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Investors should be holding more than 5% in gold as a recession is inevitable - Adrian Day

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(Kitco News) - The U.S. economy has been fairly resilient through the first half of 2023, which is prompting some economists to shift their forecasts and price out any potential recession; however, one market strategist believes that the U.S. is still on track to weaken by year-end.

In a recent interview with Kitco News, Adrian Day, president of Adrian Day Asset Management, said that some economists overestimate the current strength of the economy and the resilience of consumers.

“We always seem to forget that recessions don’t happen overnight,” he said. “Investors keep expecting things to happen immediately, but it takes time for economic conditions to change.”

While consumption has supported activity through most of this year, Day notes that consumers have burned through their COVID savings as credit card debt rose sharply in the second quarter.

Earlier this month, the New York Federal Reserve reported that consumer debt increased to $1 trillion between April and June.

Day noted that not only are consumers using debt to cover their expenses, but they also now face higher interest rates because of the Federal Reserve's aggressive tightening. He added that these are not the signals one wants to see in a healthy economy.

“Because of decades of low-interest rates and government COVID money, consumers were in pretty good shape, but that just means there is a longer runway before we hit a recession,” he said. “In one year, consumers have burned through all their savings and are now taking on record debt as interest rates remain extremely high.”

Day said that it is only a matter of time before consumers, unable to service their debt, start to default on the $1 trillion, which poses a significant risk to the economy.

“We haven't escaped a recession, in my mind, by any means,” he said. “You can't raise rates from zero to five without doing serious damage.” 

Day added that the longer the Federal Reserve maintains these elevated interest rates, the bigger the risk they will pose to the economy.

In this environment, Day said that he expects it's only a matter of time before investors turn to gold to protect their wealth as the economy slides into a recession. However, he added that the trigger for gold remains the Fed’s monetary policy.


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“When the Fed stops tightening before inflation is controlled, then I think gold will go up,” he said.

Although Day is solidly bullish on gold through the rest of the year, he noted that the precious metal faces some significant near-term challenges. He pointed out that short-term Treasury Bills currently provide a yield of around 5%, which is significant competition for gold, which offers no yield and costs money to hold.

However, he also noted that short-term T-bills aren’t an investment strategy. “Short-term Treasures are just a parking spot,” he said. “I understand there's a point when being early is the same as being wrong. But gold should be well supported as we inevitably move closer to a recession.”

As to how much gold investors should hold, while some analysts recommend holding about 5% of their portfolio in the precious metal, Day said that with a recession looming on the horizon, investors should look at increasing that amount.

“Gold remains an important insurance policy to protect your portfolio, and when risks are high, your need for more insurance increases,” he said. 

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.