Gold Falls Through April Low
JOE FOSTER: On June 19, Federal Reserve chairman Ben Bernanke made some comments that disappointed the gold market. He said that the Fed may remove its measures of quantitative easing over the coming year if the economy and labor situation improves. This implies that interest rates could go up in the future, and in fact, we had a spike in interest rates in June. This caused a rise in real interest rates and this was hard on gold. Also, the U.S. dollar strengthened in response, and as we know, gold has a negative correlation with the U.S. dollar. Between the rise in real rates and the stronger dollar, gold took a hit in June.
Price Impact on Mining Production
FOSTER: The average all-in cost of mining globally is approximately $1,050 an ounce. On average, many mines are not affected by the current low in gold prices. In fact, many of these mines are making money and generating cash. However the marginal cost of production is much higher, so there are some mines that are producing at much higher costs. We've seen a couple of the smaller miners announce shutdowns at around the $1,400 an ounce price mark. Currently, gold is trading below $1,300 an ounce [filmed on July 2, 2013], so we would expect to see more of these higher-cost mines announce closures as the gold price declines. That's actually good for our gold outlook: less supply in the market is obviously supportive of gold prices.
The State of Expansion Projects
FOSTER: The gold industry has been reviewing its expansion and new capital projects, and this process has been ongoing. There's been a change in management across many gold companies as they seek to become more profitable. This project review process has taken a new twist now with lower gold prices. Projects are now coming under greater scrutiny and we would expect to see more of this type of activity. More companies are looking to high-grade or renegotiate contracts, things of that nature, to get project costs down. And if they can't generate sufficient rates of return at current gold prices, then we'll see more cancellation of these development projects. This reinforces the idea that less gold coming into the pipeline in the future should be very supportive of gold prices.
Outlook for Gold
FOSTER: Let’s start with the long-term outlook. Our long-term outlook has not changed for gold. There's still a tremendous amount of financial risk in the system. The U.S. is still running large fiscal deficits, and extreme monetary policies dominate in the U.S., Japan and Europe. There are a lot of risks in the system that could still drive gold much, much higher. In the near term, gold is in search of a catalyst, and frankly we're not sure what that catalyst might be. Again, it could be some of these risks that we've mentioned coming back to the fore. It could be some disappointing news on the economic front. But we expect, as we go through the second half of the year, to find a catalyst that again moves the gold market higher.
The final thing I will say is that the gold market is very out of favor with investors. We've seen a sell-off that is historical this year; we’ve rarely seen falls in the gold price like we've seen in 2013. Just from a reversion to the mean perspective, we think there's been an awful lot of selling and that should reverse itself in the second half of the year.
Positioning INIVX in New Environment
FOSTER: A couple of things that we have done: one, from a macro perspective, we have increased our weighting in gold bullion. Gold tends outperform gold equities in a declining market, and that's what we've seen in 2013. We generally hold higher allocations of cash in a falling market, and that's what we've done this year. A key focus is that we are still looking for growth in these gold companies and we look for projects that generate sufficient returns at current or even lower gold prices. In addition to cost, we look at the projects that these companies are planning, and identify those projects that are still robust at current gold prices.
Read additional comments from Joe Foster: Gold Commentary - June 2013
- - - - - - - - - -
The views and opinions expressed are those of the speaker and are current as of the video's posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results. For more information about Van Eck Funds, Market Vectors ETFs or fund performance, visit vaneck.com. Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com
Please note that Van Eck Securities Corporation offers investment products that invest in the asset class(es) included in this video. Gold-related investments are subject to risks associated with precious metals, market risk, industry concentration, inflation, foreign securities, frequent trading, short-sales, leverage, and non-diversification.
Investing involves risk, including possible loss of principal. An investor should consider investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus and summary prospectus contain this and other information. Please read the prospectus and summary prospectus carefully before investing.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation. © 2013 Van Eck Securities Corporation.
Van Eck Securities Corporation, Distributor
335 Madison Avenue, New York, NY 10017