Joe Foster: Buy Miners, Not Bullion, For Next Gold Run

by: Hard Assets Investor

Joe Foster is one of the leading minds in the gold space. His fund, the Van Eck International Investors Gold Fund, has delivered 11+ percent compounded returns for more than 50 years, and is up more than 34 percent year-to-date.

In a wide-ranging interview with, Foster surveyed his bullish outlook for gold and silver, explained why miners are the best bet right now.

HAI: How long can gold's meteoric rise continue? Is the talk of $2,000 gold outlandish?

Joe Foster, Van Eck (Foster): I think we're going to be in a bull market for gold as long as we have so many financial stresses around the world.

There are a lot of problems with the global financial system right now, and there really is no solution in sight for things like the sovereign debt problems in Europe, the debt problems in the U.S. and the slow economy in the U.S. and Japan. We're seeing inflationary pressures in emerging markets due to food and commodity price inflation. All these things are driving the price of gold, and they've been created by problems in the financial system that are not being rectified.

In general, I think we're in the middle of the bull market. I'm not sure if we're in the early-middle, the middle-middle or the late-middle, but I expect the bull market to go on for some time.

HAI: Do the problems have to get worse or do the stresses just have to continue?

Foster: The financial stresses caused by these things are driving more and more investors to gold all the time. As long as they remain unresolved, I think you'll see individual investors, institutions and governments continue to gravitate towards gold and silver as well.

HAI: How big is the institutional move toward gold?

Foster: It's something that's very difficult to quantify, but there is a high level of interest in gold at institutions of all stripes, including pensions, endowments and family offices. Everyone wants to know if the bull market is over and if it's too late to move into gold. I've seen some stats saying that many of these institutions don't have gold in their portfolios at all; I think there's a lot of room for these investors to come into the market.

HAI: Was the spike to $50 in silver a bubble or a realistic price move?

Foster: I think the spike was just another aspect of the broader bull market in precious metals. Silver had an extraordinary year in 2010 that spilled over into 2011, but the move to $50/ounce was driven in large part by technical targets and speculative investments. Now that the market has gotten that threshold out of its system, perhaps silver won't be so volatile.

I think we'll see $50 silver again in the future, but it could be a while before it markets it to that level.

HAI: Will China and India continue to drive demand for precious metals, or will price sensitivity keep them out at a certain level?

Foster: Surprisingly, demand for jewelry and investment actually increased in the first quarter over a year-ago period. We're seeing rising affluence in emerging markets, particularly in places like India and China, and price has not been a deterrent from drawing more investors into gold both as an investment and as jewelry.

HAI: Let's turn to the other side of the equation and look at supply. Is it possible to increase supply or are we already past "peak gold"?

Foster: It's going to be difficult for the industry to increase supply. Supply had been trending downward since 2001. In the last couple of years it has increased marginally, but the increase has been very muted.

The problem is that there hasn't been another prolific gold mining field discovered in recent periods. You have to go back to the 1980s when major discoveries were made in Australia and Nevada. Without that kind of major discovery, you're not going to get much of an increase in gold production.

HAI: Are those new finds out there?

Foster: There's really no way to know. Prolific gold regions are far and few between. Exploration spending is increasing, companies are generating a lot of cash, and a lot is going into the ground for new exploration; hopefully those companies are successful and make new discoveries. But to this point, we just haven't seen them.

HAI: Which is more attractive at this point -- metals or miners?

Foster: Miners. Gold stocks have underperformed significantly this year. Valuations are now at the very bottom of the valuation range, at levels we haven't seen since the crisis of 2008. Stocks are very cheap relative to the price of gold right now, and I think miners will give you the best leverage as we go into the next leg-up in the gold price.

HAI: Does that extend to the juniors?

Foster: Yes, I think it does. The underperformance is really across the board. The juniors had a great year in 2010, but all of them have underperformed in 2011. I think it's an industrywide phenomenon that gold stocks have fallen out of favor recently, and I expect that to reverse course across the board.

HAI: What are your top three picks in the miners space?

Foster: I like Osisko (OSKFF.PK). It is starting up a mine in Quebec as we speak, and hopefully that startup will go smoothly and that will be reflected in the price of gold in the second half of the year.

I also like Kinross (NYSE:KGC), which has underperformed over the past few years and is a real value play right now.

Of the smaller juniors I like Guyana Goldfields (OTCPK:GUYFF). They have a relatively high-grade deposit in Guyana that I think is very attractive, which they are working on developing right now.

HAI: What else should investors be aware of on the horizon?

Foster: The big thing is QE2 is coming to an end, as many investors are wondering how gold will react to that.

With the end of QE2, the economy will have to stand on its own feet, with the support of extraordinary monetary and fiscal stimulus. I'm not so sure it will be able to do that; I just don't see the driver of the economy. Housing is still in a depression, and without a healthy housing market, I don't think the economy will get back on track.

As we enter the second half of the year, I think the market will start to recognize that. And if more stimulus is required from the Fed or the government, I think that will drive more people to gold.

HAI: That's all very bullish for gold. What could derail your thesis?

We'd need to see sustainable US GDP growth in the range of 4 percent to show that the economy is getting back on track. Just looking at the numbers that have come out over the last several days, the economy continues to struggle. And if it's struggling following the intense stimulus the economy has been subjected to, I just don't see it getting out of that mode as long as the housing market is struggling.

If we had 4 percent GDP growth and we became convinced that the federal government was going to reduce the deficit and get its fiscal house in order, all without stimulating inflation, that would be the worst-case scenario for gold. But I see that as a very, very low probability.