Adrian Day: Gold 'Capitulation' Provides Buying Opportunity
Spot gold has fallen from above $1,350 in early April to below $1,200 an ounce. Last week, gold hit its weakest level since early 2017.
“The U.S. economy, stock market, and particularly [the U.S.] dollar have all been broadly positive for most of the year, making it a difficult environment for gold, with demand for the metal sliding; U.S. coin sales hit 10-year lows, reflective of this lack of demand,” said Day in a note to clients.
There is market talk that Turkey may have been a seller of gold lately, which the fund manager said “makes sense” since “one sells liquid assets” in a crisis.
“If this is the main cause of [gold’s] sharp decline in the last week or so, then it is of necessity a temporary phenomenon,” Day said. “The U.S. economy, stocks and the dollar may stay reasonably strong—for now at any rate—so gold won’t suddenly explode upwards, but we could reasonably expect a near-term return above $1,200 towards the mid-$1,200s.”
Meanwhile, Day cited recent news that Vanguard is getting out of the gold business at a time that general sentiment toward gold is collapsing. The “largest precious metals fund by far” will change its name and mandate from the Precious Metals Fund to the Global Capital Cycles Fund, Day noted.
“Vanguard shunning gold at this point may prove to be a contrary indicator of historical proportions,” Day said.
Meanwhile, the fund manager pointed out that large speculators in the futures market collectively hold a net-short, or bearish, position.
“This, plus the largest gold fund changing its mandate, is as close to capitulation as one can get,” Day said. “The short-term recovery could be as sharp as the decline, once the selling pressure is gone. This gives us the opportunity to buy great [mining] companies on sale, as well as to make some short-term trades is grossly oversold stocks.”