(Kitco News) - Gold has rallied over the past three months up 17.7 percent, and is up over 5 percent year-to-date. However, as the Federal Open Market Committee meets on Tuesday to decide on a rate hike, gold is vulnerable to a pullback, as Fed Chairman Jerome Powell is set to adopt hawkish rhetoric in his press briefing that day.
This is the assessment of Adrian Day, Chairman and CEO of Adrian Day Asset Management, a seasoned veteran of the financial industry and author of multiple books.
"I think gold is vulnerable to a pullback because the market is so convinced of a 25 basis point [hike] and a pause in March," he explained. "Powell doesn’t like the fact that the stock market is continuing to go up, which means the stock market is not taking him seriously… His incentive is to come out and say something strong, that we [The Fed] are going to keep on with this job until inflation is defeated."
Stock markets have indeed rallied this year, with the S&P up by 6 percent year-to-date.
Day cautioned that if Powell comes out with hawkish rhetoric and downplays the idea of a pause, then that could temporarily send gold’s price downwards below $1900 per ounce, but he forecasts that gold will resume its rally in 2023 to "exceed" its prior all-time highs. He said that he is "exceptionally bullish" on gold.
"What makes gold bullish… is if interest rates are going up, but the market believes that the Fed will not continue to raise rates," he said. "I think gold will exceed its all-time high this year. Little doubt about that."
However, Day clarified that if the Fed continues to raise rates beyond expectations, this would "derail" the gold market.
He spoke with Michelle Makori, Lead Anchor and Editor-in-Chief at Kitco News, at the Vancouver Resource Investment Conference.
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Stock Market Outlook
Despite his rosy forecast for gold, Day was not as optimistic about the stock market, and claimed that the S&P 500 will fall by at least 20 percent this year.
"If earnings come down 10 percent and the price-earnings multiple contracts by 10 percent, that’s essentially a 20 percent decline in price," he predicted. "That would be my bottom-line decline. I think it could easily be more."
In addition to Fed tightening, Day pointed to fundamental problems in equity markets, such as stock prices being a poor reflection of underlying earnings data.
"I think the S&P is headed for a fall," he stated. "When you look at the S&P right now, it’s trading at 18-and-a-half times earnings. Bear markets do not end at 18-and-a-half times earnings… which is well above the average multiple for the S&P over the last 40 years."
To find out which gold mining stocks Day is investing in, watch the video above.
Follow Michelle Makori on Twitter: @MichelleMakori
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