HardAssetsInvestor

Written by Matt Hougan  |

September 07, 2010

From The Vault: Adrian Day On Gold And Wheat

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London's leading independent global value investor sees short- and long-term opportunities for gold (and most commodities), but thinks the wheat and fertilizer booms are overdone.

Back by popular demand, HardAssetsInvestor refeatures a conversation with Adrian Day, one of the true pioneers of global investing. For years, the London native has run a boutique global investing firm (Adrian Day Asset Management) that combines complete independence, a global purview and a long-term value philosophy to bear on the markets. HardAssetsInvestor.com's Editor-in-Chief Matt Hougan caught up with Adrian recently to discuss his view on gold, platinum, wheat and the broader commodities landscape.

HardAssetsInvestor.com (HAI): We've recently had a significant pullback in gold, and there are concerns about a gold bubble. What's your short-term outlook for the metal?

Adrian Day, CEO, Adrian Day Asset Management (Day): I tend to be more focused on the long term, generally. I'm a long-term value investor who doesn't mind grinding out the volatility to realize the potential of an investment. But there is a lot of discussion of gold.

Over the short term, I have been concerned about gold for a few reasons. For one, summer is often a seasonally weak period. For two, we obviously had a great run-up in gold in the spring, what with the Greek issues and the European sovereign debt crisis. Gold went substantially above trend and the bullish sentiment rose substantially. There have been lots of reasons to expect a pullback over the summer.

To be honest, I was expecting more of a pullback than we saw. I've been very, very impressed with gold's resilience. When you think about the run we had, to see a pullback from $1,250/ounce to $1,160/ounce really wasn't much of a correction.

I would be cautiously optimistic on gold in the short term. The pullback we saw may well have let a little bit of air out of the market and got the nervous holders out, so we may well be forming a new basis to move up.

HAI: What, then, of the long-term view?

Day: Long term, of course, gold is much more difficult to analyze than normal equities or commodities. There is no cash flow, no earnings and no yield, as its detractors constantly remind us. So we look at other things like book value: What is the value of gold relative to the money supply, for example. On any of the sort of metric you look at on gold, be it gold relative to money supply, gold relative to where it was in the 1970s, etc., and then if you look at the inflation that's taken place since then, gold should be higher than it is today. The numbers are clear.

The other thing I look at when I think about gold long term is, what are the reasons gold moved up in the last few years? Frankly, it's because people are concerned about paper money, and not just the U.S. dollar; they are concerned about paper money around the world.

People have started to doubt the ability of central bankers, particularly in the U.S. These people are supposed to be in control of the money supply, but they seem to have lost control of it. You can't turn to the euro because of the problems there, and in fact, every currency you look at has problems. So people are turning to gold as a way to preserve wealth.

HAI: You mean it's an inflation play?

Day: No, actually. I don't think it's an inflation play, at least not alone. There is concern that inflation will return if the stimulus measures continue, but I don't think most people are buying gold for that reason. They are buying gold because they are concerned with the preservation of money.

You look at that aspect and see if anything has changed, and the answer is no. The people in control of things at the Congress and the Fed don't understand what got us here in the first place, so they don't know how to get us out at this point. Having someone like [Democratic Congressman] Barney Frank writing the new laws governing Fannie Mae and Freddie Mac is quite ironic.

I think people will continue to buy gold and hold gold as a protection measure. They'll hold it to protect against the dollar and currencies declining in value, and if inflation comes back, that will add fuel to the fire.