David Lin – ‘High Probability’ Market Is Topping, What’s Next? (Uncut) 01-29-2025

‘High Probability’ Market Is Topping, What’s Next? | Adrian Day

We’re back at the Vancouver Resource Investment Conference. Joining us once more is Adrian Day, President of Adrian Day Asset Management and the Portfolio Manager of the Europe Pacific Gold Fund. Welcome back to the show, Adrian.

Good to see you. Well, thank you for having me, David. Good to see you in person.

Not too long ago about the jobs market. You broke that down for us in great detail about how the last jobs report may or may not be a positive for the economy. Let’s just jumpstart off of that because the theme of our conversation today is your economic outlook, how that translates to the gold market, how that translates to the stock markets and ultimately what investors can do with this.

So are you positive right now on labor growth? No, no, I’m really not. And we talked about it last time. I mean, I think that obviously the jobs number that came out from BLS, the new jobs, was a very strong number, 256,000 jobs and of which 220,000 were private sector jobs.

So very strong, better than estimates, etc. But as I mentioned last time, you know, the ADP number, which is a private company measuring private companies only, they’ve found 123,000 new jobs. So one of them is wrong.

They can’t both be right. One of them is wrong. And the BLS numbers, as we know, are subject to fairly significant revisions.

They have a first revision, second revision. I’m willing to bet that those revisions are downwards, not upwards. OK, so going forward that the unemployment rate is currently at 4.2 percent.

Do we expect that to hover around 4 percent or move up? Yeah, I think it’ll probably just move up, but only move up incrementally by a tenth of a percent, a tenth of a percent. I don’t expect anything dramatic in that number anytime soon. Trump’s inauguration is today on the 20th.

What do you think are his primary objectives economically for the first 100 days and how will those impact markets? No, that’s an excellent question. There are certainly some positives on which we can be reasonably optimistic. I mean, if they start by doing a lot of cutting of small business regulation, that could be very, very positive for the economy and positive in the short term.

You know, small businesses, as we know, even over the last six or nine months, small businesses have been consistently negative on the outlook, negative on inflation expectations and negative on, you know, the question is, do you expect to hire anybody, any new employees in the next six months? Small businesses have been consistently negative as opposed to medium and large corporations. And the biggest reason for that is just the two reasons. One is prices going up and one is regulation.

If they can slash regulation on small business, they can get business moving, I think, pretty quickly. So that’s a big positive. You know, tariffs may have to wait a little while and they are not going to be a positive.

Whatever the ramifications are, it’s certainly not a positive for the economy. But I think cutting regulation and freeing small business is the most dramatic. And also continuing the tax cuts.

Sorry, that’s very important to me. Tariffs could have the unintended consequence of having disinflation in the sense that it would slow down consumption because of higher prices. Of course, everybody says, I mean, everybody reads the assumption is tariffs are going to be inflationary.

That’s not true at all. Tariffs can be very, very deflationary. Let’s look at 1931.

They can be very, very deflationary. Let’s hope it doesn’t get to that. You’re not saying we’re going to repeat 1929? I’m not saying anything.

I’m just saying tariffs are not necessarily inflationary. Now, about the stock market here, are we topping right now, U.S. equities? I think there’s a high, I think there’s a probability that we are topping. You only have to look at the leaders of the market over the last two years.

The Magnificent Seven, and in particular, five of them. Look at Apple. That looks to me like it’s rolling over.

Even Microsoft. Look at Microsoft. That looks like it’s rolling over.

I mean, the plain fact is these stocks, I mean, Apple is very, very expensive on a fundamental basis and it does not have the growth. You look at NVIDIA, which is growing, but the plain fact is NVIDIA stock cannot continue to grow at the rate it’s grown in the last three years before it’s taken over the entire world equity market. So just, there doesn’t have to be a catalyst to these things.

Sometimes they just get too expensive and the buyers stop buying. There’s no new buyers to buy. And I think that’s where we are with these, with the Magnificent Seven.

Okay. What would be the trigger for a further downside correction here? Well, it doesn’t, again, it doesn’t necessarily have to be a trigger. If you get to a point where he loves Apple, but he’s decided I own enough of it, I’m not buying anymore.

You love Apple, but you think it’s too expensive. I don’t like Apple and I’m not going to buy it until it gets to half the price it is. Well, we’ve just run out of buyers and that can happen.

You just run out of buyers. There doesn’t have to be a trigger. There’s certainly plenty of things that could be a trigger.

Potentially money flowing into another asset class, money market funds, for example, when yields are still high with bonds, just, you know, people moving money around. Sure. I mean, and, you know, rates are going to have to, whatever the Fed does, rates on treasuries are going to have to stay relatively high, at least for the next six months.

Just because if you look at the number of treasuries that are rolling over and the number of treasuries that the Trump administration will have to sell in the next few months. None of they’re doing, but they’re just in that situation where we’re going to be selling a large number of treasuries in the next three months. Trump is probably, well, the Trump administration is probably going to continue selling most of them at the short end, just as Jenny Yellen was doing.

But that means the rates are going to go up. And you’re right. You know, if I’ve owned Apple, I’m not picking on Apple, but if I’ve owned Apple for a long time, and now it’s rolling over, I’ve got a nice profit.

Why don’t I lock in some of that profit and park my money in a 5% T-bill for three months? Sure. Makes a lot of sense. But as the market rolls over, as chicken and egg, as the market rolls over, then people start to look for other places to put their money.

Some of that is treasuries. Some of it will be other US stocks, the defensive stocks that haven’t moved, the income stocks, the value stocks that are at a huge discount to the growth stocks, foreign markets, commodity stocks, maybe even gold stocks. Well, yeah, that’s a good point.

What’s an adequate hedge against volatility? Suppose I were to have the view that stocks will correct in the next three months or so, where do I go besides cash? Well, I think cash, to be honest with you, would be the number one place to go. And the second place to go would be physical gold, you know, gold. Why physical gold? Why physical as opposed to… Well, why gold anyway? Why gold as a hedge against equity volatility? Gold tends to… Well, two things.

One, gold tends to act as a hedge on volatility. And secondly, of course, gold is moving up. And I think it’ll continue to move up because of who’s buying gold, what are the drivers of gold.

That’s not going to change. I’m just having a, you know, if you look at this chart of the S&P versus gold, ever since 2022, they’ve been moving in lockstep. So what’s your assessment of this relationship when it comes to hedging against equity volatility? No, it’s a good question.

If you look back historically, if you look back historically, all of the ratios and correlations you can think of for gold, gold versus stocks, gold versus a strong dollar, gold versus real interest rates, blah, blah, blah. They’ve all reversed. They’re all different in the last two years.

Yes. Right. Gold is moving up with the dollar.

Gold is moving up with stocks. Gold is moving up even though interest rates have turned quite strongly positive on a real basis. Gold is moving up with the stock market, as you said.

And why is that? It’s quite simple. It’s because the people who have been buying gold, primarily global central banks, secondarily Chinese retail investors, and thirdly, wealthy Middle Eastern and Asian families, they are not concerned about the jobs report last week. They’re not concerned about the CPI.

They’re concerned about something much, much bigger than that. And if so, if you look at the central banks, central banks are buying because they want to diversify away from the dollar and their reserves because of a weaponization of dollar. They own too much of an asset that is now being weaponized and they’re at risk.

Is that going to change in the next few years? You know, I’m not making any… Well, I am making political statements, but I don’t want people to draw. I don’t want people to extrapolate and say, oh, this guy hates Trump or this guy loves Trump. But the plain fact is when President Trump says any country that moves away from the dollar, we’re going to put 100 percent tariffs on you.

Does that make Brazil, South Africa say, hmm, you know what? We’re really sorry, Mr. Trump. We didn’t mean it. We love you.

We’re going to start buying more dollars. I think on the contrary, that approach makes them only want to step up their move away from the dollar. That may incentivize countries like China to ban the export of critical minerals and we could see stuff like antimony or even copper move up.

No, I think that’s absolutely true. I think those kind of moves, threats and moves would be very, very dangerous for the world economy, including the U.S. economy. But the point I’m making is that the people that have been buying gold for the last two years were not looking at the stock market or real interest rates in the U.S. or jobs growth in the U.S. And so those correlations, which are valid correlations over the long term, simply didn’t apply in the last two years.

And my second point is that the people have been buying gold and the reasons that they’ve been buying gold have not changed. Central banks are going to continue to buy gold because of a weaponization of the dollar. So long as the Chinese economy is in the place it is, we’re waiting for stimulus this year and it looks like, you know, people are expecting stimulus in the Chinese economy.

But it also appears that President Xi doesn’t want to do as much broad stimulus as many people want. So as long as people in China are worried about the economy, worried about Taiwan, worried about the stability of the banking system, the fragility of the banking system, they’re going to put money into gold. So the drivers are still there.

And as regards North American investors, for reasons they haven’t been buying gold, we had a little bit in the summer, an early fall, early autumn. But the reasons they haven’t been buying are because they think the economy’s strong, inflation’s under control, real rates are positive, the dollar’s strong, stock market’s going up. All of those reasons are reasons, traditional reasons, not to buy gold, right? That’s the macroeconomic environment, that’s the worst possible for gold.

They’re traditional reasons not to buy gold. And on the surface, I mean, as you know, I don’t think the economy’s as strong as it appears, but on the surface, they all appear to be intact. And so the reasons for a North American investor not to look at gold remain intact.

How much upside do we have now that we’re at $2,700, $2,730 in gold? Oh, I don’t think we’re anywhere near the top. Again, central banks are going to want to continue to diversify away from the dollar. You look at central banks, you look at the dollar as a percent of global central banks’ foreign reserves, ex-U.S., not counting U.S., but global central banks’ foreign reserves.

At the end of 1999, it was almost 80%. Almost 80% was in the dollar. What, five years ago, it was around 65%, 67%, right? So it’s been a long, steady move to diversify reserves.

But in the last five years, it’s moved down to, oh, you can probably pull up the number very quickly because you’re good at that, but it’s moved down to around 54%. When are they going to stop? When is a country that is nervous about the threat from the U.S., when are they going to stop diversifying, buying those reserves? They could, in theory, diversify their foreign currency reserves by buying treasuries from other countries. Of course.

Yeah. But a lot of that money is going into gold. Do they want to go to zero dollars? Not necessarily.

Is 50 where they’ll stop? I doubt it. I think they want to move those dollar reserves down meaningfully. So I think over the next few years, we’re going to continue to see central bank buying.

And not pour, you know, China, as we know, was the biggest buyer last year of 2023 and then the first half of 2024, but it stopped, it paused in May. So we had five months without China buying and then they came back in. I think we’re going to see that as the gold price moves up, different central banks will decide to pause, hoping they can get a lower price.

Well, this is just, I mean, this is just it. China’s central bank resumed buying gold as of December. They’ve been on a six month hiatus, according to this report.

I actually talked about it recently. So they are starting. Central banks are price sensitive.

Do you think that central banks are a leading indicator for upward momentum because when they’re buying the price now, presumably, they think it’s going higher. They’re not. Yes.

Correct. But they’re not momentum buyers by any means. Central banks don’t tend to be momentum buyers.

And again, if you’re a central bank and you’ve got 60 percent of your reserves in the US dollar and you are worried about threats from the dollar because you’re friendly with China, you may not be fighting a war in Europe, but you’re friendly with China, you export to China and you’re worried about the dollar. Are you really going to stop buying gold because it’s moving 27 to 2750? I don’t think so. You’re doing something.

It’s like people who buy for insurance. You know, you don’t go, you don’t stop buying insurance because the price moves up a few dollars. That’s right.

Well, do we buy gold or equities? That is the penultimate question. Penultimate. Penultimate.

The ultimate question is what do we do with our money? We can ask you that at the end. But the penultimate is what do we do with the gold market, equities or gold? Well, I mean, look, I’ve always thought people should start with gold. But from a market point of view, you know, the gold stocks are remarkably undervalued relative to gold.

They are undervalued relative to their own history. They are under owned. They are under owned.

So I think the gold stocks represent the better value right now, which isn’t directly answering your question. I think the gold stocks represent a better value. And when interest in North America remembers North America, because again, you know, Mrs. Whatever in Mrs. Whatever in Shanghai isn’t going to buy Newmont and the People’s Bank of China isn’t going to buy Newmont.

And you know, that needs North American North American investors by and large. When the North American investors turn positive on the gold sector, then the gold stocks have much more dramatic move. Over the last 12 months as of today, the gold price, the bullion is up 33 percent.

The GDX index is up 33 percent and the GDXJ, the junior index is up 37 percent. Now, investors are greedy. These are bad numbers by any stretch of the imagination.

But we want that leverage. Otherwise, why diversify away from the risk, relatively risk free nature of gold? No, absolutely. We haven’t seen that.

We haven’t seen the leverage for people normally, normally demand from gold. But remember, we’re still getting outflows. Even though the indexes are up, we’re still getting outflows from the index.

But the GDX and GDX have had outflows over the last two months. GLD, which is a physical. If you look at since the U.S. Thanksgiving, the end of November, there’s only been four days with net inflows.

That’s astonishing to me. So people in North America are continuing to sell gold stocks, continuing to sell physical gold. And we see that with mutual funds.

The outflows are just steady and consistent. Do you think that people will be more interested in the physical gold bars this year or stocks just based on sentiment? Well, I think we’re going to be more interested in both. But the gold stocks definitely are less.

The gold stocks are definitely better value at this point. Here’s the thing. If we’re expecting an economic slowdown of some sort this year, the labor market is going to improve dramatically.

I was talking to some investment bankers at this conference, Adrian, and deal flow right now is a little bit slow. And one of the reasons that I’ve been told is because the retail crowd is not here, at least not to the same scale where it’s at the conference, at the market overall. And so retail investors don’t have money.

The economy is slowing down. They’re barely even paying rent here in Vancouver. Forget buying gold stocks.

And without the retail crowd, the gold stocks aren’t going to have enough incentive to go make deals, consolidate. And the bankers are complaining about this. So that’s the environment.

Oh, it’s a very poor environment for gold companies or any mining company, even these stories capital is. No question about that. No, what you’re saying is absolutely true.

I mean, I talk about the outflows from the gold stocks and the GLD. A coin dealer friend of mine says 50 percent of the people that are calling him are calling to sell gold, not to buy gold. When you ask him a question, why are you selling? Most of them, he says, say, because I need the money.

You know, that’s a bad sign. But I think what’s going to drive the market is not so much the small cap stocks, but what’s going to drive the gold equity market are, you know, generalist funds, generalist investors, small institutions. And they’re just not in this market.

It’s not that these people have looked at the gold stocks and say, you know what? I don’t want to buy them. They’re just not looking. They’re simply not looking at the gold sector right now.

That will change, in my view, when the broad market starts to roll over and people say, let’s look for somewhere else to put our money. Yes. OK, so do you think then that gold equities have a year of outperformance ahead of us in 2025? And if so, why? I think the next few months could continue to be much as we’ve seen already.

The optimism about Trump remains. The optimism about the economy remains. And so I don’t expect anything dramatic in the next few months.

I’ll answer your question, yes, but I prefer to phrase it this way. When North American money moves into the gold sector, the gold stocks will see dramatic outperformance. Yes.

I think that’s absolutely true and why? Most funds, most institutions, they want to own a gold stock, not gold bullion. They want to get that leverage. The gold stocks, as I said, are very, very undervalued.

Yes. You know, one of my favorite examples, you look at Agnigo, Agnigo is now the second largest gold mining company in the world, and it’s a stock with no particular hairs on it. So unlike Barrick, you don’t point it and say, I know why it’s underperforming.

It’s because they’re in Pakistan. It’s because Mali just stole their gold. You know, there’s no there’s no hairs on that.

And you look at Agnigo, it’s selling at about nine and a half times price to cash flow. That’s in the lowest decile of its multiple in its entire history, in this entire history. And normally, when the gold price goes up, the multiples expand.

Yes. They don’t retract. So the gold stocks are cheap.

Secondly, the margins are expanding. We haven’t had the fourth quarter reports yet, but I suspect that we’ll see a fourth quarter of expanding cash flow for the mining companies. We’ve had three back to back quarters of expanding cash flow.

At some point, people are going to start noticing that. Here’s a sector that is actually expanding its cash flow, expanding its free cash flow. And goodness, look at this.

It’s selling at 1.4 times price to NAV, as opposed to five times to the S&P. Oh, my gosh, it even yields more than the S&P. Let’s have a look at that sector, because it’s actually growing and it’s cheap.

Yes. And the margins are expanding because, of course, the gold price is moving up and costs, although there’s been so much focus on costs, every quarterly analyst call with every company, you know, they spend half the time talking about costs and how costs are going up and what their programs are for reducing costs. But the costs of gold mining are not going up as fast as the gold price is going up.

So the margins are expanding. The junior mining index last year did not significantly outperform the seniors in the sense that the GDXJ, well, I know the GDXJ isn’t just juniors, it’s mostly mid-tiers, but the GDX was up 33, the GDXJ was up 36. So same kind of logic and questioning here.

Why buy the juniors if you could just buy the seniors for a similar amount of performance and less risk? Right. Well, again, you know, again, last year was a year when we didn’t see the stocks outperform gold. We didn’t see for the longer period.

We didn’t see silver outperform gold. We didn’t see the juniors outperform the seniors. We didn’t see the silver stocks outperform the gold stocks.

And those are all things you would expect in a strong bull market. Right. But we didn’t see it.

And we didn’t see any of that all for the same reason. I personally, I would continue to favor the seniors, as I mentioned before, the seniors are always the place where new money goes. Generalist money, excuse me, institutional money.

You know, if I run a global value fund and I think I ought to own some gold, I’m going to start looking at Franco and Wheaton and Barrick and Agnigo. I’m not going to start looking, well, I won’t name names. I’m not going to start looking at Ajax expiration, right? You know, I’m going to start looking at the big cap stocks.

And that’s where the money is going to first go in the market. And only after those stocks have all moved, some of them have disappointed and they’re all expensive, do we start, do we start seeing money move down the food chain. Is consolidation the theme for 2025? I’m not sure that it is any more than 2024, but we’re definitely going to have to see, we’re going to see more consolidation.

It’s just an ongoing theme in this industry. I mean, for a small industry, for a small industry, you know, the top five stocks in the US are $15.1 trillion. The top hundred gold stocks are $400 billion.

I mean, it’s a tiny industry. For a tiny industry, we simply have too many companies and we have too many CEOs. Okay.

That means what? Most of them are going to disappear? No, I think most of them will merge. I mean, even, even, I think most of them will merge. The problem is with the juniors, as you know, so many of them are lifestyle companies or quasi lifestyle companies.

Do you think enough juniors went bankrupt last year such that the ones left alive here are better investments? No. No. No, we haven’t had that yet.

We haven’t had that washout yet. We’ve got a long way to go on that. A long way to go on that.

In my view. Okay. Well, the ultimate question then is besides gold, what do we do with our money? Yeah.

I mean, I do think short term treasuries of 5% is not a bad place. I mean, you earn a little bit of money while you’re waiting. You’re waiting to find good opportunities.

So that’s number one. Number two, I would look at other commodity stocks, particularly copper stocks that are cheap. I think oil and gas stocks, maybe not the Canadians, but there are some, there’s still reasonable value and other commodity stocks generally.

I think some of the smaller markets around the world offer good, good value, but we’re basically bottom up investors at the moment. So there’s a lot of good buys in Britain. We’ve got a horrible government in Britain.

If I can be political, it’s even worse than the government the US sat for the last four years. It’s a disastrous government. The economic policies are disastrous.

Wealthy people in Britain are all trying to leave the country. I think they say one millionaire is leaving every 15 minutes. They’re all trying to flee the country.

And some of the stocks are, you know, very good values right now. So we’re looking there. But it’s a bottom up approach.

So we’re finding them in Britain, we’re finding them in Hong Kong, we’re finding them in Singapore, finding them in Brazil. You’re not concerned about the US dollar appreciating versus these currencies? Yeah. So it depends what you’re looking at.

If you’re looking at a British exporter, then a lower pound is helping them to export more. So that’s helping the company. Their expenses are in a depreciating currency and their exporting are going up.

So that’s helping those countries. Obviously, if you’re buying a company whose revenue is all in the local currency, like a newspaper or a beer manufacturer, then you don’t want to see a depreciating currency. You want to see appreciating currency.

But if you’re buying something whose costs are in the local currency and who are exporting, so they’re getting revenue in appreciating currencies, then a lower currency isn’t such a bad idea. Okay. From the point of view of the investment, not from the point of view of the country.

Makes sense. So we’re seeing sort of all sorts of good opportunities. I mean, you know, and I’m also buying good income stocks in the US, which have been laggards.

Yeah. And you can get good quality income stocks in the US yielding seven, eight, nine percent. I’ve asked you this question several years ago when inflation was a bigger concern than it is now.

Do you think stocks are the ultimate inflation hedge? You did ask me. I remember now. Yeah.

That was a popular topic at the time. I remember. The answer is stocks are often a good inflation hedge, but not always.

So if you have a severe inflation with currency controls, that’s an extreme case like Argentina, Venezuela, Zimbabwe, then local stocks are very, very good investments for the local people. Right. For the local people, not for foreigners.

I mean, an American investing in Zimbabwe stocks over the last 10 years didn’t do very well. Sure. But a Zimbabwean did well.

Sure. So that’s one extreme. Yeah.

In a reasonably modest, albeit rising, inflationary rate, stocks can be a good inflation hedge. And that’s why I frequently say something that sort of sounds counterintuitive and surprises a lot of people. I say gold shouldn’t be seen as an inflation hedge.

No. Yes. When the price of when inflation moves up, gold price will move up.

But it’s moving up in nominal dollars. And the point I’m making is there are lots of other assets that either are or can be good inflation hedges from real estate to stocks to, you know, commodities to collectibles, all sorts of other things. Gold is really a good chaos hedge because there are not many other chaos hedges.

There’s short-term government bonds, U.S. government bonds, and there’s gold. There’s not a lot else that’s a good chaos hedge. The VIX, I guess, but you have to type that pretty well.

The VIX index. Yes. Yeah.

That’s been, yes. Yeah. That hasn’t really performed its job in the last year, I would say.

Well, yeah. Well, the last year was great for equities. Finally, Adrian, what’s your framework for managing your portfolio? Let’s just take the gold fund, for example.

Do you have a certain allocation to large caps, small caps, cash, and so on that you have to respect? Or do you just kind of go bottom up and buy whatever you think is good? If you don’t mind, I would rather answer that from the point of view of a separately managed accounts because mutual funds have very, have a lot of restrictions on size. So in the separately managed accounts, I don’t start with the allocation. The allocations, and whether it’s senior goals, junior goals, or whether it’s cash, or whether it’s Asia or whatever, the allocations are driven by where I find value.

So we have about 4, 5% of our accounts right now in Hong Kong. It’s not because I said I want 5% in Hong Kong. It’s because that’s where I keep finding good value stocks.

And so with the gold stocks, we have about, I mean, I would never want to get to a point where 100% of a gold portfolio was all in tiny junior exploration stocks. I wouldn’t want to get that. But where we are right now, we’re probably about 30% in the major miners and major royalties.

And over half of that is in the major royalties. So Franco, Wheaton, Royal Gold, they really form the foundation of the gold portfolios for me. Because they’re low risk, but they also have, you know, upside.

A Franco or a Wheaton from here is not going to be the best performing gold stock next year. It’s not going to be a 10-bagger from here. But it is going to go up with the market, and it has low risk.

We’re very selective on the senior stocks that we buy, because I think most of them, I mean, mining is a bad business. It’s a difficult business. As Robert Freeland says, Murphy works overtime in the mining business.

And so it’s just not a good business. Like airlines, they’re just not good businesses from the investment point of view. So we’re very selective with the senior stocks.

But again, I think there’s some good values there. And then, you know, we have the intermediates, and we have juniors. We probably have about 30% of portfolios in either exploration or junior royalty companies.

Excellent. Adrian, thank you very much. Where can we learn from you and your funds? Where can you learn from me? Where can you learn? Where can we go to learn about you and find out more about your funds? Thank you.

OK, you can find out about me. Sorry. AdrianDay.com. OK.

Let’s put the link down in the description below. Follow Adrian at AdrianDay.com. Thank you very much. Thank you so much, David.

A great pleasure to always see you in person.