Silver? Watch Gold & Base Metals
Friday, 2/27/2015 10:47
So says this long-time gold analyst in his 2015 outlook...
GOLD ANALYST Joe Foster is the investment team leader for
Van Eck's flagship gold fund, the Van Eck International Investors Gold Fund.
Working in the mining and investment business for more than 25 years, and now frequently quoted in the Wall Street Journal and Barron's as well as being a frequent guest on CNBC and Bloomberg TV, Foster also serves on the investment teams for the Van Eck Global Hard Assets Fund and the Van Eck VIP Global Hard Assets Fund, and is an advisor to the Market Vectors ETF Trust – the Gold Miners ETF (GDX) and Junior Gold Miners ETF (GDXJ).
Here he speaks to Hard Assets Investor's managing editor Sumit Roy about his latest outlook for gold...
HardAssetsInvestor: You recent said that while the US economy is on solid footing right now, that could change sometime in the next year or two. What makes you say that?
Joe Foster: The US expansion is getting a bit long in the tooth and this expansion can't last forever. If you look historically, the beginning of the end of the cycle happens when the Fed starts raising rates. So if the Fed does actually start raising rates sometime this year, then I don't think the expansion can withstand too much in the way of rate increases before it starts to slow down. And then you'd see other financial stress start to creep in. I expect to see that over the next year or two.
HAI: In Europe, we've seen the opposite situation. Their recovery has not been nearly as strong as here in the US and they've been easing monetary policy. What do you make of the situation in Europe?
Foster: It's hard to imagine Europe pulling itself out of the malaise it's been in for many years now. It's only been compounded by problems in Greece and the problems of dealing with Russia and what's going on in Ukraine. The European economy is in a tough situation and it's hard for me to see it getting out of it any time soon.
HAI: Partly because Europe's been doing so bad, we've seen the Dollar in the midst of one of its biggest rallies in years. Do you see it continuing higher? And is that going to be a head wind for gold?
Foster: It's definitely a head wind for gold. Things are OK right now in the US economy with low energy prices and unemployment coming down. That's an environment that produces strength in the Dollar, especially when other regions of the world aren't doing so well. That's one of the reasons gold could continue to struggle for much of this year.
HAI: The World Gold Council said recently mine production hit a record high last year. That's somewhat surprising considering the low-price environment we've been in. Has production finally peaked?
Foster: I think we'll look at 2015 or 2016 as the peak in production. If it hasn't already started, it's about to start a slow decline that will probably be more or less permanent
HAI: That sounds bullish for gold, but do you think that's going to be the catalyst that will finally be able to lift gold above, say, $1400?
Foster: No, I don't. It's supportive of gold in the longer term, but the market won't react to that until they see a trend established. That's something we'd need to see that over the course of several years in order for the market to react to it.
As far as moving gold through the $1400 level, that would be driven by some sort of financial stress or economic weakness in the US economy. And again, that probably comes once the Fed starts raising rates.
HAI: We know a huge chunk of demand comes from India and China, but it seems like in the short term the price is driven by the news we hear in Western countries, such as what the Fed is doing; what the ECB is doing; or what's going on in Greece. Is it the East or West that's driving the gold price?
Foster: The Asian buyers tend to set a floor under the price. They're very price-sensitive. If you look over the past couple of years, they've been happy to come in and support the market around the $1200 level, and that's why we're seeing the resilience here. When we get these intermittent $100 rallies that take gold up to $1300, that's driven more by Western investment demand. But I see the Asian demand as more underlying support for the market long term.
HAI: Do you think silver will remain tied to the hip with gold? As gold goes, silver goes, basically?
Foster: Yes, I do. The No.1 driver for silver is gold. And then a secondary driver for silver would be the other base metals.
HAI: The Market Vectors Gold Miners ETF (GDX) seems to have formed a base around the $20 level. Do you think this is a good entry point for investors?
Foster: Yes. Gold stocks have had a really tough time, but we definitely see value in them. If we're right and if gold is forming a base here around the $1200 level, then it's a great entry point for gold stocks.
HAI: What should investors watch out for in the next few years regarding precious metals; what are the big themes you're looking at?
Foster: Investors should keep an eye on the development of financial risks and tail risks coming into view over the next few years. They should also keep an eye out for strong demand out of China and improving demand out of India.
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