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Why Is Anti-Goldbug Dennis Gartman Getting into Gold?

http://www.theaureport.com/pub/na/15533?utm_source=delivra&utm_medium=email&utm_campaign=Gold+final+streetwise-reports+08%2F21%2F2013+14%3A28%3A10

Dennis Gartman Dennis Gartman, the editor and publisher of The Gartman Letter, has made no secret of his disdain for gold. But he believes a good trader is agnostic of everything. So, when technical charts indicated it was time to buy, he did. In this interview with The Gold Report, Gartman talks about how he has been playing gold off of other currencies to turn a profit and discusses whether he is ready to get into gold equities yet.

Companies Mentioned: AngloGold Ashanti Ltd. : Barrick Gold Corp. : Newmont Mining Corp.

The Gold Report: Dennis, in late July, you told CNBC that you're a "buyer of gold" after being what amounted to the grand marshal for the gold bear parade. Why did you change sides?

Dennis Gartman: Simply because the gold bear parade had gotten a bit overcrowded. It was actually quite astonishing to me. Everybody was overtly and manifestly bearish of gold. If I've learned anything in 40 years, it's that when things get terribly one-sided, it's probably time to go to the other side. Gold had reached some technical levels that I found interesting, but more important, it had reached a level of psychological bearishness that pushed me off the sidelines, off from being bearish of gold, to being bullish.

TGR: Have you taken some ribbing from your colleagues as a result of that position?

DG: I found it amusing that I was taken to the woodshed because gold went down another $15/ounce from where I bought it.

TGR: While you are buying gold, you told CNBC that you're not a true believer. What's holding you back?

DG: The true believers in gold—the goldbugs, the folks who think that the world is coming to an end, that gold is the be all and end all, that money should be backed by gold—I'm not of their religion. Good traders are agnostic of everything. They look at numbers simply as something dancing across the page, as cleanly and as unaffectedly as they can, buying the things that look cheap and are starting to go higher, selling the things that are high and are starting to move lower and not caring a wit about what it is that they are trading. Most people who trade gold are true believers. They believe that gold is the be all and end all. I could care less.

TGR: In another interview, you said that you're bullish on gold in yen terms versus gold in U.S.-dollar terms. Could you please flesh out the difference?

DG: First of all, let's understand that gold is nothing but another currency. Yen is a currency. The dollar is a currency. The euro is a currency. That's all it is.

Having grown up as a currency trader, I was always taught to trade one currency against another. One is long of Canadian dollars, short of yen. One is long of euro, short of British pound sterling. One is long of gold, short of yen.

I'm long of gold, short of yen for the very simple reason that the Bank of Japan, under the new regime of Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda, has made it abundantly clear that it will do everything within its power to expand the bank's balance sheet over the next year and to weaken the currency over time.

It's been a far better trade over the last two years than being long of gold in U.S.-dollar terms. Gold in yen is down 1% over the last two years. Gold in U.S.-dollar terms is down 28%. I think down 1% is better than down 28% almost any time.

TGR: Has gold in U.S.-dollar terms bottomed?

DG: Gold in dollar terms likely has not bottomed. Gold in dollar terms has been a bear market since the autumn of 2011. Each low has been lower. Each high has been lower. Until that trend changes, it's a bear market.

Prices have been moving from the upper left to the lower right. I haven't learned many things in 40 years of doing this, but if something has been moving for two and a half years from the upper left to the lower right, the odds are next month it will have moved even lower to the right. No, gold has not seen its low in dollar terms.

TGR: What has caused that two-year decline?

DG: Too many goldbugs. Too many people hoping that there will be a continuation. Although they take Federal Reserve Chairman Ben Bernanke to task for what he does, they hope he will continue because they hope that the expansion of monetary aggregates gives rise to higher inflation. They have been abundantly wrong about that—it has not. It may eventually, but it hasn't thus far. Because it hasn't created the inflation that the goldbugs wanted, they continue to buy gold. They find themselves in an uncomfortable and losing position, day by day and hour by hour.

TGR: Is stagflation or rapid inflation more likely?

DG: Stagflation—no question. It's been happening for the past several years and will continue. Why? Wages are under pressure and will continue to be under pressure. People won't like this answer, but in a world where 1.3 billion Chinese, 1.2 billion Indians, 240 million Indonesians and 28 million Malaysians are being brought into the modern world; where Africans are being brought into the modern world; and where transportation and communications are better than we've ever seen, if you think that a high school education in North America or Europe is going to give you the same living standard and the same wage rates that your parents got, you're naïve. Wage rates in Asia are going to continue to put downward pressure upon wage rates in Europe and the U.S.

When wage rates are under pressure, and they are under pressure, where can inflation be derived from? The true believers have always thought that an overexpansion of the monetary aggregates has to give rise to inflation. Thus far, they've been proven wrong.

TGR: You have bought the S&P 500 and the Nikkei in recent weeks. Why did you make those moves?

DG: For the same reason I made the move to buy gold. Everybody had been so overtly bearish. Let's be honest, I got very lucky. I sold half of it last Friday, going into the nonfarm payrolls number, and I sold the other half of it two days ago. Now I am once again agnostic of stocks.

I'm still bullish in the long run. This bull market still has years to run, but sometimes it's better to just stand on the sidelines. As I like to say, in a bull market, there are only three positions that you should ever consider having: wildly bullish, pleasantly bullish or neutral. I was wildly bullish. I'm neutral for a while.

TGR: If you're bullish on gold, what about gold equities?

DG: If you'd asked me that question a year ago, I would have said that they're a losing proposition. If you wished to bet on gold, why would you buy gold equities that expose you to management ignorance and the vagaries of natural disasters? For the past two years, gold equities have lost day after day after day. It has been a horrifyingly bad trade. It has made no sense.

But today, gold equities have been beaten up so badly relative to gold that they've discounted natural disasters. They've discounted management ignorance. They've discounted all of the ill that could befall an industry.

If you're going to be a buyer of gold miners, buy the real gold miners. Buy Barrick Gold Corp. (ABX:TSX; ABX:NYSE). Buy Newmont Mining Corp. (NEM:NYSE). Buy AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE). Buy the companies that have been around for a while.

It's the first time in some two and a half years that gold equities may actually begin to rally when gold rallies—and may even begin to rally when gold goes sideways.

TGR: But wouldn't some of those smaller companies rally along with the gold price?

DG: The answer is maybe. But that's roulette. Nine times out of ten, even when gold rallies, you're going to lose money. You may get lucky, but mostly you're going to lose money.

TGR: Do you see another round of consolidation coming to the gold equities?

DG: There is always consolidation in gold equities. There has been for hundreds of years. There will be hundreds of years into the future. That will never change.

TGR: Are you bullish on any other precious metals like silver, platinum, palladium or even rhodium?

DG: I know nothing about them. Those are for people smarter, more naïve or more courageous than me. I don't trade silver because I don't trade things that can move 3% in a day. I don't understand that kind of irrationality. I leave that to others.

TGR: That's happened to gold in the last few months, too. It certainly moved a few percent a couple of times in April.

DG: That was also very disconcerting. I don't like that. It also moved a couple percent after the nonfarm payrolls number; it moved 1.5% lower and 1.5% higher. That's illogical. It makes me tend to go to the sidelines.

TGR: You started out in commodities in the cotton business. How does your experience with cotton inform your view of gold?

DG: My experience in agriculture, not just cotton, taught me a good deal about psychology. Learning how psychology dashes about is extremely important in agriculture and absolutely attributable to any other commodity, equity and even the bond market.

The cotton market taught me to watch how the term structure of the futures functions. I learned not to sell any market that's gone to backwardation where the front months are above the backs. That tells you a lot about what informed money is doing.

It also taught me a lot about technical analysis. It taught me that I need to understand the fundamentals of what I am trading, and then I need to understand what the chart is telling me. Investors need to understand whether they are going to be bullish or bearish fundamentally, and then they better see what the chart is telling them.

Everything I learned in cotton is absolutely applicable to what goes on in almost any other market.

TGR: What is the gold chart telling you right now?

DG: That it's a bear market in dollar terms and that it's a neutral market in yen terms. If you're going to be long of gold, you're better off owning it in yen. That's what the charts are telling me.

TGR: At the New Orleans Investment Conference in November, you're going to be on the speakers docket with the likes of Dr. Ron Paul, Marc Faber and Charles Krauthammer. What role will you play in that group?

DG: I will be the court jester. My duty is to laugh with Marc Faber, who is one of the truly funniest people in the world despite his Swiss accent and his Swiss background. He's hysterical, but we usually end up arguing. We're on the opposite side of ideas. I probably will not be a proponent of what Ron Paul argues because I know that he'll be arguing against the Federal Reserve, and I'll argue that the Fed, under Bernanke, saved the world from crumbling in 2008 and no one gives it credit for that. My role with Dr. Krauthammer will be to bow in awe of the guy's majestic wisdom because he is truly a brilliant gentleman.

TGR: What's the key message that you're telling subscribers of The Gartman Letter right now? What sort of wisdom are you imparting to them?

DG: My message is the same one that I've imparted for the last 35 years. Buy things that are going up. Sell things short that are going down. Run from losses as quickly as you can. Admit when you're wrong. Try to understand why something is fundamentally going higher. Make sure that the chart agrees with what you're saying.

TGR: What's the trade right now?

DG: The world is a far better place than the goldbugs would ever admit. The world is moving forward and advancing on a shocking basis economically. There will be people who will tell you that things are getting bad. I will tell you they've never been better. They might not be perfect here in the U.S., but the rest of the world is scrambling to jump into the 21st century. Those who forget that, those who miss that, are going to miss great opportunities. It's a bull market in equities in global terms. You better understand that.

TGR: Thanks for talking with me today.

DG: My pleasure.

Finding Bargains Down Under with Rick Rule

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Rick Rule Down markets are notoriously rife with good deals, and nowhere is this truer than down under in Australia. In this interview with The Gold Report, Rick Rule, founder of Sprott Global Resource Investments, explains how he takes advantage of Australia's small, volatile market and investors' ethnocentrism to find high-quality companies whose shares are, in his opinion, going for a steal.

Companies Mentioned: Birimian Gold Ltd. : Hot Chili Ltd. : Hummingbird Resources Plc : Papillon Resources Inc. : Peel Mining Ltd. : Perseus Mining Ltd.

The Gold Report: You recently said that this is your fourth cycle in a commodity sector in your 40-year career. Where are we in this current cycle, and how do you determine that?

Rick Rule: The bottom is usually marked by a two- or three-week period of capitulation selling followed by a standoff, where both the buyers and the sellers are exhausted. We haven't seen that yet. We've had two or three different periods with a couple of days of capitulation selling but not a two-week period as we saw in 2000.

I wouldn't be surprised if the downturn was four years, which suggests we have a year and a half to two years before we clean out the excesses. The junior sector is substantially overpopulated with companies, managers and agents. There needs to be a major cleansing over the next 18 months.

TGR: Will it be more cleansing or more mergers and acquisitions?

RR: Cleansing. Most of the walking dead juniors, the zombies, are a bunch of liabilities disguised as public companies. Their assets are liabilities; their financials are liabilities; mostly their managements are liabilities. It's wonderful. Every 5 or 10 years you have this major reset in the junior sector. Although it's extremely unpleasant to go through, it's very healthy.

A lot of money can be made in deep and cataclysmic market downturns, not just on the rebounds. People do egregiously stupid things out of panic at the bottom. They engage in capitulation selling with no regard to value. In that situation, you don't need to buy in anticipation of news, because good news comes out and there's no market reaction to it. You can wait for the news to get out, analyze and digest it and then buy it. That's as much fun as you can have in this business.

TGR: Is this basically buy and hold? Find the good values now and ride through this down market?

RR: That has always been my technique. For me a market is just a facility to buy and sell assets. Juniors rise in value when they answer a series of unanswered questions; that takes time. I never go into a speculation with a planned timeframe of fewer than 18 months. I'm 60 years old now—the idea that I have to hold a stock for 18 months doesn't give me apoplexy. I'm on my 31st cycle like that.

When I interview a junior I ask, "What are you going to do with the money you're asking me for? Tell me how this $3 million is going to make the company worth twice as much." About 70% of the time the junior doesn't have an answer. That makes my life really easy. I just get up and leave.

TGR: That's a pretty quick litmus test.

RR: It's as though somebody is going to drive from Los Angeles to San Francisco and starts driving east. Those juniors don't have a plan. They don't have a map. They plan to pay down payables and then slam a few holes in the ground, and if there's good fishing nearby, they'll take advantage of that.

TGR: You've been focusing on Australia, which you've said is cheaper than North America and has better quality.

RR: It's true in both cases. This is a wonderful topic because I can get the Australians and the North Americans mad at me at the same time. Compared to the North American market, Australia's is very small and much more volatile. When outside money floods into it, the valuations explode and the market goes higher faster. When outside money pours out, the market contracts ridiculously.

The Australian equities market becomes very ethnocentric in a bad market. Australians focus within Australia and tend to sell non-Australian things more than Australian things. We like to go into Australia in bad markets and find the companies that have done a good job overseas but have been sold because of this ethnocentricity. We try to put equity into existing Australian companies and be supportive shareholders.

The Australian exploration community is extremely competent overseas, particularly in Africa. They're used to Archean terrain and harsh climate conditions.

TGR: Can you highlight some of the companies you're investing in that have projects in Africa?

RR: We're following 70 or 80 exploration plays in Africa. Most are too low grade to ultimately attract our attention, but seven or eight deposits will almost certainly become mines.

With the number of companies active in West Africa, there's going to be a fairly active consolidation. In several situations, we think we're going to get what we laughingly refer to as a "double bump": the property will prove itself up, and then the company that has the property will be acquired, and then the newly acquired property will provide a growth profile to the acquirer. You get a bump for being acquired and a bump for the earnings visibility of the people who acquired it.

This theme worked well for us in the early 1990s and coming out of the 1998–2002 market. Our hope is that West African consolidation over the next five years will give us several double, triple or quadruple bumps.

TGR: Australia-based companies in the Sprott portfolio that are doing business in West Africa include Papillon Resources Inc. (PIR:ASX), Birimian Gold Ltd. (BGS:ASX) and Perseus Mining Ltd. (PRU:TSX; PRU:ASX). Are those the types of double bumps you're looking for?

RR: There's a range of discussions there. Papillion is a first-rate deposit. It's done a superb exploration job, and its deposit has size and grade. It could get over the 5 million ounce (5 Moz) market; it certainly has 3 Moz–plus potential. It could make a lot of money for its ultimate acquirer.

Birimian and Hummingbird Resources Plc (HUM:AIM) are attractive in their own right. They're not as large as Papillion, but the potential profitability of their deposits stands out. Perseus has had operational failings that have caused people to reflexively sell them out of disgust. They're just too cheap—the market is valuing their exploration and development assets at zero, and we don't think they're worth zero. A year and a half ago I would have said that Perseus would be a consolidator, but now I expect it will be consolidated because it's selling for 80% less than it did 18 or 19 months ago.

"Compared to the North American market, Australia's is very small and much more volatile. When outside money floods into it, the valuations explode and the market goes higher faster."

West Africa is superior exploration terrain. The amount of money being spent there and the quality of the people exploring there could yield the best exploration results of any region on the globe. It has a lot to give up, and we think it will give it up this cycle. Three or four players will come to dominate the sector. That theme has worked for us in Mexico, in Peru and in Nevada. We are confident it will work for us in West Africa.

TGR: Because Australia is such a small and volatile market, is it challenging for companies listed there to raise money? Do they start cross listing?

RR: They don't necessarily need to cross list. Really good projects will finance themselves. We recently participated in a small financing of about $12 million for Hot Chili Ltd. (HCH:ASX), an unfortunately named copper explorer in Australia that's mining in Chile. To raise that money, it talked to the top five people on its shareholders register. It didn't have to go to the brokers or the institutions.

If Papillion needed to raise more money, I expect it wouldn't have to engage the Australian broker/dealer community. It could engage the top 10 names on its shareholder register.

TGR: I noticed that all the major mining areas in Australia are in New South Wales or Western Australia. Is it critical that those locations are part of your investment strategy for Australia?

RR: We like the whole continent—the Gawler Craton and South Australia. We like New South Wales and Queensland, the eastern goldfields, a lot. We still like the iron oxide copper-gold exploration opportunities in Australia. We like the Archean terrain in eastern Australia and the western Australia goldfields. The Australian continent has an unusually generous mineral endowment.

Our existing participation is limited to the areas where people deliver good drill holes and the Australian valuations are insufficient. In other words, it's limited to where we see bargains. We like what Peel Mining Ltd. (PEX:ASX) has been achieving up at Cobar. Cobar is familiar territory for us, which is an advantage.

TGR: Do you think Australia-based companies will get a bump up if Kevin Rudd comes back as prime minister and alleviates the mining tax?

RR: The mining industry has had a good 10 years in Australia and has unfortunately bragged about its good fortune so much that Australians think there's more money to steal from miners. Similarly, wages are sticky. People competed aggressively for workers in Australia, and workers' wages did extraordinarily well, tripling in many instances. It will take two to three years for those expectations to diminish—expectations on the part of the issuers, suppliers, workers, managements and government-sponsored entitlement beneficiaries.

TGR: There is a perception that Australia's growth is linked to China's due to the proximity of the two. If China's growth is slowing, does that mean Australian mining could potentially slow?

RR: The perception that Australian growth is tied to Chinese growth isn't really a perception—it's reality. China has several problems, such as its weakness in the economies to which it exports, the misallocation of capital internally and the opacity of the lending and capital allocation system. China will have a rough 18 to 36 months working through the capital misallocation. The other part of me says that 5% or 6% growth from a huge base like that means a recovery is inevitable.

"Bear markets cause bull markets; these are wonderful times if you're an investor as opposed to a momentum player."

Looking at the incredible success of the Chinese diaspora globally, you see that as people become freer, they become richer. I think the process is underway and inescapable in China. You don't put the toothpaste back in the tube. It's just the way it works.

TGR: Australia has been getting a lot of press for rare earths, particularly heavy rare earths. Could it complement or overtake the Chinese production of rare earths?

RR: It has the ability to complement Chinese production. If the Chinese were to raise the rare earth prices, production would increase in South Africa, Congo, Australia and any place with Archean rocks and pegmatites. The Australians are leaders in Archean geology.

TGR: Australia is becoming a hotbed for oil and gas exploration. Are you looking at that sector?

RR: We certainly like Australian geology and Australian geologists, but we haven't found the opportunity in conventional energy in Australia that we have found in mining there.

TGR: You are heading down to do a variety of presentations in the coming months. What message do you hope your audience takes away?

RR: I don't know that I have an awful lot to say to conference attendees other than bear markets cause bull markets and that these are wonderful times if you're an investor as opposed to a momentum player.

My message to the financial services industry and to the issuers in Australia is that while capital markets may be shut, Sprott is not. We are able to mobilize our own capital, and we have clients and partners with the same capabilities and outlook that we have.

TGR: Can a regular investor who is not accredited take advantage of this extreme opportunity for financing, as Sprott is doing through private placements and private equity, by buying into Sprott funds?

RR: That depends on the domicile of the investor and his or her personal circumstances. Of course, we would solicit discussions that would lead to people participating with us or owning us. Our U.S. brokerage operation offers resource investment services to investors with portfolios of all sizes.

TGR: So if investors are interested, what should they do?

RR: The easiest way is to go to our website, http://www.sprottglobal.com. I encourage readers to click on the Sprott's Thoughts tab and take advantage of the free subscription. That's a free daily publication that draws information analysis and paradigm from 26 of Sprott's thought leaders. The best way to get to know us is to listen to us on a daily basis for free.

TGR: Rick, I appreciate your time.

Rick Rule, founder and chairman of Sprott Global Resource Investments Ltd., began his career in the securities business in 1974. He is a leading American retail broker specializing in mining, energy, water utilities, forest products and agriculture. His company has built a national reputation on taking advantage of global opportunities in the oil and gas, mining, alternative energy, agriculture, forestry and water industries.

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DISCLOSURE:
1) Karen Roche conducted this interview for The Gold Report and provides services to The Gold Report as an employee. She or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Rick Rule: I or my family own shares of the following companies mentioned in this interview: Papillon Resources Inc., Peel Mining Ltd., Hot Chili Ltd., Perseus Mining Ltd., Hummingbird Resources Plc and Birimian Gold Ltd. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

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