Adrian Day sees a bright future ahead… but could it get too bright?

By Allen Alper. and Aaron Hoos
on 4/12/2011

When investors are bullish about a particular sector, they want prices rising and rising. But could they rise too much? Many investors would say no but experienced investors know that while high prices are good, they can come at a cost.

At the recent PDAC Convention, one of the speakers was Adrian Day, founder of Adrian Day Asset Management and an expert in resource investing. After his speech, we interviewed him to dig deeper.

We started by talking about the speech he gave at PDAC, which he summarized briefly for us: "What I had to say to people was: Despite the record high prices in many cases, and despite the fact that the last decade resources have generally been the best performing asset class, this is still early days in the resource boom."

PDAC reached an attendance of about 25,000 people and there was talk among some investors that this high attendance could indicate a bubble. We asked what Mr. Day thought, just to ensure that this wasn't a bubble. Mr. Day didn't think so: "I was at a big investment conference in Orlando last month – it was a generalist show – and the gold and resource panel got a modest attendance, nothing to indicate that the general investor is over-invested in this area. I don’t think this is a bubble at all. Yes, 25,000 people gives me pause, but when you look at the long-term fundamentals and other indicators of what is and isn't a bubble, I'm not concerned."

This is exciting news for resource investors! A resource boom usually means rising prices and every investor wants to buy low early in a boom and see those prices rise dramatically. But how long will it last? If an investor wants to time the market accurately, and sell at the right time, when will that right time be?

Mr. Day gave us his estimate: "People have to focus on what the long term fundamentals are and what is really driving this market," Mr. Day said. "We know what's driving the market: [First,] the increasing demand from China and [second,] the difficulty in getting large new projects coming on. We know the main factors but when you dig in, you'll see just how critical those two factors are. China's demand is growing very, very dramatically. In my view, China's economy is now at one of those critical take-off points. I don't think we've seen anything yet." Then he continued with the second market-driver: "At the same time, in most resources, we're unable to find sufficiently large deposits to meet that growing demand."

These offer a great recipe for higher prices, and Mr. Day told us the good news… and the bad news: "It will lead to higher prices – no question about that. In addition to that, I'm a little bit concerned that if we get to a point where there are serious shortages of various commodities and that could have very negative implications for the global economy. If you look at uranium, it doesn't matter if uranium is $50/pound, or $100/pound, or $300/pound. If there's a nuclear power plant in China, they will buy uranium and it's just a matter of a higher price. But if it's corn or wheat, it becomes a very different issue. And if you look at oil, it's somewhere in between. If it reaches a certain level, it can cause social unrest."

So, what should investors do? Should they buy and just ride the wave to higher prices? Mr. Day advises that investors ride the wave, but be smart about it: "On a fundamental basis, do not be too quick to sell. I'm not talking about selling an individual stock or sector, but I'm talking about not getting out of gold and silver just because we're at a record prices. Don't get out of copper and oil and gas just because the prices are going up. I'm not saying that you shouldn't take profits in individual stocks, and I'm not saying that you shouldn't sell overvalued stocks and buy undervalued stocks. [However, investors should] be very cautious about selling too soon." Then he added a resource boom duration that might surprise many people: "I think we've got another ten or twenty years of this market ahead of us."

Mr. Day isn't one to give advice that he, himself, doesn't follow. He added: "We manage segregated accounts – for individual retail investors and corporations (like small companies and pension funds) and right now, resources are one of my main areas where I see best rewards. Even our conservative global investors have about 35% to 40% right now. That shows you how strongly I feel about resources."

With such a long resource boom anticipated, what does Mr. Day recommend for investors to think about adding to their portfolio? He answered: "I like the entire commodity complex, but for the next year or 18 months, I would focus primarily on gold for its monetary aspects. The financial system's issues are still not resolved. In addition to that, my favourite trade right now is copper because China's demand is picking up dramatically. I also like oil and agriculture. As for companies, a lot depends [on the company]. Freeport is at $52. It's an excellent company and the valuation is still reasonable. They have a great balance sheet and they pay a dividend. If the price of copper goes up, it will be a clear winner. I also like a lot of the junior stocks. One of my long-term favourites is Virginia Mines (VGQ, Toronto). Even though the stock price has jumped from $7.20 to $9.00 in the last two weeks, it is still good value based on real assets."

Successful investing is all about finding an investment (or asset class) that is going up and buying in early and enjoying the increase. However, as Mr. Day pointed out, there can be implications for higher prices. Still, a strong resource market for the next ten to twenty years is an exciting prospect for resource investors.

Adrian Day is considered a pioneer in promoting the benefits of global investing in this country. A native of London, after graduating with honors from the London School of Economics, Mr. Day spent many years as a financial investment writer, where he gained a large following for his expertise in searching out unusual investment opportunities around the world. He has also authored two books on the subject of global investing: International Investment Opportunities: How and Where to Invest Overseas Successfully and Investing Without Borders.

Mr. Day is a recognized authority in both global and resource investing. He is frequently interviewed by the press, domestically and abroad. He is a popular speaker and frequently invited to lecture at financial conferences and seminars around the world. For a list of Mr. Day's upcoming public appearances, please click here.

REFERENCES

Adrian Day Asset Management

http://www.adriandayassetmanagement.com/

assetmanagement@adrianday.com

Adrian Day is considered a pioneer in promoting the benefits of global investing in this country. A native of London, after graduating with honors from the London School of Economics, Mr. Day spent many years as a financial investment writer, where he gained a large following for his expertise in searching out unusual investment opportunities around the world. He has also authored two books on the subject of global investing: International Investment Opportunities: How and Where to Invest Overseas Successfully and Investing Without Borders.