Fund Manager Adrian Day believes that the U.S. dollar is fundamentally overvalued and we can expect a devaluation at some point. This is good news for the price of gold.
In this interview with The Gold Report, Day adds the even-better news for investors in gold equities is that so many good shares now sell for so little, and he discusses several companies that won't remain bargains for long.
The Gold Report: Despite the lack of an economic recovery and the reality of ever-increasing debt, the U.S. dollar and the equity markets remain strong, while gold (as denominated in U.S. funds) remains weak. Do you expect these conditions to change?
Adrian Day: Yes, absolutely. The strong dollar and equity markets are two of the main reasons why gold has been down over the last 18 months. The third reason is anticipated higher interest rates.
Gold will recover because the U.S. dollar is overvalued against most other currencies, by as much as 25–30% against most Asian currencies. We're not expecting an equities crash any time soon, but the risk level in the market has increased, and stocks are no longer fundamentally cheap. So investors will increasingly look to the protection gold affords.
As for higher interest rates, the U.S. Federal Reserve has, by its actions if not its words, made clear it is waiting for perfect conditions before raising rates. I'm not quite sure when we're going to see such conditions. In any event, higher rates are already factored into the gold price, and should the Fed approve a quarter-point rise, I would actually expect gold to rise on that news.
TGR: Many people argue that continuing zero-interest rates are the only reason the economy is doing as well as it is. Do you agree?
AD: No question. This has been one of the weakest-ever economic recoveries out of a recession. My greatest concern is the lack of tools remaining to the Fed should the U.S. economy enter even a modest recession.
Interest rates are too low. A strong economy requires capital investment, which comes from savings. Creating wealth by printing money builds a facade. It depreciates the value of the underlying currency, encourages speculation and punishes savers, especially retired people.
TGR: What do you make of the reports that China and Russia, possibly with the aid of Brazil and India, intend to create a rival to the petrodollar?
AD: This is coming. History teaches us that economic dominance is never permanent. States that dominate the world through military and economic power establish a reserve currency. But over time, the baton is passed from one state to another, and in many cases it's clear who the successor will be. Britain was once the dominant power, and the pound was the reserve currency throughout the 19th century. After World War I, however, it became obvious that the U.S. would replace Britain as the leading world power and that the U.S. dollar would become the reserve currency.
America's situation today is similar to what the British faced a century ago. I believe that the U.S. has peaked. It is hugely indebted, with a huge welfare state and an overextended military. So who will replace the U.S.? This is not obvious. That's why we have this attempt by the BRICs to weaken the dominance of the dollar.
This is a step along the path to a new reserve currency. If this is to be the Chinese yuan, that's probably 15 years away, because China's capital markets are just not deep enough today. In the meantime, the excess U.S. dollars all over the world will begin to return home, and this process will depreciate the value of the U.S. dollar.
TGR: The current bear market in precious metals equities began in April 2011. Despite all the talk of "creative destruction" among mining equities, are there still too many "zombie" companies?
AD: Far too many. It is too easy to raise mining money in Canada. If you discount a company's stock and give a five-year warrant at a small premium, someone will buy it, even if it's only an existing shareholder who liquidates his current holding to get a more attractive deal in the new round. In addition, there is flow-through financing, which would often not be possible were there no tax benefits.
In 2014, 57% of the financings in the gold sector were for less than $1 million ($1M). We're now seeing financings for as little as $100,000 or even $50,000. This money is spent merely to keep the lights on and pay salaries. It's not spent on actual work in the ground. I've even heard of financings where the entire point was to repay old debt owed to directors and managements. About 45% of TSX-listed gold companies have less than three months cash on hand.
TGR: A higher number of listed companies means more fees for the exchange, but what effect does the continued existence of hundreds of zombie companies have on the gold sector as a whole?
AD: It affects the whole sector negatively because every $1M put into a bad company is $1M that's not going into a better company. Investors burned by investing in zombie companies turn away from gold companies for good.
TGR: Which companies have you been buying lately?
AD: Over the last couple of months, we have been buying a lot of companies. The seniors include Franco-Nevada Corp. and Goldcorp Inc. Smaller producers include Eldorado Gold Corp. andB2Gold Corp. We've also bought Pretium Resources Inc., Vista Gold Corp., Almaden Minerals Ltd. and Balmoral Resources Ltd.
TGR: What do you like about Balmoral?
AD: First, it is a prospect generator, and I like this model. Producers are hungry for resources but with few exceptions aren't doing much exploration themselves. And so they rely increasingly on others to find their future reserves. This model doesn't guarantee success, of course, but I would point out that shares of the prospect-generator group have outperformed traditional exploration companies by quite a wide margin over this bear market.
Second, this is a company run by good people with a good balance sheet who are doing good work on the Detour Trend in Quebec, a very prospective area in a great jurisdiction.
Third, Balmoral shares are very cheap right now.