by Drew Voros
Gold analyst Joe Foster is the investment team leader for Van Eck's flagship gold fund, the Van Eck International Investors Gold Fund. He also serves on the investment teams for the Van Eck Global Hard Assets Fund and the Van Eck VIP Global Hard Assets Fund, and is an advisor to the Market Vectors ETF Trust - Gold Miners ETF (GDX) and Junior Gold Miners ETF (GDXJ). Foster has been in the mining and investment business for more than 25 years and is frequently quoted in the Wall Street Journal and Barron's as well as being a frequent guest on CNBC and Bloomberg TV. Hard Assets Investor Managing Editor Drew Voros recently spoke with Foster about the gold market as well as the gold mining sector.
HardAssetsInvestor: Why has gold been sliding during the last month of the year? The fundamentals remain strong, right?
Joe Foster: I have to think it's some sort of year-end positioning or squaring or some sort of year-end trading that's holding it down. It could be capital gains taxes are probably going to rise next year, so there could be some profit-chasing ahead of that. We know there are some very large [hedge] funds that have had poor performance and may be facing redemption. These funds are holding large gold positions. So they may be using gold as a source of cash.
And then, it could be the markets are thin at this time of year. So it just could be there are some bears out there that are driving it lower.
HAI: We saw some of this last year at this time, didn't we?
Foster: Yes we did. In fact, it was a more dramatic sell-off at the end of 2011 than it has been this year.
HAI: The general feeling is that the U.S. economy is recovering, albeit slowly. What does an economic recovery in the United States do for gold prices? Is that a bearish fundamental?
Foster: I don't think there's really that much of a correlation between what's going on in the economy and what gold is doing. Prior to the crisis, we had a very strong economy and gold was in a bull market. And since the crash, gold has been in a bull market. So I don't think it's a function of the U.S. economy. It's more a function of the financial risk that's out there. There have been a lot of risks to the financial system that have been driving gold. I see that as a driver more than the economy.
HAI: Will the Fed's loose monetary policy, at some point, translate into actual inflation?
Foster: I think so, ultimately. Once the economy starts functioning normally, and once the credit market starts functioning normally, I think there's a huge risk of an inflationary cycle that could drive gold much higher.
HAI: And if interest rates are rising at the same time, is that a positive influence on gold?
Foster: In and of themselves, rising rates would be negative. They tend to be positive for the dollar and negative for gold. But if we get into that type of situation, you have to ask, why are they rising, because inflation is getting out of control? If that's the case, then gold would be doing very well. The other thing you have to think about is, Will the authorities actually be able to raise rates when they should? Rising rates could kill an economic expansion, and that's the last thing that these guys want.
HAI: Looking at gold's impressive bull run over the last 12 years, has there been any fundamental that you've seen change?
Foster: You can divide it into pre-crisis and post-crisis. Before the crisis, gold was mainly currency-driven. The dollar was in a bear market, and gold was responding to that. So you had a weak dollar and strong gold. It was relatively simple before the crisis. Since the crisis, there are all these other factors: the sovereign debt problems, the quantitative easing, the risks to the banking system. A lot of other factors have come into play since the crisis, which are influencing the gold markets.
HAI: What does a stagnant or, let's say, a flat gold price next year mean for gold miners? Do they need to see a higher gold price? And if so, how high does it need to be?
Foster: The gold stocks are highly correlated to the gold price. So yes, it takes a rise in gold price to have a rise in gold stock prices. If you're forecasting a weak-to-lower gold price next year, then the stocks are not going to do well. That's not my forecast. That was yours.
HAI: What is your forecast for gold? You obviously see a higher price.
Foster: I think we're going to have a year similar to the last couple of years. All the things that have been driving gold the last couple of years will continue, and we'll continue to have a steady rise in the gold price. That should bode well for the gold stocks. In fact, I think the stocks should have a better 2013, because there have been some changes in the industry that lead me to believe that companies will do a better job of meeting expectations and controlling costs than they have in the past.
HAI: I imagine you're referring to some of the CEO changes at the large miners.
Foster: Yes. That tells you that they get it at the board level. The boards of these companies have said that underperforming is not acceptable. Something needs to change in the way that you run your business. And so they've brought in some new management at the top to make those changes.
HAI: Is there a common problem that these CEOs haven't been able to overcome? We've been in an environment of a rising gold price. What has been the issue, in terms of performance?
Foster: In my view, the core of the problem has been cost, both capital and operating costs, which have risen beyond anybody's expectations. It caught the entire industry off guard. Managements were slow to react to it. Because of those rising costs, companies have missed expectations. They are not as profitable as the markets thought they would be, and their share prices have suffered because of that.
Companies have come to realize they can't deliver the growth they have promised in the past. Instead, they need to focus on cost control, returns to shareholders and bottom-line profits, rather than growth. Those are the changes I think we'll see that will bode well for the industry.
HAI: Will we see any acceleration of mergers and acquisitions at the larger mining companies? Or will it remain majors buying juniors?
Foster: I think it will remain subdued until we see better valuations. The stocks are so depressed right now that few are willing to engage in M&A activity. Until we see better stock performance, we won't see a whole lot of M&A.
HAI: Is there room in the gold market for another physically-backed ETF?
Foster: There's no limit to the size of the existing bullion ETFs. Whatever capacity the market requires will be met by either existing or new ETFs. Bullion ETFs reached a new all-time high this year. When you add them all up, their holdings would be equal to the gold holdings of the third-largest central bank in the world. They're continuing to grow. So there could be room for more.
HAI: Has that growth of physically backed-gold ETFs surprised you?
Foster: If you asked me that three or four years ago, I would have said, yes, they've grown much bigger than I would have thought. Now that they've been in existence, I guess it's not as much of a surprise.
HAI: Is silver a metal you would invest in, in tandem with gold? Does it make any sense to get both?
Foster: We have silver stocks in the funds. If I find a silver company I like, I'll buy it and expect it to perform in line with gold stocks. I see very much the same drivers in the silver market. The only difference concerns what you asked earlier about the U.S. economy in relationship to gold. My answer for silver would be that the economy does have an impact on silver. And in a strong economy, I would expect silver to outperform gold, because there's a very large industrial component to silver.
HAI: Have the silver miners been managed better than the gold miners? We haven't been seeing as much turnover on that side.
Foster: There just aren't as many of them. And there really aren't very many silver companies. There are far, far more gold companies, so you're not going to see them in the headlines as much.