Adrian Day is finding that the glass is definitely half full these days. While the founder of Adrian Day Asset Management believes that volatility in precious metal stocks will continue, he also believes that gold’s extreme bottom is behind us and macroeconomic and geopolitical conditions will continue to support gold. In this interview with The Gold Report, Day is downright exuberant on gold stocks (NYSEARCA:GDX) and discusses royalty companies, prospect generators, majors and juniors that can mitigate risk.
The Gold Report: Gold had a somewhat remarkable August. What’s your view? Is the bottom behind us?
Adrian Day: I think it’s behind us. The principal reason gold has rallied is the sense that the decline was overdone. We got an extreme bottom, and then gold started to slowly move back up. All Federal Reserve Chairman Ben Bernanke ever said was that there might be a cutback in bond buying later in the year if the economy continued to improve. That’s a rather mild statement, simply saying that additional bond buying might be reduced; nobody is talking about actually reducing the Fed’s balance sheet.
During the last few weeks, gold has really responded to the situation in Syria. Gold declined when the British parliament voted down joining the U.S. strike effort. When the U.S. Foreign Relations Committee approved action, gold went up.
The third factor is short covering. The shorts both in gold and in gold stocks reached record high levels at the end of June and beginning of July. There’s been a significant decline in the shorts since then, from 130,000 short future contracts held by speculators to about 71,000 in the last month, but that is still a very high level of shorts historically.
TGR: You take reasonably high net-worth clients and invest them in individually managed accounts, many of which are anchored by gold assets. How are you managing the risk inherent in gold equities?
AD: If you’re involved in gold, it’s going to be volatile. There is no way around that.
We manage the risk by buying companies that are low risk. For the senior companies, that might mean diverse assets around the world not exposed to one political jurisdiction, or it might mean more royalty companies, which have a low-risk business model by definition and strong balance sheets. We buy companies that don’t have any significant negatives. In the junior space, I’ve always thought that certain well-picked juniors with good balance sheets can be low-risk investments even if the stock price is volatile.
TGR: How does the Fed’s monetary policy factor into your management of gold accounts?
AD: The comments from the Fed that caused gold to go down gave us the opportunity to buy quality gold stocks at much lower prices. The reaction to Fed comments was overdone. The most I’ve heard any analyst mention is Fed bond buying going from $85 billion ($85B) a month to $65B a month. That is still $65B of additional money creation every month, an enormous amount of stimulus for the economy.
TGR: You talked earlier about investing in low-risk or lower-risk gold assets. You’ve had a lot of investment success with precious metal royalty companies. Are these companies still worth the premium investors have to pay for them?
AD: I’d say yes. A company like Franco-Nevada Corp. (FNV:TSX; FNV:NYSE), which with a $6.5B market cap is the largest royalty company, has a very low-risk business model. The royalty companies make an investment, and once they do they’re not responsible for anything going wrong. Just think of all the things that have gone wrong in the mining business over the last few years. When the capital expenditure (capex) on Barrick Gold Corp.’s (ABX:TSE; ABX:NYSE) Pascua Lama went from $2.5B to $8.5B, Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX), which owns a royalty on Pascua Lama, didn’t have to pony up a penny. It’s not responsible for all the court hearings and the capex increases, the additional taxes levied by the local government, the environmental protests, and so on. That’s the beauty of the business model. Essentially, you don’t have the risk of mining, and mining’s a very, very high-risk business.(...)Click here to continue reading the original ETFDailyNews.com article: Finding Low-Risk Miners In Today’s MinefieldYou are viewing an abbreviated republication of ETF Daily News content. You can find full ETF Daily News articles on (www.etfdailynews.com)
- Finding Opportunity With The Market Vectors Gold Miners ETF (GDX)
- Finding The Best Exposure In Homebuilding ETFs (XHB, ITB, PKB)
- Market Vectors Gold Miners ETF (GDX) Will Continue To Track NYSE Arca Gold Miners Index
- Why These Silver Miners Will Shine (SIL, SLW, AG, HL)
- Follow The Smart Money To Undervalued Miners
Nasdaq quotes delayed at least 15 minutes, all others at least 20 minutes.
Markets are closed on certain holidays. Stock Market Holiday List
By accessing this page, you agree to the following
Press Release Service provided by PRConnect.
Stock quotes supplied by Telekurs USA
Postage Rates Bots go here