Peter Schiff’s Gold Videocast — Adrian Day on Gold in 2016 (Video)
In his inaugural Gold Videocast for SchiffGold a few weeks ago, Albert K Lu interviewed Adrian Day, CEO of Adrian Day Asset Management. Day said he believes the gold market is “consolidating, bottoming, and turning around.”
The last couple of weeks seem to confirm Day’s insight. Since hitting its low the day after the Federal Reserve raised interest rates, the price of gold has risen more than 10%.
A lot was made of the Fed’s rate hike in the mainstream media, but Adrian agrees with Peter – he doesn’t see a series of interest rate increases in 2016 because it’s an election year and the economy simply won’t support it. He called a rate-hike pause the new interest rate cut. He went on to say gold is set up for a strong rally. Once it gets going a lot of people will scamper at signs of positive news and jump in.
When you have a decline over four years, it takes time to turn the corner and that’s what we’re seeing now. Gold is very undervalued right now.”
This is just the first of Albert K Lu’s exclusive interviews for SchiffGold. As creator and host of The Power & Market Report, Lu has years of experience analyzing the precious metals market and speaking with industry experts.
Follow along with the full transcript:
I’m Albert Lu. I’m joined today by Adrian Day, the Chairman and CEO of Adrian Day Asset Management. He’s also the Sub-advisor of the Euro Pacific Gold Fund. Adrian, thanks for joining me today on SchiffGold. How are you?
Adrian: I’m fine. Thank you. And you?
Albert: Very good, very good. We concluded 2015 with that highly anticipated rate hike, and I want to know what your thoughts are about the gold price. What do you think the gold investors are pricing in? Are they…because we haven’t seen…We didn’t see a rise in gold prior to that, and we haven’t really seen much activity since then. We’ve had a little bit because of the crisis, but is gold pricing in full four rate hikes for 2016?
Adrian: Well, I think you’ve hit the nail on the head there. Obviously, the one rate hike in December was well priced in. It was well advertised, and in and of itself, I would have expected a rally after that. But with the Fed talking about four rate hikes next year, I don’t think the market was expecting that. Well, I know the market wasn’t expecting that and the gold market, in particular. And that’s why we’ve seen this, should we say, lack-luster rally in the last two months, last six weeks. But, excuse me. I don’t see four rate hikes next year. I truly don’t. First of all, it’s an election year, and the Fed, historically has been loath to raise hikes meaningfully in election years, and that’s especially true right now where they’re worried about political interference in vaunted independence, says he cynically. But I also think the U.S. economy is just fundamentally not strong enough to accept a series of rate hikes at this point. So I don’t think that’s going to happen, and the gold market, to me, is consolidating, bottoming and turning around. But when you’ve had a decline from 2011 to end of 2015, it’s not the fact that gold has declined by virtually 50% because, in the 1970s bull market, gold declined. In ’75, ’76 it declined by about 47%, very similar. It’s the length of time, and when you have a decline of four years, it just takes time to turn the corner. And I think that’s what we’re seeing now. Gold is very, very undervalued in my view, and even more undervalued are the gold stocks. I mean the gold stocks are just selling at the most extreme levels of undervaluation that I’ve ever seen in any market. Gold mining relative stocks, relative to gold is selling at 70-year lows. I mean this is just astonishing. And in terms of price, the XAU is back where it was at 2000 before the rally began when gold was trading at $250 to $300 and even at today’s price with three and four times those levels. And yet the stocks are back where they were back then. So I think the stocks are just at extreme levels of undervaluation.
Albert: Adrian, how much of the decline we’ve seen over the past few years do you attribute to basically speculators piling on a trend and doing so in the options market through paper gold?
Adrian: You know there’s definitely some of that. I like to look at it a little bit differently, but it’s the same basic sort, and that is that sentiment in gold has turned so extremely negative, but when you have negative sentiment then everything becomes an excuse to become more negative, and things that should be positive are either ignored or have a very short term positive effect. And so you see these extremes in sentiment. You see extremes in options or in commitment of traders, in shorts. Shorts in gold stocks are building up once again to very, very high levels. What that means, of course, is that when you get a turn in sentiment which can come for any reason, and that turn is kind of confirmed, I think if we see gold move up above 11 and then move to 11.20, 11.40, I think you’re going to see that sentiment change. And because people, a lot of people are short but equally many investors are underweight and are waiting on the sidelines to get into the market, you could quite well see a sort of scramble at that point that would lead to a very strong medium term rally.
Albert: I tend to agree with you, Adrian. I think in terms of the stimulus that turns things around, I think the Fed, you have to tip your hat to them. They’ve done a marvelous job of setting expectations, and they’ve actually got the gold market to price in, I think, four rate hikes. Now it could be that we go into 2016 and a rate hike pause is the new rate cut, and that’s the thing that stimulates gold investors to actually push the price up.
Adrian: I think so, and just I think you’re right, yes. And historically, of course, we shouldn’t forget that typically the first rate hike has actually been positive for gold and commodities, generally, but it’s been positive for gold. What really matters with gold is not the first rate hike and not the nominal rate hike, but it’s real rates. When real rates start to get above 4%, 4.5%, historically that’s where gold starts to get hurt. So there’s this feeling out there that higher rates are bad for gold. But it’s only higher rates above a certain level. 1%, .5%, 1.5%, when inflation, we won’t say it’s dead, but those rates, those real rates in real terms are not particularly high, and to go from 0 to 0.5, or 0.5 to .75 is truly meaningless. So I’m not worried about… I wouldn’t even be worried about four interest rate hikes next year, to be honest, if each one is .25%. It would matter to perception, but in reality it wouldn’t mean that much. So no, I agree with you, and I think we’re going to see a pause next year. I don’t think we’re going to see four full rate hikes. I just don’t think that’s in the cards.
Albert: Yeah, I agree with you. I think the political business cycle, managing that is too important. And so I expect them to not follow through as Peter Schiff has said. He doesn’t expect them to follow through. And I think that actually would be quite positive for gold.
Adrian: Right, right. And Peter Schiff has been one of the few people that’s sort of got this interest rate completely right. I mean the consensus was for the Fed to raise rates much more and much earlier, but he was very adamant in saying that they wouldn’t do it in the spring or summer or even in the fall. So no, hat’s off to him for that. But just to get back to the gold stocks for a second if I can. You look at the XAU which is an imperfect index, but the XAU which is the index of leading North American gold and silver stocks. Since over the last 25 years, whatever, 30 years, since 1984, that XAU has fallen from top to bottom, has fallen more than 50% five times, and every one of those falls was followed by a rally of at least 100% which only gets us back to where we were of course, but sometimes by 200% to 300%. I think we’re now set up for that kind of move. And one can’t predict that it’s going to come this month or next month, and of course, past performance is no predictor of future, etc., but as the SEC likes to say, as Winston Churchill also said, “The past may not be an accurate predictor, but it’s the only predictor we have.” So I think we’re set up for a very, very strong rally here, very strong rally.
Albert: All right. Let’s leave it on that positive note, Adrian. Thank you very much for joining me. Appreciate it very much.
Adrian: Well, thank you, thank you.
Albert: I’ve been speaking with Adrian Day, CEO of Adrian Day Asset Management and also the Sub-advisor of the Euro Pacific Gold Fund. Don’t forget to visit us at SchiffGold.com. Sign up for Peter’s gold video cast to get updates, news and opinion. For SchiffGold, I’m Albert Lu.
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