Gold Continues to Shine
April 30, 2020
Hello and welcome to Asset TV. The coronavirus health crisis has led to historic sell offs and a flight to safety. Joining us today to discuss gold is Joe Foster, Portfolio Manager at VanEck. Joe, thanks for being with us.
Joe Foster: Hello, Jenna. It's nice to be here.
Jenna Dagenhart: Yeah, so Joe, despite being recognized as a safe haven investment, gold and gold stocks were caught up in the broad market sell off in February, in March. What happened here and was this something that you anticipated?
Joe Foster: Well, I've always told investors that in a crash, gold and gold stocks will sell off with the rest of the market. In that situation, people are raising cash, they've got redemptions, margin calls. Funds are positioning for a risk off environment, so there's just a flight to cash and everything goes down at the same time. We've been using the 2008 crash as a template, and if you look at that crash, gold and gold stocks, again, they went down with the market, but they bounced back very quickly in a strong V-shaped recovery. And we've seen this time, the market went down in March, but by April 13th, gold and gold stocks had returned to the pre-crash levels and in fact, gold had made a new long-term high of over $1,700 an ounce.
Jenna Dagenhart: Yeah, the highest price in seven years.
Joe Foster: Yeah, it's doing very well.
Jenna Dagenhart: And what have been some of the most notable changes to gold price fundamentals during this latest market crisis? And have they impacted your near or long-term outlook for gold at all?
Joe Foster: We have adjusted our outlook for sure. We turned very bullish on gold last year when gold broke through the $1,365 level when the Fed [U.S. Federal Reserve] reversed course and started cutting rates. That brought on a falling real rate environment and gold historically has always done very well when real rates are falling. So, now layer on that this deflationary pandemic shock and you've got rates falling further. We're going into a recession. We don't know how deep it will be or how long it will be. Debt is increasing. Companies are increasing their debt levels to cope with this. Governments are having massive increases in debt to raise the funds to get through this crisis. So, there's an awful lot of uncertainty in the market going forward and we think that that can propel gold up to $2,000 an ounce over the next 12 months, and in certain scenarios we could see gold go up much higher than that.
Jenna Dagenhart: Yeah. Joe, with interest rates as low as they are, as you mentioned, that definitely reduces the opportunity cost of holding gold.
Joe Foster: Oh, definitely. So, obviously gold doesn't pay any interest, but with interest rates at zero or even negative in Europe and Japan, gold is now competitive with interest bearing instruments.
Jenna Dagenhart: And gold prices seem to be supporting the case for owning gold stocks now too. Is there anything other than gold prices backing your bullish view?
Joe Foster: Well, the gold companies are very well positioned, both financially and in terms of cashflow. So, looking first at their balance sheets, we look at net debt to EBITDA [earnings before interest, taxes, depreciation and amortization] which is the debt ratio that many banks use. On average, the net debt to EBITDA of the gold industry is about one fifth of the debt ratios of the S&P 500. So, these companies are very strong financially and in fact, many gold companies have negative net debt, which means they have more cash than debt on their balance sheet. Also, these companies are generating a lot of cash. When you consider that it costs about $925 an ounce on average to produce gold, you have to add in other noncash costs like exploration, capital needs, overhead. When you throw it all in, it costs about $1,200 an ounce to run a strong gold company. Compare that with current gold prices, these companies, there's cash flying $400, $500 an ounce in free cashflow. So, very, very strong financially.
Jenna Dagenhart: Certainly. And finally, how do you think that the coronavirus pandemic is impacting gold stocks?
Joe Foster: It's had a limited impact on the miners. Looking back at March, roughly 12% of gold mining globally was offline due to the lockdowns and the mitigation efforts. Since then, we've seen Quebec, Argentina, South Africa allow the miners to go back to work. So, currently we're looking at probably, roughly 8% of the industry is offline due to the virus and we expect that to decrease over the next several weeks. So, these companies are seeing a limited impact. And in fact, I think governments are finding they’re very well suited to combat this type of a health crisis. Many companies have operations in Africa where they've gotten malaria, they've been through the AIDS epidemic, the Ebola epidemic. They know the protocols and the procedures, and so they're implementing those, obviously globally now, but they're very well positioned to take on a health crisis like this.
Jenna Dagenhart: And what about valuations?
Joe Foster: Valuations, another aspect, I'm glad you brought that up, is stocks are very cheap historically. So, they're trading at about eight times cash flow right now. Compare that with a longer-term average of around 11 times cash flow. In a stronger bull market, you get up to 20 times cash flow. So, these stocks are very cheap. Financially, they're strong, they're generating a lot of cash, they're paying dividends. We've seen two companies increase their dividends in the midst of this crisis, and we expect more companies to continue increasing dividends once all the mines are back online. So, this industry is very strong. Contrast that with many other industries that are struggling and will continue to struggle for the foreseeable future. We think gold stocks are an outstanding value right now.
Jenna Dagenhart: Yeah. A lot of companies cutting dividends.
Joe Foster: Yeah. Cutting dividends, adding debt to their balance sheet. Gold is one of the few industries with a rising commodity price, a rising price for its product. So, that's a very unique situation for these gold miners.
Jenna Dagenhart: Yes, very unique indeed. Well, Joe, thank you so much for joining us.
Joe Foster: Yes, it's good to be here and stay well.
Jenna Dagenhart: And thank you for watching. That was Joe Foster, portfolio manager at VanEck. I'm Jenna Dagenhart with Asset TV.
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