Gold is not the best inflation hedge, these assets are better – Adrian Day

kitco news special coverage of the precious metals summit is brought to you by corvus gold we're here now with adrian day president of the adrian day asset management firm and he is also the portfolio manager of the europe pacific gold fund adrian welcome back to the show welcome to kitko well thank you for having me david a beautiful conference here we're having at the beaver creek precious metal summit you used to you told me offline you used to be an editor of a newsletter called the inflation survival letter what a fitting title for today adrian how can we survive inflation today well that was back in the early 1980s a long time ago and mark skousen in fact was my first uh my first boss he was the editor i was mentioning you know the market is still not believing inflation that's pretty clear if you look at uh you know the tips and and well look at what gold's doing and look at many things the market simply doesn't seem to really believe the inflation story and they seem to be still believing what the fed is saying about it being transitory um you know to me obviously there are there are reasons to think that some of the recent jumps we've had in certainly in certain prices are temporary but you know if if prices in aggregate go up yes then that's a reflection of inflation and it seems to me we definitely have inflation and the problem is as prices continue to sustain themselves at a higher level more and more people will change their buying patterns and start to buy certainly um durables in advance you know to to say to get in ahead of a uh price increases um and so then it it can become something that just feeds on itself and and i think we have a danger of that at the moment are you saying that it's not actually a bad thing that we have quote unquote inflation because that's reflected in asset prices as an investor asset and price asset price inflation is something that everyone aspires to have no i think inflation i think inflation as it's normally looked at is a bad thing for an economy it is a bad thing now as someone who invests in gold do i like inflation or not that's a different question unfortunately sometimes when you're a gold investor you know all sorts of bad things are good for your investment but there's no question i i think is a big mistake a lot of people think when there's a little bit of inflation it makes people feel happier about things they get a pay raise and the stock portfolio goes up and they feel good about it but in real terms you've got to look at it in real terms and i think inflation is just a it destroys the purchasing power of money which means that it destroys the savings of the middle class and we've seen that time and time again if you look at whether it's in argentina or zimbabwe or you know the weimar republic or go even further back to other historic periods of inflation it's the middle class that gets wiped out for people that have essentially done the right thing for people that have saved money that have put it in the bank but haven't gone into debt because of course in an inflation debt is is good thing so the people who have done the wrong thing haven't saved and created loads of debt they're the winners in inflation you know you're right that the market isn't doesn't seem to currently reflect higher levels of inflation and don't really believe uh were they do believe the fed's narrative of a non non-persistent inflationary environment if you take a look at this for example this is the uh real yield 10 year inflation-adjusted yield it's still at negative territory if you look at the nominal yield it's it's still near you know not very high levels compared to historical averages so notwithstanding the fact that the market may not believe that there is already persistent inflation you can argue that there already is right consumer prices have gone up the question is how we can protect against that how we can hedge against higher levels of inflation hence inflation survival right well primarily it's real assets real assets is what protects you from inflation and real assets can be real estate they can be equities because you own a piece of a real company now when i talk about equities of course i'm not talking about gamestop or something i'm talking about ownership in real companies but traditionally in periods of rising inflation the stock market does well because it's a way for people want to get their money out of the banks they want to get money out of bonds and they put it into real assets um you know i'll mention something if i may which i find interesting if you look at history over you know 800 years gold is not the best inflation hedge on a relative basis compared with other things gold underperforms during inflation but it is a it is a very good deflation hedge um and that's because deflation is often associated with monetary uh upheaval of some type so clearly if you're in a country like argentina or zimbabwe or weimar republic where you have runaway inflation then holding your assets in gold is obviously a very very good thing to do but even if you look back at the 70s you're the second half of the 70s gold was not the best performing asset and these these numbers come from a book you've probably heard of called the golden constant yes by roy jastrom and and and i just found it absolutely fascinating um but in a way it it makes logical sense things that can things that can be productive real assets that can be productive are going to do better in a period of inflation but an asset that doesn't produce yes but even during a hyper inflationary scenario like you mentioned zimbabwe the weimar republic you listed some examples in those scenarios presumably any other currency other than the home domestic currency would be a valuable play it's not just gold that could protect it no you're absolutely correct you're absolutely correct yeah okay why is it then that gold this year underperformed the stock market even though we had inflation at uh near record levels since the highest level since 2008. you know i i think you have to go back to last year and the beginning of last year from the bottom in march end of march to the end of july you had gold go up 44 in in four months basically that is on a historical basis that is just a a gross anomaly i mean gold it's not bitcoin or tesla it's not supposed to go up 40 in four months and so i i think you had this um irrational exuberance if you want about gold um after the after the recovery uh from you know after the uh fed started printing money like crazy you had this exaggerated move at some point you reached the top you run out of buyers and then slowly over the last really year right a little more than a year you've had people just give up you know people slowly give up so i think it's a matter of of market psychology uh people who bought back uh in june or july last year and so they lost 20 percent of their money in six months and if they bought gold stocks of course they probably lost 20 in in a few weeks they're not in a great rush to get back into gold so i think that's an important factor the gold investor doesn't see there's any rush to get into gold at the moment you know there's a lot of people i know who say you know i'll give you more money for your account but i i don't think i need to give it to you now so i think gold investors are not in a hurry and of course so long as a stock market continues to go up again people don't see the need to move into a into an asset that's a hedge into an asset as a an insurance policy which gold is so so long as the stock market continues to do well so long as the dollar continues to hold up reasonably well i don't think people see a great rush and the last point is that people actually believe the fed's narrative about tapering you know jiren powell the federalist of chairman said it himself last week in jackson hole so this isn't just me talking but he he was very clear about making a distinction between reducing asset purchases on the one hand and increasing um increasing interest rates on the other hand i think the fed is going to reduce asset purchases and pretty soon i don't know how dramatic it is i don't think the i mean there's a lot of room in the federal reserve's balance sheet to come down uh without uh without getting back to the levels we were only a year ago even last month in august the fed was ramping up its asset purchases so they can reduce those asset purchases and i think we're going to see that i think we're not going to see any interest rate hike i i don't think we'll see that until 2023 that's the key question forget what the market believes do you think the fed even believes their own narrative of transitory inflation that's an interesting question i think at first they did but as it persists because what was it well let's not forget april was the month the april numbers were the month that really got everybody looking at inflation but if you go all the way back to last august it had been slowly moving up pretty much month by month but but since april we're now we're now five months and there's no sign that inflation is is is pulling back i think that is is decreasing i think whether they believe it or not i think they have to believe it they have to believe it because if we get increa and that's why they're talking about over two percent inflation target we have that's that's a over a period of time so we can justify higher inflation to offset the lower inflation i think they have to believe it because if if the inflation numbers continue to move higher and i'm not talking about runaway inflation at this point but if we get you know a three and four percent consistent inflation number and we move up to five the fed's going to have to increase interest rates and i i think i think the fed is extremely reluctant to raise rates at the moment extremely reluctant they have other excuses they could possibly pull remember they have a dual mandate of full employment we're not at full employment yet so they could argue well you know the labor market's not doing so great we can't raise rates yet well we've also got how many is it 10 million new job listings that aren't being filled up yeah so whether we're a full employment or not that's a huge discussion yeah because this is not normal normal circumstance but yes you're right you know there's there's covid the covet variants there's uh unemployment there's all sorts of reasons not to increase rates but if we saw inflation at four and five percent then i think there'd be some pressure on them to do something about inflation okay so just to wrap up the inflation discussion and we'll move on to blood markets now if you had to rank hard assets as the ultimate or the best inflation hedges you've you've got real estate you've got precious metals what am i missing here so rank them for us um well and also equities equity equities are an inflation edge because sure your ownership in real businesses and frankly people's own individual businesses can be an inflation hedge interesting um yeah i think gold gold and silver well gold is is a good inflation hedge on a risk reward basis okay because i don't think there's a lot of risk in gold silver's probably a better inflation hitch it historically has been a better inflation hedge um and and right now i think it would be a better inflation hedge but i'm avoiding your question hunter uh well what do you think about if you can if you were to compare let's say real estate versus uh versus precious metals yeah again the problem you know right you have to look at the situation right now not theoretically right you're not asking me theoretically you're asking me right now i think the problem is that you know real estate has just got too expensive for most people so i don't think i don't think in a modest inflation of three or four percent right we're going to get dramatic additional dramatic moves out of real estate interesting you know there's a lot of supply of real estate in terms of rental units and so on um so i don't think we're going to get a huge huge response about base metals like copper i mean you would assume that during an inflationary environment raw materials would be more expensive so would you just buy the raw materials yeah all the raw material uh miners sure yeah um i when i look at commodities i'm i'm a bull on commodity i think i think the narrative of another commodity super cycle is i i i haven't called it that but i don't think it's far from from the truth but that's all based on demand it's based on continued growth in china it's based on continued infrastructure spending in china and it's based on infrastructure spending in the us some of which we may or may not get i i like personally i like to focus more on on individual commodities where you have not only a good demand story say copper or nickel where you have the electrification story you know as we know electric vehicles take four or five times as much copper and nickel as internal combustion engines electric utilities use far more copper and steel than do uh coal-fired uh plants so if the whole electrification story is very positive for demand for copper nickel but i also like to look at i also like to look at individual commodities where there's a supply side of a story and i'm less of a bull in the near term say on uranium than some of my good friends are and that's because there is no shortage of uranium that could come onto the market if uranium sustains a price of let's say 50 or 60 dollars a pound is a lot of excess supply in in kazakhstan same in a way with oil you know if if the oil price sustains it were to sustain itself at 80 to 100 there's a lot of excess capacity both in uh saudi arabia but also in uh you know america now there's in the u.s of course you've got political considerations of cor as well joe biden seems to think that uh the whole world should should produce uh oil and metals for the us to consume but we don't actually want to produce them here in our country but there's excess capacity it's not a it's not a physical shortage copper on the other hand has much more of a genuine physical shortage um you know if you look ahead five years copper mines take a long time to to come from what discovery certainly decades from discovery to production but even from a go-ahead decision until they're in production is normally five years minimum so you pretty much know what mines are going to be producing in five years time yeah um there's no major mine that we don't know about that's going to be producing in five years time and and the truth is there's a physical shortage of of copper when i talk about a physical shortage i'm not talking about the world running out of copper i'm talking about prices having to go up right for demand and supply to come into balance yeah your analysis is interesting it differs from some other analysts who say that we're just in a bowl cycle for for these commodities we're in a larger commodity super cycle they might call it but you're saying that uh the demand supply fundamentals don't support a prolonged bull cycle for some of these commodities for all of them okay well i think you know if you look at say the year 2000 to 2007 in particular but also to 2011 that super cycle that was a super cycle based on based on the economic growth in china and when an economy whether it's china in that period or whether it's um frankly germany and 1870 to um you know either first world war whatever period you want to look at when you have when you have a a large economy industrialized and and you have that sort of emphasis on economic growth such as we got in china in that ten years then all of the things nick or zinc you know they all they all go up because the demand from that new source is a new source of demand and the demand for all commodities increases we're not at that stage now you know china's past that stage i think and i don't think indonesia or brazil or india are about to take its place so it's a much more selective that's why i hesitate to call it a commodity super cycle to be honest i understand outside of inflation that if we were to take a step back and analyze the uh global markets at large what are the major risks if maybe not just risks plural the major risk that you're looking now for as an investor oh lordy i think the major risk in the markets is that just assets generally are very expensive they are excuse me they are overpriced on a historical basis and they're over based on a valuation basis now that doesn't mean that you're going to have a crash in global stock markets and global real estate and everything else anytime soon doesn't mean that at all but what it does mean is that the risk in those assets just continues to go up as as asset prices go up as that and more importantly as valuations go up then then the risk goes up and there's been study after study that shows when you know plotting every single instance when people bought stocks trading at less than 10 times earnings which is cheap over the last 50 years and they didn't necessarily go up the next year or even a year after that but over five and ten years they did go up and then you you you compare that with buying stocks at expensive multiples and in this study it was 15 times sales which again is expensive and again it didn't show you it there was no decline for the one year following those purchases but over five and ten years there was a decline so the point i'm making is that the risk just continues to go up the thing about that and that to me is the biggest risk in the market because right now the u.s stock market trading at two times two standard deviations trading at higher multiples than even on the eve of the great crash in 1929 there is no question that is overvalued and that uh you know there's risk in the market what valuation does not tell you valuation does not tell you anything at all about timing you know and i like to joke with people you know um a a a dutch julie bulb in in in amsterdam in in in january of 19 of sorry january of 1636 trading at 25 000 gilders well that was pretty overpriced but it went all the way up to 37 000 gilders so what you do you have no idea when the thing's going to end yeah well some private investors might have the luxury of standing on the sidelines and waiting for a correction to buy a cheaper prices but for some institutional investors who have a fundamental to be in the market what are some of the risk mitigation strategies that they could employ specifically for higher valuation i think you can buy hedges so one of the things we do for our individual accounts is we've we've bought the vex and we've bought it as a hedge in and of itself it certainly hasn't been a very good investment for the last uh couple of years but then you don't exp i mean the thing everybody says about gold you don't expect a hedge or an insurance policy to be a good investment in fact you actually hope it's not a good investment um but but so so i think i think institutional investors can can hedge their exposure in in that way and and we're doing that as a fund manager are you at all concerned or motivated by performance metrics like the sharp ratio do you ever think okay how do i maximize this ratio how do i minimize volatility i don't know first of all i don't try to minimize volatility because volatility is inherent of a golden gold and silver space i think if i were a global value investor i might try to minimize volatility but you know in the gold space volatility as rick rule likes to say make volatility your friend not not treated as an enemy um yeah i mean obviously we're always trying to outperform other funds i mean and i'm sure our funds are trying to outperform as well um but i think you do that not by necessarily taking additional risks but i think you do that by trying to focus on what sub-sector of the market i'm not even talking about individual stocks now but what sub-sector whether it's the royalty companies or the big miners or the junior miners etc which sub-sector is is represents the best value and is likely to do best in the next sort of few months give us some ideas of some of these sectors yeah i mean right now i'm a huge fan of the big royalty companies you i don't know if you know that but i mean a huge fan we bought franklin i bought frank nevada 1985 in his first reincarnation so i've been around this sector a long long time i don't think those are i don't think those are the best value right now um the big the good quality big miners i think are ridiculously cheap right now um and if you look at a company say like barrack which is this can i mention an individual name yet which is the second largest gold mining company in the world you know on any metric you look at whether it's price to cash flow price to free cash flow price to fake free cash flow it's trading pretty much at the lowest it's ever traded it just doesn't make sense when gold is trading at around 1800 around 1800 so i think i think the big cap miners and there's several of them that are really good quality have good balance sheets the balance sheets of a big miners as you know have improved tremendously the xau is now cash net cash positive which is really quite astounding when you think it's a capital intensive industry you know you should be accepting of debt in in a mining in the mining sector but um so there the balance sheets are much better than they were um but i think those and the valuations are ridiculously cheap when gold turns up those will be the stocks that people will go to first you know for generalist investors they're not going to buy ajax exploration however cheap it is they're going to buy barrick and newman and magnego and and so on you mentioned to me offline nestle as well uh for me as a student of finance it's less interesting what you like and more interesting why you like them nestle well the reason i like nestle is um that was a that was actually i think i can say this from the sec point of view but as you see if you're listening because there's nothing to do with performance um nestle was the first stock we bought in 1991 when we started the firm and if you look at nestle over a 50-year period it has had pretty much every year it's increased its revenue and pretty much every year it's increased its dividend you know swiss companies don't don't pay quarterly dividends on monthly dividends it's it they announce the dividend once a year and every year in the last 50 years they've increased that dividend except two years when it stayed the same so it's a very very consistent long-term track record and you know we look at what they're doing now of course because you know the past is the past but um again notwithstanding all the structures that the sec says about the past as winston churchill said you know the past does not predict the future but it's the best indicator we've got of the future yeah um and a company has been as consistent as that analysts face it their products are pretty um you know they're the sort of products that are not um seasonal or or you know they don't change with the wind sure churchill also said plans are useless but planning is indispensable i find that very applicable to investments as well absolutely yeah let's end the conversation on stocks where sectors you don't like i find that just as important as the things you do oh gosh well i'm probably going to get some feedback if i say i don't like cryptocurrency you're not the only one so please but i don't like cryptocurrencies um again my comments don't say anything at all about whether they're going to be higher a year from now um my biggest my biggest uh uh uh negatives on cryptos are twofold one is there's actually no real value there notwithstanding what carl menger said about value is what the what the purchaser thinks it is um it wasn't uh the austrians weren't like that pressy but there's nothing there you know at base there's a wonderful formula um but there's no reality to it and even if bitcoin's supply is extremely well controlled which i will warrant um there's no shortage of the number of new cryptos that can that can arise and all of those cryptos in aggregate to me are the crypto market so that's one sector i don't like um i'm not a big fan of some of these sort of social media companies and high-tech companies and the companies that did particularly well during lockdown because i wonder how much growth is left in them and you know i'm thinking of companies like um netflix for example or um you think that maybe people are returning back to the office life is returning to normal and then maybe things are returned to the way they were and so maybe we won't be using these work from home services or lift at home services as much not as much as we did okay and if you walk around talking to the companies here a common theme is oh it's so good to see you in person i'm so sick and tired of zoom meetings now zoom is a wonderful tool sure it's not going to go away because people have obviously discovered there is a way of having meetings there's a lot less you know a lot lower cost but it doesn't replace everything it doesn't replace so i think the growth uh in a lot of these things we've already the growth is already built into the stock price so the risk is not that they outperform and the stocks continue to go up the risk is that they underperform and and because that's the way we look at it right we're not really when you're an investment advisor you're not really in the business of making predictions you're in the business of looking at the risk and reward so you can have a wonderful company with wonderful gold growth prospects but if the growth is already reflected in the stock price you know if people say well this is as good as it can get and it's already reflected in the stock price there's only one way you can go which is down like you think value will beat growth over the next foreseeable five to ten years yes yes but sometimes with value as you know you have to wait a long time there's a wonderful story i perhaps shouldn't name name him because i don't know if this is public but the person is a wonderful value investor being he's retired now but he had one of the best track records out of course he wasn't in dot com stocks in 1999 and 2000 and he was getting redemptions from the fund and he was asked he was asked about about about this and he said sometimes you have a bad decade yeah sometimes you don't recover from that bad decade well best of luck adrian with your fund and i hope to speak with you again soon excellent thoughts today okay well thank you very much i appreciate it all right and thank you for watching kikku news we'll have more for you from beaver creek kitco news special coverage of the precious metals summit is brought to you by corvus gold [Music] 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Keywords: gold, silver, finance, news, investing, investing news, finance news, financial news, economy, precious metals, gold price, silver price, gold price today, silver price forecast, gold price forecast, kitco news, inflation, crypto, david lin, tech stocks, tech sector, nasdaq, david lin kitco, stock investing, crypto investing, gold investing, gold and inflation

Id: nmploT9pLig

Length: 30min 32sec (1832 seconds)

Published: Sat Sep 11 2021

Reddit Comments

[u/Silver-Sandman]

Anyone but me listen to this? Adrian knows some serious stuff.

[u/Genesis44-2]

Kitco

[u/DrJohnH1]

What does he recommend?