Jenna Dagenhart: Hello, and welcome to Asset TV. Joining me now with his midyear outlook is Joe Foster, Gold Strategy Portfolio Manager at VanEck. Joe, what's been driving gold's performance? How have we gotten to $1,800 an ounce?
Joe Foster: Well, it started last year in 2019. The [Federal Reserve (Fed)] cut rates, and that was a bit of a surprise to most market watchers. And what that did is it caused obviously rates to fall, and for gold, rates turned negative in real terms. So, when you adjust for inflation, in real terms, when rates are negative, that's always been a great environment for gold. Gold becomes competitive with other interest-bearing assets like bonds and your bank savings accounts and things like that. So, you seek to have a rotation of money into gold from those other types of assets.
Also, the Fed had to bail out the repo market last year, and we've seen an increase in financial and economic risks generally. And obviously, with the pandemic, those risks have increased even more. So, we've had some very strong gold prices over the past year.
Jenna Dagenhart: You're anticipating gold hitting $2,000 in the next six to 12 months. What do you believe would have to happen in order for prices to reach that level?
Joe Foster: Well, there's so much financial and other uncertainty in the market right now, that there's a lot of risks that we'll watch play out over the coming year that I think will drive gold higher.
First of all, we're in the midst of a recession. We don't know how deep or how long that recession is going to be. We've got high levels of unemployment. Many economists expect unemployment to remain in double digits into 2021. We'll probably see more failures and bankruptcies across corporations and also consumers or households. Some of the government stimulus is rolling off soon, and that's going to put some households in a very difficult situation. We're looking for a cure to the pandemic. We don't know when that will come, when we'll get a vaccine that works.
And lastly, the election is coming in November. Depending on your political views, one or the other candidate might be better or worse for the economy, but we think that there are risks amongst both parties going forward in controlling the pandemic and spurring the economy on in the future.
So I think all of these risks will drive gold to $2,000 over the next six to 12 months, and maybe much higher beyond that.
Jenna Dagenhart: And the majority of year-to-date inflows into the gold space have been via gold bullion exchange-traded products. Do you believe that this is where investors should be allocating?
Joe Foster: Well, in this environment, some gold exposure is definitely desirable as a form of portfolio insurance. Most of the money, as you said, has been going into the gold bullion ETFs, not so much into gold stocks, but gold stocks are a great way to access the gold market. And we think, at this point in time, gold stocks are particularly attractive. They carry leverage to the gold price, so they tend to outperform as the gold price is rising. And these companies are generating growing profit margins. They're generating increasing dividends. They're financially strong. They've got very favorable debt ratios. And in addition to all that, they're undervalued. They're trading below the valuations that we've seen historically for these stocks. So, we think gold mining stocks are a great way to gain exposure to the gold sector.
Jenna Dagenhart: Yeah, gold stock performance has been eye-popping though. Is it too late for investors to get in at this point?
Joe Foster: Well, you have to put that in context. So, the gold price has been going up as well, so these companies become much more profitable as the gold price rises. And if you look at the performance of gold and gold stocks—and we look historically for comparisons to what's going on in 2020—for the first half of 2020, gold's been up 17%, whereas the gold miners index is up 25%. So, they're outperforming, but not by a very wide margin when you compare it to historical measures.
Joe Foster: If you go back to 2009, after the financial crisis in the first half of 2009, gold was up 5% and the gold miners were up 13%. So, the miners in that period actually doubled the performance of gold. If you look at the first half of 2016, which is when this bull market started, gold was up 25% in the first half of 2016. Gold stocks were up 102%.
If you look at the magnitude of the price action this year, it is really nowhere near where it has gone in past cycles or in past similar periods. So, we think, again, these stocks are undervalued, and they have a lot of room to run in a rising gold price environment.
Jenna Dagenhart: Building off of that, Joe, where specifically do you see opportunities within the gold mining sector?
Joe Foster: There are opportunities that vary depending on the size or type of company you look at. We break the gold mining sector down into majors, mid tiers and juniors. When you're looking at the majors, we don't find much growth in the majors. They're not developing new mines all over the world, but where they're adding value is they're growing profits. They're expanding their margins with the gold price. They're growing their dividends. They're growing their returns to shareholders. So, for that type of value creation, you want to own some of the major gold miners.
If you look at the other end of the spectrum, the juniors, these would be companies that are exploring. They're searching for the next new gold deposit. There's a lot of juniors out there. Stock selection is very important, but these are the companies that are finding the new development projects of the future. And we've seen some very exciting discoveries lately, especially down in Australia, from some of these junior developers. So, these are the ones that are expanding, bringing new developments, growing production, and for that type of exposure, we look to the smaller companies.
Jenna Dagenhart: Well, Joe, thank you so much for your time. Great to have you.
Joe Foster: Thanks, Jenna.
Jenna Dagenhart: And thank you for watching. That was Joe Foster, Gold Strategy Portfolio Manager at VanEck, and I'm Jenna Dagenhart with Asset TV. To receive regular updates from VanEck's experts, please visit vaneck.com/subscribe.
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