Staying Bullish: A Talk with Adrian Day, of Adrian Day's Global Analyst

The Gold Report February 2004 www.theaureport.com

The Gold Report recently caught up with Adrian Day, a British-born money manager. We thought we’d share some of his thoughts about the gold market and the U.S. economy with you.

A graduate of the London School of Economics, Day is president of his own money management firm, Global Strategic Management, which specializes in global diversification and gold equities for individual and institutional clients. He is the author of two books on the subject of global investing, and the editor of a premium fax/e-mail service, Adrian Day’s Global Analyst.

The correction in gold is certainly not unexpected. Looking at prices over the last year, it has moved way off the trend line. And with the dollar correcting a bit, it’s not surprising that gold has started to pull back.

I think the correction probably has a little further to go, and I’m not at all concerned. In my opinion, we’re in a long-term bull market, and one or two years could take us to $550 or $600 per ounce. As a long-term fundamentalist, I’m much less concerned about what might be happening this week or next week. In this market, you want to be looking for opportunities to invest, and not worrying about short-term corrections. Gold has had a reasonably good correction – approximately $20, or less than 5% from the top – well, that’s really not too bad.

Gold Valuations

To put a few companies and their valuations into context, the seniors have moved above their long-time average valuations on the basis of the price per ounce of gold and the productional price per ounce of gold in reserve. With the recent correction, the price of the stocks is approaching slightly under-valued on a long-term historical basis. The South African stocks Gold Fields and Harmony are probably the cheapest of the lot, but are also vulnerable to a higher rand.

Some second tier stocks, in particular Iam Gold, are reasonable values. But highfliers like Gold Corp., and Glamis are not priced well. On a fundamental basis, Newmont is not the cheapest of the gold stocks, but it is one that will lead in an up market. Currently, it’s a good buy, especially for those who don’t already own it. I also favor Harmony, with its good valuation and very aggressive and entrepreneurial management team. While they don’t have the best mines in South Africa, there is potential, and they’ve done a good job.

Gabriel is troubled by two concerns. It is clearly one of the largest, most prospective undeveloped gold deposits in the world, but its geographic location has investors wary. I believe that Romania is a solid country, but there is concern about its close proximity to Serbia. The other issue, which I think is moot, concerns past management. Frank Timis, the founder of the company, has stepped down as CEO and been replaced by Oyvind Hushovd, a Finn who used to be with Falconbridge. Hushovd has an excellent reputation, and so we’ve now got a company with a great deposit, and good management. Whether management will develop it themselves, or sell to someone is an open question, but I think the stock is a good buy.

An Overlooked Market

The gold market now generally has two types of investors – the traditional “gold bugs” who have either returned or stepped up their buying, and very short-term oriented hedge funds. Recently, sophisticated money has been coming in from some of the big pension or generalist funds, but that’s still moderate and very selective. What’s missing in the gold market is the investing public in the middle – including professionals and individuals.

Although gold has been virtually the top-performing asset class for three years running, it isn’t attracting new investors. Part of that might be a timing issue, since when gold was doing well in 2002 the broad market was down so much that there was a reluctance to jump from a collapsing sector into gold, which might also collapse. But now that the broad market is coming back, the sentiment seems to be that investors may buy gold when their other stocks get back to breakeven. I take this as a good sign – because if everybody jumped in right now – gold would go even higher.

An Uncertain Economic Recovery

The U.S. economy is doing very well, on the surface. Despite strong GDP numbers, recovery is selective in three important areas.

First, most of the increase in GDP over the last two years is attributable to increased government spending, not a good sign for sustained economic recovery.

Second, although some aspects of the economy are doing very well, and capital investments are beginning to turn around, there is still great weakness in employment. Given that we’re into a fairly strong recovery, payroll numbers are still weak. And that is a danger sign, because no matter how much money companies are making, if they’re not hiring, they’re not going anywhere in the long run.

Third, the consumer debt situation is problematic. Credit card debt is at a record high, which is not surprising with such low interest rates. But when you look at the debt service numbers – relative to consumers’ income – we are seeing all-time highs. One would expect that with such low interest rates, the debt service burden would also be down, but many people are over-extended right now. If interest rates start to move up at all, there are going to be problems, especially in the area of housing. I believe that the risk over the next couple of years is a very real one.

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