4 Views On Gold Going Into 2015: D'Agostino, Gartman, McGlone & Rule

Gold is still making a slow recovery from its disastrous 2013 performance. ETF Report explores experts'
expectations, sources of demand and ETF choices.

[This article originally appeared in the November issue of ETF Report, and is republished here with permission.]

Our panel of experts discuss gold's outlook, proper allocation and what would need to happen to change their views.
Gold has attempted to claw back from one of its worst performances ever, in 2013, but is this merely a pause before
the downtrend resumes the early stages of another bull run? In any case, how much gold should an investor hold in a
diversified portfolio? ETF Report sat down with four experts to help sort out the outlook for gold: Rick Rule, director,
president and chief executive officer of Sprott US Holdings; Mike McGlone, director of U.S. research for ETF
Securities; Dennis Gartman, editor and publisher of The Gartman Letter; and Ed D'Agostino, publisher of Mauldin
Economics and general manager of Hard Assets Alliance.
Are you bullish or bearish on gold in 2015?
Rick Rule: Quite bullish; sentiment is very negative. Markets move up when they exceed expectations, and
expectations could not be lower.
Mike McGlone: I am bullish. There is good potential that the price of gold in U.S. dollars may be bottoming near the
widely watched $1,200/oz level as we speak. We estimate this area as the all-in cost of production for gold, and it
was a key inflection point last year that brought about significant physical buying, notably from the East. Major
disturbances occurred in the gold and precious metals derivatives market last year on the approach to $1,200,
indicating it was a key stress level.
It's worth noting that the price of gold in terms of the euro currency is up about 9% year-to-date compared to a U.S.
dollar price increase of about 1% [at the time of this interview]. Gold is the quintessential currency, and increasing
currency volatility should ultimately benefit gold.
Dennis Gartman: It depends upon whether one asks me that question for gold in U.S. dollar terms or for gold in
terms of other foreign currencies. For gold in U.S. dollar terms, I'm agnostic; I don't care much at all. I can make you
the bullish case and I can make you the bearish case. I could probably lean towards the bearish case slightly more
certainly, but not dramatically.
On the other hand, if you asked me my view of gold in terms of yen, I'm phenomenally bullish. If you ask me if I'm
bullish of gold in terms of the euro, I'm phenomenally bullish. Because I see gold as being nothing more than another
currency, I see those two currencies as being under duress, and I see gold as being the better of those currencies.
Gold in yen terms can go demonstrably higher; gold in euro terms can go demonstrably higher.
Ed D'Agostino: I'm moderately bullish for 2015. But rather than describe my position as bullish or bearish, a better
way to outline my view on gold is to say gold is an essential asset class to own in 2015. I'm not predicting a major
price move. Barring any major geopolitical events, I believe we will see low double-digit growth in gold in 2015. But
investors must have exposure to gold. There is simply too much risk in the world not to have an allocation.
What will be the biggest driver of prices next year?
Rule: A renewed investor concern about the U.S. economy and the U.S. federal deficit. Any improvement in East and
South Asian economies would help too, as Asian retail physical demand is important.
McGlone: An end to the stock market rally would likely be a key driver when that eventually happens, as it has been
the only game in town and has drawn the most capital and attention. We are not predicting a time frame for that, but
when it happens, gold is likely to be a primary beneficiary. More fundamentally, a continuation of declining sovereign
debt yields should be a key driver for higher gold prices.

There are currently 10 European countries with two-year note yields that are negative, including France and
Germany. This is something one would expect in a Lehman-type event, yet in this case, it appears more sustainable.
The ratio of the U.S. 10-year yield to that of the German bund 10-year yield is currently about 2.6. This extreme level
of yield disparity has never happened in the modern financial system (since 1990 in our bund/U.S. Treasury
database). The highest ratio before this year was 1.5.
Gartman: Geopolitical forces will be of secondary importance next year. Monetary policies will be of primary
importance. And it's for the monetary reasons that I'm bullish on gold in yen and euro terms. There's no question that
Japan and Europe have lagged far behind the United States when it comes to the expansion of their monetary
aggregates.
They need to expand their monetary aggregates. Japan absolutely must. Europe has been a terrible laggard and its
economy has suffered dramatically because of that. So it will be an expansion of the monetary aggregates that will
take gold in euros and gold in yen higher.
D'Agostino: There are two main drivers. First, geopolitical risk is very high right now. ISIL threatens to completely
disrupt an already-unstable Middle East. Make no mistake, ISIL's efforts are all centered on one outcomewar. And
they just may get it, as the world likely has no choice but to engage. Implementation and coordination will determine
both the outcome and the way the East views the West, moving forward. Getting this right will be tricky, to say the
least. Strange bed-fellows will be formed before this fight is over.
The second driver is financial. Major economies are undergoing massive changes right now. In the West, recovery
from the financial crisis is slow, despite massive government intervention and central bank balance sheet expansion.
As I write, global stock markets are flirting with a correction, the U.S. housing market is stalling, consumer sentiment
is falling and commodity prices are collapsing. The only factor holding down gold's price is the "flight to safety" trade,
with global investors fleeing to the U.S. dollar. This is a risky bet, and sooner or later some of the flight capital will be
redirected to gold.
How much of an investor's portfolio should be allocated to gold?
Rule: About 10% between bullion and miners, depending on the investor's age, wealth and the composition of the
rest of the portfolio. Long-bond investors should own more.
McGlone: Depending on the investor, between 5 and 20% potentially, with some of the overall mix in other
commodities. We prefer to focus on an index or basket of precious metals (gold, silver, platinum and palladium) as it
can provide superior, longer-term portfolio enhancement and augmentation with similar exposure to emerging market
demand than a broader basket of commodities, but without the issues of using derivatives and dealing with
backwardation or contango in the futures market.
In the current market, with most precious metals at steep discounts from the highs reached a few years ago and with
stocks quite richly valued, it seems prudent to look to overweighting precious metals in portfolios, just as it was
prudent to underweight gold when it hit $1,900 in 2011. Precious metals are one of the few asset classes with a solid
history of low or negative correlation to stocks; thus, they have a higher tendency to enhance and augment portfolio
returns.
Gartman: On balance, everybody should have somewhere between 2 and 7% of their worth in gold.
D'Agostino: That's a question that needs to be addressed at the individual level, of course, based on age, wealth,
etc. For the individual with a reasonable amount of wealth, a minimum allocation ranging from 10 to 20% of
investable assets is reasonable. The case can be made for a larger allocation, depending on your goals and your
global outlook.

What would make you change your outlook on gold?

Rule: A real economic recovery in the U.S., with increases in labor market participation, real wages and capital goods
spending, and a successful interest-rate hike.
McGlone: Generally, historically, the worst environment for gold has been disinflation (declining inflation) with high
real yields, such as in the 1990s. There is not much room for disinflation with inflation currently so low so that it is not
much of a risk. A sharp pickup in sovereign debt yields with less of a pickup in inflation would be bad for gold (rapidly
increasing real yields) but again, is not likely. Other factors that could pressure gold are a continued rally in the U.S.
equity markets; a sustained rally in the U.S. dollar; aggressive central bank tightening; a sharp decline in the price of
oil; or a sharp reduction in the U.S. debt to GDP ratio.
Gartman: If the Fed were to say inflation simply has never gotten anywhere close to its hoped-for 2% and that we
would have QE4, that would change my opinion. It would drive me from being agnostic to being supportive of gold in
dollar terms.
D'Agostino: Financial stability as demonstrated by a reduction in real debt levels of Western governments and a
global GDP growth rate in excess of 5%; a smooth transition in China from an export economy to a consumer-based
economy; world peace; or maybe a unicorn sighting. In other words, I don't see my outlook on gold changing in the
near future.
Anything else you'd like to add?
Rule: Gold will continue to be an important component in global retail savings, especially among Asian workers who
have a long cultural affinity for the metal, and a healthy disrespect for their own currency. An increasing realization at
home and abroad that the U.S. 10-year Treasury is a long-term wealth destroyer as a savings instrument could lead
to both private and official sector rebalancing, which would favor gold. In the gold equities, a gradual realization that
investment efficiency is more important than leverage to the gold price will begin to improve corporate performance
over time.
McGlone: Some of the developments of 2014 have been quite positive for building a foundation for a sustained rally
in the price of gold. The global decline in sovereign debt yields is a strong net positive for the price of gold. Along with
the decline in the price of most industrial commodities, it is also indicating the global recovery may be on much less
sound footing than most analysts expect. If the market ends the year with gold having sustained above $1,200 an
ounce and the equity market shows signs of stumbling, the foundation would be quite positive for gold to start 2015.
Another significant trend in the precious metals market has been the migration of demand to the emerging markets.
This is not your father's precious metals market. Emerging markets had virtually no participation during the last bull
market in the 1970s. In 2013, emerging markets accounted for about 60% of total precious metals demand, up from
about 33% in 2003 and only 25% in 1993. The trend is clear: Rapidly increasing emerging market per capita incomes
are helping to drive the increase in precious metals demand, a trend that is unlikely to reverse.
Gartman: Far too much time is spent on the part of the gold bugs worrying about defending, investigating, paying
attention to the notion of manipulation of gold prices. Who cares? It's a waste of time and effort. Whether it is or is not
manipulated is unimportant. If it is, it is already discounted in the price. If it is not, it is already discounted in the price.
What a great waste of time on the part of the bugs to worry about manipulation. If they would spend half as much
time trying to find a cure for major diseases as they try to find proof of manipulation, the world would be a better
place.
D'Agostino: There are many ways to gain exposure to gold, from investing in the equities of mining companies, to
ETFs, to physical precious metals. A blend of these three basic strategies can be very powerful, and they serve
different functions.
Metals-based ETFs are fantastic for trading on volatility. Mining stocks and their related ETFs currently offer massive
leverage to gold prices. With mining stocks being so beaten down and forsaken by the broad market, many of those
companies have tightened up operations and reduced overhead. It's hard not to load up on mining stocks right now at
current prices; this could be the trade of the decade.

But I encourage investors to remember, when turning to gold as store of wealth, a hedge against instability, and a de
facto insurance policy against risk, there is no substitute for physical gold. Store it in a nonbank facility and make sure
you own the metal outright not fractional, but a fully allocated physical precious metal. If things get really ugly, you
want the option of holding your metal in your hand.