Resources Still the Place to Be, but Watch for Correction
Interview

Virtually all markets and asset classes rallied last year, but among the strongest were the resources, continuing to rise on the back of continuing strong demand from China and other emerging economies. Though the broad Dow Jones-UBS Index was up just 19%, individual components were very strong, particularly the base metals, with copper up 139% and others, such as aluminum up, 50%. Oil and gold were also up strongly, while many of the agriculturals lagged, dragging down the index.

Resource stocks dominate our list of "Current Positions," with an emphasis on gold, silver and energy. Our stocks participated in the rally, for the most part, though many of them, like the index, 41% off its 2007 peak, remain well below their recent highs (Goldcorp, Silver Standard, Vista, and so on). But after the strong rallies, many of them are up 100% or more from where we bought (Devon, Virginia, Silver Wheaton, Allied Nevada, Sprott, and Midland, for example).

Base Metals Due for Correction, While Oil and Gas Stocks not Cheap

We were expecting a correction in the base metals. That correction may yet come; it certainly appears that China's end-usage is weaker than imports and that inventory is piling up. Further, the current round of tightening there threatens resource demand. We certainly are positive on the long-term outlook and are looking for opportunities to add some top-quality base metals names to our list. For now, all our major companies are either gold and silver or energy, while we have more base metals exposure among juniors and explorers.

We are holding our oil and gas positions, though not adding for now, since most oil and gas stocks are no longer inexpensive. Gas may well be inexpensive, but about 1,500 uncompleted wells (stopped when the price collapsed) could be brought back on quickly and act as an anchor on the recovery. Cold weather is boosting demand right now, but won't last. Besides, many gas assets already reflect higher prices. We own EOG and are holding, but not adding gas companies right now. Exxon's purchase of XTO, boosting the major's reserves to 50% gas, is certainly a sign of confidence in gas, but Exxon has a longer-term perspective than do most investors!

Reasons to Own Gold Unchanged as Banks Become Buyers

It is gold that dominates our list of "Current Positions." Despite hitting yet new highs near the end of the year, there is much further to go for gold and gold stocks. Gold itself saw its ninth annual advance, to new highs before a 10% correction at the end of the year. Gold certainly was helped by the weak dollar—and the year-end sell-off was provoked by a dollar recovery—but it's much more than an anti-dollar play. Gold is up in terms of all currencies, boosted by concern about inflation and extraordinarily low interest rates. Mostly, it's a vote of no confidence in the world's paper monies, and skepticism of central bankers' abilities to effect stable money, and specifically to exit stimulus programs in an orderly manner. Nothing has changed, and gold is becoming a new de-facto alternate currency. There is a lot further to go.

Most significant perhaps, central banks have switched from being net sellers to buyers. As we have discussed before, banks that built up their reserves in the last couple of decades tend to have the highest levels of reserves but the lowest proportion of gold (India, China, Korea etc.). The overall level of gold in central bank reserves has dropped from over 30% a decade ago to just over 10%, the lowest level ever. The ease with which India (and Mauritius) scooped up half the IMF's gold for sale shows clearly that demand overhang is not a problem. Central banks are likely to be net buyers for years to come.

Stocks up Strongly Last Year, but Still Undervalued

Our list emphasizes gold stocks large and small, which, despite the strong rallies last year (100% plus for Goldcorp, Franco Nevada, Vista Gold, Allied Nevada, Almaden and several more) remain for the most part not only well below the 2007-2008 highs, but fundamentally inexpensive. Producers are still selling at historically low prices relative to bullion, and at the lowest price-to-earnings and price-to cash flow ratios in over 20 years. The major producers have problems, however, as we've discussed before, most importantly the difficulty in replacing.

Given these difficulties, we favor the juniors and exploration companies; these dominate our list of "Current Positions." This is where the best value is often found as well as the growth. A couple—Sunridge and Miranda—are even selling below where we bought them, and that's despite higher gold prices and, particularly in the case of Miranda, advances at the company.

Top Current Buys

So we are comfortable holding and adding to the exploration stocks, on a selective basis, and expect to be adding new recommendations over coming months. Among the stocks on our list, at current price levels, we would look to buy Vista Gold (VGZ, NY, 2.55), Virginia Mines (VGQ, Toronto 5.31), Kiska Metals (KSK, Toronto, 72 cents), and Royal Gold (RGLD, Nasdaq, 44.07). You can buy Royal Gold now; we can get the others a little cheaper if we are patient.

President of Adrian Day Asset Management and a pioneer in global investing, Adrian Day is a London native who was graduated with honors from the London School of Economics. Adrian's thoughts, opinions, insights and analyses have appeared in the pages of Barron's, Forbes, Bloomberg Markets, KitcoCasey.com, The Stock Advisors, Dick Davis Digest, MSN Money, Financial Times, The Daily Reckoning, The Herald Tribune, The New York Times and—of course, The Gold Report—among many others. He also writes the quarterly Portfolio Review newsletter for clients, serves as editor of Adrian Day's Global Analyst and has authored two books on global investing: (International Investment Opportunities: How and Where to Invest Overseas Successfully and Investing Without Borders).

Contact: Adrian Day, 801 Compass Way, Suite 207, Box 6643, Annapolis, MD 21401 Tel: 410-224-2037 begin_of_the_skype_highlighting              410-224-2037      end_of_the_skype_highlighting Fax: 410-224-8229 Email Adrian Day

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DISCLOSURE: Adrian Day's Global Analyst is distributed by Investment Consultants International, Ltd. Publisher: Adrian Day. Owner: Investment Consultants International, Ltd. Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor's opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions.