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Rising Risk Strengthens Gold Outlook for 2018


GILLIAN KEMMERER: Welcome to the broadcast, I’m Gillian Kemmerer. The VanEck gold strategy is turning fifty this year. In light of this tremendous milestone, Portfolio Manager Joe Foster is here to share his outlook for both the commodity itself and the corresponding equities. Thanks so much for joining us, and congratulations on the milestone.


JOE FOSTER: Yes, thank you.


KEMMERER: Let’s start broadly: what is your macroeconomic outlook for 2018 and where does gold fit in?


FOSTER: We believe that we’re in a late-cycle economy. When you look at the stock markets, stock valuations are at, or near, historic highs. The economy is at full employment. Debt levels amongst households and corporations are at high levels. When you look at what’s going on in the markets, you could say that there’s a mania forming currently, certainly in cryptocurrencies and possibly in the general stock market, where we’re seeing new all-time highs in the S&P, the Dow, the NASDAQ, week after week. So we think these are all signs of a late-cycle economy. In addition to that, central banks are tightening around the world led by the U.S. Federal Reserve (Fed). The Fed started tightening policies a couple of years ago. So that’s going to choke off the juice that’s been driving these stocks ever since the financial crisis. If there is a downturn that creates financial risk, that will drive investors to defensive assets like gold and gold stocks.


KEMMERER: You used the word ‘mania’ and I feel like that would be a really adequate way to describe how both business media and some investors I have spoken to have talked about tax reform. It’s really expected to be a tailwind for the U.S. economy. Could it be a headwind for gold?


FOSTER: Any time the government cuts taxes, that’s a good thing. And they’re cutting corporate taxes significantly, so that’s going to be great for profits. It’s going to be good for the economy. But the thing that politicians aren’t very good at is cutting spending. And this tax bill will increase the deficit by an estimated $1.5 trillion over 10 years. The deficit in 2017 was $666 billion or 3.3% of GDP. Our total deficit is about 85% of GDP. Over 10 years it’s expected to grow to almost a 100% of GDP. You just can’t keep piling on more and more debt. If we do see an economic slowdown, or even a recession, this debt load will become a huge problem. And it could even bring on our next financial crisis. So that’s a possible scenario where I think investors should be thinking of ways to create some insurance in their portfolio to guard against that type of turmoil. And we think gold and gold stocks are a great way to do that.


KEMMERER: In light of this macro picture that you’ve just described, where do you think gold prices shake out by the end of 2018?


FOSTER: As we move into 2018, gold prices have been strengthening. And we’ve seen this over the last several years. In December of 2017 we saw gold become oversold ahead of the Fed rate increase. Once the Fed raised rates, we saw gold rebound and move through $1,300 an ounce. I expect that strength we saw at the end of the year to continue early into 2018. Having said that, I think gold is pretty much range-bound in the first half of the year. We’ve seen gold trading in a range between $1,200 and $1,400 an ounce for the last couple of years. And I would expect it to continue within that range until we see a catalyst that moves it higher. I think that, as we move through 2018 and into 2019, we’ll see more risks come into the economy and more risks come into the financial system. I think that could drive gold much higher.


KEMMERER: Interestingly, last year gold stocks did not reflect their typical leverage to gold. Do you think that this is something that can be explained?


FOSTER: Yes. Gold stocks did well last year. If you look at the Gold Miners Index (NYSE Arca Gold Minders Index (GDMNTR) it was up 12%. Gold itself was up about 13%. So, good performance out of gold and gold stocks. However, we normally expect gold stocks to outperform. They carry leverage through their earnings and through the increase in their reserves and resources at higher gold prices. We didn’t see that leverage in 2017. We believe there are two reasons for that. The first reason is that gold stocks had a tremendous year in 2016; gold stocks were up over 50%. So I think there was some reversion to the mean in 2017 and gold stocks cooled off a bit. The second reason is that investors aren’t really looking at gold or gold stocks right now. They’re looking at cryptocurrencies and they’re looking at the FANG stocks. They’re looking at the stock market. Gold’s not receiving much attention from the investment universe right now. Nobody really cares about gold stocks at the moment. And that’s reflected in their so-so price performance.


KEMMERER: Looking ahead to 2018, are there any specific segments within that larger universe that you like?


FOSTER: Sure. Within our gold stock portfolio we favor the mid-tier and junior stocks. When we look at gold stocks, what we want first and foremost is companies with the ability to create value and grow production, to grow low-cost production. We find that in mid-tier and smaller-cap stocks, companies like B2Gold or Alamos Gold. Mid-tier companies like these are very dynamic and they’re creating value. We do have some great large-cap stocks in the portfolio: Newmont Mining is one and Agnico Eagle Mines is another. But, having said that, we are currently underweight in the large-cap stocks and we’re favoring the mid-tier and smaller stocks where we see more opportunities to create value.


KEMMERER: You’ve alluded to this already, but gold has advanced for two years now. Do you see a corresponding increase in discoveries coming?


FOSTER: The higher gold prices have meant higher earnings for the gold companies. They are spending more on exploration. But we haven’t seen an increase in the rate of discoveries, and we don’t expect to really. Gold mining has reached a stage that you can call “peak gold”. That’s a bit of a cliché, but it’s true in the gold industry. All the easy near-surface deposits have been found and it’s getting much more difficult to find new large gold deposits around the world. So a lot of the larger companies have been taking strategic stakes in smaller development companies with the hopes of growing projects into something more meaningful. I think that will lead to more M&A activity down the road. But I don’t think we’re going to see a significant increase in discoveries.


KEMMERER: Joe, thank you so much for taking the time to share your insights on the gold market for next year and congratulations on the 50 year anniversary.


FOSTER: Thank you.


KEMMERER: And thank you for tuning in. For this and other insights from VanEck’s strategies, visit vaneck.com/subscribe.