It’s often been said that what’s bad news for the economy is good news for the gold market. This year, with chaos and global shocks in distressing abundance, gold went from meandering between $1,100 and $1,300 an ounce for years to over $2,000 an ounce within a matter of a few months.
“Gold prices respond to systemic financial distress,” says Joe Foster, who manages the VanEck International Investors Gold Fund. “And there’s a lot of that out there now.”
Foster, a former geologist who made the transition to the investment side of precious metals in 1996, sees plenty of steam left in the current rally. “The case for investing in gold has not been this compelling in years,” he observes. “We believe current price trends suggest a long, sustained rally in gold, similar to the 2001-2008 secular rally. A price of over $3,000 over the next couple of years is reasonable in our view.”
Gold tends to do best in times of marked inflation or deflation, both signals of troubling times for the economy. Foster believes the pandemic is likely to depress economic growth and spark deflation in the near term. Without intervention, millions of Americans risk eviction by year’s end. Continued layoffs, high unemployment, the devastating impact on businesses and government budget shortfalls all point to an environment in which deflation thrives.
Other factors, like the weakness of the U.S. dollar, geopolitical uncertainty and continued rising debt levels at corporations add credence to that view. Negative real interest rates, which signal an economy desperately trying to right itself, is a positive for the perceived safe haven of gold.
Foster says the economic fallout from the pandemic is likely to continue at least through next year. “Things could start returning to normal with the wide availability of a vaccine,” he says. “But I think that’s a 2022 story.”
Further out, gold could also prosper once a recovery begins. At that point, inflation might rear up as the massive monetary stimulus being pumped into the economy to deal with the pandemic leads to rising prices. “The Covid-19 war might end with another cycle of unwanted inflation,” he says.
Amid all the tumult, supply and demand dynamics appear to favor the metal moving forward. Gold continues to be a scarce commodity, and the fact that there have been no significant new gold discoveries since 2016 only adds to its supply pressure. Demand for gold, however, has continued to rise as investors seek exposure and central banks add to their gold reserves. The increasing use of exchange-traded products backed by physical stores of gold offers another level of pricing support.
The Case For Gold Miners
Investors can ride the price of gold through several routes, including physical gold bullion, exchange-traded funds that track gold prices, or mutual funds and ETFs that track gold miners. While all are affected by changes in the price of gold, miners are historically more volatile and magnify the movement of gold prices both up and down.
Because the costs of mining are fixed, any price increase typically brings with it a boost to cash flow profits—and stock prices. Conversely, a price drop has a negative effect on all those things. This historical pattern held true in the upcycle for gold in 2020, when the VanEck Vectors Gold Miners ETF (GDX) was up 42% year-to-date as of mid-September. Over the same period, the VanEck Merk Gold Trust (OUNZ), which follows the price of gold, rose 28%.
Foster has more insight than most into the drivers that make for successful gold miners, or dismal failures. He moved to Reno, Nev., in 1982 to obtain a dual degree in business and geology at the state university’s graduate school. Upon graduation he found work at a local mine, just as Nevada was ramping up its mining industry, and stayed there for a decade. Looking for a life change, he answered an ad from VanEck for a gold mining stock analyst in 1996, got the job, and moved to the New York area.
Although he hadn’t invested in a single gold mining stock before becoming an analyst, his engineering knowledge proved to be a strong asset in evaluating companies. “There are three key things from the technical side: the geology of deposits; how to get gold out of the ground; and metallurgy, or how to extract gold from a rock,” he says. “I learned the investment side on the job.”