buy your stock. We don't see that much anymore, because few brokers still drive their book of business through commissions. The changeover from a commission-oriented business to an active management business doesn't sound like much on the surface, but it's a dramatic change from 10 years ago in terms of how the junior resource market is affected.

TGR: But these all sound like reasons to stay away, as opposed to investing.

PG: Supposedly the whole idea in investing is to buy when no one wants a company and sell when everybody wants it. Given the dramatic increase in metal prices, finding and developing an ore body now is far more lucrative in terms of potential returns than it was a few years ago. So those who identify significant deposits will command a premium. That's what I've tried to concentrate on in my model portfolio, particularly in the gold area. Those are the companies I think have been undervalued.

TGR: Would you expect these companies to start seeing better earnings now as a result of the metals rising or are most of your plays basically acquisition targets?

PG: Most of my plays are based on increasing value and possibly an acquisition as juniors. But for the majors, I think we will continue to see more consolidation, more mergers. Even juniors will continue merging together to become more efficient and effective. Part of the excuses that miners had a year or so ago, particularly the major producers, was that their costs went up so much, especially the cost of energy. Those costs are no longer such a factor, but we're still not seeing significant production.

Yes, the general cost to mine has gone up because the very inexpensive heap-leach type deposits that everybody could make money on 15 years ago and are gone. One of the world's premier districts, South Africa, has all but shut down its gold mining. Their costs have become so much higher because of the depth of the mines, and they've also been hit hard by the weak dollar and strong rand.

In these circumstances, I think we need to look for and concentrate on majors that are streamlining their operations and have deposits that are very cheap to develop.

TGR: Can you tell us about some of the companies in your model portfolio and why you selected them?

PG: To follow up on what I just said, an ideal company that fits that mold is Evolving Gold (TSX.V:EVG). Earlier this year Evolving Gold made a major discovery in Wyoming, the Rattlesnake Project. It's in an area of the country famous for large-scale gold production; the Cripple Creek area has produced over 25 million ounces of gold already. The company is awaiting drill results on over 40 holes that have been in the labs for assay. Drilling will pick up again in the spring, but the hope is that many of these assays will continue to show that the company is on to a several million ounce deposit. It's early in terms of results so far, but you can do back-of-the-envelope analyses and start to think they're already there, with a lot more opportunity. That is what I think people need to look at—companies that are already identifying significant deposits that they can grow larger.

TGR: Any other examples?

PG: Yes. Another one on our list like that that fits that same mold is East Asia Minerals Corporation (TSX-V:EAS). It looks as if East Asia's already into something significant. Now it's a question of how big they can make it by drilling. Companies like that will get a premium over pure exploration companies that are still early-stage and haven't yet identified anything of very great significance.

TGR: Any companies that you’ve held in your portfolio for awhile that you can provide an update on?

PG: Northern Dynasty Minerals Ltd. (NYSE.A:NAK, TSX:NDM) has the largest undeveloped copper-gold deposit in the world, in Alaska. While historically it has been a relatively good area to be, a small but extremely loud and active group of people has been voicing opposition to their Pebble Project. These people haven't come close to stopping the due processes of mining permit applications and so on, but the market is apparently worried that there's some small chance of the project not going forward. Hence, Northern Dynasty's share price doesn't remotely reflect what we already know it has. That's bad news for those of us who bought it and thought it should be much higher. But it's good news for those who realize that chances are the project is going to move forward and are still able to buy something of enormous quality for such a low price.

TGR: Who else are you following that appears to have upside potential?

PG: One group that has been developing junior and producing companies for several years is really in a class by itself—the Hunter Dickinson Group. It happens to be the management group in Northern Dynasty and has a history of numerous successes in developing companies from early stage all the way to production. At that point, they sell them or bring in another group to manage them.

HD has just introduced its newest company, Heatherdale Resources Ltd. (TSX-V:HTR), and brought it to the public market. It's a classic Hunter Dickinson type company. It has an extremely attractive copper-gold-zinc-silver project in Alaska and has done some extremely promising initial work on it. I know of no environmental issues. It has a first-class exploration team, the same team that took Farallon Mining Ltd. (TSX:FAN), another HD company when it was first drilling in Mexico, from 60 cents to $22 per share. The discovery team at Farallon is now running Heatherdale and they seem to be very optimistic about this project. So Heatherdale is being driven by the best of the best in my prejudicial view and is a company I like a lot.

TGR: That's great. Any others?

PG: A company that I'm just becoming involved with is managed by Forbes & Manhattan Asset Management Corp., an investment merchant bank out of Toronto that has a lot of similarities to Hunter Dickinson. It's called Rodinia Minerals Inc. (TSX-V:RM), and is primarily focused on a fairly new area I'm exposing myself to—the rare earths metals market; in this particular case, lithium. Rodinia is well positioned in an area in Nevada, basically surrounding a well-known project there. It has all sorts of upside potential in that market. Rodinia has an unbelievable deposit and I think we're going to hear more about rare earth metals. This company has as good a chance as anything I've seen to grow into something really substantial.

TGR: Right. The rare earths were a big point of conversation at the San Francisco Hard Assets Conference last month. Any other plays that our readers should be tracking and looking at?

PG: Silver has been overlooked, in part due to the onslaught of short positions by a select few major houses on the Comex. So far, that's suppressed silver from sharing in the major run-up we've seen in gold and platinum, but I think silver's turn to lead is near.

So something in the silver area would be interesting. One company that comes to mind—and of course I'm prejudiced because it's a company I'm engaged by—is Silver Quest Resources Ltd. (TSX-V:SQI). I like its assortment of early- to mid-stage projects, almost all of them with very good news of late. It's run by Randy Turner, probably one of the most experienced and successful people in the exploration business. And management is so important in juniors. Probably the single most important thing outside of the project itself is the person at the top. So with a belief that silver is going to see its light and looking at some plays that are either pure silver or predominantly silver, Silver Quest fits that mold. I'm certain there are other silver companies out there, too, that could also work.

TGR: When you're looking at junior mining, do you think there's any advantage in looking at pure plays? Or does the combination of silver and gold mean two better reasons to buy?

PG: Purists probably like to see something pure silver because silver is the poor man's gold, it's every bit as good as a monetary instrument, it's the black sheep of the family that never gets put in the same light as gold, yada yada. I don't think that's the case because silver simply is not in the same boat as gold, especially when it comes to a monetary investment. But it is close enough and has a relationship to gold; you don't throw out the baby with the bathwater. And, like I said, because it's been out of the limelight, I think silver is about to have some time in the sun. Some of these purer silver plays have not seen the percentage gains that some of the gold plays have, so it looks like their turn is coming.

TGR: Any other comments you'd like to provide to our readers?

PG: While I don't look for the stock market to go down a lot, I don't think investors should feel that somehow the junior market stays up if the stock market does go a lot lower. If there's another large-scale fairly fast move down, it will take the junior market with it; so I think investors need to be selective. I don't think we'll see rises in metal prices lift all boats. It's a far more selective market now, tougher to see gains. You just can't throw darts as you could have 10 or 15 years ago and expect the stocks to go up.

TGR: Well said. We appreciate your insights.

DISCLOSURE:
1) Karen Roche, of The Gold Report, conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Evolving Gold, Northern Dynasty
3) Peter Grandich - I personally and/or my family work for and own shares of the following companies mentioned in this interview: Evolving Gold, Northern Dynasty, Heatherdale Resources, Silver Quest Resources and Rodinia Minerals.

It was 25 years ago last month that financial adviser and market analyst Peter Grandich found himself working as a stockbroker, without a high school diploma or even a day's worth of training. And he's proud of his humble beginnings. Just before he ventured onto Wall Street, his paid job was in a warehouse, but he spent every spare minute possible studying the markets. Although cold-calling left him cold, but he quickly warmed up to putting out an investment newsletter. That was the genesis of The Grandich Letter. November also marked the first anniversary of his newsletter becoming a blog through a working relationship with www.agoracom.com. He has a book coming out in 2010, Confessions of a Wall Street Whiz Kid.

Peter's ability to analyze and forecast financial happenings has resulted in hundreds of media interviews including GMA, The Kudlow Report, Fox News' "Your World with Neil Cavuto," Business News Network, Wall Street Journal, Barron's, New York Times, MarketWatch and dozens more. He's spoken at investment conferences around the globe and is regarded as one of the world's foremost market strategists. In 2001, he and Lee Rouson (former New York Giants running back and two-time Super Bowl champion) founded Trinity Financial Sports & Entertainment Management Co.

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