SilverStrategies.com editor Sean Rakhimov says the economic crisis may go on for a generation but the market is a separate animal that will stir back to life sooner. He thinks the share prices of some major stocks will come back and then they will turn around and buy juniors that survive this crisis on the cheap to justify those share prices. But bullion is one vehicle with which one cant go wrong

This is Part II of the interview.
Click here to read Part I


TGR: At what level might the supply deficit trigger direct contract transactions in oil?

SR: Right now the supply and demand is about 85 million barrels a day supply against 87 million roughly in consumption. Suppose those numbers get to 90 and 95 (million barrels a day of consumption). At some point the shortage will become so severe that it’s going to wreak havoc in the marketplace. Those who have the oil will start to choose who they sell it to and in exchange for what. And I don’t think it’s going to be paper. That’s my longer term outlook.

TGR: What should investors be doing?

SR: It depends on the timeframe. If you’re talking about stocks, investors should take a hard look at their portfolios and ask themselves one question. Go through each stock and say, “Is this company going to be around on the other side of this financial crisis?” It may take six months; it may take three years for all I know. But if the company survives this current situation, I believe the benefits are going to be tremendous. Unfortunately, getting from here to there will be tough. It is already very, very difficult to get any kind of financing. And as we know, the mining (exploration) sector lives by it for the most part. A lot of these projects require large capital expenditure, either for exploration or development. Otherwise, they can’t do it.

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TGR: Have you gone through your grid and come up with a list of companies that make the grade?

SR: I would be reluctant to discuss specific companies, particularly because investing is about the investor. If you want a simple version, stick with the major blue chips—but even then, survival is not a given. For instance, a company like Teck Cominco Ltd. (TSX:TCK.A) (TSX:TCK.B) (NYSE:TCK) is in a serious situation and the stock has plunged dramatically; it’s been one of the blue chips for the longest time and they’re a very conservative company.

TGR: Any other suggestions?

SR: If you need a guideline, the way I expect the market to play out going forward is for gold and silver to come back first. Base metals will probably lag behind by about a year to 18 months. When I say “come back,” I mean this downtrend in their price in the marketplace will reverse. Within two or three quarters after that, majors such as Newmont Mining Corp. (NYSE:NEM) and Barrick Gold Corp. (NYSE:ABX) will start making profits, good profits, large profits. Through that, I think their share price will come back and then they will turn around and buy juniors that survive this crisis on the cheap to justify those share prices. That’s the basic scenario I’m going by.

TGR: So you say first the bullion itself.

SR: First the bullion itself. You can never go wrong with that.

TGR: Despite the pullback we’ve encountered? Both gold and silver suffered during this asset devaluation.

SR: Well, yes and no. In retrospect in a perfect world it would have been wise to sell our gold and silver and their stocks and go into cash and try to buy them later on the cheap. In the real world, it doesn’t work like that. One thing to remember is gold and silver are the only markets that are driven by fear. We saw a good manifestation of that a couple of months ago, when gold shot up $90 in one day. We’ll see more days like that. In fact, it could be tomorrow for all I know, or the day after.

TGR: Do you see a specific catalyst for this?

SR: Not specific. It can be anything—war with Iran; some big banks going under; another country defaulting on its obligations. It can be a major investor like a sovereign wealth fund going to 50% gold or something. It can be absolutely anything. Now the trick here is gold and silver markets are not based on large amounts of buying. Let’s say tomorrow Warren Buffet says he’s going to buy $10 billion worth of gold. Immediately the supply is going to dry up. People who have gold will say, “Wait a minute, we’re not selling. The price is going up.” So the effect of a single event like that in the gold and silver space can reach far beyond what it would in any other market.

It is important to remember you don’t want to be in and out of assets of this type on a whim. Even if it takes a year, even if you have corrections like this, for my investment strategy I do not believe that gold and silver are amenable to buying and selling as are assets in other markets. Better to treat them like insurance, where you have it in good times and bad times. It won’t take a lot of buying to push these metals back up. And even though the metal prices have come down, if anything, demand for gold and silver has increased.

TGR: Evidenced by trying to find some coins.

SR: Absolutely and on any level. A week or two ago I was talking to a gentleman in London who runs a business that basically allows people to invest in gold. He told me that the gold he has in storage for his investors has reached some 11.5 tons in about 2.5 years. This is just one market participant out of who-knows-how-many and he deals mostly with retail investors. I believe the demand is there now and is only going to increase. Our current situation is going to add to that, not subtract from it.

Today’s metals prices are absolutely bogus, as is the price for oil. Yes, you can buy it at that price, but that is not what it’s worth. Right now oil is trading much, much cheaper than water, maybe one-third of the price of water. It should not be possible. I don’t believe in the rational market theory. I think the market is always wrong in the short term.  Continued...