Stocks Disconnect From The Economy – And Gold Responds

A Guest Editorial
From Adrian Day

Dear Fellow Investor,

My friend Adrian Day is one of the smartest and most experienced analysts and money managers in the business, with a track record that is the envy of all.

I was pleased to find in his most recent client letter that he addressed, in his typically cogent fashion, the macro-economic issues at play and delved into gold’s response to these historic developments.

Adrian was gracious enough to allow us to excerpt his letter here, and to provide a link to the full analysis as well. I hope you enjoy it as much as I have!

— BL

Stocks Disconnect From The Economy – And Gold Responds

By Adrian Day

Global stock markets zooming ahead amidst historic unemployment and economic contraction is surreal.

Half of the U.S. has been locked down, with economies virtually shut, a second virus wave appears underway, and yet the stock market is almost back to February’s all-time highs. And this is not only in the U.S.; stock markets have rallied strongly around the world. We know that central bank money creation is the primary cause, but this dichotomy cannot continue indefinitely, at least without a meaningful correction.

Meanwhile, gold — for sounder reasons than stocks — has outperformed and, notwithstanding anticipated volatility, will, we think, continue to do so.

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The Economic Outlook Is Uncertain

The keyword for the economic outlook is uncertainty. The economy cannot resume the level of January after months of closures, not in anything like the near term. Some sectors will do well, but others will be very slow to recover — office space, for example, or malls. Many small businesses, such as restaurants, will try to do the job with fewer people.

Real unemployment is probably higher than the headline numbers suggest, as furloughed workers are counted as “employed.” And it will get worse as restrictions from layoffs in the government payroll protection loans end. There’s uncertainty about a second wave of the virus and potentially resumed restrictions on businesses. Already, over half of the U.S. population is seeing announced re-openings on hold or reversed.

There is as much uncertainty on the supply side of the equation as the demand. Both will shrink, which is why I do not think we shall see deep and sustained deflation as much as a shrinking economy, with the possibility of inflation later.

Fed policy will destroy the capitalist economy and more.

One cannot discuss the economic outlook without discussing the Federal Reserve and other central banks. The dramatic decline in short-term interest rates; the huge explosion in the Fed’s balance sheet, moving from $3.8 trillion to $7.1 trillion over the past year; and the moves by the Fed in rapid success to buying investment-grade bond funds, then junk bond funds, then individual bonds, raise the question of what comes next.

Are negative rates ahead on the next downturn? Where does QE Infinity take us? And is the Fed going to start buying equities next? And then we shall start to see selective “debt jubilees”, with the government forcing different lenders to forgive certain types of debt.

The Federal Reserve is buying bonds of companies such as CocaCola, Apple and Berkshire Hathaway. Why does the government need to lower Warren Buffett’s cost of capital? And they are buying bonds of some foreign companies including Daimler. Why? This unprecedented — and illegal, by the way — move by an arm of the government into the private financial markets is not receiving sufficient attention, in my view. It is the beginning of a very slippery and dangerous slope indeed….

Gold Stocks Are Still Cheap;
Corrections Are To Be Bought

As gold is undervalued, gold shares are undervalued against gold itself. And, despite the recent strong rally, they remain in the lowest 25 percentile in terms of price and valuations.

As gold moves up, especially in an environment of low oil prices and generally low currencies (the two largest cost inputs in a mining operation), much of that increase flows to the bottom line. Mining companies, with a new-found discipline and a more favorable environment, are generating free cash flow for the first time in many, many years.

We remain somewhat concerned about the possibility of a pullback in the price of gold. I do not anticipate that such a correction would be particularly deep or long-lasting, but a pullback in gold itself would see meaningful corrections in the mining stocks, particularly after such strong short-term appreciation….

CLICK HERE
To Read The Rest Of Adrian’s Report…

Editor’s Note: Adrian goes on to address the potential for a correction in gold and whether gold stocks will fall if there’s a correction in the broader equity markets. He also examines the global economic damage from the pandemic shutdown and analyzes why stocks have — thus far — ignored the devastation.

If you’d like to subscribe to Adrian’s letter, he’s offering Golden Opportunities readers a special discounted rate of just $199 for the first year. Just email his office at globalanalyst@adrianday.com or call 410-224-8885 to subscribe.