Lackluster gold should find some of its sparkle in the second half of 2014, according to Joe Foster, fund manager at Van Eck Associates. The prospect of loosened import and tax restrictions in India is one potential catalyst, and stabilization in the exchange-traded funds is another positive. He shares with The Gold Report his perspective on the likely state of merger and acquisition activity in the gold equity space this year, and discusses companies positioned to ride the upswing.
The Gold Report: Gold has been hovering between $1,250 and $1,300/ounce ($1,300/oz). How have supply-and-demand factors shifted since earlier in the year, when things seemed more bullish?
Joe Foster: At the beginning of the year, gold was being driven by risk concerns. Investors started worrying about risk when we saw problems in emerging markets like Thailand, Turkey and, eventually, Ukraine. The Chinese economy seemed to be slowing down.
It was less of a supply-demand story and more one of people looking at gold as a safe haven and a hedge against some of the risks in the world.
TGR: Is the world less risky now than it was three months ago?
JF: I don’t think so, but these things move in phases. Since then, the stock market is hitting new all-time highs, and people have become complacent again. The market is not that worried about risk right now.
TGR: You have talked about the impact of exchange-traded funds (ETFs) on the market. Do you see demand coming back for ETFs any time soon?
JF: I think the ETFs have stabilized. We saw inflows into the bullion ETFs early in 2014. We have seen some outflows the last couple of months. The best we can say is that ETFs have stabilized; the relentless selling pressure of last year is gone.
TGR: Has the rise of ETFs added volatility to the market that wasn’t there five years ago?
JF: I don’t think so. Gold has always been a relatively volatile market. The ETFs have added depth to the market, and they’ve brought people into the market who probably would not have been there otherwise.
TGR: A lot of people are saying that China, while still growing, is growing at a slower pace. Will that change in the near future?
JF: I’m not an expert on China, but I know a little about what drives gold demand in China. We have to look at two things. One is the wealth effect and the growing upper and middle classes in China. That creates demand for gold as an investment and as jewelry.
The second angle is gold as an investment asset. The Chinese don’t have very many places to put their money outside of real estate, stocks and gold. Even in a weak economy, gold is a safe investment.
TGR: If India relaxes its import restrictions, as rumored, what impact could that have on the gold price and, by extension, the mining equities?
JF: If India should relax its gold taxation and its import restrictions, the impact could be big in H2/14. There is a lot of pent-up demand in India. That’s one of the catalysts we’re looking for as we move through H2/14.
TGR: Could that move gold up as much as 5% or 10%? If gold increased that much, how long would it take to move the gold mining stock prices up?