Gold's $1200-1400 Trading Range
Friday, 8/29/2014 14:50
Gold fund manager talks technical and fundamental state of market...
JOE FOSTER is investment team leader for Van Eck's flagship gold fund, the Van Eck International Investors Gold Fund.
He 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 – Gold Miners ETF (NYSEArca:GDX) and Junior Gold Miners ETF (NYSEArca:GDXJ).
Working in the gold mining and investment business for more than 25 years, Foster is now frequently quoted in the Wall Street Journal and Barron's as well as being a frequent guest on CNBC and Bloomberg TV. Here he speaks to Hard Assets Investor's managing editor Sumit Roy about his latest outlook for gold...
HardAssetsInvestor: Gold zoomed higher during the first quarter, but it hasn't really done much since then. Do you expect volatility to return to gold at some point this year?
Joe Foster: Gold has been range-bound. It's basically been hanging around the $1300 level since March. Normally, we see strength in the fall for a variety of reasons. Seasonally, the price of gold seems to pick up as we move toward year-end. We could test the highs again later in the year, which would be around $1400 an ounce. If we do that, we'll probably see a little more volatility. And then if something happens in the market that gets it through that $1400 level, certainly I would see it becoming more volatile.
HAI: Do you follow that technical picture at all? Is $1400 a key level?
Joe Foster: Yes, technically speaking, $1200 to $1400 is the range we've been in since the middle of 2013. We've been in this range for a year now.
HAI: Is it surprising to you that gold is holding in there despite the fact we're seeing the US Dollar rally?
Joe Foster: No, it's not surprising, because we saw gold collapse last year. That was a historic collapse in gold price. Any negativity in the market toward gold was already priced in last year. This year, even though we're seeing Dollar strength, gold is standing up to that because pretty much everyone who wanted to sell got out last year.
That other thing that is supporting gold is the geopolitical risks we're seeing around the world. And that's also supporting the Dollar. Both gold and the Dollar are being used as safe-haven investments in this environment.
HAI: Seemingly every day we're getting some headline about the geopolitical situation either in Iraq or Russia or Ukraine. Are these going to be drivers of gold going forward, or are they merely an excuse to trade on a day-to-day basis?
Joe Foster: I call them supporters, not drivers. They're supportive of the market and they generate short-term gains in gold. But I don't regard them as longer-term drivers.
HAI: You manage gold mutual funds for Van Eck, and of course Van Eck is also the issuer of the very popular ETF, Market Vectors Gold Miners ETF (NYSEArca:GDX). Of course, there's also a host of other ETFs tied to physical gold out there. How should an investor decide what to buy to get exposure to the gold that they want?
Joe Foster: Whether it be physical gold, gold bullion ETFs or gold equities, they all give you exposure to gold. There's a very high correlation between gold equities and gold. They really are proxies for gold itself; that's why you invest in these things.
Gold equities have had a very tough time for several years, up through 2013. When you look at the fundamentals as far as what's the right type of gold investment in this environment, we like equities because a lot of the things that caused the gold stocks to underperform have gone away.
The companies are better run now than they were several years ago. They're hitting their targets, they're meeting expectations and that's allowing the gold stocks to outperform gold.
HAI: Given that they've done better than gold this year, could that be an early sign that perhaps the bottom is in for that sector?
Joe Foster: Yes, I think so. It's not just a reversion to the mean, it's based on fundamentals. The companies have had serious problems with controlling their costs, and now they're bringing their costs under control. They're much better businesses now, so fundamentally they're a more attractive investment today than they were a year or two ago.
HAI: Is silver a metal you cover? Do you see it performing in line with what gold does?
Joe Foster: Yes, we invest in silver stocks too. Within the gold funds, we have a number of silver stocks. I invest in the silver for the same reason as gold. Silver is also a monetary metal and it moves on the same fundamentals as gold.
HAI: Finally, much has been written about the marginal cost of gold production, or the level at which gold mining becomes unprofitable for the industry. Analysts at Goldman recently said they thought that level was $1200. Do you have any thoughts on that?
Joe Foster: $1200 is definitely a critical level. We talked about the technicals, but looking at the fundamentals of the gold price, one of the reasons I think $1200 is a firm base is that that's where these companies have geared their business. And if it were to drop below $1200, we would see a significant increase in the number of mine closures and cutbacks due to low gold prices.
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