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Adrian Day: 'I'm very bullish on gold' prices

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(Kitco News) - Gold should benefit not only from loose monetary policy but the likelihood that interest rates will remain low for a long time even when the economy starts to recover, said Adrian Day, chairman and chief executive officer of Adrian Day Asset Management.

Further, banks may be more willing to lend money than after the 2008 financial crisis, which is yet another factor that fuels inflation and thus interest in gold, Day said.

Meanwhile, when it comes to mining stocks, Day said he would favor companies with good balance sheets and management, but emphasized discipline when taking out a position.

“I’m very bullish on gold,” Day said in an interview with Kitco News. “The primary reason is monetary – the actions of the U.S. Federal Reserve, the European Central Bank and other central banks. Nothing has changed in that regard since the beginning of the year, except it has gotten...more supportive for gold.”

Some might have been puzzled that spot gold fell roughly $250 during the week-long period after hitting a seven-year high on March 9, Day noted. This was due to a liquidity crisis as equities melted down, with market participants selling assets to generate cash, especially those in which they had profits. The same happened when stocks crashed in 2008, Day pointed out. Gold prices fell from around $980 in mid-August of that year to $714 a few months later, but then went back to $994 by the following February, the fund manager continued.

In fact, Day pointed out, the more-than-$200 decline back in 2008 was far worse percentage-wise than the recent one, since gold prices were far higher to start with this month. And like then, he looks for gold to rise again. In fact, the metal has already risen sharply this week after more aggressive stimulus measures were announced by the Federal Reserve on Monday.

Day cited a quote from famous U.K. Prime Minister Winston Churchill, who once said something along the lines of: “The past is not a guarantee of the future, but it’s a good indicator.”

Gold often is the first asset to recover after a crash, Day continued. He pointed out that this was the case after the 1987 stock-market crash, the crash at the start of the new millennium, and the 2008 credit crisis.

“And it tends to have a pretty good recovery when it does recover,” Day continued.

Central bankers around the world are now “throwing money” at the economic problems created by the COVID-19 pandemic, Day said. Furthermore, he continued, Fed policymakers likely will be hesitant when the time does come to think about tightening again.

“If I’m right and that money [created by policymakers] gets into the economy, six to nine months from now, inflation will start to accelerate,” Day said. “But we will be at a point when the Fed cannot do what it normally does to stop inflation, which is to ratchet interest rates up. I don’t think the economy will be strong enough at the end of the year for the Fed to start pushing up rates meaningfully.”

Meanwhile, Day also explained that gold should benefit if the pandemic comes under control, assuming that the U.S. dollar in turn gives up some of its recent safe-haven strength. The dollar did fall on Tuesday, and the precious metal often moves inversely to the U.S. currency.

Money in ‘real economy’ means inflation

Day pointed out that when the Fed tried to “create money” with quantitative easing after the 2008 crisis, much of the money did not necessarily work itself back into the “real economy,” ultimately holding gold back from where it might have gone. The central bank began paying interest on excess reserves for the first time in 2009, Day explained. Thus bankers, who were feeling under pressure from examiners to avoid risky loans instead borrowed from the Fed, then turned around and put it back on deposit with the Fed to earn a quarter to three-eighths of a percentage point on a “risk-free” spread. Thus, much of the new money was not getting into the real economy, meaning inflation remained contained, he explained.

“You had the most idiotic policy that the Fed has ever instituted, in my view,” Day said.

This interest-rate spread for banks eventually went away, he continued. Now, the fund manager pointed out, banks are considered healthier and are not being scrutinized as heavily over risky loans, while the Trump administration has reduced regulations, including those for the financial sector. All of this means banks likely will be more willing to lend – meaning more money in the economy and thus potential for inflation, Day explained. Many businesses also need loans as lifelines to avoid closing, further increasing pressure on banks to lend, Day said.

“That means money gets into the economy, which means with a lag of typically nine months...we start to see inflation,” Day said.

And while he personally does not consider inflation to be the most important factor affecting gold, others do. This means potential buying as the “inflation genie gets out of the bottle” and initially exceeds Fed targets, Day said.

Look for ‘the best’ in mining stocks

So how does an investor go about picking mining shares amid the recent volatility and uncertainty?

Day would focus on producers considered “the best” rather than speculating on when companies might be oversold on a short-term basis. He also favors companies with strong balance sheets, especially when looking at smaller producers.

He also emphasized looking at companies considered to have good management.

“People often don’t think it makes much of a difference in big companies, but just think of the difference that [chief executive] Mark Bristow has made to Barrick [Gold Corp.]. Or think of the company Sean Boyd built at Agnico [Eagle Mines Ltd.]. People do make a difference, even at big companies.”

With volatile markets, Day said investors must be “extremely disciplined” in their approaches – having limits on how much they buy at a time and putting thought into price targets. Those who understand the options market can also sell puts.

“The most important thing is to focus on quality and be disciplined about the buying,” he said.

Day suggested keeping an eye out for situations in which the share price of a smaller company with less liquidity, such those in the junior-mining space, falls sharply when there is no obvious bearish news involving the producer. Often, this can happen when there is simply one big seller in a thin market, such as a fund making redemptions.

“Just keep a good watch on the stocks you want to buy.”

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.