Van Eck Gold Fund Manager Talks Market Conditions
Joseph Foster, portfolio manager for the Van Eck International Investors Gold Fund, gold strategist for Market Vectors Gold Miners ETF, and investment team member of the Van Eck Global Hard Assets Fund shares his outlook on gold: "I donít think this bull market will end until there is a material change in the way governments manage the fiat monetary system. There is no discipline, the Fed sets the funds rate at artificially low levels, then supplies as much money as the market cares to take. We are witnessing the result..."
RESOURCE INVESTOR: Please put gold's quick breach of the $900 level and rapid rise to $1,000 in some perspective. What can we learn from past history and any possible historical analogues you see?
JOE FOSTER: There was a similar rise in percentage terms in 2006 when gold topped out at $730. This was followed by a period of consolidation, which may also be in the cards in the current market.
RESOURCE INVESTOR: Please provide your perspective on the oil-gold price correlation. How positive has it been? Do you see this correlation continuing as long as oil rises or stays above a certain price?
JOE FOSTER: Fundamentally, there is no reason for gold to correlate with oil. Gold is a financial asset and oil is a source of energy. However, when oil becomes an inflation driver then they will move in tandem as investors hedge against inflation with gold. That is what we are seeing today.
RESOURCE INVESTOR: How much of this rise is due to the dollar's decline? The breakdown in housing credit and subsequent credit crunch?
JOE FOSTER: The gold bull market was primarily a dollar-linked phenomenon through 2006. Now, in addition to dollar weakness, we have layered on the weak economy, financial chaos and inflationary pressures. You couldnít ask for a better scenario for gold.
RESOURCE INVESTOR: Do you expect to see further worsening in broader U.S. economic conditions, recession or stagflation for example? What would this portend for the gold price?
JOE FOSTER: I believe the U.S. is heading into the worst recession in many years and one that could possibly spread throughout the globe. The magnitude of the housing meltdown and the unprecedented failure of the credit markets make it unavoidable. I believe these problems will be supportive of gold for the many years it will take to return the markets to some form of normalcy. Itís an environment in which gold will thrive.
RESOURCE INVESTOR: How and to what degree does the supply-demand balance of bullion factor into the market price and outlook going forward?
JOE FOSTER: Gold has moved to new highs on investment demand. Anecdotal evidence indicates fabrication demand for jewellery has dropped materially. Fabricators would like to see some consolidation before they come back to the market. Markets donít normally go up in a straight line, unless they are in bubble-mode. I donít see this gold market as a bubble, so I imagine there will be buying opportunities later in the year....
RESOURCE INVESTOR: What do you see in the way of a short-term correction in gold, in gold mining company shares? Would you see these as buying opportunities? Why and why not?
JOE FOSTER: The market for gold and gold shares usually sees some weakness as we head into the summer months. Due to the unprecedented and tenuous economic and financial conditions, perhaps this year will be different. In any case, I believe the bull market is far from over and would view a consolidation as a buying opportunity.
RESOURCE INVESTOR: How might investors best distinguish between a short-term sell-off and correction and an actual turning point and reversal in bullish trend?
JOE FOSTER: I donít think this bull market will end until there is a material change in the way governments manage the fiat monetary system. There is no discipline, the Fed sets the funds rate at artificially low levels, then supplies as much money as the market cares to take. We are witnessing the result. The 1970ís bull market did not end until Paul Volker was finally given the authority to take the painful measures necessary to smash inflation. Once the authorities are finished putting out fires, we will see if they attack the root cause of the problems.
RESOURCE INVESTOR: Do you see gold being at an early or mid-stage of some long-term bullish cycle? Why or why not?
JOE FOSTER: Following on my last response, I donít have a lot of faith in our government to take tough measures or effectively manage something as complex as monetary policy. I think we are into an era of elevated financial uncertainty that will be prolonged by the looming funding crisis for Medicare and Social Security. Structurally higher costs for food and energy compound the risks. I donít think weíve reached the mid-point yet.