Etikett: gold stocks

Focusing on Gold’s Resilient Base

Focusing on Gold’s Resilient Base VAnEckFocusing on Gold’s Resilient Base

Gold and Precious Metals – Focusing on Gold’s Resilient Base

Gold Trended Higher Early, But Ended April Slightly Down as Dollar Strengthened

Gold trended higher in early April due to trade tensions between the U.S. and China, prospects of airstrikes on Syria, and heightened inflation expectations following a higher than expected March Producers Price Index (PPI)1 and a 2.1% annual rise in the core Consumer Price Index2. Gold topped at $1,365 per ounce on April 11. This level has been the proverbial price ceiling for gold since 2014. Gold subsequently moved lower as a number of generally positive economic releases enabled the U.S. dollar to trend to its high for the year on May 1. Gold was also pressured by real rates that moved higher with U.S. Treasuries. The yield on the 10-year Treasury surpassed 3% for the first time since 2013. For the month, gold incurred a small loss of $9.65 (0.7%) to finish at $1,315.35 per ounce.

Despite No Surprises in Earnings, Gold Stocks With Small Gains

While there was a lack of positive surprises in first quarter earnings, gold stocks were still able to eke out gains as the NYSE Arca Gold Miners Index (GDMNTR)3 rose 1.7% and the MVIS Global Junior Gold Miners Index (MVGDXJTR)4 advanced 1.8%.

Gold’s Resilient Price Floor Has Been Rising Since 2015; Likely to Be Tested Again

While $1,365 per ounce has been the ceiling for the gold price, the floor has been rising consistently since 2015 in a positive trend of higher lows. The base of this trend is currently around the $1,285 per ounce level. As expectations for a June 12 Fed rate increase mount, gold might test the trend’s base in the coming month. Given the resilience the gold price has shown amid concerns over geopolitical risks, trade tensions, and inflation, we would be surprised to see gold fall below this level. Perhaps gold will take another run at $1,365 in the second half of 2018.

Response to Earnings Highlights Lack of Interest in Gold Stocks

A lack of interest in gold stocks over the past year has caused them to fall short of performance expectations, which we highlighted anecdotally in our March commentary. In an April report, RBC Capital Markets was able to quantify this by looking at performance following earnings beats and misses over the last five years. They found that the sustainability of gains from earnings beats has declined in the last two years. Meanwhile, losses on earnings misses have gotten much worse in the last 1-2 years and the loss is sustained over a longer period. RBC also found that the value traded per day in 2018 is at levels last seen at the end of the bear market in 2015, when gold bottomed at $1,050. This points to a lack of buying interest. Absent are those momentum players that follow the winners who beat and value players that pick up the losers who miss. While this lack of interest sounds negative, we are excited by the opportunity it presents. We believe gold equities are undervalued, and the companies are fundamentally sound. A spark that moves the gold price through its $1,365 ceiling may rekindle interest in the miners.

“Gold is Where You Find It”

According to an old prospector saying, “Gold is where you find it”. Many of the companies we follow have found it in very out-of-the-way places. Not next to a highway in Ohio, but near a glacier in British Columbia, in the Atacama desert at 14,000 feet altitude, or 10,000 feet underground in South Africa. Companies must be skilled at building infrastructure in these remote areas.

Understanding Geopolitical Risk

Gold is also often found in places with geopolitical risk. In order to invest in a company, we must be convinced geopolitical risk can be mitigated, if not eliminated by management. Geopolitical risk comes in various forms at the national, state/provincial, and local levels. The most common risks at the national level are changes in taxes or royalties and import/export restrictions. At the state/provincial level, there are risks of legislation that might make mining prohibitively expensive. At the local level, disgruntled groups may blockade an operation and unions sometimes engage in work stoppages. These risks tend to be higher in emerging or frontier countries; however, developed countries are not immune. For example, the largest open pit gold operation in Ontario, Canada has delayed expansion plans to 2026 due to a lack of support from a local Aboriginal community.

Conversely, places assumed to be politically risky to a generalist may, in reality, be very favorable mining jurisdictions. The West African nation of Burkina Faso is one of the best places to build a mine. The gold industry is growing and exciting discoveries are being found. The permitting process is straightforward and efficient. A mining culture has developed, and materials and supplies are becoming more available. While the general election in 2015 was not without drama, in the end there was a peaceful transfer of power. The gold industry is a significant part of the Burkina economy that no leader wants to disrupt.

Argentina and the Impact of Geopolitics on Gold Projects

One of our more successful investments historically was Andean Resources. In 2007, Andean discovered high-grade veins on the Cerro Negro property in Santa Cruz Province of southern Argentina, a part of Patagonia. By 2010, Andean had delineated a 2.5 million ounce reserve, and the company was sold to Goldcorp, Inc. (2.9% of Fund net assets*) for $3.4 billion. The stock gained 1,800% from our first investment in 2007 to the 2010 acquisition. By 2010 it became obvious that the administration of former president Cristina Elisabet Fernández de Kirchner was driving the Argentinian economy into a ditch. The last geopolitical straw came in 2011, when exchange controls were announced and we began to avoid the country due to its growing hostility towards mining and other business.

We took a renewed interest in Argentina in 2015 with the election of Mauricio Macri. President Macri has invigorated business by unwinding exchange controls, export duties, capital restrictions, and many other impediments left from 12 years of Kirchner rule. This year we returned to Argentina to visit gold properties and assess the geopolitical climate. Cerro Negro is now one of Goldcorp’s core operations, producing 452,000 ounces in 2017 with a reserve of 4.9 million ounces. The Macri Administration eliminated a tax on reserves that had essentially stopped exploration spending. Goldcorp started drilling again, and they were proud to show off the Silica Cap discovery. Silica Cap is a vein system that we estimate could bring over 2 million ounces into the reserve.

Photo courtesy of Joe Foster. Drilling the Silica Cap system. Silica Cap outcrops visible as dark patches on skyline.

Another highlight of the trip was Yamana Gold’s (2.7% of Fund net assets*) Cerro Morro project, also a high-grade vein system that aims to start production in May. Yamana was able to draw on its expertise from similar operations in Chile and Mexico. We expect to see a smooth start-up that ramps to 180,000 ounces of gold and 7 million ounces of silver annually.

Yamana and Goldcorp have assets across the Americas, so their exposure to Argentina is limited. While we were pleased with the progress companies are making, there are still concerns that keep us from investing in a pure play in Argentina. Unions continue to exert extraordinary power. They are involved in many aspects of planning and decision-making at the mine level. Work stoppages are not uncommon, sometimes for reasons unrelated to mining that are beyond the control of management. Provincial rules can differ widely. Across the border in Chubut Province, open pit mining and the use of cyanide is banned, which is effectively a ban on gold mining. Inflation is running at 25%, and it remains to be seen if the central bank can bring it back to acceptable levels. Mary Anastasia O’Grady of the Wall Street Journal leads an April op-ed with: “Are Argentines ready to throw off the yoke of peronista populism, thuggery, and politics by roadblock that has destroyed their nation, and to rebuild the free republic of the 19th century?” If Macri can maintain popularity into the December 2019 elections while continuing reforms and taming inflation, then perhaps Argentina again becomes an investment destination for us.

by Joe Foster, Portfolio Manager and Strategist

With more than 30 years of gold industry experience, Foster began his gold career as a boots on the ground geologist, evaluating mining exploration and development projects. Foster is Portfolio Manager and Strategist for the Gold and Precious Metals strategy.

Please note that the information herein represents the opinion of the author and these opinions may change at any time and from time to time.

IMPORTANT DISCLOSURE

*All company weightings, if mentioned, are as of April 30, 2018, unless otherwise noted

1The Producer Price index (PPI) is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time.

2The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

3NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold.

4MVIS® Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.

Important Disclosures

This commentary originates from VanEck Investments Limited (“VanEck”) and does not constitute an offer to sell or solicitation to buy any security.

VanEck’s opinions stated in this commentary may deviate from opinions presented by other VanEck departments or companies. Information and opinions in this commentary are based on VanEck’s analysis. Any forecasts and projections contained in the commentary appear from the named sources. All opinions in this commentary are, regardless of source, given in good faith, and may only be valid as of the stated date of this commentary and are subject to change without notice in subsequent versions of the commentary. Any projections, market outlooks or estimates in this material are forward-looking statements and are based upon certain assumptions that are solely the opinion of VanEck. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur.

No investment advice

The commentary is intended only to provide general and preliminary information to investors and shall not be construed as the basis for any investment decision. This commentary has been prepared by VanEck as general information for private use of investors to whom the commentary has been distributed, but it is not intended as a personal recommendation of particular financial instruments or strategies and thus it does not provide individually tailored investment advice, and does not take into account the individual investor’s financial situation, existing holdings or liabilities, investment knowledge and experience, investment objective and horizon or risk profile and preferences. The investor must particularly ensure the suitability of an investment as regards his/her financial and fiscal situation and investment objectives. The investor bears the risk of losses in connection with an investment.

Before acting on any information in this publication or report, it is recommendable to consult one’s financial advisor.

Forecasts, estimates, and certain information contained herein are based upon proprietary research and the information contained in this material is not intended to be, nor should it be construed or used as investment, tax or legal advice, any recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security. References to specific securities and their issuers or sectors are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities or gain exposure to such sectors.

Each investor shall make his/her own appraisal of the tax and other financial merits of his/her investment.

Sources

This commentary may be based on or contain information, such as opinions, recommendations, estimates, price targets and valuations which emanate from: VanEck portfolio managers, analysts or representatives, publicly available information, information from other units or Companies of VanEck, or other named sources.

To the extent this commentary is based on or contain information emerging from other sources (“Other Sources”) than VanEck (“External Information”), VanEck has deemed the Other Sources to be reliable but neither the VanEck companies, others associated or affiliated with said companies nor any other person, do guarantee the accuracy, adequacy or completeness of the External Information.

Limitation of liability

VanEck and its associated and affiliated companies assume no liability as regards to any investment, divestment or retention decision taken by the investor on the basis of this commentary. In no event will VanEck or other associated and affiliated companies be liable for direct, indirect or incidental, special or consequential damages resulting from the information in this publication or report.

Risk information

The risk of investing in certain financial instruments, is generally high, as their market value is exposed to a lot of different factors such as the operational and financial conditions of the relevant company, growth prospects, change in interest rates, the economic and political environment, foreign exchange rates, shifts in market sentiments etc. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. Past performance is not a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. When investing in individual shares, the investor may lose all or part of the investments.

Conflicts of interest

VanEck, its affiliates or staff of VanEck companies, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned in this commentary.

To limit possible conflicts of interest and counter the abuse of inside knowledge, the representatives, portfolio managers and analysts of VanEck are subject to internal rules on sound ethical conduct, the management of inside information, handling of unpublished research material, contact with other units of VanEck and personal account dealing. The internal rules have been prepared in accordance with applicable legislation and relevant industry standards. The object of the internal rules is for example to ensure that no analyst will abuse or cause others to abuse confidential information. This commentary has been prepared following the VanEck Conflict of Interest Policy.

Distribution restriction

This commentary is not intended for, and must not be distributed to private customers.

No part of this material may be reproduced in full or in part in any form, or referred to in any other publication without express written permission of VanEck. ©2017, VanEck.

Index Descriptions

All indices named in the commentary are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made.

Gold’s Muted Response Speaks Volumes

Gold’s Muted Response Speaks Volumes

Contributors to the text Gold’s Muted Response Speaks Volumes: Joe Foster, Portfolio Manager and Strategist, and Imaru Casanova, Deputy Portfolio Manager/Senior Analyst for the Gold Strategy

Gold Faced Selling Pressure Early in February Despite Normally Positive Conditions

In an environment that would typically be positive for gold, it appears gold faced selling pressure as investors searched for liquidity to cover margin calls and redemptions. Gold declined in February as increased market volatility and a drop in equity and bond markets failed to support demand for gold as a safe haven1. On February 2, the labor market report in the U.S. showed a strong rebound in average hourly earnings that was well above expectations. The U.S. dollar rallied and gold declined. Equity markets dropped, with the Dow Jones Industrial Average (DJIA)2 down almost 9% by February 8 (ending February down 4%), U.S. Treasury yields rose, and the U.S. dollar, rather than gold, was the beneficiary.

Weaker U.S. Dollar, Heightened Inflation Expectations Helped Gold Reach Month High

On February 14, January’s inflation report beat consensus, with headline inflation measured by the Consumer Price Index (CPI)3 accelerating to 2.1% year-on-year. U.S. Treasury yields continued their rise and the U.S. dollar weakened. Meanwhile, the equity markets and gold bounced back. Gold reached its high for the month of $1,353.70 per ounce on February 15.

Gold Rally Loses Momentum as U.S. Dollar Strengthens on Fed comments

However, the gold rally was short lived, as the markets priced in hawkish expectations ahead of the release of Federal Open Market Committee (FOMC) minutes on February 21. The Fed minutes themselves did not contain much new information, but confirmed the market’s expectations for three rate hikes this year. In addition, the testimony by new Fed chairman Jerome Powell to the House of Representatives’ Committee on Financial Services was viewed as optimistic, stating that he sees gradual rate hikes, and more importantly, an improved U.S. growth outlook. The U.S. Dollar Index (DXY)4 was up 1.7% during the month. Commodities were lower during February, which is also negative for gold. Gold closed at $1,318.38 per ounce on February 28, down 2% or $26.78 per ounce for the month.

Demand for Gold ETPs up YTD Helping Bullion Outperform Gold Stocks

Demand for gold bullion-backed exchange traded products (ETPs) declined in February, with holdings down about 0.3% for the month. This followed a 1.3% increase in holdings in January, resulting in a net 1.1% increase year to date as of February 28. We track the flows into the gold bullion ETPs as we believe investments in those products typically represent longer-term, strategic investment demand for gold and, as such, provide an excellent proxy for the direction of the gold market.

Gold stocks underperformed gold, with the NYSE Arca Gold Miners Index (GDMNTR)5 falling 9.91%, and the MVIS Global Junior Gold Miners Index (MVGDXJTR)6 dropping 6.7% during the month. The junior companies caught up with their larger peers after underperforming in January.

Gold Stocks Impacted by Reaction to Mixed Q4 Reporting, Not Fundamentals

While many gold companies reported positive fourth quarter 2017 operating results, earnings/financial results were mixed and guidance for 2018, in some cases, seems to have surprised the markets. The negative sector headlines put significant selling pressure on the stocks. In many cases, these negative surprises have shorter-term effects, and do not change the companies’ fundamental valuations. However, more recently, it appears that selling pressure might be intensified by headline-driven, algorithm-based trading where the longer-term fundamentals are ignored.

The End of the Low Interest Rates Era and the Multi-Decade Bond Bull Market?

It looks like the post-crisis era of ultra-low, below-market interest rates and the multi-decade bond bull market both came to an end in February. In early February the simultaneous fall in both stocks and bonds caught the markets very off guard. Five- and 10-year U.S. Treasury rates jumped up and out of a downtrend that goes back to 1985. The stock market sell-off was a taste of the unintended consequences of Fed policies that encourage investors to take on more risk, driving markets in one relentless direction for nine years. Funds designed to thrive in a low volatility environment were forced to sell in a reinforcing feedback loop, exposing new systemic risks.

Bitcoin Crash Another Sign that Easy Money May Be Over

Another sign of the end of an era of easy money was the bitcoin crash. From its high of $19,511 in December, bitcoin declined 70% to its $5,922 low on February 5. It has since recovered to around $10,000. Bitcoin has already gone through one crash this year and the value of the emerging technology, while potentially disruptive, is still unproven.

Investor Complacency Remains Despite Volatility, Rising Debt, Rising Rates

Safe haven investments showed little reaction to the stock market selloff. Gold and the dollar essentially trended sideways, while U.S. Treasuries headed lower. So far investors are treating the stock market volatility as an overdue correction, however we see it as the beginning of a secular shift in markets and investor psychology that brings more volatility and risk going forward. Perhaps the prelude to a bear market and economic downturn.

It looks like a higher interest rate regime is taking hold. It is not yet clear whether it is being driven by inflationary expectations, Fed rate increases, increasing fiscal deficits, or a combination of all three. Protectionist trade policies, wage pressures, and a weak dollar may cause core inflation to trend through the Fed’s 2% target, which may bring more aggressive rate policies. Fiscal deficits projected to rise above $1,000,000,000,000 in a couple of years will cause the Treasury to issue huge quantities of debt at the same time the Fed is reducing its $4,000,000,000,000 hoard of U.S. Treasuries, mortgage-backed securities, and agency debt. (FYI…12 zeroes equals a trillion).

A new era of higher interest rates brings added uncertainty. As these rates rise, equity risk premiums get squeezed, making stocks less desirable. According to Gluskin Sheff7, a 50 basis point rise in rates costs the economy $250 billion in debt service annually. We do not know how the new Fed management will respond to volatile markets and potentially weaker economic growth. Unwinding the Fed balance sheet (quantitative tightening) is an unprecedented financial experiment. Is the February volatility an indication of how a system dominated by passively managed funds, algorithms, and automation will behave?

We believe the muted response from gold and other safe haven investments suggests complacency continues to dominate the markets. In fact, the University of Michigan Consumer Sentiment Index’s mid-month reading for February rose unexpectedly to nearly a 13-year high. As the year unfolds, we expect an erosion of complacency and confidence that benefits gold.

IMPORTANT DISCLOSURE

1Safe haven is an investment that is expected to retain its value or even increase its value in times of market turbulence.

2The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

3The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them.

4U.S. Dollar Index (DXY) indicates the general international value of the U.S. dollar. The DXY does this by averaging the exchange rates between the U.S. dollar and six major world currencies: Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish kroner, and Swiss franc.

5NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold.

6MVIS® Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.

7Gluskin Sheff + Associates Inc., a Canadian independent wealth management firm, manages investment portfolios for high net worth investors, including entrepreneurs, professionals, family trusts, private charitable foundations, and estates.

Important Disclosures

This commentary originates from VanEck Investments Limited (“VanEck”) and does not constitute an offer to sell or solicitation to buy any security.

VanEck’s opinions stated in this commentary may deviate from opinions presented by other VanEck departments or companies. Information and opinions in this commentary are based on VanEck’s analysis. Any forecasts and projections contained in the commentary appear from the named sources. All opinions in this commentary are, regardless of source, given in good faith, and may only be valid as of the stated date of this commentary and are subject to change without notice in subsequent versions of the commentary. Any projections, market outlooks or estimates in this material are forward-looking statements and are based upon certain assumptions that are solely the opinion of VanEck. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur.

No investment advice

The commentary is intended only to provide general and preliminary information to investors and shall not be construed as the basis for any investment decision. This commentary has been prepared by VanEck as general information for private use of investors to whom the commentary has been distributed, but it is not intended as a personal recommendation of particular financial instruments or strategies and thus it does not provide individually tailored investment advice, and does not take into account the individual investor’s financial situation, existing holdings or liabilities, investment knowledge and experience, investment objective and horizon or risk profile and preferences. The investor must particularly ensure the suitability of an investment as regards his/her financial and fiscal situation and investment objectives. The investor bears the risk of losses in connection with an investment.

Before acting on any information in this publication or report, it is recommendable to consult one’s financial advisor.

Forecasts, estimates, and certain information contained herein are based upon proprietary research and the information contained in this material is not intended to be, nor should it be construed or used as investment, tax or legal advice, any recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security. References to specific securities and their issuers or sectors are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities or gain exposure to such sectors.

Each investor shall make his/her own appraisal of the tax and other financial merits of his/her investment.

Sources

This commentary may be based on or contain information, such as opinions, recommendations, estimates, price targets and valuations which emanate from: VanEck portfolio managers, analysts or representatives, publicly available information, information from other units or Companies of VanEck, or other named sources.

To the extent this commentary is based on or contain information emerging from other sources (“Other Sources”) than VanEck (“External Information”), VanEck has deemed the Other Sources to be reliable but neither the VanEck companies, others associated or affiliated with said companies nor any other person, do guarantee the accuracy, adequacy or completeness of the External Information.

Limitation of liability

VanEck and its associated and affiliated companies assume no liability as regards to any investment, divestment or retention decision taken by the investor on the basis of this commentary. In no event will VanEck or other associated and affiliated companies be liable for direct, indirect or incidental, special or consequential damages resulting from the information in this publication or report.

Risk information

The risk of investing in certain financial instruments, is generally high, as their market value is exposed to a lot of different factors such as the operational and financial conditions of the relevant company, growth prospects, change in interest rates, the economic and political environment, foreign exchange rates, shifts in market sentiments etc. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. Past performance is not a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. When investing in individual shares, the investor may lose all or part of the investments.

Conflicts of interest

VanEck, its affiliates or staff of VanEck companies, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned in this commentary.

To limit possible conflicts of interest and counter the abuse of inside knowledge, the representatives, portfolio managers and analysts of VanEck are subject to internal rules on sound ethical conduct, the management of inside information, handling of unpublished research material, contact with other units of VanEck and personal account dealing. The internal rules have been prepared in accordance with applicable legislation and relevant industry standards. The object of the internal rules is for example to ensure that no analyst will abuse or cause others to abuse confidential information. This commentary has been prepared following the VanEck Conflict of Interest Policy.

Distribution restriction

This commentary is not intended for, and must not be distributed to private customers.

No part of this material may be reproduced in full or in part in any form, or referred to in any other publication without express written permission of VanEck. ©2017, VanEck.

Index Descriptions

All indices named in the commentary are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made.

Gold Sets a High Bar for Bitcoin

Gold Sets a High Bar for Bitcoin

Gold Sets a High Bar for Bitcoin, a Gold Commentary July by Joe Foster, Portfolio Manager/Strategist

Key Takeaway

  • Gold bullion rallied 2.25% in July despite heavy gold bullion ETP redemptions, while gold stocks moved slightly higher.
  • We see $1,200 as a resilient floor for gold, with prices yet to trend through $1,300. The most obvious catalyst is likely to be U.S. economic weakness, which might persuade the Fed to turn cautious.
  • Investors are eager to understand digital currencies like bitcoin. We evaluate this ”fad” in the context of time-tested gold investing.
    The most significant development that has come out of the digital currency craze is validation of distributed ledger technology.

Gold Bullion Rallies in July

The monthly low for gold came on July 10 at $1,204 per ounce. Gold then rallied to finish July at $1,269.44 per ounce, a gain of $27.89 (2.25%; YTD gold bullion has gained 10.17%). This was the third time this year that gold has successfully tested the $1,200 level. Although the U.S. dollar had a precipitous fall in July, it was not the primary driver for gold. Thus far in 2017 gold has been responding more to changes in real interest rates. Gold has an inverse correlation to real interest rates, which moved higher early in the month (coinciding with gold lows) before trending lower. The change in direction for gold and interest rates was driven by somewhat dovish Congressional testimony by Federal Reserve Chair Janet Yellen, which the market interpreted as an indication that another Fed rate increase this year is less likely.

July Gains Impressive Given ETP Redemptions

July saw heavy redemptions in the gold bullion exchange traded products. Physical demand from Asia is typically low during the summer and there were not any significant moves in futures positioning. Normally this would contribute to price weakness, so July’s modest gains for gold are somewhat impressive. It is possible that July’s gains were driven by buying in the over-the-counter market (OTC), however there is no published data for OTC transactions. We do expect that more transparency for the OTC market will be available soon. The London Bullion Market Association (LBMA) and the London Precious Metals Clearing Limited (LPMCL) recently began releasing aggregate data on gold inventories in London vaults with a three month lag. Vaulting statistics are a first step and are likely to be followed by trade reporting at a later date.

Gold stocks moved slightly higher with the gold price. For July, the NYSE Arca Gold Miners Index (GDMNTR) gained 3.6% while the MVIS Global Junior Gold Miners Index (MVGDXJTR) advanced 0.20%. Gold stocks advanced despite heavy redemptions in gold stock ETFs, a situation that parallels the curious July relationship between the rising gold price and the gold bullion ETP redemptions. Markets don’t always do what is expected of them.

Recent Momentum Suggests that $1,300 is Likely to be Tested

While $1,200 has proven to be a resilient floor for gold, the price has yet to trend through the $1,300 per ounce level. Twice this year gold turned down as it approached $1,300. The recent upward price trend suggests $1,300 may soon be tested for a third time. Gold prices typically trend higher in the fall as seasonal physical demand improves. In terms of identifying catalysts that might enable gold to break through $1,300, the most obvious candidate is economic weakness that might persuade the Fed to take a more cautious stance. The Fed is expected to announce plans in September to reduce its massive crisis-era balance sheet and there could also be significant risks surrounding these plans.

Gold is Physical, Bitcoin is Digital

Recently, we have received many questions about digital currencies and in particular, bitcoin (defined as the world’s first decentralized digital currency). The queries range from our general opinion to concerns that bitcoin might displace gold demand. While we have no digital currency experts on our gold team, we follow the development of these new currencies with interest. It is clear that those who promote bitcoin are using gold’s image to help validate their product. Press articles are often accompanied by a picture of stacks of shiny gold colored bitcoins. Bitcoins are created by “miners”. This is aimed at creating the illusion of a solid currency. In reality, digital currencies are strings of 0s and 1s stored in a computer in some unknown location and cannot be touched or seen.

There are, however, several important similarities between gold and bitcoin. Both are outside of the mainstream financial establishment. Both are not issued or controlled by governments, and both are traded around the globe across borders. Supply of both gold and bitcoin is limited, so they are sound forms of currency. For most transactions to be used in an economy, they must be converted into paper currency.

Gold versus Bitcoin

However, there are a range of significant differences:

  • Gold has been established as a store of wealth throughout human history. Gold’s market capitalization is roughly $8 trillion, of which $3 trillion is in coin and bar form. Approximately $50 billion worth of gold trades each day. Bitcoin is microscopic in comparison with a market capitalization of approximately $45 billion and $1.5 billion in daily trading volume.
  • Gold can be stored anywhere. If stored at home, it can be used for barter the next time a hacker or solar flare takes down the grid. Digital currencies are worthless without electricity. Taking delivery will always be impossible with digital currency.
  • Bitcoin mining is a difficult concept to fathom. Bitcoin miners use computer programs to solve complex math problems and receive in exchange new bitcoins. What does this activity have to do with creating a store of wealth?
  • Most bitcoin markets are lightly regulated and are located outside of the U.S. A major potential drawback to digital currency is their use for money laundering, illegal trading, computer ransom attacks, tax avoidance, and to subvert exchange controls. Expect governments to intervene heavily if any of these activities become significant. Over the past year the People’s Bank of China (PBOC) forced the three biggest bitcoin exchanges to adhere to anti-money laundering rules, implement trading fees, and then forced them to halt bitcoin withdrawals.
  • Distributed ledgers are promoted as unhackable. However, police were recently able to find the digital keys to an online criminal’s accounts and seize approximately $8 million in digital currencies.
  • Digital currency has yet to stand the test of time. We do not know if a digital currency that is secure today will be secure under new technology. Distributed ledger passwords could be relatively easily broken if quantum computing becomes a reality.

Distributed Ledger Technology is Game Changing

The most significant development that has come out of the digital currency craze is validation of distributed ledger technology. This technology has the potential to revolutionize many aspects of the financial system, trade, and essentially anything where records are maintained. A secure system that eliminates middle men has obvious advantages. Imagine trading stocks without brokers, transfer agents, and custodians ― a scenario where fees are likely to disappear.

Source: Capco.com.
Equally as significant, digital currencies have caused many to question what exactly a currency should be and whether there is a better alternative to fiat currency. The monetary system is broken. Central banks seem powerless to prevent the economy from going through busts that destroy wealth and create hardship. Currency volatility under the fiat system has been extreme. Politics, corruption, and mismanagement are a constant concern.

Technology Likely to Improve Gold Ownership Efficiency

Combining distributed ledger technology with an established sound and solid currency may provide the best alternative. To this end, later in 2017 the Royal Mint in the U.K. is set to launch Royal Mint Gold (RMG). RMG will be a digital record of ownership for gold stored at its vault, while CME Group will operate the product’s distributed ledger platform. It will carry the option to convert to physical gold. It is not clear whether this product will enable consumer purchases with some type of RMG credit card. Regardless, technology is accelerating towards the day when gold can be used both as a store of wealth and an efficient medium of exchange.

Digital Currencies Are Not Likely to Replicate Gold’s Unique Role

Bitcoin and other digital currencies are a fad that has attracted the attention of programmers, speculators, and early adaptors. Given the fundamental characteristics of gold and digital currencies, we do not believe digital currencies will ever replicate or replace gold’s unique role as a form of portfolio insurance and as a hedge against tail risk. It is my opinion that governments will not allow digital currencies to reach the critical mass needed to challenge the utility of fiat currencies. At best, digital currencies may eventually occupy some middle ground as a niche product. At worst, they become a failed experiment that ends in tears. For now, the only thing we can forecast with confidence in the digital currency space is more volatility.

by Joe Foster, Portfolio Manager and Strategist

With more than 30 years of gold industry experience, Foster began his gold career as a boots on the ground geologist, evaluating mining exploration and development projects. Foster is Portfolio Manager and Strategist for the Gold and Precious Metals strategy.

Please note that the information herein represents the opinion of the author and these opinions may change at any time and from time to time.

Important Information

1 U.S. Dollar Index (DXY) indicates the general international value of the U.S. dollar. The DXY does this by averaging the exchange rates between the U.S. dollar and six major world currencies: Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish kroner, and Swiss franc.

2 The correlation coefficient is a measure that determines the degree to which two variables’ movements are associated and will vary from -1.0 to 1.0. -1.0 indicates perfect negative correlation, and 1.0 indicates perfect positive correlation.

3 NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold.

4 MVIS Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.

5 Black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict.

6 VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options.

Important Disclosures

This commentary originates from VanEck Investments Limited (“VanEck”) and does not constitute an offer to sell or solicitation to buy any security.

VanEck’s opinions stated in this commentary may deviate from opinions presented by other VanEck departments or companies. Information and opinions in this commentary are based on VanEck’s analysis. Any forecasts and projections contained in the commentary appear from the named sources. All opinions in this commentary are, regardless of source, given in good faith, and may only be valid as of the stated date of this commentary and are subject to change without notice in subsequent versions of the commentary. Any projections, market outlooks or estimates in this material are forward-looking statements and are based upon certain assumptions that are solely the opinion of VanEck. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur.

No investment advice

The commentary is intended only to provide general and preliminary information to investors and shall not be construed as the basis for any investment decision. This commentary has been prepared by VanEck as general information for private use of investors to whom the commentary has been distributed, but it is not intended as a personal recommendation of particular financial instruments or strategies and thus it does not provide individually tailored investment advice, and does not take into account the individual investor’s financial situation, existing holdings or liabilities, investment knowledge and experience, investment objective and horizon or risk profile and preferences. The investor must particularly ensure the suitability of an investment as regards his/her financial and fiscal situation and investment objectives. The investor bears the risk of losses in connection with an investment.

Before acting on any information in this publication or report, it is recommendable to consult one’s financial advisor.

Forecasts, estimates, and certain information contained herein are based upon proprietary research and the information contained in this material is not intended to be, nor should it be construed or used as investment, tax or legal advice, any recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security. References to specific securities and their issuers or sectors are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities or gain exposure to such sectors.

Each investor shall make his/her own appraisal of the tax and other financial merits of his/her investment.

Sources

This commentary may be based on or contain information, such as opinions, recommendations, estimates, price targets and valuations which emanate from: VanEck portfolio managers, analysts or representatives, publicly available information, information from other units or Companies of VanEck, or other named sources.
To the extent this commentary is based on or contain information emerging from other sources (“Other Sources”) than VanEck (“External Information”), VanEck has deemed the Other Sources to be reliable but neither the VanEck companies, others associated or affiliated with said companies nor any other person, do guarantee the accuracy, adequacy or completeness of the External Information.

Limitation of liability

VanEck and its associated and affiliated companies assume no liability as regards to any investment, divestment or retention decision taken by the investor on the basis of this commentary. In no event will VanEck or other associated and affiliated companies be liable for direct, indirect or incidental, special or consequential damages resulting from the information in this publication or report.

Risk information

The risk of investing in certain financial instruments, is generally high, as their market value is exposed to a lot of different factors such as the operational and financial conditions of the relevant company, growth prospects, change in interest rates, the economic and political environment, foreign exchange rates, shifts in market sentiments etc. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. Past performance is not a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. When investing in individual shares, the investor may lose all or part of the investments.

Gold’s Resilience Strengthens in February

Gold’s Resilience Strengthens in February

Gold’s Resilience Strengthens in February. Gold moved through the $1,200 level and showed resilience in February as a number of normally bearish factors failed to weaken prices. Federal Reserve Chair Janet Yellen’s mid-February testimony to Congress indicated tighter monetary policies, and subsequent comments from regional Fed presidents reinforced Yellen’s hawkish views. This lifted the market odds for a March Fed rate increase and in response the U.S. dollar strengthened considerably, with the U.S. Dollar Index (DXY)1 up 1.9% for the month. The weakness in Chinese and Indian demand for physical gold seen in 2016 continued into the new year, and January Swiss trade statistics showed that exports to both China and India are below last year’s levels. In addition, markets in China were closed at the start of the month for the week-long lunar New Year holiday. At the same time, U.S. equities had a strong month with the Dow Jones Industrials Average (DJIA)2 setting a record of twelve straight days of new all-time highs above 20,000 beginning on February 9. While none of these events would typically be supportive of gold, bullion nonetheless gained $37.68 (3.1%) for the month. In fact, through the end of February, gold is up 8.3% and has outperformed the DJIA by 2.5% in the first two months of 2017.

We attribute the recent resilience of gold to three factors: 1) a new era of geopolitical uncertainty since Brexit; 2) February saw the first significant net inflows to bullion exchange traded products since the November U.S. presidential election; and 3) upticks in inflation have caused a decline in real rates. The February releases of both the U.S. Consumer Price Index (CPI)3 and the Producer Price Index (PPI)4 surprised analysts with their largest monthly jumps in several years. Annual core CPI inflation is now at 2.3%, putting it at the upper bounds of where it has been trending since the 2008-2009 financial crisis.

Lackluster Yearend Reporting Highlighted by Downgrades and Increased Spending

In contrast to bullion, gold stocks lagged in February, as the NYSE Arca Gold Miners Index (GDMNTR)5 fell 3.9% and the MVIS™ Junior Gold Miners Index (MVGDXJTR)6 declined 2.2%; however, January’s results have helped to keep the YTD returns strong at 9.2% and 15.3%, respectively. Most gold producers have reported yearend results and given guidance for 2017, but the reporting has been lackluster. Although most producers have met expectations, there have been a few negative surprises that have weighed on their stocks. Additionally, a couple of miners downgraded the quality of their reserves or lowered production forecasts, and a couple of others raised equity. Given higher gold prices, spending is on the upswing. BofA Merrill Lynch expects that North American senior and mid-tier companies will increase total exploration spending by 51% and new project capital by 32% in 2017. While this will reduce cash flow this year, it should pay off with discoveries and developments further down the road.

Gold Stocks Price Movement Not Fundamentally Driven

While these announcements cast a negative tone over the fourth quarter earnings season, they do not explain the significant underperformance of gold stocks relative to bullion. The weakness in gold stocks was exaggerated by the unusual trading on the afternoon of February 27. Gold trended lower beginning around noon that day as Robert Kaplan, President of the Dallas Federal Reserve, made comments supportive of a rate increase, which stimulated U.S. dollar strength. Gold ended the day with a $4.38 (0.3%) loss, reflecting a normal fundamental reaction to the news. In the same afternoon gold stocks reacted as if gold had taken a $30 beating. Trading volumes hit a historic daily high. The unusual trading and lack of fundamental drivers suggest that technically driven funds received sell signals that induced further stop loss selling. What prompted such sell signals is a mystery, but it has resulted in making stock valuations that were already attractive, dirt cheap. Miners will try to turn that dirt into gold.

Gold Looking for a Price Catalyst in 2017 (and It’s Not Likely to be Inflation)

Thus far in 2017, gold has lacked a catalyst that would move the price strongly higher. We believe such a catalyst is likely, but the source and timing are impossible to predict. In the coming months or years, it is our opinion, that a geopolitical, economic, or financial event that motivates investors to seek safe haven7 investments is likely. Given the easy monetary policies globally, recent expectations for growth, and the potential for trade protectionism, we understand those who see inflation as the next gold catalyst. Gold has always reacted strongly to inflation that is out of control. However, while we could be wrong on this, we do not believe that inflation will trend much higher. Much of the increase in inflation over the past twelve months can be attributed to the resurgence in commodities prices from very oversold levels. In our view, the commodities rebound is not likely to further drive inflation in the near term. The popular reflation theme relies on growth and government spending that may not be as strong as expected, as President Trump may face challenges passing his agenda through Congress. Lastly, the Fed seems poised to tighten policies for an extended period, which works against inflation. Until inflation or some other catalyst emerges, we believe that the gold price will follow the usual ups and downs this year but in general terms, will be well supported in 2017.

Substantial Cost Reduction Across Industry Stabilizing

We have just returned from the BMO Capital Markets 26th Annual Global Metals & Mining Conference held in Hollywood, FL, an annual gathering of metals and mining executives, including many gold producers and developers. It is becoming increasingly clear from the yearend reporting results across these mining companies that the substantial decline in mining costs of the past few years is beginning to reach its limits. While we see no mining cost inflation on the horizon, some companies are seeing costs level out. On average, all-in sustaining costs (AISC) for gold companies are now around the $900 per ounce level. Some companies, particularly among the majors, continue to guide for lower costs, which should enable the average to decline further in the next couple of years.

New Crop of Gold Companies Key to Future Growth

In basic terms, one of the most direct ways to create value for shareholders in the gold sector is to discover a piece of real estate in some remote part of the world that can be turned into a gold mine. There is a new crop of emerging producers that attracted significant attention at the BMO Conference. These are development companies that were able to advance projects through a very difficult bear market and are now favorably positioned producers in an improving market. What is remarkable is that each of these companies started production on time and on budget. There have been no indications of significant problems with these startups because they have been staffed with excellent talent and have been able to access high quality engineering and construction teams. Going forward, these companies are now focused on optimization, expansion, and exploration to help grow their businesses.

There are two routes a development company can take: 1) be acquired by a producer, or 2) build a mine. For shareholders, either outcome is attractive provided the mine is successful. Historically most large producers have grown through acquisitions, however acquisitions can be costly because they usually come at a premium. Thus far in this cycle, producers are using a different approach by taking equity stakes in early stage, pre-resource companies that they believe will develop winning properties. Meantime, emerging producers could become the mid-tiers and majors of tomorrow. As we expect production among the majors to stagnate or decline in coming years, these new emerging companies are helping to revitalize the sector. If the major’s current growth strategy does not pay off, these young companies could become the acquisition targets of the future.

by Joe Foster, Portfolio Manager and Strategist

With more than 30 years of gold industry experience, Foster began his gold career as a boots on the ground geologist, evaluating mining exploration and development projects. Foster is Portfolio Manager and Strategist for the Gold and Precious Metals strategy..

Please note that the information herein represents the opinion of the author and these opinions may change at any time and from time to time.

1NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold. 2MVIS Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver. 3Safe haven is an investment that is expected to retain its value or even increase its value in times of market turbulence. 4Tail risk is a form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution.

Important Disclosures

This commentary originates from VanEck Associates Corporation (“VanEck”) and does not constitute an offer to sell or solicitation to buy any security.

VanEck’s opinions stated in this commentary may deviate from opinions presented by other VanEck departments or companies. Information and opinions in this commentary are based on VanEck’s analysis. Any forecasts and projections contained in the commentary appear from the named sources. All opinions in this commentary are, regardless of source, given in good faith, and may only be valid as of the stated date of this commentary and are subject to change without notice in subsequent versions of the commentary. Any projections, market outlooks or estimates in this material are forward-looking statements and are based upon certain assumptions that are solely the opinion of VanEck. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur.

No investment advice

The commentary is intended only to provide general and preliminary information to investors and shall not be construed as the basis for any investment decision. This commentary has been prepared by VanEck as general information for use of investors to whom the commentary has been distributed, but it is not intended as a personal recommendation of particular financial instruments or strategies and thus it does not provide individually tailored investment advice, and does not take into account the individual investor’s financial situation, existing holdings or liabilities, investment knowledge and experience, investment objective and horizon or risk profile and preferences. The investor must particularly ensure the suitability of an investment as regards his/her financial and tax situation and investment objectives. The investor bears the risk of losses in connection with an investment. Before acting on any information in this publication or report, it is recommendable to consult one’s financial advisor. Forecasts, estimates, and certain information contained herein are based upon proprietary research and the information contained in this material is not intended to be, nor should it be construed or used as investment, tax or legal advice, any recommendation, or an offer to sell, or a solicitation of any offer to buy, an interest in any security. References to specific securities and their issuers or sectors are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities or gain exposure to such sectors. Each investor shall make his/her own appraisal of the tax and other financial merits of his/her investment.

Sources

This commentary may be based on or contain information, such as opinions, recommendations, estimates, price targets and valuations which emanate from: VanEck portfolio managers, analysts or representatives, publicly available information, information from other units or Companies of VanEck, or other named sources. To the extent this commentary is based on or contain information emerging from other sources (“Other Sources”) than VanEck (“External Information”), VanEck has deemed the Other Sources to be reliable but neither the VanEck companies, others associated or affiliated with said companies nor any other person, do guarantee the accuracy, adequacy or completeness of the External Information.

Limitation of liability

VanEck and its associated and affiliated companies assume no liability as regards to any investment, divestment or retention decision taken by the investor on the basis of this commentary. In no event will VanEck or other associated and affiliated companies be liable for direct, indirect or incidental, special or consequential damages resulting from the information in this publication or report.

Risk information

The risk of investing in certain financial instruments, is generally high, as their market value is exposed to a lot of different factors such as the operational and financial conditions of the relevant company, growth prospects, change in interest rates, the economic and political environment, foreign exchange rates, shifts in market sentiments etc. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. Past performance is not a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. When investing in individual shares, the investor may lose all or part of the investments.

Conflicts of interest

VanEck, its affiliates or staff of VanEck companies, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned in this commentary. To limit possible conflicts of interest and counter the abuse of inside knowledge, the representatives, portfolio managers and analysts of VanEck are subject to internal rules on sound ethical conduct, the management of inside information, handling of unpublished research material, contact with other units of VanEck and personal account dealing. The internal rules have been prepared in accordance with applicable legislation and relevant industry standards. The object of the internal rules is for example to ensure that no analyst will abuse or cause others to abuse confidential information. This commentary has been prepared following the VanEck Conflict of Interest Policy.

Distribution restriction

This commentary is not intended for, and must not be distributed to private customers. No part of this material may be reproduced in full or in part in any form, or referred to in any other publication without express written permission of VanEck. ©2017, VanEck.

Index Descriptions

All indices named in the commentary are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made.

Gold Bull Market Loses Some Shine, But Remains Healthy

Gold Bull Market Loses Some Shine, But Remains Healthy

Market Review – Gold Bull Market Loses Some Shine, But Remains HealthyGold Consolidates Amid Late Summer Doldrums

Gold Market Commentary September 2016

Market Review

Gold was range-bound in September, moving in the $1,300 to $1,350 per ounce range. Economic news from the U.S. was generally weak and central bank announcements were supportive of gold. The Federal Reserve (the “Fed”) kept rates on hold and downgraded its median GDP growth projection for 2016 to 1.8% from 2.0%. The Bank of Japan (BOJ) acknowledged that negative rates and quantitative easing are not working as well as planned, so it decided to experiment further with unconventional monetary policies. The BOJ is now targeting the yield curve and attempting to keep 10-year Japanese Government Bonds (JGBs) sufficiently above shorter term negative-yielding maturities. This initiative is aimed at aiding banks, pension funds, and insurance companies who are having difficulty making ends meet in this low/ negative rate environment the BOJ and other central banks have engineered. We believe that these ongoing attempts to manipulate markets will lead to unintended consequences that raise systemic risk.

Gold bullion ended the month at $1,315.75 per ounce for a 0.5% gain while gold stocks experienced more positive returns. The NYSE Arca Gold Miners Index (GDMNTR)1 posted a 3.8% gain while the MVIS™ Junior Gold Miners Index (MVGDXJTR)2 advanced 5.8%.

Market Outlook

Gold had been consolidating in a narrow $1,300 to $1,350 per ounce range since hitting its post-Brexit highs in July. As we write in early October, markets are again pricing in a higher likelihood of a Fed rate increase in December based on comments made by Fed members following its September meeting. This, in turn, is lending strength to the U.S. dollar.

As a result, gold has fallen below $1,300 per ounce and broken below the longer term trend line that had been established this year. This leads us to be less aggressive in our gold price expectations for 2016. It looks like the current consolidation could persist through October, dependent on any economic news that develops. However, this price action changes virtually nothing in our positive long-term outlook for gold. Price weakness is likely to spur seasonal demand out of India and Asia. We continue to believe that a Fed rate increase would ultimately be seen as another misstep that puts global growth at risk. In addition, the U.S. presidential election, implementation of Brexit, and further loss of confidence in central bank policies should support gold through 2017 and beyond.

Each year in mid-September, top managements of gold companies converge on Colorado for the Precious Metals Summit and the Denver Gold Forum. Based on our 41 meetings, eight presentations, and numerous dinners, gatherings, and interactions with industry contacts, we came away with a more refined outlook for the gold mining sector. Here are some important takeaways:

1) Costs savings continue, margins expanding – We questioned whether the cost cycle had run its course after all-in sustaining (mining) costs fell from roughly $1,200/oz in 2012 to $900/oz in 2016. We were surprised to hear companies anticipate continued savings in mining practices, technology implementation, procurement (the act of finding, acquiring, buying goods, services or works from an external source) and contractor costs. We now believe industry costs can trend towards $800/oz through 2018.

2) Companies focused on organic opportunities – Low gold prices forced companies to look inward at existing operations and projects. Success with brownfields exploration (modification or upgrades based on a prior project) have led to expansions or extended mine lives. Revised planning has enabled development projects to require less capital with higher rates of return and phased expansions.

3) Heavy M&A cycle not likely until late 2017/2018 – With more organic opportunities, there is not as much pressure to make acquisitions in the near-term. That said, corporate development teams were quite active, suggesting some companies are preparing to pull the acquisition trigger at some point to replace future production declines.

4) Dividend increases to be limited in 2017 – We had hoped to hear of strong dividend growth in 2017, however, we now believe any increases will be limited due to capital allocations to existing property developments and in some cases to further help pay down debt.

5) Ongoing industry themes – An emphasis on free cash flow over production growth, flat management structure, mine management focused on Net Asset Value (NAV) growth, use of double digit hurdle rates at conservative gold prices on new projects, partnering with juniors for exposure to greenfields (a property or project where no previous work has been conducted).

One of the dominant financial trends of the past decade is a move by investors out of actively managed funds and into passively managed index funds or exchange traded funds (ETFs). The latest example is the Illinois State Pension Board, which according to The Wall Street Journal, decided to jettison active mutual fund managers altogether, leaving only passively managed choices for its state workers. The reasons cited for the move into ETFs included lower fees and potentially better performance as many active managers fail to outperform their passive peers. We have witnessed this recent preference for ETFs here at VanEck.

Although gold has experienced some consolidation recently, we still maintain our positive outlook for gold and believe that investors would be wise to consider their exposure to gold stocks, either passively or actively, as these equities typically outperform gold bullion in a rising market and underperform when gold falls.

by Joe Foster, Portfolio Manager and Strategist

With more than 30 years of gold industry experience, Foster began his gold career as a boots on the ground geologist, evaluating mining exploration and development projects. Foster is Portfolio Manager and Strategist for the Gold and Precious Metals strategy.

1In the U.S., the federal funds rate is “the interest rate” at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. 2The correlation coefficient is a measure that determines the degree to which two variables’ movements are associated and will vary from -1.0 to 1.0. -1.0 indicates perfect negative correlation, and 1.0 indicates perfect positive correlation. 3U.S. Dollar Index (DXY) indicates the general international value of the U.S. dollar. The DXY does this by averaging the exchange rates between the U.S. dollar and six major world currencies: Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish kroner, and Swiss franc. 4The ISM Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. 5A survey of consumer confidence conducted by the University of Michigan. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy. 6The U.S. consumer confidence index (CCI) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending. 7NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold. 8MVIS Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small-and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.

Please note that the information herein represents the opinion of the author and these opinions may change at any time and from time to time.

Important Information For Foreign Investors

This document does not constitute an offering or invitation to invest or acquire financial instruments. The use of this material is for general information purposes.

Please note that Van Eck Securities Corporation offers actively managed and passively managed investment products that invest in the asset class(es) included in this material. Gold investments can be significantly affected by international economic, monetary and political developments. Gold equities may decline in value due to developments specific to the gold industry, and are subject to interest rate risk and market risk. Investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, including the takeover of property without adequate compensation or imposition of prohibitive taxation.