Day mentions a few gold stocks he likes currently and discusses factors that could impact the gold market moving forward.
Adrian Day of Adrian Day Asset Management isn’t keen on the US stock market right now, but that doesn’t mean he thinks investors should stay away from stocks in other areas.
“We are looking abroad, there are some good buys, particularly in Asia. The established markets in Asia — Hong Kong, Singapore,” he said at the recent New Orleans Investment Conference. “You can get really good-quality companies yielding 4, 5, 6 percent, and trading a single-digit per year still. So there’s some good values over there for people who want income.”
His firm is also buying “some of the base metal commodities, particularly copper,” along with gold stocks. “Gold stocks are incredibly depressed, in my mind, just incredibly depressed,” Day explained, adding, “if gold is cheap relative to the financial assets like stocks and bonds, gold stocks are even cheaper because they’re cheap relative to gold on a fundamental basis, on a price basis.”
When asked if there are any specific gold stocks he likes right now, Day pointed to Franco Nevada (TSX:FNV,NYSE:FNV). “If you only want to buy one gold stock — just buy it and forget about it — I think Franco Nevada is the one to buy,” he said, though he noted that the company “is perhaps a little bit expensive right now” for traders.
Watch the interview above for more insight on the gold market and which stocks Day likes right now. You can also view the transcript below.
INN: Let’s start by talking about gold. Last time I checked, gold was up year-to-date, but quite a bit below $1,300. Where do you see gold going in the next few months and heading into 2018?
AD: As with any market at any time, there’s so many factors that are influencing gold at the moment. I think most of them in the long term fundamentally are very positive for gold, but in the short term we’ve got hope, expectation — I think hope is perhaps a better word — that maybe Congress will pass a tax bill. If they pass a good tax bill that cuts taxes and simplifies taxes, that would be very, very positive for the US economy, and also positive for the dollar, positive for stocks and therefore negative for gold. I think there’s a little bit of concern about that.
And also, it’s funny — this time of the year, October, is often a period when you see a little correction in gold after an August/September run up before a December/January, February/March run up, so I’m not overly concerned about it fundamentally. I’m very bullish.
INN: Any other catalysts that could impact gold going forward? We’ve got interest rates, we’ve got the US president, political things going on.
AD: There’s so many things that are going on, and so many things that can influence. I’ll go back to what I just said about the tax bill, if Congress passes a good tax bill. The contrary is also true — if Congress passes a bill, but increases the deficit significantly, that will hurt, that will make the Fed back off a little bit. It’ll also be bad for the dollar, and therefore positive for gold. On the other hand, if they fail to pass a bill altogether, that shows more dysfunction in Congress, which is, again, positive for gold. That’s one thing.
I think interest rates … obviously gold has been concerned about the Fed tightening, quantitative tightening, but just as with the increased interest rates, they’ve been extremely cautious. I think they’re going to be very, very cautious in reducing the balance sheet. I think gold immediately is concerned about quantitative tightening, but as time goes on we’ll see it’s really not as scary as it appears.
INN: I watched your talk yesterday, and you discussed some of the negative impacts that very low interest rates can have. Do you mind going into that a little bit?
AD: The problem is not so much low interest rates as artificially low interest rates. Rates in the last … couple of years around the world have been the lowest interest rates have ever been in the entire recorded history. That’s quite a significant statement. And what happens when rates are artificially low is people who [are able to borrow tend to] borrow more. So first of all, it hurts savers. You have people who’ve saved all their life, don’t have a lot of debt, have worked hard, [are] in retirement and … their standard of living is just declining because they’re not earning anything on their money. Or they start taking risk that is not appropriate for a person at their stage of life of their financial means. Both of which are very, very negative socially and financially.
On the other hand, the more wealthy people have the ability to borrow money. When you can borrow money very, very cheaply and you’re well off, you do — and you borrow money to buy stocks. Margin debt is at record highs; the last time margin debt was anywhere near this high was at the beginning of 2007. We know what happened the following year. And the time before that was the year 2000, and we know what happened the year after that. I guess in general artificially low interest rates distort everything. It makes people take actions that they wouldn’t otherwise take — the little old lady speculating in the stock market, the wealthy guy borrowing money to buy extra stocks and so on. And all of these will have negative consequences when rates turn.
INN: If you’re an investor — there’s so much going on right now. What should your approach be?
AD: In our management program we have quite a lot in the stock market, and we’re not panicking to get out. But I do think the risk has increased significantly in the stock market, and we are certainly not, with very few exceptions, very unusual circumstances, we are not buying the US stock market at the moment. I just think it’s far, far, far too expensive and the risk is too high. And, of course, when a manager talks about risk/reward he’s not making a prediction that the market will turn down, or will crash. I’m simply saying that the risk is too high to be investing right now.
We are looking abroad, there’s some good buys, particularly in Asia. The established markets in Asia — Hong Kong, Singapore. You can get really good-quality companies yielding 4, 5, 6 percent, and trading a single-digit per year still. So there’s some good values over there for people who want income. And then we’re also buying both some of the base metal commodities, particularly copper, although they’ve had a bit of a run up so we’re a little cautious right now, today. And then we’re buying gold stocks. Gold stocks are incredibly depressed, in my mind, just incredibly depressed. If gold is cheap relative to the financial assets like stocks and bonds, gold stocks are even cheaper because they’re cheap relative to gold on a fundamental basis, on a price basis. I think the gold stocks are extremely good value right now.
INN: Do you have any specific examples you could mention?
AD: I always hate doing that because, you know, you’ve got to talk to a person about “what are your circumstances, what are you trying to achieve.” I always say to people, “if you only want to buy one gold stock — just buy it and forget about it — I think Franco Nevada is the one to buy. Now, if you’re a trader, I would say Franco Nevada is perhaps a little bit expensive right now. But if you want to buy one gold stock and forget about it, Franco Nevada is a blue chip of all blue chips.
There’s many, many juniors that are very good value right now. Some of the prospect generators, which have a low-risk business model, are very cheap. I like Evrim Resources (TSXV:EVM), it’s about 24 cents right now, I think they’re almost giving it away, and it’s well cashed up. Riverside Resources (TSXV:RRI) is another one, 28 cents, 29 cents … and again, very good balance sheet. They raised some money last year, Evrim raised some at the beginning of this year. Both of those two are very well cashed up, so you don’t have to worry about another financing any time in the near term. And they have JVs with several companies in each case. I like both of those, very, very good.
INN: Last question. You’ve talked before about the risks of investing in gold producers — last month we had Paulson & Co. say, “maybe we should have a group of people that tells [gold producers] what they should be doing. Do you like that idea? Does that make it less risky?
AD: I do like the idea, with a few caveats. I think the Paulson Group [is] absolutely correct in saying that the senior mining companies have had awful returns on the money that we give them, not only over he short term, but over the long term. I did a study once that showed over the last 40 years, the gold-mining business has the second-worst returns of any industry in the world, and the worst was the airlines. And there’s something that’s similar about both of those, but in the gold-mining business you do have inherent difficulties. It’s a very, very capital-intensive business, it takes a long time after discovery, the odds of discovery are low. After discovery, before you put something into production, it’s a long time with environmental and permits and everything else. Then once you’ve built the mine, you’ve sunk a billion dollars into Tanzania or something, the government can come along and say, “hey, now you’re here and you’ve spent the money, we’d like a little more of that.”
So inherently it’s a difficult business, but I do think the gold-mining managements — and this is the point Paulson was making — have really exacerbated the problems by being pro-cyclical. Now, pro sounds like a good thing, but when you’re investing it’s a bad thing. The gold-mining companies, with few exceptions, Franco Nevada being one that I mentioned earlier, typically have been overpaying for marginal properties at the top and then not buying at the bottom. Very few companies, relatively, very few companies were buying anything in 2013, ‘14, ‘15 when the prices were low. Companies were on the edge of bankruptcy, you could’ve stolen projects, but companies were selling their own assets and reducing their debt. The time to take on debt is at the bottom, which is what Franco did — [for the] first time in its 40-year history it took on debt in 2015, I think it was, at the end of ’15, to buy an asset they wanted. But not at the top. You don’t take on debt at the top when things are expensive, to overpay. So I think they’re absolutely right about that, they have a stunning chart. Did you do an interview with him?
INN: No, I didn’t get the chance to.
AD: They had a stunning chart that showed that of the capital that had been deployed by the — they had a list of about 20 senior companies — in 2010, ’11 and ’12, a majority of that has now been written off. We’re not talking about they haven’t earned the money back yet; you would expect that because it takes a long time in the mining to earn the money back. We’re talking about they have written off a majority of the money that they spent on acquisitions in those years. That’s just an astonishing fact. So getting a group together, notwithstanding all the legal problems of … conspiracy and all that, collusion, but getting a group together to say, “look, you’ve got to stop … wasting your money on marginal assets at the top of the market when prices are high.” We’re not at that point now — but being more shareholder friendly, cutting salaries when things aren’t doing well, what a novel idea. I think it’s a good idea, yes.
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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.