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 Editor Drew Voros recently spoke with Foster about the new two-faced gold investor as well as the mining sector.
Hard Assets Investor: We’re seeing a bit of recovery in gold mining stocks, which is obviously tied to the price rebound in gold. How would you characterize the last week or two?
Joe Foster: Well, we have seen a tremendous amount of physical demand and jewelry demand out of India and China. So I think a lot of people are seeing these gold prices as an extraordinary buying opportunity. That’s why the price has gone from, well, we bottomed at $1,321 a couple of weeks ago, to now we’re up to $1,476 (April 30, 2013). So there's just been a lot of physical buying coming into the market, causing the price to snap back.
HAI: What period of time does it take you to kind of determine whether this is going to be sustained, or if this is just a natural reaction to the big price move down?
Foster: My conviction hasn’t been shaken in the longevity of this bull market. This was an unnatural sell-off. But I think it will get back on track. We’ve had a strong move higher over the last couple of weeks. I don’t know that that can last. I think there's been a lot of damage done to sentiment towards gold.
Gold will go through a period of rebuilding confidence. While gold has snapped back in the near term, I think we look to it as having more ups and downs, more corrections, more sideways movements in the weeks and months ahead, before we re-establish the positive trend.
HAI: There's been a lot of talk about physical gold-backed ETFs selling off and a disconnect with the physical demand you just spoke of. Is this a new dynamic in terms of the gold market in general?
Foster: You're looking at, in large part, as two separate classes of gold investors when you look at the ETF versus the physical demand. A lot of this physical demand is, again, coming from the Middle East and Asia. Most of the investors in the ETFs are from Western countries - both institutions and individuals.
I guess there's a lot of negative sentiment in the Western markets developed around gold lately, with some brokerage reports that were very negative on the gold market. There have been some high-profile investors that have come out, who have been sellers, sometime over the last six months.
That negative sentiment has driven some of the weak hands out of the gold ETFs. At the same time, gold investors in Asia and the Middle East don’t view it that way. They're seeing it as a tremendous buying opportunity. So you have two different classes of investors - one taking profits, and one seeing opportunities.
HAI: Is this a new market wrinkle for you?
Foster: Yes, because the investors have been on the same page across the board, pretty much throughout this bull market. So there is a divergence going on. We’ll see how it plays out. But it is a new dynamic.
HAI: Has there been any kind of fundamental change for gold, other than maybe a recovery in America?
Foster: No. That’s why I started by saying my outlook for the global market hasn’t changed a bit. Governments are still debasing their currencies. The market’s choosing to ignore that right now and I'm not sure why that is. Again, a lot of negative sentiment has been created by investment banks and others. Maybe that’s part of why the market is ignoring these things.
But when you invest in gold as a hedge against monetary debasement and financial stress ... and there's still plenty of that going on in the world right now - more than ever, really. So the fundamentals are there. For me, it’s just a question of when the market’s attention decides to focus on these things again. And at that time, I think we’ll see gold start to do better.
HAI: Let’s talk about gold miners. Newmont Mining (NEM) earnings came out yesterday (April 29, 2013). What struck me was gold production being down. Is that something that surprised you more than necessarily the bottom line?
Foster: I would characterize it as a minor negative. I think Newmont’s production is pretty much backend-loaded this year. So I think they’ll probably make up most of that as we move through the year. That’s the problem with quarterly reporting with these gold companies. It’s not an exact science when the gold is going to come out of the ground.
I think the market’s reaction to Newmont is way overdone on the downside today. To me, it’s just another instance of the negative mood around these gold stocks. Any little negative news, however slight, tends to cause these stocks to sell off progressively. I would characterize Newmont’s results as a slight miss. And it’s just one quarter. They’ve got three more to go.
HAI: You’ve talked before with us about how the changing of the CEO guard at so many gold companies recently is actually very positive for the future. Are you seeing guidance coming a little closer yet? Or is that still going to take a little time to play out?
Foster: We've only had a couple of companies’ reports so far, but results have been on target, or even exceeded the target. So for the few companies that have reported so far, they’ve actually looked pretty good to us.
HAI: Let’s shift to South Africa. There’s talk of platinum mines closing. It seems sort of contrarian to the demand situation. Is South Africa becoming more and more of a question mark regarding figuring out what’s going on, not just with platinum, but precious metals in general?
Foster: No, I don’t think it’s too much of a question mark. The situation for the mining business in South Africa is definitely deteriorating. You have various unions that are causing wages to rise. It’s very, very labor-intensive mining that goes on in South Africa. So these companies are really affected negatively by large wage increases.
We have competing unions that are starting to drive up wages fairly dramatically. You’ve got difficult mining conditions with the narrow, deep underground mining that you find in South Africa. It’s just become a very difficult place to run a mining business. That’s the trend we see in South Africa, and we don’t see an end to it in the foreseeable future.
HAI: With oil prices clearly downtrending, is that something that maybe investors are overlooking? Energy is not seemingly that large head wind that we typically see, right?
Foster: Well, we’ve got Brent crude at $100 a barrel, so it’s still high. I think energy prices will remain a large cost center for these companies. But other costs will come down. Outside of South Africa, we are seeing some relief from the cost pressures that these mining companies have been under for the last several years. So outside of energy and outside of South Africa, the cost outlook is improving.
HAI: What’s the spot price for gold that miners look at as being the level of profitability? Is it $1,000, $1,200? Is there a number that you use? Or is that even fungible?
Foster: Well, we look at all-in mining costs, which are roughly around $1,000 an ounce, average across the industry. Cash flows above that $1,000-an-ounce mark would be discretionary. Most of that goes towards capital projects these days. But that’s the cash that’s available for dividends and other things.
You can see we’re at nearly $1,500 an ounce now. So on average, these guys have $500 an ounce to play with. That’s still a very a respectable cash flow that we’re seeing from these gold companies.
HAI: How cash flow about for silver miners?
Foster: Yes, it’s the same, similar. The silver price today is still well above their all-in mining costs. So they're in the same boat as the gold companies, in that regard.
HAI: We’ve seen pretty strong production in silver. Do you expect that to continue, that upward trend in production?
Foster: Not in the long term. The projections we’ve seen will continue for another year or two, but then level off three or four years out. So it’s temporary.