The Most Hated Setup in Gold in 50 Years

[00:00:00]But one day, three weeks ago, there was zero bullish sentiment.

[00:00:10]>> Hi everyone, welcome to Gold Silver. I'm Maggie Lake and joining me today to discuss the outlook for precious metals is Adrien Day, chairman and CEO of Adrien Day Asset Management. Hi Adrien.

[00:00:21]Wonderful.

[00:00:22]>> Well, hi Maggie. It's really good to finally meet you.

[00:00:25]>> Yes, I know. We I was just saying we missed each other uh when we were in person at a conference a couple weeks ago. We were both too busy running around as it happens. Uh but it's wonderful to catch up with you now. So I'm really curious Radic kind of really interesting juncture here for precious metals prices uh and market action I think because there are a lot of long-term fundamentals that I think people feel quite bullish about but boy that short-term price action has been disappointing. What do you see when you look across the complex?

[00:00:55]>> Yeah. No, no, abs, absolutely right. I mean, I'm I'm incredibly bullish on the longerterm fundamentals, but as we know, the war um which resulted in a dollar safe haven bid and and also a higher oil price, which resulted in concerns about higher inflation and higher interest rates. So, you know, a higher dollar, a higher uh CPI, and expectations of higher uh rates, they've all conspired to sort of really hurt gold. And the question for me is how long does that last? Does it last a week? Does it last a month? Maybe it lasts 3 months. I don't know. Um but it does strike me that if we look out at least 6 months, hopefully the war will be over by then.

[00:01:41]And if when that happens, it strikes me that the dollar will lose that safe haven bid and will probably resume its downward trajectory, but we were seeing last year.

[00:01:53]>> I mean, I'm not calling for a crash, just a weaker dollar. And then we have the Fed and inflation to still deal with because of course, as you know and everybody knows, um the oil price spike is not the only cause. In fact, it's not really the cause of higher CPI at all.

[00:02:12]Well, it's the cause of higher CPI, but it's not the only cause and it's not the underlying cause. And so, even when the oil price uh comes down, retreats, we're still going to be faced with a CPI number that is significantly above the Fed's own target. and Fed Chairman Kevin Walsh has told us, you know, but he he regards it as a failure that the Fed hasn't achieved its own target.

[00:02:39]>> So, are we going to see rate hikes later in the year? Perhaps we will, but it's but again, it seems to me that there are constraints on just how hawkish the Fed can be. Not only political constraints, but also, you know, economic constraints. Um, and that would include half the population living paycheck to paycheck >> and uh not being able to withstand higher interest rates on their car loans and so on. And it also includes things like the private credit market which um you know I don't think we we've escaped I won't say it's on the precipice but you know I think there's a risk that if interest rates were to move up too much then we would see more problems in the private credit. So anyway that's that's the way I'm looking at it now. But I'll say one more thing if I may. What to me is really interesting is if you look at gold's action in the last 10 days. Okay, we went down. Now we're up today. But gold did not decline anywhere near as much as you would have expected if you looked at the oil price moving up and you looked at the dollar moving up. So is the gold market now beginning to look ahead, look beyond that?

[00:04:01]>> That's that's really interesting. uh because I think that you know we're all trying to look for signs that you know give an indication or what the catalyst.

[00:04:10]So where some may see a a decline from the peak you're seeing some resilience here.

[00:04:17]>> Yes. I mean obviously gold was weak up until today. Gold has been weak in the last um you know 10 days but when you look at a graph of the dollar and oil not anywhere near as weak as it quote should have been >> or would have been you know a month or two or three ago. So I I I think we may be you know perhaps we've seen the bottom. The interesting thing of course is the central banks are still buying.

[00:04:47]you know in May they bought more of it in April in April they bought more than in March and so on. Um the central banks are still selling are buying buying sorry tether is still buying which is a very important story that's not fully appreciated I think in the market but the rest of us are not buying investors aren't generalists aren't small institutions aren't you know ETFs are continuing to see outflows uh particularly in North America uh >> what is sentiment like what are you picking up in terms of se sentiment uh when it comes to gold, why are so many selling?

[00:05:26]>> Yeah. Well, of course, the people I talk to are not not not representative of the entire market. The sentiment is clearly extraordinarily weak. I mean, you look at the you you know, the bull bear sentiment indicators that they do on stocks and emerging markets and the dollar and everything else. And you know, you'll often see a 6040 or even a 6535, which is considered kind of lopsided. The bullish indicator on gold stocks for the last couple of weeks has been down at 7. This is just astonishingly lopsided. Even at its peak, the dollar was only, you know, 80% bullish, so 20% bearish, but seven. And as you probably know, my favorite anecdote is one day, now it's 3 weeks ago, unfortunately, but one day 3 weeks ago, there was zero bullish sentiment. Um, and I like to joke, well, they didn't ask me, but um, >> or maybe some of the people listening to this as well, but for I think this is a very important point, though, for the person who may be listening to this who's newer to the market, maybe who got involved in the last year and saw that big hockey stick up and down. Uh, what would you say to them in terms of, you know, you've been at this a long time.

[00:06:51]What would you say to them in terms of what to understand about this kind of price action?

[00:06:57]>> Yeah. Well, first of all, as you know, and we all should know, resources and resource stocks in particular are just inherently volatile. There is no way to get around that. They're volatile on an hourly basis, a daily basis, and an annual basis. And I always have a rise smile when someone says, "Oh, it's horrible. It's horrible. The S&P is down 2% today." I said, "Well, my gold stocks are down 2% in the last 3 minutes.

[00:07:22]That's nothing." Um, but I think so, first of all, we have to realize that they're inherently volatile. But if I and others are correct that we're in the middle of a longer term bull market in gold, midcycle corrections are typical. I was going to say they're not unusual, but they're not only not unusual, they're typical. We can go back to obviously the classic case will be 74 197475 where gold dropped 46%.

[00:07:57]Uh and of course the gold stocks uh we didn't have the XAU or the GDX back then but the gold stocks dropped anywhere from 80 to 90% in that time. If you had sold anywhere in that year except right before the crash, uh, and not got back in, you would have missed, you know, the greatest bull market in history. Go back to 2006, we had another, what was it, 35% decline in the gold price and a commensurate drop in the gold stocks. So midcycle drops are perfectly normal. We can look at 2008 which of course was a little unusual because it was a great financial crisis. It wasn't just a gold stock correction but even there you had a very sharp short and sharp drop in the gold stocks and 3 months after the bottom they had doubled. M >> so my advice to people who are relatively new in this sector is um first of all don't panic don't be reactive if you didn't sell in January and I notice there's an awful lot of people telling us now that they did sell in January but if you didn't sell in January in my view it is completely too late to even be thinking about selling >> and um but you know after we get after we get a recovery rally and after we're back to normal, then I think we should look at is our position right sized.

[00:09:31]>> Um I have never met an investor come to me and say they want to invest in gold.

[00:09:36]I've never had a single one who has said, "I'm only a short-term investor and I can't stand volatility." You know, everybody's a long-term investor and yeah, I'm okay with volatility until it happens. So, but to me, the important thing is one to understand yourself. Are you really okay with volatility? You know, I think Warren Buffett once said you should you should you should only hold stocks, but you'll be comfortable if they drop 50%. M >> and of course what he meant by that is that that if if you know and like a stock and it drops 50% that's an incredible buying opportunity. So one understand yourself and then the second one is to rightsize it um you know within so so that a 40% decline as we've seen in the gold stocks does not disrupt your standard of living.

[00:10:29]>> I think it's probably a good idea. So, let's address those who may be thinking about it, especially when they saw the big moves early in this year, didn't do it, and now think, well, that's it. I I've missed a generational opportunity, it's too late to get back in, or, you know, I if it's going to just move sideways, I there are better places to put my money. Um, what is the role they should be thinking about in terms of holding gold in a portfolio? and and would now be a good time for them to start dollar cost averaging it.

[00:11:01]>> Yeah. Well, I always distinguish differentiate between gold bullion and gold stocks. Gold bullion, you know, if you're and and and the difference of course is why you're holding something. If you're holding gold as a defensive insurance position, then absolutely I think you should be dollar cost averaging in now. Um and you should be taking your quue frankly from the central banks. Um if you're looking at maximizing your returns from gold investments, you can obviously buy gold on leverage or you can do futures or all wonderful things like that. But obviously buying gold equities is mining equities is the most straightforward way of of of of getting leverage on gold. Um, yeah, if I were new to the space, if I'd met got an inheritance last week and I had no gold stocks, I would absolutely be buying now. Now, would I be buying 50%, 30%, 60%, I don't know of my position, tender position, but I would definitely be putting money to work right now. Um you look at all of the senior gold stocks um are trading right now on any on any valuation metric you look at on every valuation metric they're trading in the lowest quartortile of their 50-year history. They are cheap and some of them of course are even dramatically less expensive than that on a valuation basis. Um, and so we've got a situation where the prices are down 40% from their January peaks, the valuations are in the lowest quartortile of their 50-year history, and the sentiment is as weak as you could possibly get it. And so that to me as a contrarian is just a perfect setup. And the thing to understand about gold stocks is they will go down dramatically sharply. They will drift down for a while but when you get that recovery it is typically very sharp. I mentioned 2008 where they doubled in 3 months the whole sector.

[00:13:16]So I I find different investors have different styles and are good at different things. I'm a long-term value investor. I just find it a lot easier to buy things when they're cheap and hold on rather than try to get the bottom, you know, and miss it.

[00:13:35]>> Yeah.

[00:13:36]>> Um Yeah. And and they do tend to they do tend to move quickly when they move.