Sell Japan, Buy Gold Miners?

By MoneyShow.com  JUL 31, 2013 12:30 PM

Global expert Keith Fitz-Gerald is bearish on the Japanese yen and Japanese bonds, but bullish on the long-term prospects for the out-of-favor junior gold miners. Here's why.

 


Steven Halpern: We're here today with Keith Fitz-Gerald, chief investment strategist of Money Map Report and the chairman of the Fitz-Gerald Group, which provides financial consulting services to governments and corporations. How are you doing Keith?

Keith Fitz-Gerald: I'm doing great. Thanks for having me today, Steven.

Steven Halpern: Keith, given that much of your time is spent in Japan, I'm always interested in your outlook on that market. What's your outlook for Japanese stocks?

Keith Fitz-Gerald: Well, I'll tell you. After a brief burst that is prompted by Japan's Prime Minister Shinzo Abe's commitment to his version of Ben Bernanke's bailout strategies, I'm growing less confident in their ability to execute a major overhaul of the Japanese economy. Unfortunately, it's not good at this particular moment.

Steven Halpern: Okay, now, also you are short the yen, as well as Japanese government bonds. You've taken that position through ETFs. Can you tell us a little about those positions?

Keith Fitz-Gerald: You bet. The argument is very, very simple and again, I do spend a lot of my time there, unlike a lot of analysts who simply are familiar with it from reading the headlines. I'm married to a Japanese and have spent 25 years living there, at least part-time, every single year.

We are short the yen for one simple reason. Japan has the highest debt load per GDP of any nation on the planet. They are so far out of whack, that if you add up public, private, and corporate debt, you're looking at almost 500% of GDP.

At the same time, they've got a very old population. They have a very low birth rate. They have no immigration policy to speak of. The workforce is declining at the same time the number of pensioners requiring support is increasing. What this means net-net is that ultimately, the yen is going to have to come down.

It's going to have to come into line with overseas capital markets and Abenomics is going to ensure that that happens. They need a weak yen. That's part one of what they call the three arrows.

We've simply taken the mind, that the best way to play that, is the Proshares Ultra Short Yen (NYSEARCA:YCS). So far, we are well into the double-digit returns. I think there's an awful lot of juice left in that trade.

Steven Halpern: For Japanese government bonds, what would you recommend?

Keith Fitz-Gerald: Japanese government bonds are very interesting. We use a PowerShares Deutsche Bank Inverse Japanese Government Bond Futures (NYSEARCA:JGBS). Boy, these things are a mouthful aren't they? What we're looking for here, really, is the same sort of phenomena we're looking for in the United States.

Eventually, by virtue of all this money that Abenomics is going to pump into the Japanese economy, inflation will ignite, the value of the currency will change and ultimately the value of bonds, this long bond run we've seen, will go the other direction. This is really a trade designed to help investors set that up.

Steven Halpern: Outside of the Japanese market, you recently said that Junior Gold Miners are about the most unloved, intensely disliked investments on the planet, but you've taken a contrarian view and believe that that pessimism is a reason to buy. Can you explain your position?

Keith Fitz-Gerald: Absolutely, you know that old joke as well as I do. Contrarians are great at picking tops and bottoms. The rest of the time, they're just wrong.

In reality here, I think we've seen something that the rest of the world simply hasn't seen. Every bubble, whether it's resource related or not, has to have an adjustment along the way. It's not uncommon for resources to correct 40%, 50%, even 60% and the Fed and other central banks remained trapped in gilded cages that they made for themselves.

To me, that speaks to the logical need to preserve value. When I see a stock or a collection of companies, in this case, Junior Gold Miners, that are intensely disliked, unloved, un-favored, that to me is an important indicator when you couple it with short interest that's been running at an all-time high that there's a change in the wind.

To quote legendary investor Jim Rogers, I just want to wait until somebody puts money down in the corner of the room, then walk over and pick it up. I think we're at that point in time.

Steven Halpern: You'd be taking a long-term view on the mining stocks, correct?

Keith Fitz-Gerald: Yes, that is correct. I don't like to do anything that is short-term if I can help it. I'm very much an advocate of moving with the markets, rather than against them. Timing is an exercise in futility. Even the very, very best traders have trouble doing it consistently, so I'd rather be an investor.

In that sense, I want to look for the motion in the ocean, the changing of the tides, rather than discrete specific waves, because those come and go all day long. Unless your timing is very good, you're going to miss them.

Steven Halpern: In terms of the Junior Miners, would you be recommending that individual investors look at the actual mining companies themselves, or would you prefer a more diversified investment in an ETF?

Keith Fitz-Gerald: Well, this is an interesting question, Steven. You could go for the discrete companies. The problem with that is that you really have to be able to sort the cash from the trash. It's very hard to do that unless you absolutely know what you're doing, spend an awful lot of time on site, and literally walk the dirt with the geological engineers.

I think the better way for 99% of all investors is something called the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ). That is going to sweep in some questionable companies, but for the most part, it's going to grab a whole broad swath of the industry that I think is poised for a run.

Steven Halpern: Thank you for taking the time today and we look forward to talking again.

Keith Fitz-Gerald: It's my pleasure. Thanks for having me.

Editor's Note: This article was written by Steve Halpern for MoneyShow.

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