Adrian Day: Gold Stocks More Undervalued Than Ever, Takeoff Will be Dramatic

He noted that there’s been a misalignment for the last 11 years, but particularly in the last two years, when central banks and wealthy families in the Middle East and Asia started loading up on the yellow metal for insurance purposes.

‘Their motives are long term and defensive, so they buy bullion, they don’t buy gold stocks. So in a way — and people don’t like it when I say this — but in a way, up until let’s say the last couple of months, I would argue that it was gold that was out of kilter with economic reality, not the gold stocks. The gold stocks were where they should have been; gold should have been lower, but it was this central bank buying that pushed it up,’ Day explained.

In his view, when the US Federal Reserve starts cutting interest rates and monetary factors start driving gold, the metal will eventually make it to US$2,100 per ounce and stay there. At that point, investors will get interested in gold stocks.

‘Particularly if the broad market starts to wobble. It doesn’t have to crash — a crash would not be good for gold stocks — but wobble. And people start to get out of NVIDIA (NASDAQ:NVDA) and look for other (options) — maybe out of NVIDIA and into ExxonMobil (NYSE:XOM) or something. There’s a bit of rotation. That’s good for gold. If we see that, I think the scenario is a perfect setup for gold,’ he during the conversation.

Day added that although he’s said before that gold stocks are incredibly undervalued, the situation has only intensified. As an example, he noted that major producer Agnico Eagle Mines (TSX:AEM,NYSE:AEM) is selling at its lowest price-to-cashflow multiple ever aside from the last quarter of 2015, when the gold price fell as low as US$1,061.

‘We’ve been through this so many times in the past — gold stocks can languish for a long time. And then when they take off, first of all they take off suddenly, and secondly the returns are dramatic,’ he said.

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.