Joseph (Joe) M. Foster, Portfolio Manager for the Gold Equity strategy, Van Eck Global
Hannes Huster:
Dear Joe, thank you very much for the opportunity to interview you today.
Before we start to talk about the markets please give my readers an overview about the work you are doing for Van Eck Global.
Joe Foster:
I manage the active gold accounts for Van Eck. That includes Van Eck’s active gold fund in the U.S. and Europe. My team seeks to generate alpha in the gold sector by utilizing a bottom-up approach to stock picking that involves modelling the companies financially, routinely meeting with management, and traveling to project sites for evaluations. I worked over a decade as a geologist in Nevada gold mining and exploration before coming to Van Eck as an analyst in 1996. Hopefully our investment process and my background helps us make better investment decisions.
Hannes Huster:
Gold has had a tough time since the top in 2011. We are now in a correction since 44 months and the price of Gold in US-Dollars has lost around 40%.
That said, I see it as a correction in a major up-trend. What are your thoughts about it? In which point of the cycle do you see Gold at the moment?
Joe Foster:
All of the financial risks that drove gold to $1920 in 2011 remain, but they are being ignored by the markets, which I believe have become overly complacent. I agree that gold is in a hard cyclical correction within a secular bull market. We see Europe and Japan have adopted the radical monetary policies the Fed has promoted that so far have had no unintended consequences. The markets have accepted zero rates and QE as normal policies. I think the misallocation of wealth and distortions to investment behaviour brought on by these policies will end badly and eventually drive gold higher.
Hannes Huster:
Always a tough question, but would you be daring enough to predict the price of gold in 6, 12 and 24 months?
Joe Foster:
I believe gold is forming a base and while we could see another down-leg in the gold price, it seems most of the selling pressure is behind us. I think it will continue to struggle through the summer. The Fed rate decision expected in the second half could be a turning point. Increasing rates presents a new risk to the financial system that could expose weaknesses that drive gold. I expect gold to establish a more positive trend in 2016 and beyond.
Hannes Huster:
Is China an influence on the price of gold and if so how? Do you think the economy in China is okay?
Joe Foster:
The Chinese economy is obviously struggling, but wealth continues to grow along with risks that are driving the Chinese to gold as both a luxury item and safe haven. We continue to see firm demand from China and better demand from India that is underpinning the gold price at current levels.
Hannes Huster:
How would a Greek exit affect the world financial sector and what would be the effect on the gold price?
Joe Foster:
A couple of years ago a Greek exit would have been problematic. Now, I believe the ECB, IMF, and EU in general have prepared for a Greek exit. If it happens, I think it will cause some dislocations, banking stress, and panics locally. However I don’t see it threatening the European financial system or being anything more than a temporary driver of gold.
Hannes Huster:
I am personally not so optimistic about the economy in the US and I think sooner or later the FED has to again print more money.
How do you see the economy in the US and do you think the FED has resolved all their problems just by printing trillions of Dollars?
Joe Foster:
QE hasn’t delivered the intended economic growth. It has delivered booming stock and bond markets and income disparity. The economy is growing, but remains vulnerable to a downturn. Why else is the Fed so reluctant to announce a 25 basis point rate increase? Why haven’t they normalized rates by now? The U.S. expansion is six years old. We’ve never seen a U.S. expansion go beyond 9.5 years. If QE is ineffective and rates are near zero, I think the Fed is very afraid of having no way to stimulate in the next downturn. We could see even more radical monetary policies. We are, in fact, seeing more radical policies in Europe in the form of negative interest rates.
Hannes Huster:
When we take a look back in history we have never seen such a situation like we have today. The central banks are printing money worldwide, they are executing their QE programs, the interest rates are near all-time lows but we don´t see inflation.
How do you assess the situation and do investors need gold as an inflation hedge when there isn’t any on the horizon?
Joe Foster:
First of all, gold is an inflation hedge, but more importantly, it is a hedge against systemic financial risk, financial tail risk, if you will. That could come in the form of inflation, deflation, currency crisis – anything that threatens the financial system, and especially the U.S. financial system, can drive gold. The velocity of money is at multi-decade lows, perhaps all-time lows. Most of the money that has been printed is stuck within the banking system. Banks have higher reserve requirements, more regulations, and tighter lending rules. The money has not been allowed to circulate as it has in past cycles. Eventually, if the banking system ever returns to normal, all of the liquidity that has built up in the system could certainly create an unwanted inflation cycle.
Hannes Huster:
As always in these downturns the gold stocks have dramatically declined in value.
Do you think gold mining companies are cheap at the moment or do you see another wash out coming?
How is the demand in your ETF´s in the Gold sector at the moment?
Joe Foster:
In my view gold stocks have been oversold. Looking at P/NAV, P/CF, or P/E valuation ratios, really any valuation metric you choose shows gold stocks trading below their long-term average. The downturn has also caused companies to become more efficient and better managed. So we’re looking at well managed companies that are cheap.
Hannes Huster:
I know it´s a tough question but what are the three most important criteria for you and your team when you look at to invest at a producing goldmine?
Joe Fosters:
I want to clarify, I manage our active gold equity funds. This is separate from our gold equity ETF’s, which choose companies based primarily on market cap. Our active funds are “all-cap” funds, which carry a range of small- to large-cap companies. The most important things we look for when selecting a stock is quality gold properties, management who can develop on-time and on-budget, and jurisdictions that are favourable for mining.
Hannes Huster:
In the last few months we have seen a strong US-Dollar. On the other side we have seen a rising price of gold in Canadian Dollars, the Australian Dollars and the Brazil Reals.
Do you think investors have realized that mining companies in these countries can still produce with a good profit margin?
Where are your preferred regions to invest?
Joe Foster:
We invest globally wherever we find quality gold properties in countries with favourable mining laws and tax structure. Our active funds are most concentrated in the Americas, West Africa, and Australia. Weak currencies globally have had a favourable impact on costs in places like Canada, Brazil, and Australia. However, currencies are not our primary consideration because gold is a dollar-based commodity. We invest in companies that are profitable regardless of currency fluctuations.
Hannes Huster:
Our newsletter focusses more on the Mid-Tier and Small-Cap sector in the Gold space.
In the last few months we have seen some M&A action in this area.
Do you think we will see more mergers and acquisitions coming and if yes, do you have any companies in mind that could be a take-over target?
Joe Foster:
M&A activity has been subdued and I believe it will remain so as long as gold remains in a bear market. Eventually, I believe valuations will improve in a more positive market. At that point, I think M&A will pick up. That said, M&A is an ongoing theme in the gold industry and we like to play that angle in our active funds. So far we have had four of our companies involved in M&A activity this year, which is good for performance. I consider most of the juniors in our active funds M&A targets.
Hannes Huster:
I know that Van Eck is also active in Australia. As we follow many Australian companies, what is your general opinion about the mining sector in Australia?
A question that comes up very often is the difference in the valuations. From my point of view mining companies from Australia are trading very often at a discount to their North American peers.
Do you agree or disagree with this opinion?
Joe Foster:
Australia is a mature gold mining region, but is still a major gold producer. We have some interesting situations in Australia in the junior and mid-tier space with some consolidations and new discoveries – Evolution Mining and Gold Road come to mind respectively. For quality companies, we don’t see much difference in valuation with the North Americans.
Hannes Huster:
Do investors have the ability to check Van Eck’s biggest holdings at a particular point in time?
Joe Foster:
Our active funds post top ten and portfolio holdings regularly.
Hannes Huster:
I personally like the mid-tier gold producers. Can you name some of your favorites in this sector?
I think B2 Gold has done a phenomenal job of managing their operations and acquiring exciting development properties in this bear market. Agnico has been a solid performer and has had some good exploration success lately. Randgold’s ramp up at Kibali is going very well.
Joe Foster:
Hannes Huster:
With the GDX-Junior ETF you can also invest in smaller companies. What is the minimum market cap the companies need and what are your favorites in the junior sector?
