Adrian Day: Interest Rates, Dollar To Help Gold
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“Like other assets, gold has been supported by the Fed’s about-face on tightening, while the prospect of a lower dollar would also be very positive for gold,” he says in a quarterly portfolio report.
“Certainly, declining rates did not help gold, particularly from 2011 to the end of 2016. However, a central bank that lowers rates because it can’t raise them is a different matter. Concerns about a slowing economy and particularly the impact of higher rates on the massive amounts of debt – at the government corporate and consumer level—will keep rates low and this remains very positive for gold.”
He adds that debt is a concern globally, not just in the U.S.
Day listed three factors currently holding back gold, including a recovery in equities. However, he said, a “stumble” in stocks likely would mean “insurance” buying of gold would resume, as occurred when equities sold off in autumn.
“Second, the uncertainty over the China-U.S. trade talks and Brexit is supporting the dollar and not gold,” Day said. “A conclusion to those issues would help gold.”
The third factor holding back gold, for now, is the U.S. dollar, Day said. However, while the fund manager said he does not expect the dollar to tumble any time soon, “absent a black swan, we do believe that there is very little room for additional strength, so the stage is set.”
Meanwhile, Day commented that gold stocks have been playing catch-up to the gold rally since August.
“As a group, the gold stocks, including the large miners, remain very undervalued on a long-term basis relative to both gold and to the broad stock market,” he said. “When gold breaks convincingly above $1,300, the stocks can move dramatically before they reach anything approaching long-term average valuations.”
He commented that mega-mergers – such as Barrick Gold Corp. buying Randgold Resources Ltd. and Newmont Mining Corp. in the process of acquiring Goldcorp Inc. – have focused investor attention on the gold sector again.
“While we do not think that consolidation is over for one second, the next round of M&A may involve junior producers, or companies developing a single attractive asset,” Day said. “Though we rarely buy a stock solely because we think it could be acquired, there are certainly several stocks in portfolios that could be reasonable targets in the months ahead.”
Day expressed concern about the potential for a slowing U.S. economy, as well as a pullback in global equities, at least in the near term.
“While we are holding most of the stocks we own, we are buying little and slowly trimming opportunistically,” he said. “Many of our favorite stocks and sectors, while still reasonable value, are no longer bargains following recent rallies.
“We are holding our exposure to gold and resources, though, as always, with some trading among specific positions. Trimming positions now means having the cash available to buy when stocks get meaningfully cheaper.”