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Jayant Bhandari, an institutional investment adviser to the junior mining market, is like a leopard stealthily scanning for market inefficiencies that will make his clients more money. The most promising arbitrage situations—trades that exploit price differences between similar financial instruments—come about as a result of takeover bids, while others happen when a company’s shares trade significantly below its cash on hand. In this interview with The Gold Report, Bhandari shares arbitrage opportunities he’s stalking and some company stories with management teams that he thinks are close to perfect.

The Gold ReportIn a recent article, you argued that investors in the West will find their way to gold when the new reality dawns on them that losing a bit of money to preserve the rest is “a good deal.” Please explain further.

Jayant Bhandari: What has to happen does not have to happen right away. Everyone in the world is flocking to the U.S. dollar. It offers liquidity, but eventually the U.S. dollar will become too expensive. When that starts happening people will look for other opportunities to safeguard what they own, and gold is something that will become increasingly visible.

TGR: How long is the U.S. dollar going to continue its ride?

JB: The U.S. dollar could do well for quite a period of time because while the U.S. is sinking, everything else is sinking faster. The European Union is in worse shape. Most of the developing countries, apart from China, are in horrible shape. They consume pretty much everything that they create. The U.S. dollar, despite all that is going on, remains one of the better currencies.

TGR: You also relate gold buying to how in India people buy gold and cattle—not necessarily because these are excellent investments but rather that these things will ultimately lose less value than other investments.

JB: A lot of people buy gold because of inflation but I don’t think that’s the reason why Indians, people in the Middle East and people historically in China have bought gold. As I mentioned in that article, the return from 300 million cattle in India is about minus 50–70%, depending on the kind of cattle. People invest in negative yield investments because they have few options in these societies. But that is what’s increasingly happening in the West. It started with the European bond market. This morning I see Swiss bonds trading at a negative yield, which tells me that this society is no longer offering people opportunities to make money by investing. When that starts happening people do what they have to do to safeguard whatever they can safeguard.

TGR: You present a rational argument for buying and holding gold. Yet you buy and sell precious metals equities, mostly small-cap gold and silver equities, which carry more risk than owning gold. Why are you active in this space?

JB: The reason I’m in the junior gold equity market has almost nothing to do with goldper se. These are two different beasts: gold is gold and gold equities and gold mining is a business. When I invest in a mining company or a junior mining company, I assume a very low gold price, something generally lower than the spot price, and then I do a valuation based on that price. Now, when I enter the gold market I presume that gold will go up and if gold actually goes up it will trigger a higher valuation of these equities. I am increasingly more optimistic about gold and as a result I think this will underpin an increase in buying volume and investment in the junior mining space.

TGR: Is the junior mining market largely undervalued given current metal prices or is it fairly valued?

JB: There are still lots of useless companies in the junior market, most of which are “lifestyle” companies. Yet the market fall has resulted in the fall in the share prices of some very good companies, too. That’s where the future value is and where money will be made.

TGR: What do you mean by lifestyle companies?

JB: Junior mining companies exist in an interesting space. The CEO often decides his salary, expenses and what kind of accountability he wants. If he chooses, he essentially has a company credit card to live the life that he wants, and regulations cannot help you there because as long as they are expenses, and the CEO signs off on those, they are legally legitimate. This is a lifestyle company.

TGR: In a different opinion piece on you wrote, “The real problem with the junior mining industry is that investors have lost faith in those who run these companies.” Are you willing to name some management personnel that you still have faith in?

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