Severe Bull Market for Gold

Seeing beyond the blind curves of bailouts and meltdowns takes the keen vision of a veteran market observer, Roger Wiegand, Editor of Trader Tracks . In this exclusive interview with The Gold Report, Wiegand predicts a “severe bull market” for gold that will include both juniors and seniors. He advises selective buying and names several of his favorites.



The Gold Report: When we spoke in mid-July, at the height of the market, you predicted a major downward correction.





Roger Wiegand: The call was pretty accurate, although the oversell was surprisingly deep. The reason was the hedge funds had gotten into a position where they had to raise cash as crude oil was starting to sell with speed. Oil was a dominant part of their investment. When the price of crude oil fell swiftly, funds were forced to sell everything to cover investor redemptions. Now we're at the bottom again, and prices are basing and moving up.



The bigger question is when will things turn around? When oil was being sold, it was sold in a basket of commodities, which in those funds all component markets were long only. As oil sold back to critical price levels, funds by their rules were forced to redeem millions of dollars after just five days' notice. With several of these funds being in the same dilemma, selling was massive and quite fast. Keep in mind the commodity selling basket included, crude oil, natural gas, gold, silver, sugar, grains and other commodity markets. This hurt prices across the board in all of these sectors, including the CRB Commodities Index.



Gold and silver shares, along with physical metals, were wounded pretty badly in that down draft so it usually takes an extra 90-day quarter to get back on track. I believe shares will recover and some have already. The XAU and HUI look pretty good but aren't nearly as high as they should be. Gold and silver shares should resume new rallies in January, February, and March.



One of the big problems hitting a lot of juniors today is the inability to raise cash. Some are going to go out of business. Those that have cash, are operating new mines, or hold reserves in locations near senior miners like Hecla Mining (HL) and Newmont Mining (NYSE: NEM) , can probably be acquired. The other shock is inflation, which is going to become much worse. Any miners operating costs are extremely high relative to where they were only one to three years ago. Many are producing at an operating cost of $400 to $600 per ounce. Not long ago, these higher costs were $75 to $200. With our gold price near $850 they can't make much money.



Silver miners are under even more of a cost squeeze. Inflation will keep driving mining costs up. But I think the price of gold and silver will also rise. With global credit conditions and the stock markets in serious trouble, gold will not be denied. On October 6, we had a major markets' selling day worldwide. Gold was the only rally sector on that day. Our technical analysis reveals a larger, major gold breakout is imminent. Will the Plunge Protection Team sell gold this week as they prop stock index shares? We think they could, although with gold near $850 support, we suggest gold will be let to run and rally until at least 1040 resistance. Should gold breakout above 1040 into new and higher territory, we should expect some deliberate bullion bank shorting to stop a runaway gold price. Correspondingly, the interventionists would be buying S&P's to prop main stream shares.



TGR: Will the cost of inflation match gold's rise?



RW: It's hard to say because some miners have a much lower cost of doing business than others. It's going to be very rough between now and the first of the year. Some senior miners are producing silver at a small loss right now. This will change quickly as silver prices begin new rallies.



TGR: Can you elaborate on that?



RW: This bailout mess is complicating matters. Our government's highest priority is to restore calm in the markets and cause cash to circulate. But I don't think this bailout will solve the problem. It's just a big waste of money. You're going to see growing inflation over the next few months. Commodities will rise slowly except for those base metals related to industries such as automobiles, housing, and heavy manufacturing, which have experienced heavy sales losses. So where do we go from here?



I have word from a high-level official the dollar and our currency systems are going to breakdown before January 15th. I hope it doesn't happen, but that's my contact's prognosis has been correct 99 times out of 100. That's pretty scary.



TGR: So if the system breaks down then what?



RW: The dollar, bonds, and non-precious metals shares will tank. We'll have massive inflation, prices will go up, the economy will stagnate, and a lot of businesses will grind to a halt. That's a depression, not a recession.



TGR: What will gold do?



RW: Gold will skyrocket.



TGR: And it'll drop?



RW: It'll drop at first because people will be scared of any market initially. However, afterwards, gold's really going to take off. Canadians are more knowledgeable about mining and precious metals' valuations than Americans. They own physical gold and silver and invest in shares. It's the backbone of their economy – oil, gas, and precious and base metals are big business in Canada and getting even larger. Ninety percent of our U.S. population seems completely oblivious to a basic understanding of the role of gold. Sure, they're a little worried about their jobs and credit but until this week's substantial market scare, any idea of buying physical precious metals or shares has been largely under the American public radar.



TGR: They don't understand what's going on?



RW: They're absolutely clueless as with each and every stock market tumble and gold rally, The Plunge Protection Team intervenes to sell gold short and prop up mainstream shares.



TGR: What specifically don't they understand?



RW: I don't think they understand the depth of our credit and finance problems. They don't grasp the incredible potential for damage not only to our economy but also to the entire global finance system. This week's international events including the unfolding credit crisis disaster in Europe is waking them up. The American public herd is moving beyond being just nervous. Now they are getting scared. There is real fear in the air with inflation, massive job cuts and a drumbeat of bad news.



TGR: Getting back to gold—it's now at about $834. You see it trending up gradually over the next three months.



RW: Yes.



TGR: Where will it be in January, assuming you are right about a system breakdown on January 15th? When will gold soar?



RW: Historically, between Labor Day and Christmas, you'll get two, 46-day complete up and down rallies in gold. I'm talking about a bottom to top to bottom and with a sideways trading pause after each peak. Following that, a new cycle starts over again at a new, higher bottom and goes to a higher high and then sells off once again. Picture two, full, 46 day cycles for the last annual trading quarter of 2008. We are currently in the middle of cycle number one. It's already started off the bottom after we had a recent, bad selling period.



For now, I'm looking at a December, 2008 gold futures contract on real-time and its low was $739.70. The high took it to about $920. So that's only one of the first one or two legs up in this cycle. Based on my charts, I see a small continuation triangle on the day chart for these futures. I expect a major rally in gold. I expected it yesterday. It may come next week but when it does, this rally is going to be a big one. I think it'll be the number-three cycle leg of the five legs up and it could easily cause gold to rise $100 or $150. Obviously nothing is cast in bronze, but that's what the charts say.



Now, to answer your question, where do we go on price by the end of the year? Between November 15th and the 25th, December 2008 silver and gold options will expire. And there are several stock expirations, too. If you have stock call options on the big mining companies, those expire around the 27th of the month. In other words, if those are December calls, they'll expire in December but the futures options expire one month earlier. What traditionally happens when all these people exit the trades is that the November 15th-18th timeframe becomes a metals price peak. I think gold could go as high as $1,040 but it's more likely to be $985. All bets are off, however, if things get too crazy with the credit bailout and its fallout. Subsequent fear can cause market mayhem and very wider rally trading days.



TGR: But it would be on the upside, not the downside.



RW: Yes, it would be on the upside. I think $985 to $1,040 is as high as we'll get for this quarter. You're going to get a little selloff from around Thanksgiving until Christmas. Last year gold started up again right after Christmas on December 28th and that was two weeks early for January's cycle. The normal next quarter rally would start from the 10th to the 15th of January, 2009.



Now if the dollar and bonds really collapse, gold could go much higher. For March, 2009 silver and April, 2009 gold—your two main precious metal months for trading futures—we're looking for silver to be $26.50 and gold to be $1,290. I was a little higher on gold before this smash we had over the last couple of months, so we're rising from a lower price. Instead of $1,300 or $1,400, I expect to see $1,290-$1,295 for the April, 2009 gold futures contract.



For the March, 2009 silver contract, which is the big one, you might expect $30.71 with $26.50 probable. Keep in mind physical metal prices on futures and cash are different. Cash is today's right-now-spot. Futures are the price traders have determined for a given month in advance for today. You'll often get a different market response from the shares. They are regularly in a rally run ahead of the futures. On the other hand, futures can rise ahead of the shares. When this occurs, they're usually about two weeks out of sync in either direction; eventually matching each other.



TGR: So you think that in the first quarter we'll see the shares begin to take off.



RW: Yes.



TGR: Even if we have the January 15th breakdown?



RW: That's a tricky one to call because people can become frightened enough not to buy any shares . But, on the other hand, the approaching election is going to pump stock markets all the way through November 15th. After that, many investors will take profits and bailout. Then they would expect to get back in at a lower point. And I think they will, despite the fact that these other matters could become very severe.



TGR: Do you think the people will take the profits?



RW: A lot of people will take profits, first of all, in November, because of the cycles. But if the dollar and bonds cave in and people are screaming depression, are they going to buy more junior or senior shares? Common sense says they wouldn't. On the other hand, some of those juniors with good reserves located right next to senior operating mines should be considered prime investing plums.



TGR: So if we were expecting a major devaluation of the stock market in January, would you recommend that investors who are long on senior or junior shares sell now and wait until January, then selectively come back in?



RW: That's a difficult call. We have a lot of juniors in our newsletter, Trader Tracks , that are deeply under water. The reason we're continuing to show them is because last March and April 2008, I told my readers they had three choices. They can get out entirely and hold cash; they can sell half and keep half; or they can hang onto the whole trade knowing full well shares are going to sell way down, which is what happened.



Do people buy new trades right now? They can if they go to the right places and they're very selective. Junior and senior shares should have a nice rally along with the metals themselves this fall. Those rallies should hold through the fall cycle, probably into November. There may be some dips in the middle, but with all these other things happening, it won't amount to a hill of beans.



In a bull market, a severe bull market, which I think we're going to see this fall, physical prices will go up most in the first cycle. Selective share prices move more gradually. People want to take profits when they make them, but I think a mid-cycle fall pullback will be modest and then go sideways before resuming the rally again. So, all in all, it should be a pretty good fall. It would certainly be much improved over the terrible sell-off we've just experienced. Keep in mind tax-loss selling will further sell down already beaten down juniors. Many will be gone for good as the best rise in new rallies, gradually.



TGR: But if the dollar's going to break sometime before the 15th of January and we expect that to correlate to a radical adjustment in the stock market, wouldn't those junior and senior shares move down in January?



RW: Yes, they would but we don't know if that's going to happen. The chances are much higher of that happening now than they were before. On the other hand, people could hang on to those investments despite the fact that the stock indexes are going to come down. Everybody's got a different definition of what makes a crash. I think a market crash is more than 500 or 600 points—it's closer to 1,000 points. On the charts we see the S&P 500 and the Dow selling down in chunks, which will be fairly large, but is that a crash? I don't know. We're going to go down in steps and stairs. I think it can be gradual and take place over several months and, barring any absolute disintegration with the dollar and bonds, I think it's just going to be a normal recession probably evolving slowly into a depression.



TGR: If the dollar does break on January 15th, would that throw us into a depression?



RW: I think it could. There's no question in my mind that we're in a deep recession right now and our government does not acknowledge that at all. Neither do Wall Street and the media. Because of spin and jawboning, none of the major nations will admit being into a recession or even the beginnings of one. Very soon, this will change as worse things appear in the news.



TGR: If the American public understood, we'd be in a different place right now.



RW: We sure would. You can trace a lot of what's happening now back to the crash of the NASDAQ in 2000. If Greenspan had handled that better, we wouldn't be where we are now. We wouldn't have a lot of the derivatives that have been written since then on real estate. Real estate derivatives are the crux of the problem. Tom Donlan, who writes the Op Ed page in Barron's every week, had a good solution many months ago. He said the fastest way out of this is to let housing crash. Let foreclosed homes go back to the banks. Let the system flush itself out quickly.



Mr. Donlan told us prices would go back to where they belong and then we could start over. If our leaders had taken his advice, we would have been beyond these problems of today. Instead, they kept trying to glue the whole mess back together and it's not working. It's been proven before that prolonging financial agony is not a solution. It only makes it more severe over longer time spans. There was a little known and very short depression in the USA in 1920-1921 lasting roughly only 18 months. While that one was very bad, our government let it alone and the healing process was swift. Currently, the new bailout game only extends the correction cycle and the severity of all these problems.



TGR: Do you have some stock recommendations for these turbulent times?



RW: I'm recommending Clifton Star Resources (TSX.V: CFO) , a junior in Quebec. This is an old mine property that was fallow for 50 years. Two women inherited the property. They made a deal with Clifton Star, the new operator-owner and they've raised a lot of money. This is a mine with fantastic geology, and being in Quebec is an advantage—it's a favorable environment, from a permitting, operations and the tax standpoint. Quebec is mining friendly.



We also still like Canplats Resources (TSX: CPQ) , which has expanded its property territory to 500 square miles. It also has big, active, senior operators nearby. The closest one is Goldcorp. (GG-NYSE; G-TSX) ; I think, within 50 miles. I expect Goldcorp will eventually buy Canplats.



TGR: Any idea when?



RW: I would say within six months to a year.



TGR: Any others?



RW: I still like Hecla Mining (NYSE:HL), in spite of the beating that it took. The company recently completed a stock offering of $150-$160 million and rumor had it they sold all except for about $65 million. Not true. The rest of the offering was purchased and there was even an over-subscription for, I believe, another 3.5 million shares. What an opportunity to buy a beautiful company like that; set-up for major growth at $5 or $6 a share with a low cap rate. I still contend they're going to be $15 by next spring. The increase will be partially inflation driven and partially market driven because of precious metals rallies in a flight to safety, security and growth.



TGR: Are you still following Piedmont Mining (OTCBB: PIED) ?



RW: I just checked their chart and they are on the low side for $.10 as they were hit with slow and selling precious metals markets. The stock remains a good one. It will be rising and vindicated probably in the first quarter of 2009 with the balance of the other gold and silver shares in a new rally. Shares owners should not be discouraged unless a company has too much cash burn or lacks enough capital to achieve their goals on their budget and calendar. Juniors trying to borrow money or sell stock now will be under pressure until later in 2009.



TGR: So there is still some money to be made in the market. It will just be more challenging with the current credit crisis?



RW: I'm advising investors to pare down the number of companies they own. I would not buy stock options on some of these big companies. In the year and a half before the 2006 election we had a great recommending ride. The options market seemed to be up 100% to 300% every time I looked. It all came to an end near the election, when the gold price was knocked down in that fall.



Now are they going to do that again this fall? I think interventionists try to cap gold probably at $1,040. But eventually it's like trying to handle mercury. You step on it and it squirts every which way and that's the way the gold is going to go. Investors are scrambling to own it. A recent Wall Street Journal article talked about how it's almost impossible to find physical silver to buy, yet silver's price has been knocked down to $11.



People are complaining about a fixed market, and I think that's partially true. On the other hand, there's not a lot of silver available because demand was so high. People were accusing the government of playing games because we can't buy silver dollars. But when coin orders are up 1,000% several months in a row, there's a limit as to how much any government can produce. The USA Mint was buying coin blanks from Canada for a while to keep production going, but they simply ran out. Now even Canada has some waiting times for certain deliveries.



TGR: You recommend investors hold about 10% of their portfolios in physical gold and silver. What do investors do if they can't find any physical metal to buy?



RW: They need to work with Kitco, or go to goldmoney.com, an internet depository, holding gold and silver in Zurich. It's not in your hand, but in my view it's in a good safe location. Also, we know of coin dealers who have product. They cannot offer everything previously available to retail buyers but physical purchases are not impossible at this time.



TGR: How is that different than something like the Central Fund of Canada (CEF:AMEX) ?



RW: Goldmoney.com is similar except that Director Jim Turk has been around forever. He's top notch. He started with four gold bars in 2002. They've got roughly $300 million in their depositories now. When I last spoke with him, he was still able to buy 1,000-ounce bars from the Central Bank in the UK. How long can this keep up? I don't know. The big bars are still available. Where the pinch is coming is in the coins. The Mexican coins, the European coins, the Austrian Philharmonic, the Canadian Maple Leafs, and the American silver and gold coins are all good ones. Not all can be found, but when possible we like Canadian and American gold and silver coins best of all. There are collector numismatic coins available with prices rising quickly. For most folks we don't recommend the extremely rare coins because that is a special field.



TGR: So we're looking at Kitco and goldmoney.com for silver or gold.



RW: Right. I also suggest Pat Gorman (metalguys@aol.com), a coin dealer in Phoenix. He's been around for 40 years. He may not have everything available and perhaps some is probably backordered, but he's been very strong and honest and a good businessman. David Morgan and Jay Taylor both recommend Pat and so do we.



So, it's difficult to buy physical metal—largely because the very wealthy have bought up most of it—but it's not impossible. Of course, if you aren't placing a $100,000 order, a lot of the dealers don't even want to talk to you.



TGR: So, what's the bottom line for the juniors in this market?



RW: One of my top traders closed most of his Merrill Lynch account and wrote a million-dollar check to goldmoney.com for silver. He said he didn't like the looks of this market at all. That doesn't bode well for the juniors. But some of them will be fine. You just have to be very picky.



The key things to look for right now are potential cash flow, available cash in the till, and projected operating costs per ounce along with proven and inferred reserves. If you've got a junior with proven resources and your property is next door to Newmont or Hecla, you've probably got a winner as long as you have enough cash to hang on to your project till they buy you out.



About Roger Wiegand: In addition to editing and publishing Trader Tracks ( http://www.tradertracks.com/ ), a stocks, futures and commodities electronic newsletter publication for active traders, Roger writes a weekly column, “Rog's Corner,” for J Taylor's Gold and Technology Stocks Newsletter. (See http://www.webeatthestreet.com for information on Jay Taylor's and Roger Wiegand's newsletters. Tel: 718-457-1426 Claudio Bassi, Manager cbassi@miningstocks.com.)



A native of Michigan, Roger has had an interest in precious metals and futures since the commodity rallies of the late 1970s and early 1980s. His background in a 25-year real estate development and construction career specialized in forward planning, consulting, and using creative skills for conceptual project thinking. His present work is focused on the precious metals, currency, energy and interest rate markets for trading on the primary American exchanges. Experience in land, development and base material projects has evolved into consulting for mining companies and analyzing those markets. He has developed longer-term ideas for finance and mining marketing doing work on behalf of private and public mining companies. Roger's consulting work is to focus on concepts and “big picture” forward planning for mining companies. His newsletters utilize the global news, and his personal research and knowledge for expressing personal trading ideas.

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