The Right "Day" for Gold

04/30/2004 12:00 am EST

Focus:

Adrian Day

Chairman and CEO, Adrian Day Asset Management

"Gold’s dramatic decline from over $420 calls for an update," notes Adrian Day, one of the advisory world's leading authorities on natural resources. "Is this the correction we have been patiently waiting for? And most important, is it time to buy now?"

"We are now seeing the correction we have been waiting for, and I believe it represents an opportunity for late-comers and procrastinators to buy. But equally, we are not convinced we’ve seen the lows and would not use all one’s powder quite yet. Why has gold collapsed so sharply? Certainly, the dollar’s continued recovery, along with the improved outlook for the US economy and accompanying expectation of a sooner-rather-than-later hike in interest rates, all combined to make the short-term outlook for gold negative. Moreover, the technical backdrop was negative, with gold having tested and failed to move above the early January $430 high. This fall in gold should also be viewed in the context of a sharp correction in most commodity prices, on the back of a strong dollar and a tightening in China, dampening some demand for resources. And once the decline started, it was aggravated by stop losses and margin liquidation among recent speculators.

"The long-term fundamentals remain intact, both the macro economic outlook and the industry-specific fundamentals. The dollar will fall; the current account deficit is at crisis levels (5% of GDP) and in both the US and globally, reflation efforts are underway. Though published inflation rates in the US remain low, even these have turned up, and, behind the headline numbers, prices for frequently purchased goods and services are rising more rapidly. Even given these official levels, short-term rates in the US are negative, and would remain negative even if the Fed were to hike rates 50 basis points. Negative rates are very positive for gold.

"So though the longer-term fundamentals are clear, and this correction is precisely what we—and others—have been anticipating for some time, one must display patience; such counter-trend corrections often take longer than one would expect. Having said that, we do not expect significant further downside; on price declines, there is strong physical buying from Japan, China, and India, as well as speculatively, it would appear, on the Comex. Gold will turn around and the resistance at $430 will be taken out eventually, probably by some new development (such as a geopolitical incident of a rising perception of inflation). It has been argued that the length of gold’s move from the 1999 low exceeds recent gold bull moves. We think the 1970s would be a more fitting parallel to the brief flurries since, and we firmly believe this market has a lot further to go, in terms of both time and price.

"For now, gold may continue to trade in a range around $400. So, though we would be buyers at this time—and if you are starting an investment program, you should step up to the plate now, but would pick spots carefully, as well as focus on the best of the companies. Among the stocks on our list, take an initial position in Newmont (NEM NYSE) if you don’t already own it, though it could sell off more if gold’s period of weakness is extended. Much the same goes for Harmony (HMY NYSE), which is leveraged to the rand price of gold. Among the seniors not on our list of open positions, we would also buy another South African, Gold Fields (GFI NYSE). We would also buy again Meridian (MDG NYSE), on the basis of confidence in management and a strong balance sheet, with continued performance at El Penon mine; at this price there is little premium for the halted Esquel project in Argentina. And, among the juniors, we continue to favor Virginia Gold (CA:VIA Toronto), a low-risk explorer with great management and a strong balance sheet."

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