A pioneer in global investing, with a reputation for discovering big winners, Adrian Day gives The Gold Report his insight on whether he thinks gold has hit the bottom, and what it's going to take to get the juniors going again. He also tells us which juniors he thinks are positioned to weather the slowdown. Day is President of Adrian Day Asset Management, which manages portfolios in resource and global equities, and the editor of "Adrian Day's Global Analyst."
The Gold Report: So what's your take on where we are with the markets. . .you think we’ll see a change soon?
Adrian Day: People are still very, very concerned about the dollar and inflation, and rightly so. The core CPI numbers were up .7% in one month. That’s a high number and the precise number may be a monthly anomaly, but it’s very clear that the trend in prices is up.
We are seeing a pickup in inflation, not just in the United States— and this is what’s important — but all around the world. I realize, of course, that rising prices are not the same as inflation. But we are seeing rising prices in pretty much all areas of the world, and they are going up faster than the central banks themselves have targeted. With all the credit problems we’ve seen over the last 18 months and all the money that’s been put into the system, I don’t think that’s going to change in the near term. So that’s a bullish sign for gold. Inflation is a factor we haven’t had in the gold market for quite some time.
The dollar is even more important, certainly for the next six to twelve months. And, again, in terms of the long-term fundamentals, I don’t see that anything has changed. All we’re seeing in the dollar is a very overdue correction to the long-term trend.
To me it’s much more a correction in the strength of the Euro than a correction in the weakness of the dollar. I don’t think anyone’s rushing into the dollar because they think our economy is strong and getting stronger. They are perhaps cautious on some of the foreign currencies, which have simply moved too far, too fast. It was an overdue correction, which came a lot later than I thought it would. And it would be a mistake to expect it to turn around after just a couple of weeks.
But if we look at the long-term fundamentals, the U.S. economy is still fundamentally weak and it seems like with every passing week there’s more bad news that’s worse than the news before. We are a long way from the bottom in both the economic decline and the credit crisis in the U.S., and there’s no particular end in sight.
The dollar has to go down over the next 12 months and that’s going to be positive for gold, no question. The low interest rates and the higher inflation numbers mean that at the short end we have negative rates right now. There might be a bit of a lag, but negative rates are always bullish for gold.
TGR: September is here. The Canadians are going to be returning from summer holiday. Do you think this year is going to be similar to past cycles, where in the fall we see increases in gold purchases and the juniors, or do you think there’s going to be a disconnect this time?
AD: That’s a good question and a bit imponderable. Usually it’s very strong in the fall, and we should have already bottomed. What’s happened this time that’s different is we’ve got the dollar correction and, a correction in the strong Canadian dollar as well.
And that’s come at the time when you would otherwise expect gold and gold stocks to be seasonally strong. Canada has housing problems and credit problems like the U.S., although not to the same extent. There might be a different mood this time and there’s no evidence so far that we’re seeing buying returning to the junior sector. And, remember, it’s not as though the juniors were strong before the summer started, so I’m a bit concerned that we may not see that increase in the junior market.
With gold itself, the weaker dollar does actually have one huge benefit — an obvious one — which is that it makes physical buying of gold actually cheaper. The Indian market especially tends to be fairly price sensitive. When gold went over the $950 level on the way to over $1,000, there was very strong evidence that the Indians started holding back purchasing. Now that gold has fallen under $850 again in the last few weeks, there’s evidence that the Indians have started buying again in heavy numbers. So a stronger dollar will actually help the gold market, but it may not help the gold stocks.
TGR: So you’re saying the stronger dollar would help ETFs, coins or actual bullion?
AD: It would help those because of foreign buying. I don’t know about gold coins, but it would certainly help the ETF, of course, which simply reflects physical gold.
TGR: Do you own, in your portfolios, any ETFs?
AD: The one we buy is GLD, which is the largest and most liquid. We also own Central Fund of Canada (CEF:AMEX), which is not an ETF, of course, but it’s similar. Not in huge amounts, but we do. It depends on the client and it also depends on the time. We are buying.
TGR: So we've got political crises, major deficits, and central banks printing money. You would think gold would be at an all-time high. What type of event has to occur to change this? It seems like we’re in a perfect storm.
AD: It's important to give it some historical perspective. There have been a lot of graphs appearing recently showing how gold broke through its 50-day moving-average, then its 100-day moving, and finally its 200-day moving-average. I looked back to the middle of 2000, however, and what really stood out on that graph was that for four or five years gold moved up and down, but very close to a basic straight line, a trend line that was moving steadily upward.
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