TOM BUTCHER: Gold's trading was pretty much range-bound between $1,200 and $1,300 an ounce during the first half of this year. What is your outlook for the second half?
JOE FOSTER: We have been saying for quite some time that gold is forming a base. Gold has been through a tough bear market that ended in December of 2015. Because of that, there is not a lot of selling pressure, and in the current environment, there is not a strong catalyst to move gold's price higher. Gold has been supported by a weakening U.S. dollar and by geopolitical issues around the world. We expect those catalysts to continue for the remainder of the year.
In addition, there are a couple of other things that we are looking at. One is the Fed. If the Fed does not raise rates later in the year, that could put more pressure on the dollar and this would be good for gold. Also, the Fed is expected to release its plans for unwinding the massive balance sheet that it has accumulated after the financial crisis. The Fed will do this by selling Treasury securities and mortgage-backed securities, which will effectively tighten the economy and create risk.
It could drive gold higher as well. We are also looking at possible seasonal demand. We have seen good demand out of India this year. We think that the seasonal pattern that has been missing for the last couple of years could return as India's festival seasons and the fall wedding season drive higher physical demand. This could be another catalyst that gets us through that $1,300 level and into a higher trading range.
BUTCHER: We have just finished the Q2 reporting season. What have results been like?
FOSTER: Q2 results beat expectations. On average, the companies reported lower costs, higher production, and, as a group, met or beat earnings expectations. The outstanding performers were Agnico Eagle Mines (NYSE:AEM) and Newmont Mining (NYSE:NEM). In addition to beating expectations for earnings, costs, and production, these companies also announced increased guidance for production in 2017 and lower costs for the year. They were the star performers.
BUTCHER: What do valuations look like now?
FOSTER: Despite a good quarter operationally and financially, stocks did not really react strongly. In fact, for the year, the gold stock indices are underperforming gold by about 2%. I think that creates an opportunity. Valuations continue to be low. When we look at price-to-cash flows, these companies are trading at about 8x cash flow. That is below the longer-term average of 11x cash flow. At higher gold prices in a bull market, you can expect price-to-cash flow up around 14x and above. The sector looks very attractive to us on a valuation basis.
BUTCHER: How can investors get exposure to gold in their portfolios?
FOSTER: There are a number of ways. The largest gold markets in the world are the futures market based in New York and the over-the-counter market based in London. If you are comfortable playing a paper market that is settled in cash, then you can play the futures market. The over-the-counter market is for larger more institutional investors that buy and sell gold bars. For individuals, gold bullion ETFs have become a popular market.
Most of these ETFs are backed by physical gold bullion. You can also buy coins or bars from an established dealer. Another way of accessing the gold market is through gold mining companies. When we invest in a gold mining company, it has reserves in the ground that we consider like having gold in a vault. That gold stays there until the company extracts it out of the ground and puts it into the market. You can invest in individual gold stocks or diversify and invest in a portfolio of gold stocks through either a mutual fund or a gold equity ETF.
BUTCHER: Have you seen any interesting evolution in the market?
FOSTER: First, the over-the-counter market, which is a very large market, has historically been very opaque. There is not much known about it really. The London Bullion Market Association has just started publishing its vault inventories, with a three-month lag, for the first time ever. They say they plan on also publishing trading statistics. This will give us an insight into what goes on in the over-the-counter market and a fuller picture on what is driving gold prices.
The second thing that is developing is new technology merged with gold trading. The Royal Mint in London is issuing a new product, expected out later this year, called Royal Mint Gold. This would be physical gold stored in a vault that is traded on a distributed ledger platform. This establishes gold trading, bars and bullion, with a new trading platform, a more modern trading platform, that is more efficient and probably less costly than older platforms.
1 Agnico Eagle Mines Limited was 4.7% of the VanEck International Gold Fund as of 7/31/2017.
2 Newmont Mining Corporation was 4.6% of the VanEck International Gold Fund as of 7/31/2017.
3 As of June 30, 2017, year-to-date performance of the NYSE Arca Gold Miners Index (GDMNTR) was +5.3% and that of gold bullion +7.8%. GDMNTR is a modified market capitalization-weighted index composed of publicly traded companies involved primarily in the mining for gold. The Index is calculated and maintained by the New York Stock Exchange.
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