“Gold to Correct Until September” – Stocks to Buy

Posted by Adrian Day via The Gold Report

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Get in cheap while companies are relatively unknown and then pick up doubles, triples, or better when they hit the big time—that is AlphaNorth Asset Management Founder Steve Palmer’s investment strategy. In this exclusive interview with The Gold Report, Steve shares some ideas for spotting big growth potential.

The Gold Report: Adrian, in your 2011 first quarter edition of Portfolio Review, you wrote that President Obama’s budget “shows he doesn’t understand the problem or is not serious about it.” How would you solve the problem?

Adrian Day: Low taxes didn’t cause the problem and high taxes won’t solve it. High spending caused the problem, therefore we have to tackle it by spending less. If you want to cut the deficit, you have to cut spending. If you want to cut spending, you have to go where the money is. You could eliminate every single discretionary item in the budget and hardly make a budge in the deficit. You need to cut entitlement spending—Social Security, Medicare and Medicaid—and defense.

How is the deficit problem affecting the gold price?

AD: It’s affecting the gold price significantly. The U.S. is borrowing tremendous amounts of money to meet its deficit. Over the last four to six years, China and Japan have been the largest buyers of U.S. debt. For the last six months, China has been a seller. Japan is likely to be a seller when the latest numbers come out.

The Federal Reserve has boosted the adjusted monetary base by over 27% from January to March 2011. It’s printing money to help the economy and to monetize the debt. It is buying Treasuries from the government because nobody else will. The Federal Reserve is buying over 80% of the new Treasuries being issued.

I think the situation is almost hopeless. About 10% of the federal budget is servicing debt. Since the credit crisis in 2008, the government has been doing more funding at the short end. The average yield on 30-year bonds is 2.2%. That’s extraordinarily low. On the new bonds, the average is even lower; I would venture to say well under 1%.

TGR: Standard & Poor’s warned that the U.S. would lose its credit rating should the White House and GOP lawmakers fail to reach a long-term solution to America’s mounting debt load. Is there a way out of this that isn’t good for gold?

AD: I don’t think so. They can’t immediately cut spending enough without putting the country into an enormous depression because so many people are dependent on government paychecks. They can’t raise taxes enough. They can’t raise interest rates.

The only answer is to print money and let the dollar go. The Fed can inflate or default. I don’t think they want to default. So, the Fed will continue deflating and printing money. The more that happens, the less attractive U.S. bonds become to foreigners.

TGR: Where do you see gold stocks and the gold price headed?

AD: I think we’re going to get meaningfully lower prices between now and the end of September. It’s partly a gut feeling, partly the fact that markets don’t go in straight lines for two years without corrections. We’re overdue for a correction in both the dollar and gold. I don’t think a correction in gold will be long and deep. I think gold stocks are going to correct much more than gold itself.

We’ve had some enormous runs in gold stocks in the last year or two. When people see gold start to correct, they will be ruthless in locking in their profits. I think some of the thinly traded juniors could come up significantly. Some of them have come off dramatically—20%, 25%—just in the last month.

In addition, May is often a seasonal peak for gold. So, weakness in July and August would be more typical than not. We just need to be a little bit patient and cautious in adding to positions. But there are some good buys.

TGR: Your firm specializes in gold plays, which appreciated more than 60% last year. Isn’t this a boom for you?

AD: Oh, absolutely. We’re going to play it for all it’s worth.

TGR: What’s the typical asset mix in your gold accounts?

AD: We have gold accounts and resource accounts. In the gold accounts, we have around 25% in the seniors. We have 10% to 12% in non-gold resources, which would include silver and more diversified companies. Then we have about 35% to 40% in exploration. We have about 10% in emerging producers, second-tier companies, like Allied Nevada Gold Corp. (TSX:ANV; NYSE.A:ANV). The rest are companies affiliated with the gold business like investment banks.

….read about Adrian’s comments on the following Companies HERE