Van Eck: The Worst Could be Over for Gold and Gold Stocks

The COVID-19 outbreak has pushed global markets into turmoil, and precious metals like gold have experienced a huge amount of volatility as a result. 

In a webinar on Thursday (March 26), Joe Foster, portfolio manager and strategist at investment management firm Van Eck, addressed what’s been happening to gold and gold stocks.

“Lately the two most common questions I’ve been getting are, ‘Why is gold not acting like a safe haven?'” said Foster. “And secondly, ‘Are the gold companies in financial trouble?'”

“The short answer is gold actually has been acting like a safe haven and will continue to do so in the future, and the gold companies are not in financial trouble. In fact, it’s just the opposite — gold companies are financially very healthy.”

Gold is acting normal…

As mentioned, Foster believes that gold’s price activity during these tumultuous times should come as no surprise to investors. Like many other experts have done, he pointed to the fact that during market crashes investors tend to liquidate gold assets in favor of cash.

“The action we’ve seen in the market during this crash that we’re in the midst of is actually quite normal for gold and gold stocks,” Foster explained.

“You have to remember that in a crash there’s a rush to cash — there are margin calls, people panic, they go to cash. In this market we also have algorithms and low-volatility strategies that are not working now. There’s not as much liquidity in many sectors, so investors … sell what’s deep and liquid, and gold is a deep, liquid market. It will get sold down in a crash and the gold stocks likely get sold off along with gold.”

Foster said the rout taking place in the market is similar to both the 2008 financial crisis and 1929 stock market crash, and noted that Van Eck is using what happened in 2008 to guide its actions right now.

Based on his observations of what happened during that time, Foster believes the worst could be over for gold and gold stocks — but not for the overall market.

“Gold and gold stocks have bounced back pretty nicely over the last couple of days, so it’s very possible that the worst is over for gold and gold stocks and the recovery has begun,” he commented.

“I don’t believe that we’ve started a recovery in the S&P 500 (INDEXSP:.INX) or in the market more broadly, however.”

… And gold stocks are healthy

Moving on to gold stocks, Foster reiterated that for the most part they are weathering the COVID-19 storm. He pointed out that even though an increasing number of companies are having to either temporarily suspend or curtail production, mostly their share prices have not suffered.

“What I will say as far as the stock performance through all of this (is that) by and large investors are looking through these operational suspensions. They’re not that significant yet in the bigger scheme of things, and it hasn’t really affected the performance of many stocks,” Foster noted.

“The ones that have been hit with underperformance have been those that have suspended their guidance for 2020, (which) will ultimately result in some guidance downgrade,” he continued.

He cited Agnico Eagle Mines (TSX:AEM,NYSE:AEM) as an example, saying that as of Wednesday (March 25) about 80 percent of the Canada-focused company’s production was suspended for “at least a couple of weeks,” and its share price took a hit as a result.

Outside of share price performance, Foster said that for the most part gold companies are in strong financial positions.

“I’ve seen reports that if you stress test most of these companies they could actually go 12 months if they had to without any production. Of course, they’d have to recover after that, but it wouldn’t create any significant financial impairment for most of these companies,” he explained.

“We obviously hope they don’t have to shut down for 12 months — that’s a world in which none of us wants to live in — but it just demonstrates the robustness of the financial position of these companies.”

When asked about junior miners, Foster made the distinction between junior producers (smaller-scale producers) and junior developers (exploration companies), but said that overall he’s not seeing significant problems for either category.

“The ones that are actually mining gold are doing fine. Obviously they’re facing the same coronavirus challenges (as other producers in) the industry, but as far their operations go, at a US$1,600 (per ounce) gold price they’re generating cash and they’re just as healthy as any other company,” he said.

On explorers, Foster said that while quite a few have reduced their field activity, they should not be negatively affected far into the future.

“It hasn’t really impacted them financially — the money that they would be spending on their projects has just been postponed temporarily. So in the longer term it’s not really much of an impact.”

3 other takeaways on gold

Aside from those two main topics, Foster also touched briefly on a number of other themes, including:

• Best- and worst-case scenarios — Speaking about the market as a whole, Foster said Van Eck’s best-case scenario is a “short, sharp recession followed by a slow recovery” that would bring the economy back to normal in 2021; the firm’s worst-case scenario is a “hard recession or even a depression.” The former would bring a higher gold price — perhaps over US$2,000 in the next two years — while the latter would take the yellow metal “much, much higher than that.”
• Portfolio allocation — When asked how much of an investor’s portfolio should be dedicated to gold and gold stocks, Foster said that 5 to 10 percent would be reasonable — although some people might want to add more given the current environment.
• Mine nationalization — Another listener asked about the possibility of gold mines being nationalized. In Foster’s opinion that is unlikely, but a gold confiscation scenario like what was seen in the 1930s could occur in Van Eck’s worst-case scenario. Overall though he thinks that probably won’t come to pass as it would require a global effort to pull off.

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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this video.