While the mainstream media and the Fed dance around the Recession word, newsletter editor (Trader Tracks) Roger Wiegand sees a harsher reality looming—as some pretty ugly numbers come to light. Dismissing recent corrections in precious metals, Wiegand predicts the onset of the biggest gold and silver rally in history.
TGR: What did you think of the recent market moves?
RW: I expected them so I am not surprised. I think the reason this happened was to raise cash and cover other troubles in the markets—in the credit crunchies part of it—and in the shares.
TGR: It does seem like every time the market has any kind of up-take, it’s followed almost immediately by a down-take, so how much impact does this have?
RW: The impact is starting to be less and less. With the fundamentals being what they are, and over the longer pull—meaning the next year to three years—the pros are selling shares into strength. They’re trying to get out of the way, because the April-May selling cycle is going to be a doozy.
TGR: What will cause the April-May sell to be worse than what we’ve just seen in March?
RW: There are several reasons,. Traditionally, April and May are the sell-and-may-go-away event. But that phenomenon will have a relatively small impact compared to the major events that will cause a market sell in April. For one thing, the brokers and the banks will be reporting on the first quarter of 2008. Those financial reports are not going to be pretty.
Builders will also report on their spring housing starts. Since it takes about four to six months to build a home, that April report is very important. It generally forecasts a trend in housing for the entire year. Again, those housing starts will look pretty sick. There’s no question in my mind that they’re going to be way under expectations.
Next you’ve got the Auto Sales Spring Market that will report on the first quarter of 2008. To call auto sales dismal is an understatement. Chrysler is forecasting a bad year through 2008. General Motors and some of the others will not do that, but they recently had a big brouhaha at the auto show with the leadership at Chrysler, and they’re basically saying it’s going to get worse.
Consumers will have a big role in this too. Their problems started with the sub-prime crisis and the derivative loans on the mortgages. That migrated into automobiles, but the next thing to hit them will be credit card defaults. I found it very interesting to learn that VISA had a big stock offering and raised something like $17-$19 billion. I was thinking to myself, “How neat to raise all that cash on shares, when, in fact, I expect a major increase in credit card defaults.” I think that was deliberate, and I think they were raising cash to get money into the business so they can manage what they see coming.
TGR: That's interesting.
RW: The next thing is—and this is a new one—Sprint and Porsche are now drawing down on major lines of credit, which they normally never do. These are mandatory drawdown lines that the banks have to honor. They’re solid contracts, and if these companies need the cash, the banks have got to pony up. The banks are in very bad shape at the moment with the liquidity crunch. Now, on top of that, you’ve got these big companies saying, “Okay, we need more money in our business; here’s our line we agreed on. Now, hand me $20 or $25 billion or, or $50 million or whatever it is that our contract allows.” For these reasons, I don't think April is going to be any fun.
TGR: Hasn't some of this already been factored into the market? Most people are expecting housing starts to be low, and everyone is already talking about recession—they expect auto sales to be low and I’m even hearing about credit card problems.
RW: The recession question is really based upon fallacious data. The CPI, a lot of the Labor Department stuff, the jobs data—a lot of those numbers that come out of the government are really phony. It’s no different in the state governments. The recession, in my view, began in April of last year. I think it’s been long underway.
David Rosenberg, the chief North American economist for Merrill Lynch, said one year ago that in about three weeks we’d be in a recession. Later on, he didn't repeat it because the numbers didn’t line up with the government numbers. But as you know, these government numbers don’t really make a lot of sense. Most people just laugh at the CPI when it comes out. They also laugh at the jobs data, but the jobs data is a market mover. There’s no question about it.
Consequently, we think the recession is well underway. Unemployment in Michigan, which is among the worst and most hard hit of all the states, is slightly under 8% officially. My rule of thumb is to take those kinds of numbers and double them. That makes unemployment in Michigan 16%. Now, unemployment in the United States—all states in the 1930s depression—was 25%. I think actually they kept better records in those days than they do now because I don’t think they were fudged.
If Michigan has 16% unemployment, that's not all that far from where they were in 1933.
TGR: Is there anything the Fed can do now or are they making the problem worse by printing more money?
RW: The Fed is making it worse. They have basically thrown up their hands with all the tricks and giveaways they've devised to provide credit to the banks. The latest one is that now they're saying they'll accept almost any kind of collateral. So they’re going to pick up all this mortgage derivative paper that is full of risk or has no value at all. It’s basically dead money, and they’re going to back it. Because if they don’t, these banks are going to go down.
And I mean all of them—all the big ones. Now, it was interesting that Richard Bovey, an investment analyst at Punk, Siegel & Co., recently said that the bank credit crunch is over. And Richard is quite smart and writes good reports. He says this is a once-in-a-generation opportunity to buy bank stocks. He starts out with the comment that it sounds ridiculous, and I think it is ridiculous. It’s way too early, and I will tell you why. I was in the real estate development business for 25 years, and I worked with some big companies and had to arrange credit lines for subdivisions. I understand that business.
What people are not recognizing is that the prices in the housing markets actually doubled from 2003 through 2006. They went up 100%. In other words, if you had a house in 2003 that was worth $100,000 and you replaced it with something equivalent three years later, it would cost $200,000, in certain markets.
Now these prices are falling drastically. They’re having auctions. One way to check the condition of the marketplace is in the Wall Street Journal. Look at the number of pages for lawsuits and watch for the pages of property auctions. And they’ve grown like topsy. It’s just unbelievable.
TGR: So you're saying housing hasn't come close to hitting bottom yet?
RW: You will see the prices of the hottest of the hot markets go back to where they were in 2003. And remember, the used housing market represents 85% of nation's housing. Fifteen percent is new building; 85% is used. People with used housing are going to have to drastically drop their prices to make a sale. Either that, or they have to sit there and make the payment, or default and foreclose.
This year Merrill Lynch’s David Rosenberg started out saying 1-2 million homes would go back to the banks or into foreclosure. Then he upped the numbers to two to four million; now he’s saying there’s a possibility of five to six million. I'm saying 10 million.
So, it’s definitely one big mess. But the next question is what about the regional banks. Smaller banks are traditionally high writers of mortgages and they hold the paper. A lot of the bigger banks sell the paper to Fannie or Freddie, and they get rid of it. They make servicing income or they make fees on the front end when they put a deal together and close it, but the liability is sold off and it’s gone.
That is not the case with the regional banks. Back in the mid-1980s, the Resolution Trust was put together to save the savings and loans and banks. At that time 5,000 banks went under or were recapitalized. The Resolution Trust made some very quick decisions; they had no time for a thorough auditing. They just looked at the books and the numbers and told some of these banks, “You’re out of business; you’re dead." They put more money into others and saved them. The process was very arbitrary, but they restored the health of the housing lending market by doing that.
TGR: Are you saying that something like Resolution Trust is in store for the regional banks?
RW: Yes. That’s exactly what my next point is. I wrote about that in Trader Tracks several months ago. I said, “Look for a Resolution Trust Number Two because I think that’s going to be a very important savior for these regional banks.” Let’s say you have one regional bank serving a town of 10, 20-25,000 people and maybe some very small ones in addition. But that one regional bank may be carrying the largest proportion of the mortgages. If that bank crashes, it would severely affect businesses and basically wipe out a whole town.
So, they can’t let that happen. I think they’re going to be backed up by a Resolution Trust Number two. It’s turning out that the government is becoming a lender of last resort, saving not only everybody in New York that made all the reckless lending mistakes, but also the regional banks. Beyond that they’re going to have to try and save quite a few other associated industries.
TGR: Is printing more cash the only way the government can save the banks?
RW: Well, they’ve been printing cash at the rate of 11 to 13%; Japan’s been printing at the rate of 20%; and Russia’s been printing at the rate of 50%. So, the dollar has to go down; inflation must go up; and gold has to go up. There is just no other way for it to go.
TGR: How do you explain the recent correction in gold?
RW: That’s nothing but a normal technical correction. I mean gold futures this morning [March 20] are trading between $915 and $938. And we have spread positions out right now—I own some myself, both in gold and silver—that went down to the tune of 23%. But my account is in excellent shape; as of the end of last week, my account was up 200% from January 1st. I’ve got traders that have been doing this kind of trading now—some have made a half-million dollars in 30 days.
It just depends on how you structure your trades, where you go, how you buy them, and how you protect yourself. Right now gold is $918; I talked to our brokers this morning. I said, “I see a floor at $915 to $920, if, at the very worst it got real nasty, it could be down to $855.” But if you look at that--$855 versus $1032 high, which is what we had earlier this week in the futures, that is not even one move in a Fibonacci (Fibonacci Retracement Levels) ratio. I use those and Elliott Wave and other analytical tools.
TGR: How do those tools work?
RW: It’s real simple. They show support and resistance numbers, and it’s almost uncanny how those numbers go back. They go right back to the same price every time, and good traders and analysts who use the technical side, not the fundamental side so much, rely on those. Our trading is based upon that. Even more importantly, we trade what I call Elliott Trade Light. Robert Prechter, who’s written a lot of books on Elliott Wave, has a very intense and technical analysis of Elliott Wave. I have been unable to trade it based upon the way they do it, but I use Elliott Wave Simple or Elliott Wave Light, and it seems to work very well.
TGR: For those of our readers who may not want to do the futures trading, do you have any recommendations on the equity side?
RW: Yes, we do. Goldcorp Inc. (NYSE:GG) is one of them. We traded in options in a lot of this senior stock three or four years ago, and it seemed at the time that it was very easy, almost like shooting ducks.
At this point, we don’t have much in the way of shares options, although I do have some warrants on 2011 in our letter for Goldcorp. Goldcorp's trading range is $21 to $46. They’re in all the right places; they’ve got a beautiful mine in Red Lake. They are also positioned for some fantastic growth in northern Mexico.
We have another stock near Goldcorp's big active mine. The name of that company is Canplats Resources Corp. (OTC:CPQRF). Canplats' trading range runs from $.23 to $4.05 but we see it going higher, somewhere between $3.21 and $3.46. I’ve been in and out of Canplats three or four times. The first time we made nearly 200%; the second time about 40%; and the last time maybe 15 or 20%. Canplats is drilling in northern Mexico, and they went to the edge of a big mining community where Goldcorp, Newmont, and others were digging and had some success. Basically, they went to the end of the stakes on the ground, and then picked them up from there. They have about 300 square miles staked out. And the drilling results have been fantastic; a lot of people are very excited about it. So we like that stock.
When we started in this business, we were really looking all over the place. Since 2004, 2005, we’ve seen a lot of things that worry us regarding politics and taxes, what I call “takings” by the government. As a result, we've focused on four spots. We like Northern Mexico; Northeast Nevada; British Columbia; Alaska; and individual parts of Canada. Those are our favorite locations. I'm sure there are many other lucrative mining areas, but we try to eliminate as much risk as possible. The places we've chosen already have proven reserves and good results—we feel there’s no reason to go elsewhere.
We’ve made money two to three times trading Bravo Venture Group Inc. [TSX.V:BVG]. The trading range on 52 weeks is $.44 to $1.67. Our goal in the fall of 2008 is a $1.05.
We also like some seniors and we particularly like silver. Silver is behaving better than gold. By that I’m saying its percentage of gain has been better over the last year or two, and we think it will continue. In the seniors, we like Hecla Mining Company (NYSE:HL) and Pan American Silver (NASDAQ:PAAS). We also like to trade the SLV and the GLD, the silver and the gold ETFs.
Helca had some problems and was dormant for a long time. They got rid of their debt and have new financing. Now, they’re on the prowl for new acquisitions. They just closed on a big mine they bought in a partnership with Rio Tinto in Greens Creek, Alaska. They’re paying $750 million for it. That’s a proven mine. The stock has been running between $9 and $12. We'd like it to go to $15. Next year, it’s probably even going to be better.
Pan American Silver is pure silver. They continue to make money. Silver Standard (NASDAQ:SSRI) is a royalty silver company. They’re going to be a real miner in Mexico, probably within a year.
Another one that we know well is Miranda Gold Corp. [MAD:TSX-V]. Miranda is in the right spot in northeast Nevada. Their only disadvantage is that they’re not an active miner, but they have partners, reserves and locations in the right mining areas. We think they’re going to be picked up by a senior company.
That will probably happen to Piedmont Mining Company, Inc. (OTCPK:PIED) as well. Their trading range is $.08 to $.38. We think that will go to the $.34 to $.37 range in late spring or early fall. By the last quarter of this year or the first quarter of 2009, we think Piedmont will be $.52 to $.55, if not higher. Again, Piedmont Mining has reserves in the ground, good management, proper funding, and good potential partners. All of these mines are located in the spots that we prefer regarding risk and opportunity.
TGR: What impact will the recession/depression/devalued dollar have on those companies that are based in the U.S.?
RW: Well, first of all, the dollar devaluation will make it more expensive for the seniors based on their field operating costs. The juniors are not debt laden with operating costs, energy, and materials because, in fact, they’re not really operating.
These disturbing recessionary, depressionary, inflation trends can pull down the junior miners in particular and can make the bigger ones static as to value. But if you have the patience to go for another year or two, I think you’re going to be well rewarded.
We’re embarking right now in Phase II upon what I think is the biggest gold and silver rally in history, and it’s not going to be that quick. But I think the main thrust of it is going to start this fall when things really get rough in the economies, not only in the U.S., but throughout the world. 2009 and 2010 are probably going to be the best parts of it.
We’re looking for a minimum on gold of $2,950 and silver at a 15 to 1 ratio at about $256. And my friend, Jim Turk—you probably saw it in Barrons—he said the thinks gold will probably be $8000. He could be right.
TGR: Do you think the rally in gold and silver will go beyond 2010?
RW: It could. It’s really hard to forecast out that far, but if you look at economic history and the way things worked in the past, you get pretty good clues as to where we’re going. If gold were inflation-adjusted, it would be somewhere around $2000, $2200 tops.
RW: Basically, we're halfway there, so the numbers are still way off. This $40, $50, or $60 sell-off in gold is peanuts. It's nothing more than a triple-witching option expiration. We’re going into the holiday weekend. People have made a lot of money. Funds need money to get out of their profitable trades in commodities and pay off other problems, but the funds are going to come right back in again next week and the week after. I think you can bet on it.
TGR: Very good. Roger, thank you so much for your time. We really appreciate it.
About Roger Wiegand: In addition to editing and publishing Trader Tracks, 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 here for information on Jay Taylor's and Roger Wiegand's newsletters. Tel: 718-457-1426 Claudio Bassi, Manager email@example.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. Roger has studied these markets intensively for 12 years, to hone personal trading skills. 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.