Adrian Day Urges Caution, Though Gold Stocks Look Like Good Buys

Gold chart and calculatorWhile fund manager Adrian Day believes investors should tread cautiously in the market right now, he is upbeat on some gold stocks.

Submitted by Streetwise:

Gold chart and calculator

Given our caution on the broad stock market, resulting from relatively high prices across the board, we have relatively few “buy” recommendations. Most of our buys are concentrated on the gold stocks, and even there, many of our limits are below current prices. I do not think one needs to be aggressive in the current environment.

Of course, so much depends on your personal circumstances—all the “financial planning” circumstances such as age, future financial obligations and so forth—as well as what your current portfolio looks like.

If, for example, you do not own very much in the gold space, I should certainly step up to the plate now; start with two major gold royalty companies, Franco-Nevada Corp. (FNV:TSX; FNV:NYSE; 61.27) and Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX; 65.51), top buys on our current list. Both are solid buys now, particularly if you do not already own them. We could see both at lower prices in coming weeks, given the sharp runs they have both experienced over the past three weeks, Franco from $54.77 and Royal from $61.37. Prices half way between recent lows and the current price would be a fair target (i.e., $58.81 for Franco and $63.40 for Royal).

American Capital, Yamana and Sunridge Redux
The acquisition of American Capital Ltd. by another of our recommendations, Ares Capital Corp. (ARCC:NASDAQ), has now been completed. Shareholders received $10.13 cash plus 0.483 of a share of Ares. Most definitely, hold your Ares shares.

To add insult to injury, investors had a Canadian tax withholding taken on the receipt of the Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) purchase rights recently distributed. The rights were over 20 cents when distributed—the value on which the tax was based—even though, because of the convoluted procedure required for U.S. shareholders, they could not be sold at that time. By the time one large custodian finally had the rights free-trading in accounts, the price had fallen to far less than the minimum commission the custodian charges. Through a combination of a cavalier company with an ill-judged plan, a rapacious tax authority, and an incompetent custodian, many shareholders end up with a loss on the distribution of these rights.

Sunridge Gold Corp. added a touch of icing to its liquidation after its assets were acquired in a friendly takeover, with the distribution of a second tranche, of CA$0.03 per share. A third and final distribution will be made once a lawsuit is settled, expected by the middle of the year. It is estimated to be around another 3 cents, though could be higher or lower depending on any expenses.

Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”

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