1987 Black Monday Repeat: How Close Are We? | Adrian Day

Adrian Day · Adrian Day Asset ManagementBullish

Franco-Nevada fell too far on the Cobre Panama report, so his fund added to it.

Adrian's fund added to its Franco-Nevada position a couple of weeks before the interview. He describes the Cobre Panama report as extraordinarily peculiar, since it was framed around reopening the mine but recommended an orderly closure with no extension possibility. He argues the headlines fixated on the closure and that Franco, which holds a stream on the mine, fell hard as a result. He implies the drop overstated the impact on Franco's fundamentals, which is why he bought.

“We added to our Franco a couple of weeks ago... it was extraordinarily peculiar report... this is perverse in my mind. And of course the headlines all focused on the closure... and Franco with the stream, obviously they fell and they fell hard.”at 40:59

Adrian Day · Adrian Day Asset Management

Gold is resilient despite headwinds, but should stay soft and range-bound while real yields stay high.

Gold has held up remarkably well despite higher oil prices, a strong dollar and rising yields, which he says should have been very negative for it. He reads that resilience as evidence of strong buying from investors who bought over the last few years, and notes China's reported gold purchases have risen month after month as the price fell, with institutions taking advantage of lower prices. He sees the rate backdrop as the headwind: yields have moved well above CPI, so real rates are positive, and positive real rates are what hurt gold. While those headwinds last he expects gold to be soft and volatile in a trading range, not breaking out to $5,000 again. His own firm is still buying, but more slowly than he otherwise would.

“Basically I think gold is being remarkably resilient to those headwinds that I mentioned, and so long as those headwinds exist then we can expect gold to be soft, volatile trading range... but it's not going to break out to 5,000 again”at 28:21

Adrian Day · Adrian Day Asset Management

Geopolitical military shocks tend to hurt gold, not help it, as seen with Ukraine and Iran.

He argues the common belief that war lifts gold is a misunderstanding, at least for events that are not completely out of the blue. In Ukraine, gold rose for about six weeks while troops massed on the border, peaked within a week of the tanks crossing, and then fell for six to nine months. With Iran, gold was rising before the strikes and peaked the day after the bombing began. Two mechanisms explain this: the dollar is a safe haven, so people rush into it and a stronger dollar weighs on gold, and geopolitical events create liquidity needs. Gold in Dubai and the Gulf sold at a 25-30% discount to market, and the Central Bank of Turkey sold gold to defend the lira.

“I think there is a big misunderstanding about how gold reacts to geopolitical events, particularly military events. Assuming that they are not completely ... they tend to have a negative effect on gold, not a positive one.”at 29:15

Adrian Day · Adrian Day Asset Management

Gold will resume its bull run once the war ends, the dollar weakens and oil and inflation fall.

He says he is completely confident the gold market is only in a mid-cycle correction, not the end of the bull market. The trigger for a resumed rally would be an end to the war. That would bring oil down, and the dollar would lose its safe-haven status and resume the decline it began in 2025. Lower oil and a lower dollar would lower inflation expectations, letting the Fed back off, which could be the trigger for gold's upturn. He stresses he is not calling for a dollar crash, only that losing the war premium lets the dollar resume its downturn. He also argues that the big gold bull markets of the 1970s and 2000s were much stronger in percentage terms than the recent run.

“I think what will make it a change will be number one an end of a war, because an end of a war will see if only for a brief period of a short period of time the oil price come down and the dollar will come down, we'll lose their safe haven status”at 34:39

Adrian Day · Adrian Day Asset Management

If real yields keep rising while CPI stays flat, that will hurt gold.

Adrian argues that if bond yields continue to back up at their current levels and CPI inflation does not move up meaningfully, the result will be a negative effect on gold. The mechanism is the rise in yields without a matching rise in inflation, which means real yields climb and raise the opportunity cost of holding gold. He treats this as a clear negative for gold.

“mean if yields continue to back up anything like the way they are and CPI numbers don't move up meaningfully, that will also... that will have a negative effect on gold. No question about that.”at 39:48

Adrian Day · Adrian Day Asset Management

Beaten-down gold miners were sold more than fundamentals justify, so he hunts idiosyncratic overreactions.

Over the last couple of months gold stocks have been slammed, often hit much harder than their fundamentals warrant, after companies released poor quarters, bad reserve estimates or other bad news. Adrian's fund is therefore looking across the spectrum, from big miners and big royalty companies to small explorers, for names with an exaggerated decline that he believes the fundamentals don't support. He explicitly says the current weakness creates buying opportunities.

“In the last couple of months those stocks have been slammed, often they've been hit much more than they should have been... so we're looking idiosyncratically for news or developments that hit stocks maybe harder than the fundamentals suggest.”at 40:40

Adrian Day · Adrian Day Asset Management

Long-end Treasury yields are not high enough to pull large money out of stocks into bonds.

Asked whether high rates could pull investors from stocks into bonds, he says no, not yet, particularly at the long end. He asks whether anyone would lend to the US government for 30 years at 5.5%, and says he would not, given current inflation and the fiscal situation. He notes the 10-year auction was well bid, but long-dated auctions are smaller than in past years because most issuance over the last six or seven years has been at the short end, which is just a place to park money. The 10-, 20- and 30-year maturities are the ones that work as investments, and he does not think yields have reached the level that would trigger a large transfer.

“I don't think interest rates are high enough at the moment for a large transfer from the stock market to the bond market, particularly at the long end.”at 3:43

Adrian Day · Adrian Day Asset Management

If Treasury shifts issuance back to 10- to 30-year bonds, long-end yields must rise further.

The path to a 6% 10-year yield, in his view, is continuing issuance combined with fewer buyers. Most recent issuance has been in shorter notes and bills. If Treasury increases 10-year issuance, and especially 20- and 30-year, back to where it has traditionally been in the mix, he believes yields must rise, particularly at the 20- and 30-year points. The key is whether supply exceeds the number of buyers, and the Treasury can control that by deciding how much long-dated debt to sell, since short-term bills can always be sold.

“if they start increasing the issuance of ten year and particularly twenty or thirty year to where they have traditionally been in the balance of Treasury issuances, then I think you're just going to have to see higher rates”at 19:38

Adrian Day · Adrian Day Asset Management

The Fed will likely hike another quarter point this year, but its room to tighten is limited.

He thinks it is fairly clear the Fed will most likely hike once more this year, by a quarter point. The first quarter-point hike mainly raised credit card rates for people who don't pay off their balances, and those rates were already in the 20s. He does not expect one more quarter point to break the stock market or commercial real estate, but he argues each increment pushes more people into trouble. That is why he has said many times that the Fed's ability to raise rates is very limited.

“we're most likely going to have another interest rate hike this year, another quarter of a percent.”at 5:51

Adrian Day · Adrian Day Asset Management

Higher rates make US government financing steadily worse, even without deficits rising or Fed action.

The US government already issues more than $4 trillion a year, partly because short-dated debt has to be rolled over more than once. Debt maturing today must be refinanced at much higher rates than were paid when it was issued. For example, a 10-year bond issued when the 10-year yielded under 2% now costs roughly double to refinance, and the same applies to 20- and 30-year bonds as they mature. So financing gets meaningfully worse with no change in the deficit and no action by the Fed.

“They will have to pay more interest rate now in order to sell those bonds. So the financing situation without the deficit going up, without the Fed doing anything, is only going to get worse and meaningfully worse.”at 10:35

Adrian Day · Adrian Day Asset Management

Rising rates will stress private credit and commercial real estate, where stresses already exist.

He names commercial real estate and private credit as the second group hurt by rising rates, and says these areas have already shown stress. Much of the private credit market is variable-rate, so rising rates pass through immediately to borrowers' costs. He says he means a lot of it, not a majority, but the effect would show up quickly. Rate increases therefore add pressure to sectors that are already struggling.

“The second group of course are commercial real estate, private credit, areas where there have already been stresses we've seen stresses in the sector.”at 10:53

Adrian Day · Adrian Day Asset Management

Most US households cannot cover a $1,000 emergency, and rising card rates will squeeze them further.

He says the bottom 50% of Americans by income and net worth have no positive net worth, and that most households could not come up with $1,000 for an emergency. Those living paycheck to paycheck have little room once food, housing, transport and clothing are paid. If the Fed raises short-term rates, the first rate to respond is credit card interest, already in the 20s. Higher card rates mean more people who cannot afford even the minimum payment.

“It's an astonishing thing that a majority of The US households could not put their hands on a thousand dollars if they needed it for an emergency.”at 11:38

Adrian Day · Adrian Day Asset Management

Borrowing to fund the AI data center build-out is coming to an end, with less debt ahead.

He agrees that AI borrowers are pressuring Treasury yields. Large companies like Amazon, Microsoft and Meta are borrowing heavily, and much of the AI build-out debt is off balance sheet, which people do not always realize. He expects the massive borrowing for data center build-outs to wind down. Skepticism in the market is already high, Intel has invoked force majeure, local opposition to data centers is growing, and clarity is increasing about how much has already been borrowed. He therefore expects less debt going forward, so AI issuers will not be a large competitor for Treasuries.

“I would think that the massive borrowing for AI build out, for data farm build outs, is sort of coming to an end.”at 16:29

Adrian Day · Adrian Day Asset Management

Oil is driven by near-term Iran war developments, not by the 10-year Treasury yield.

Asked why oil fell while the 10-year yield kept rising, he admits he hadn't thought about it. He argues that oil is much more focused on the near-term geopolitics of the Iran war, including how much oil is getting through, how much reserves are being drawn down and how much is left, along with the back-and-forth of the President's social media posts. Those factors move oil much more than interest rates or the 10-year yield do.

“So I think oil is much more focused on the nearer term geopolitical... how much oil is getting through, how much reserves are being drawn down”at 18:38

Adrian Day · Adrian Day Asset Management

Inflation is stubborn, and a BLS methodology change has understated this year's CPI.

He says the Bureau of Labor Statistics changed the CPI methodology again, and while he does not allege bad intent, the change made CPI lower this year than the old method would have. He does not think the CPI captures the full scale of inflation. He says the market, gold and bonds in particular, see inflation as very stubborn, and that Fed officials have made clear it is their priority to bring inflation to 2%. The Fed's main tool is raising rates, so bond buyers should want higher yields now to get ahead of that.

“Bureau Labor Statistics changed the methodology once again, and I'm not saying they did it for nefarious reasons, but the plain fact is the methodology change made the CPI lower this year than it would have been under the old”at 21:55

Adrian Day · Adrian Day Asset Management

The dollar's war-driven safe-haven bid will fade and the 2025 decline will resume once the war ends.

He argues the dollar has been acting as a safe haven during the war, with people rushing into it in geopolitical events, and that this has been very clear this year. If the war ends and that war premium disappears, he expects the dollar to resume the declines it began in 2025. He explicitly says he is not calling for a crash, just a resumption of the downtrend once the war premium is gone.

“the dollar in my mind will probably resume the declines that we saw in 2025 last year. I'm not calling for a crash in the dollar, I'm just saying that if we lose that war premium then the dollar will resume its downturn.”at 34:57

Adrian Day · Adrian Day Asset Management

Retail has not capitulated on gold stocks; generalist investors are still buying.

Adrian disagrees with the idea that weak sentiment makes small gold stocks attractive, arguing that retail sentiment has not yet bottomed. He cites record attendance at the two GOLD conferences he attended in Colorado the prior week, with record numbers of generalist investors, and a very strong, enthusiastic crowd at the Mining Investment Forum in Vancouver the week before. He concludes that retail is still looking and buying, so capitulation has not occurred. He acknowledges that the argument would hold only if retail sentiment were very weak.

“So I'm not sure that retail has reached anywhere near a point of capitulation. You know retail is still looking and buying.”at 43:47

Adrian Day · Adrian Day Asset Management

Stocks that have declined all year will likely face heavy tax-loss selling this year.

Adrian argues that widely held stocks sitting at losses are likely to see heavy tax-loss selling this year. The reason is that very few stocks are currently at a loss, so the selling will concentrate in the few that are. He points to a stock that has been declining all year as the type likely to face that pressure. The view is tied to the year-end tax calendar, which places the selling in the near term.

“if you've got widely held stocks that are sitting at losses, they are probably likely to be subject to heavy tax loss selling this year simply because there are so few stocks with losses at the moment.”at 44:00