Foster: Historically Low Gold Stocks Stall M&A Activity In Mining Sector

January 05, 2012

Gold analyst behind Van Eck gold ETFs remains bullish on the commodity and what he sees as undervalued miners.



Gold analyst Joe Foster currently serves as the lead investment team member for several of Van Eck’s gold exchange-traded funds, including the company’s Market Vectors ETF Trust – Gold Miners ETF (GDX) and Junior Gold Miners ETF (GDXJ). Foster has been in the mining and investment businesses for more than 25 years and is frequently quoted in the Wall Street Journal and Barron’s. He’s also a frequent guest on CNBC and Bloomberg TV. Hard Assets Investor Managing Editor Drew Voros spoke recently with Foster on the gold market in general as well as the gold-mining sector.


Hard Assets Investor: Do you think gold will see its 12th-straight year of positive gains in 2012?

Joe Foster: I continue to think that we’re somewhere in the middle of the bull market. We’re nowhere near the end. And having that outlook, I think we’ll trend higher in 2012.

HAI: Do you anticipate that central banks will continue to be net buyers of gold in 2012?

Foster: In 2011, central banks bought almost 500 tons of gold − at least that’s what the estimates are saying − which is a tremendous amount of gold. And central banks are buying gold for the same reason that we are, for the same reason we’re investing in gold-mining stocks. They see a tremendous amount of uncertainty. They see countries that debase their currencies. They see the debt problems we’ve been reading about in the papers. Central banks are looking for something that’s going to hold its value. The motivation for buying gold will continue to be there into the foreseeable future, so we expect another heavy year of central bank buying.

HAI: Why is gold suddenly so tied to the hip of the euro?

Foster: The trading pattern for gold over the past several months has been a little bit unusual compared to what we’ve seen in earlier phases of the cycle.

Despite all the turmoil in Europe, gold has had a high correlation with the euro. It’s not acting as a safe haven as it had earlier in 2011. It’s had a split personality lately. Some days it will trade as a safe haven; some days it will trade as a risk asset. The market can’t quite make up its mind how it wants to trade gold at the moment. I think that’s just sort of a phase that it seems to be going through.

The safe havens recently have been the U.S. dollar and U.S. Treasurys. So when the euro has been weak, gold has been selling off as well.

HAI: What would you suggest gold investors keep an eye on?

Foster: Just stay focused on the longer-term fundamentals, the longer-term macro outlook. You can’t characterize gold as a risk asset, or characterize it as a commodity. It’s a unique investment vehicle. You have to stay focused on the long-term fundamentals, and everything else is just noise. We’re within a positive trend. And what we saw in December, to me, is just noise.

It’s a thin market. It’s an environment in which the short players can have their way. But it’s temporary.



HAI: We saw gold miners paying dividends in 2011, something like more than $2 billion in total. What’s the outlook for dividends in 2012?

Foster: They have the capacity to increase dividends. I think we will see a continued increase in dividend payout amongst the gold producers.

HAI: Will that trend be more likely with bigger miners? Are you seeing junior gold minors also paying dividends in the same fashion?

Foster: It’s more amongst the larger companies. The larger companies have a portfolio of mining operations.

HAI: Let’s talking a little bit about Van Eck’s gold mining ETFs. Why the disparity of performance between majors and juniors? The major miner ETF (GDX) is just a fraction in the red for 2011, whereas the junior gold miner ETF (GDXJ) has fallen more than 20 percent.

Foster: I think it’s a function of the macro environment. It’s a function of what’s going on in the credit market. The producing companies are generating a tremendous amount of cash. They’re self-funding. They’ve got so much cash, they’re increasing their dividends. They’re able to fund all of their exploration and their capital needs internally. So they really don’t need to access the credit markets.

The juniors, on the other hand, these are smaller companies. And a lot of the juniors are development companies. Some aren’t even producing gold yet. They’re completely reliant on the equity and the debt markets for their funding. When the credit market starts to seize up and experience the problems that we see emanating from the eurozone, the companies that get hit the hardest in that environment would be the junior miners.

HAI: There doesn’t seem to have been a lot of consolidation in the mining sector. Do you anticipate some of the junior miners starting to get bought up?

Foster: Gold stocks have done very poorly in 2011. And you generally don’t see much M&A [merger and acquisition] activity unless companies feel good about their share prices. These stocks are trading at historically low valuations. So until management feels better about their share prices … . If they’re going to do an acquisition, they like to do it from a position of strength, when you’re talking about valuations and equity prices. So until we see more strength in gold stocks, I don’t think we’re going to see a lot of M&A activity.

HAI: Will higher gold prices push up those stocks? Or is it just a symptom of the market right now, where equities, in general, seemingly are punished, and that phase has to fade away?

Foster: Well, you won’t get higher gold equity prices without a higher gold price. So that’s the first step in achieving a higher gold price, or establishing a positive trend in the gold market. As the second step, we would have to see more investors moving into these gold stocks. And for that to happen, we need to see these companies meet earnings expectations and show some good operating performance to attract investors back into the sector.

HAI: For an investor who wants to follow gold miners, is there a particular index that you feel is better than another?

Foster: I think the Amex Gold Miners Index (GDM) is the best and the most representative of the producing companies. The Market Vectors Junior Gold Miners Index (GDXJ) would be great for the juniors. The other ones, the XAU (PHLX Gold/Silver Sector Index) and the HUI (AMEX Gold Bugs Index), take a narrow slice of the sector, but they’re not as comprehensive as those other two.

HAI: Is Van Eck contemplating any new gold ETF products?

Foster: We’re looking at other funds, not necessarily ETFs. But we are looking at other forms of gold funds to bring to the market. But it’s too early to give you any details.

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