A Golden Day

10/03/2003 12:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

"The bull market in gold is still intact," says Adrian Day, in his Global Analyst . Born in Great Britain and a graduate of the London School of Economics, Day is a leading expert on natural resources. He is also president of Global Strategic Management, where he specializes in global diversification and gold equities. Here's his latest on gold.

"The latest pullback was a technically driven decline from a short-term overextended level, and nothing to be concerned about. Gold remains above its clearly defined uptrend and above its moving averages. More importantly, the macro-economic and industry-specific fundamentals remain firmly intact. After a pause, physical buying in India and elsewhere has resumed its growth, as consumers adjust to the new higher price levels. Jewelry demand is up again, by 3%, after falling 12% last year, while investment demand is up nearly 15%. Meanwhile, the potential from China in particular looks enormous. This isn’t the old saw about every Chinaman buying one of this or that. There is already surging demand for gold, with prices on the Shanghai Exchange hitting record highs. There is strong pressure for the government to lift the ban on individual trading in gold as soon as possible.

"Demand will be boosted by the new gold Exchange Traded Funds being launched around the world by the World Gold Council. Certainly, demand has been helped by producers buying back their hedges. And the macro climate--low interest rates, positive but modest economic growth, a weak dollar, easy money, and vulnerable financial markets--is precisely the climate in which gold can be expected to perform well. September is typically one of the strongest months for gold stocks, while we frequently see declines of 20-30% thereafter. Moreover, recent price surges in the gold stocks have taken them to overvalued levels. Now, let’s be clear: the senior gold stocks, by most measures, are at above average-levels of valuation but by no means at extremes, and can be considered reasonably valued--even undervalued--for a bull market.

"So the real question for gold stock investors now is what happens to gold. I believe gold will move firmly above $400 in coming months, after a pause, and that we are still in the early stages of a secular bull move in gold. In that case, there is a lot more room in the gold stocks, and the last thing you want to do is sell out too early. In the near term, the risk of a pause in gold; overvaluations in the stocks; and seasonal factors suggest some profit taking is not out of order (particularly among the juniors). The flood of recent equity offerings in gold stocks is a warning flag. Similarly, I would advise waiting for better prices to buy over the next couple of months.

"But let’s be clear: This is a bull market and gold stocks have tremendous leverage to gold. One does not want to be too clever about trading. Your focus should be rather to look for weakness to accumulate bigger positions. Of course, there are always juniors and exploration stocks that represent good buys; among the stocks on our list, Meridian (MDG NYSE) and Virginia (CA:VIA Toronto) represent the best long-term buys. We will now look for opportunities to buy the silver stocks again in coming weeks, with Silver Standard (SSRI MASDAQ) at $6.65 perhaps closest to buy levels at present. In sum: gold and gold stocks are in a secular bull market, but we may see lower prices over the next several weeks."

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