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Examining Trends Over the Last 40 Years in the Gold Market


GILLIAN KEMMERER: Welcome to the broadcast, I’m Gillian Kemmerer. The gold industry has changed significantly over the past 40 years, with new technology and exploration trends impacting investors. Here to tell us more is Joe Foster, gold and precious metals portfolio manager for VanEck. Joe, thanks for joining us here today.


JOE FOSTER: Thank you, Gillian.


KEMMERER: I’d like to start with thinking broadly about some of the significant trends and changes in the gold industry. Let’s begin with exploration first. What have you seen change over the past 40 years?


FOSTER: I guess I go back to the ‘90s. There was an exploration boom in the ‘90s and it really started after the Cold War which ended, I think, around 1991. All the countries that were being propped up by the Soviet Union around the world lost that support and they had to turn to other areas to generate economic growth. One of the areas was to open up the resource sectors to exploration and development. That generated an exploration boom all around the world and we saw a lot of discoveries, especially in Latin America and Africa at that time. Also at that time, Nevada and Western Australia were emerging as major centers of gold production. These areas are two of the most prolific areas in the world, historically, for gold production. They were really coming on strong in the ‘90s with a lot of discoveries. Those were sort of the booming years, I guess, in my experience with gold. It hasn’t been that way so much recently, mainly because companies aren’t having as much success with exploration these days. It seems all of the easier near-surface deposits have been found. We haven’t found another prolific area like northern Nevada or Western Australia. During the last bull market, from 2001 to 2011, companies were spending more than ever on exploration, yet we didn’t see the same discovery rate that we’ve seen in past cycles. So I think, because of that, we’re seeing gold production top out and we’re starting to see a slow decline in gold production globally.


KEMMERER: Joe, what about the financial side? What are some of the changes you’ve seen there?


FOSTER: I guess there were two big changes over the years on the financial side. One goes back into the ‘90s when companies were hedging. The ‘90s were a secular bear market for gold. So the price, the overall trend, was down for the gold price in the ‘90s. Companies started hedging in the mid ‘90s. That works as long as the gold price is going down. You hedge at $500, gold goes to $400, and it’s fine. You’re getting $500 for your production. That all changed. By the bottom of the cycle in 2001, gold was down around $250 an ounce. They weren’t ready for the turn in the cycle. They had built up hedge books. When the gold price started rising, you’re delivering into a book at $300 or $400 an ounce and gold’s up at $500 or $600 an ounce. It costs you a lot of money to close out that book. It even drove some producers, particularly in Australia, into bankruptcy. The majors spent billions of dollars to close out their hedge books. It was such a painful experience that even today there is no significant hedging in the gold sector. There is a very strong anti-hedging sentiment across the entire industry now.


On the financial side, the second big change or evolution I would point to was the most recent cycle, the bull market from 2001-2011. In that cycle the gold price was rising, companies spent a lot of money on expansions, building new multi-billion dollar projects, even some acquiring copper companies and things like that. When they did that, a lot of that was debt. So their balance sheets got way out of whack. They raised way too much debt and when the gold price rolled over and started its downturn in 2011, many companies found themselves in danger of violating their debt covenants. And it really caused some financial pain for many, especially the large producers in the gold business. They learned another hard lesson there. Now they have all repaired their balance sheets and they’re in good shape. Some are still buying down their debt; most companies have a target of net debt of zero, which means no more debt than cash on the balance sheet. So the companies are financially strong again. And I think going forward they’ll maintain these conservative sort of financial practices based on these hard lessons they have learned over the years.


KEMMERER: If there’s one thing that’s impacted every industry, it’s innovation in technology. How has it impacted gold?


FOSTER: A lot of people have asked me if there’s any analog to fracking in the gold business. We really haven’t seen that. The last major change in technology was back in the ‘70s with the development of heap leaching. Heap leaching enabled companies to process low grade rock, rock that used to be waste, and went over to the waste pile. With heap leaching you can put it on a heap and you can extract the gold out. You’re turning waste into ore with heap leaching. It was a big technological revolution in the gold business. That came into wide use in Nevada in the ‘80s and globally in the ‘90s. That’s the last sort of step change in technology that we’ve seen in this sector. Everything else since then has been more or less incremental. In the ‘90s, everything got bigger: bigger haul trucks, bigger loaders, bigger shovels, drills…everything got bigger. Take haul trucks, for example, the stumbling point to make a bigger haul truck was tires. Once tire manufacturers figured out how to make a bigger tire, they could build a bigger haul truck around it, and that’s when things got bigger. More recently, it’s more with the digital age. Companies are using drones for exploration and mapping. Driverless vehicles are being used more and more in mines. Sensing technologies: you can put sensors all over a piece of equipment and they pick up when a part is being stressed out. So you can get it into the shop and replace parts before it breaks down and you have damaging downtime – just making everything more efficient. So all of these changes, they’re not step changes, they’re incremental and they allow companies to hold the line on costs and keep costs at the low levels that we see today.


KEMMERER: Joe, thank you so much for taking the time to share some of the new innovations in gold over the past 40 years.


FOSTER: You’re welcome.


KEMMERER: And thank you for tuning in. From our studios in New York I’m Gillian Kemmerer. For other insights from VanEck, visit vaneck.com/ucits/subscribe.