The soaring gold price fuelled by investors worried about U.S. and euro-zone debt levels could turn into a spectacular rally with the metal flying past $2,000 (U.S.) an ounce, says veteran resource fund manager Fred Sturm.
"If the financial stress continues, we could enter into that phase soon" where gold goes through a parabolic spike like the Nasdaq stock market did prior to its plunge in 2000, said the chief global strategist at Mackenzie Financial Corp. who oversees nearly $2.7-billion (Canadian) in assets. "We are on the cusp of an accelerated rise in gold."
It's hard to predict how high the yellow metal can go under those conditions because it is like an "elephant trying to squeeze through a key hole," he said. "Until now, we have been primarily in this orderly uptrend, but there are hints [from huge one-day gains]that we could come into this rapid-rise phase where you find buyers and no sellers."
Gold futures for December delivery closed at a record high of $1,784.30 (U.S.) an ounce in New York on Wednesday. The jump came after the U.S. Federal Reserve Board vowed to keep its interest rates near zero until 2013, while new fears arose that France could become the target of a debt downgrade. The metal has gained momentum since Standard & Poor's cut its U.S. debt rating last week, and sparked a global market selloff amid concerns about slower growth.
The last time gold had a parabolic rise was in 1979 and 1980 when it soared to $850 an ounce, and then later tumbled and sank to a low of $250 by 1999. "Gold is the best address in a bad neighbourhood," Mr. Sturm said. "All currencies are losing value around the world, and gold is the only effective currency that is gaining value."
Gold stocks, however, have lagged bullion this year, but that highlights the spiralling costs faced by miners, and "why, by some measure, gold prices may not be high enough," he said. "Margins have not kept pace with the gold price advance, but companies like Randgold and Iamgold [which are managing their costs]are having more success."
Mr. Sturm is also convinced that oil will eventually follow a similar pattern to gold, suggesting a giant oil price rally could come by the middle of this decade. While oil has tumbled to about $80 a barrel in New York from $115 a barrel last April (it closed Wednesday at $82.89), he expects the drop to be temporary because of rising demand from emerging markets like China while supply remains tight.
Even though he is getting his shopping list ready to snap up bargains among resource stocks hit hard in the recent market downturn, he suggested it might be "too early to jump in with both feet" as markets could still pull back further from their recent lows.
Among resource stocks, he is most bullish on the energy sector, particularly, over the next three to five years. Fast-growing emerging markets are nearing the end of their inflation-fighting interest-rate hikes, and that will be a "positive trigger for the next rally phase in resource stocks," he said.
Mr. Sturm is a fan of global energy service companies, and owns names like Halliburton Co. , Schlumberger Ltd. and Trican Well Service Ltd. Among base metals, he likes copper miners such as First Quantum Minerals Ltd. because they will benefit from emerging market demand while supply remains tight as mineral grades decline.
Energy stocks make up half of his $1.8-billion Mackenzie Universal Canadian Resource fund, which he has run since 1986 and now co-manages with Benoit Gervais. It gained 49.4 per cent for the year ended June 30. Over 25 years, it has an annualized 11.6-per-cent return versus 8.7 per cent for S&P/TSX Total Return Index. That gain incorporates a steep 56-per-cent loss in 2008 after the market meltdown.
"Mr. Sturm is a strong manager" who takes a more diversified approach to resource investment than the more plain-vanilla strategy of many of his peers, said Morningstar Canada fund analyst Al Kellett.
His resource funds have invested in everything from alternative energy firms to corporate bonds, and even owned Chinese forestry company Sino-Forest Corp., whose stock plunged this summer on allegations of fraud made by a short seller. His diverse strategy hasn't always worked out –alternative energy stocks got hammered in Mr. Sturm's global resource fund in the 2008 downturn – but it is not an unreasonable strategy to pursue, Mr. Kellett said.
The Mackenzie funds, meanwhile, still own nearly 3.6 million shares of Sino-Forest, according to financial data from Bloomberg. "I have no comment on Sino-Forest," said Mr. Sturm, who recently returned from a trip to China. "We will disclose that in the fullness of time."
Fred Sturm's Picks:
Halliburton Co. (HAL-NYSE): Now $43.30 (U.S.)
The Houston-based oil field services giant will benefit from the rising in spending by energy firms for oil exploration, and the use of new drilling technology to tap oil and gas tapped in shale rock, Mr. Sturm said. He also expects demand for offshore drilling, such as in the Gulf of Mexico, and from foreign markets to improve over the next 12 months. "We consider valuations to be attractive," he said. The stock is trading at 10 to 11 times next year's consensus estimates.
Cabot Oil & Gas Corp. (COG-NYSE): Now $66.70 (U.S.)
The Texas-based oil and natural gas company controls some of the best acreage in the Marcellus Shale play in Pennsylvania, he said. Despite low gas prices, it enjoys high rates of return that rival certain oil plays, and should continue with double-digit production growth, he added. "The market has not yet given full value of its acreage, but as it continues to prove the value, the markets should push the share price higher." Cabot trades below its fair net asset value, he said.
First Quantum Minerals Ltd. (FM-TSX): Now $21.73 (Canadian)
The Vancouver-based miner, whose shares split five for one this week, is a copper miner with operations around the world, including Africa, he said. "We believe the valuation is attractive relative to its sector-leading growth in production." A key project is its Sentinel copper deposit in Zambia, which could start production in 2014. First Quantum is a potential takeout candidate by some of the world's leading mining companies, he added.