-- Posted Monday, 17 October 2011 | | Disqus

Steve Palmer, founder and chief executive of the Toronto-based investment manager AlphaNorth Asset Management, prefers metals that have uses beyond sitting in a basement safe or gift-giving. In this exclusive interview with The Gold Report, Palmer explains why he is looking closely at hardworking base metals that could take off with increasing global demand and a market rally he is forecasting through the end of the year.

The Gold Report: In August, you wrote that you did not believe the U.S economy was heading into another recession despite continued investor concerns about global growth. Do you still believe that?

Steve Palmer: Yes, there is nothing that has transpired that would cause me to change that view. The economic data has been quite good. The market was retesting the low that it hit on Aug. 9 and it briefly dipped below that level. But it had one of the largest rallies in the last 25 years to rise above that low. From a technical point of view, the retest was successful and we have continued to trade higher since Oct. 4. I believe the bottom is in and the stock market will rally significantly into the end of the year. The recent market action only further supports that view.

TGR: As we emerge from that bottom, how are you choosing between undervalued companies right now?

SP: I am trying to focus on the less speculative names. Even the companies that are well financed have been experiencing greatly depressed share prices, so there are strong gains to be made in those. You don't have to go searching too far down the food chain into the really speculative stuff to generate strong returns.

TGR: You've written that equities remain extremely attractive relative to historical valuations and are particularly attractive relative to other asset classes, such as bonds. Do you believe equities are the best place for investors to be if the bottom falls out of the market, as it did in 2008?

SP: I don't believe that the bottom is going to fall out. But if you were to believe that that's the case, bonds are the place to be temporarily. If you remember back to 2008, the meltdown only lasted a few months and then the market started to move higher. Historically, it is clear that equities do outperform bonds over longer timeframes. Many investors do not realize that they can lose money in bonds. Investors can take a significant capital loss on bonds unless they hold them to maturity if yields go up. A 10-year bond that is yielding 2% is locking in a 2% return for 10 years and equities are likely to far exceed that.

TGR: Also, if inflation is higher than 2%, investors are losing money.

SP: Investors should also be mindful of the tax differences. In Canada, capital gains are taxed at half the rate as interest. If you're earning 2%, by the time the taxman gets through with it, it turns into 1%. Then if you have inflation, you are losing money every year, or at least losing purchasing power.

Investors are hoarding cash and piling into fixed-income products. They will probably continue to do that until they start losing money or see others making a lot more than they are in the equity market. Then we will see a shift.

TGR: You forecast that the equity markets are going to rebound through the end of the year. So that shift could be about to occur.

SP: For many investors it is going to take longer. Most of them will probably miss at least the first half of the rally and then they will pile in right at the end.

TGR: Recently, the asset mix in the AlphaNorth Partners Fund was 37% technology, 25% energy, 27% metals and 11% precious metals. Why does the fund have more exposure to metals than precious metals?

SP: I am not a big fan of precious metals at the moment. The precious metal stocks are far more expensive than the metal names. Both in terms of a net asset value and, on a multiple basis, precious metals are typically double the price. Base metals are, as the commodities themselves are, something that gets consumed, something people actually need. Many of the products that we use today require them. Whereas precious metals have minimal uses other than sitting in your basement vault or wearing them around your neck, which is not very practical.

TGR: That's certainly not the case with silver. Silver has a huge industrial demand component.

SP: The major uses for silver historically have been for industrial uses, jewelry and photography. The photography component has been declining rapidly with the increased use of digital cameras. If it were not for investment demand increasing in recent years, the total demand for silver would have declined. The silver price would not be anywhere close to where it is currently if it wasn't for the investor demand through exchange-traded funds and people hoarding it.

TGR: What's your thesis for investing in base metals?

SP: Base metals are tied to global economic growth. Global growth should reaccelerate shortly and continue to be driven by China. The results will be favorable for supply/demand fundamentals for the commodities.

TGR: What are some common themes in the precious metal companies that are part of the fund?

SP: They are relatively early-stage companies with favorable odds of a major discovery, or they have a very cheap valuation relative to the peer group. The holdings are skewed toward gold.

TGR: You figure out which are the best in class and then compare valuations?

SP: It is somewhat subjective. You have to assess what the odds are that the company will find something, how big the discovery could be, and weigh it against the current valuation. We try to get in situations that have cheap valuations relative to the potential of what they can find and that have high odds of actually finding something.

TGR: Do most of these companies have prefeasibility studies?

SP: These companies are across the spectrum. Some of them have a resource already. It is a question of how big the resource can get. Some of them are earlier stage where they don't have any drilling yet, but they have some very attractive targets.

TGR: What's your outlook for gold and silver?

SP: My view of gold and silver is that they trade with the U.S. dollar. The U.S. dollar has rallied in recent weeks and gold has dropped $300. If the commodities all improve and appreciate over the next couple of quarters, gold will probably get dragged along. But they aren't the preferred commodities that I like to invest in at the current time. I think there are other commodities that make more sense and that will perform better.

TGR: Namely?

SP: Copper, potash, oil, gas, zinc and coal.

TGR: Thank you very much for talking with us.

Steve Palmer is a founding partner and chief investment officer of AlphaNorth Asset Management. Prior to founding AlphaNorth in 2007, he was employed at Canadian Equities, one of the world's largest financial institutions, as vice president where he managed the Canadian equity assets of approximately $350 million. Palmer managed a pooled fund, which focused on Canadian small-capitalization companies from its inception to August 2007 achieving returns that were ranked #1 in performance by a major fund ranking service in their small-cap, pooled-fund category. He also managed a large-cap fund, which ranked in the first quartile of performance among other Canadian equity pooled funds. From 1997–1998, Palmer was employed as a portfolio manager at a high-net-worth investment boutique. Palmer earned a B.A. in economics from the University of Western Ontario and is a Chartered Financial Analyst.  

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-- Posted Monday, 17 October 2011 | Digg This Article | Source: GoldSeek.com

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