Hard Assets Heresy: Talking Down Gold

By Brad Zigler

You don't go to a conference on hard asset investing to talk down gold. You just don't. You'll make lots of enemies.

The enemy, by the hundreds, was lying in wait for Dennis Gartman, editor of The Gartman Letter, when he strode into a ballroom at the New York Hard Assets Conference Tuesday. Gartman seemed ready to defend his recent apostasy (see "A Gold Bull Stops Running"). Gartman, you'll recall, abandoned gold in late April, claiming the bull market had been broken.

His talk started darkly. Upon an introduction to polite clapping, Gartman intoned, "Save your applause. You may regret it later."

Plainly, he wasn't out to make friends. "Write this down," he said. "Buy things that are going up. Sell things that are going down. Most of you won't do that. You'll buy things only to see them go down. And when they do, you'll buy more. As a consequence, you'll fail miserably."

Invoking John Maynard Keynes' warning ("The market can stay irrational longer than you can stay solvent"), Gartman added his own corollary: "The market will return to rationality as soon as you are insolvent."

Funny line. But there was something else funny about Gartman's speech. He never actually mentioned gold. Everyone, of course, knew what he was talking about. That 800-pound gorilla sat glumly front and center in the room awaiting the question-and-answer period. But gold was never mentioned. Copper? Yes. Gartman remains bullish. Corn? Yup; bullish again. And crude oil, too. But not gold.

Gartman consumed his time on stage so well that there wasn't even time for questions. He got to beat up gold without even invoking its name.

Smart man. He finished his speech and was then hustled out of the ballroom by handlers.

I wasn't so smart. In my talk, I mentioned gold by name. Not only that, I highlighted a half-dozen gold mining stocks featured at the conference and how they can be hedged with the new generation of exchange-traded gold notes. Boy, that got the argumentative juices flowing. I got an earful of questions shot at me.

You'd think I would have learned a thing or two from Dennis Gartman. I must be a slow learner.

Want to see what prompted all the questions?

We'll post my presentation, "Hedging Gold's Volatility," here on HardAssetsInvestor.com shortly.

In the meantime, take a look at the current offering of exchange-traded products and see if you can find the ideal hedge instrument:

Exchange-Traded Gold Products (February 28 - May 5, 2008)

Comments

[GMiki]

This morning spot gold is up about $20. I'll stick with the plodders such as Jim Rogers and Warren Buffet, who don't time the markets.

We're in a gold bull market for good reason--the financial system. All is quiet now, seemingly, but is it really? The dollar is up. But is it, really?

Going to put your money in negative interest-rate securities?

Where has the stock market gone since 2000--and add in something for inflation.

True that to be in this market you have to endure some temporary downdrafts, which aren't as much fun as the powerful updrafts, but buy and hold in the precious metals sector and year over year, you're going to make money. The key is "and hold."

With only a partial investment in this market, I've doubled my money since 2000. That's not "fantastic," but it's better than the majority of investors in the general stock market. I had very big percent conservative (bond) holdings, too, which I've since dumped.

If you can time these markets, then go ahead and short. If not, then just make money being long for the long term. I'm waiting for a nice short-covering rally to take us a lot higher soon.

[Hugh]

Why Dennis Gartman has no idea what will happen with the gold price:

seekingalpha.com/artic...

[Florin]

People such as Mr. Gartman are needed. They keep the gold bull market alive by providing scepticism and a "wall of worry".
It would be far more dangerous if EVERYONE was bullish on gold and had acted accordingly.

[Delilah]

I think that a far better time frame would be either the last decade, the last 5 years, the last year. Why February?

Also, let's put up Microsoft, GE, GM, IBM, and some others against gold and the HUI or XAu. Let me guess. Mr. Ziegler has not and does not own gold in his portfolio. What is your hot record over the past number of years.

[Delilah]

Sorry for the sloppy post. I see what February meant. My error. But the facts remain that first Mr. Gartman is not a real gold believer and his record is mediocre from what I have read. And the gold market continues to flush out those who are frightened by the rapidity of the corrections. Why buy Goldcorp which is up 15 times since 2001 but has multiple sharp corrections when you can buy MSFT which rarely sells off but is down considerably since 2001? We are in a parabolic move here without any speculation whatsoever in the smaller shares and without any public play including Mr. Ziegler. Check back in next year at this time for the results.

[daniela]

Author is right that gold talk is like "you are for us or against us" talk.
Also comments to this article just prove that nobody provides clear, factual argument why gold should go up or down. Instead they are attacking author. It's this irrationality that makes gold very risky business to be in. When I hear gold talk, when the next price hike will be, it reminds me a little bit of 1999. We are in "new" era, world is getting richer, resources for gold are getting smaller....Any smart investors will look somewhere else for "gold" investment.

[Florin]

daniela, if you are so concerned about "factual arguments" why don't YOU start using them instead of attacking the legitimate comments...

[GMiki]

I looked at the Vanguard Funds results for all the funds for one year and since the first of the year to the end of March. The best performing fund was the Precious Metals and Mining--which has a lot of coal in it, by the way.

Why gold will flourish? Because the Fed is inflating away the purchasing value of the dollar. There's no place else to go but hard assets, and gold is real money. That's the fundamentals. Also, look at a five year chart of gold.

The stock market bull is over. It's over. Commodities, starting with gold for security, are on.

[ManagingEditor]

Thanks for the comments. This pretty much approximates the discourse at the Hard Assets Conference. Strong emotions all 'round.

Whether or not you believe gold is in a secular bull market, there's no denying its volatility. And volatility is (or at least OUGHT to be)dampened by hedging.

Reducing volatility reduces the size of drawdowns which means an asset requires less upside to recover from sell-offs. Simply put, if you started with $10,000 of risk capital and suffer a 20% loss, you'll need a subsequent 25% gain to reach breakeven.

Investment management is all about looking at the horizon: what asset size is needed at certain points to fund retirement or some other need. Hedging is simply a tool that can be used to increase the odds of obtaining an anticipated outcome.

[User 30121]

You give 'em hell, GMIKI!!!! Excuse me now, I have to find some more yellow/white metal to put in my safe!