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Fed's catch-22 scenario and why it means gold price will shine in 2021 - Adrian Day

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(Kitco News) - Investors who are giving up on gold because of its recent lackluster performance have not been paying close enough attention to the precious metal's price action in the last two years, according to one fund manager.

Adrian Day, president of Adrian Day Asset Management, said in a recent telephone interview with Kitco News that gold's time in the sun is not over, even as momentum has waned a little. Rising bond yields and a new focus on base metals like copper as economic growth expectations continue to pick up have taken a toll on gold. However, Day said that the precious metal remains an attractive asset. He added that he expects the market is close to a new cyclical low.

"If you took out one-year, three-year, or even six-month view, I am extremely positive on gold," he said.

The comments come as gold prices continue to hold support above $1,700 an ounce after bouncing off a 10-month low last week.

Although gold prices have dropped more than 15% from their August all-time highs, Day said that investors need to look at the recent price action in a much broader context. He noted that gold's consolidation came after prices rallied nearly 40% from their lows seen one year ago.

"The reason this consolidation has dragged on so long, frankly, is simply because the move last year was so extraordinary," he said. "You had this explosion, it took us way above the trendline, and it pulled in all sorts of buyers for all sorts of reasons. When you're in a period of negative sentiment, everybody looks for reasons to sell. When you're in a period of positive sentiment, nobody's looking at the negative.

While the gold market still has room to move lower in the near term, Day said that he suspects that the market is close to a bottom and that the sellers have exhausted themselves.

He added that sentiment could once again shift in gold's favor as inflation pressures pick up and keep real interest rates in low to negative territory. Day noted that the rise in nominal 10-year yields would soon take its toll on the U.S. economy.

"I think we are very close to the point where the Fed is going to start talking about rates moving too far, too fast," he said.

Day added that the U.S. central bank could not afford to raise interest rates or let bond yields rise much higher because of the growing government debt.

"If you look at the federal government today, only about 10% of federal receipts are going to interest payments. That's the lowest rates in history," he said. "If the 10-year yield goes to say 2.5%, which is still low on a historical basis, those interest payments would more or less double. That's not a good place to be."

Not only will a low interest-rate environment be positive for gold, but Day said that more liquidity in the financial system would also provide long-term support for the precious metal. Last week Congress and U.S. President Joe Biden approved a $1.9 trillion stimulus bill, which includes a $1,400 for consumers.

Day added that financial markets would see a lot more liquidity later in the year when the economy opens up, and people start going back to work and spend the money they have been saving during the pandemic.

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.