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Joseph M. Foster's Outlook on Gold and Gold Mining Companies January 28, 2011
This is a brief outline of a conference call with Joseph M. Foster, Portfolio Manager for Van Eck International. The topic of the call was "Gold and its impact on Gold Mining Companies". The conference call was facilitated by AIG Global Asset Management Company (India) Pvt. Ltd. on January 20, 2011.
Author : iFAST Research Team


Untitled Document

Key Highlights

  • The sovereign debt crisis, quantitative easing in the US and inflationary pressures in the emerging markets drove investors to gold in the year 2010.
  • In the long term, the supply from gold mines is expected to be stagnant.
  • A bit of correction is expected in gold at present but gold to reach new highs again in the year 2011.
  • The fund is fully invested in gold and silver stocks and will continue to maintain a similar portfolio in the year 2011.

 Drivers of Gold Market in 2010

  •  In the year 2010 it was the sovereign debt crisis in Europe with Greece and Ireland getting bailed out. There was a serious financial problem which was driving investors to gold.
  • The US economy was finding it difficult to get back on track with unemployment at an alarming rate. So Fed continued with its monetary policy of Quantitative Easing, printing money to buy US treasuries. The Fed was trying to monetize the debt, which went against the US dollar and led to inflationary pressures driving people to buy gold as a hedge.
  • The inflationary pressures across the emerging markets like India, China, Russia and Latin America were driving investors to gold. In fact China imported around 200 tons of gold in the year 2010 which was a huge increase over the year 2009. 

Supply Side

  •  Mr. Foster highlighted that supply from gold mines has been stagnant in last few years. Although the year 2010 was a record year for gold production, it was in a limited range so he expects gold mines supply to be stagnant in a longer trend.
  • Another source of supply is gold scrap which is coming in the market with high gold prices in the last several years; however the supply of gold scrap in 2010 was lower as compared to the previous year. So there is a declining trend in gold scrap coming to the market.

 Gold Demand Classification in 2010

  • The fabrication demand which is mainly for jewellery was stronger in the year 2010 than in 2009. Usually jewellery demand weakens when gold prices are high but the overall demand for jewellery in 2010 improved which was a positive for gold.
  • There was continued increase in demand among the central banks; the central banks in Europe were not selling. They seem to have sold as much as they would like to sell and have not been in the market for last couple of years to any significant degree.
  • There was also a growing demand among the central banks of emerging markets like Russia, India, China and many other smaller countries, which have been adding gold to their foreign reserves. This overall growing demand among the central banks was another positive for the gold market.
  • Investment was the biggest driver of gold demand. Issues like the sovereign debt crisis, quantitative easing and the emerging market inflation were feeding into the investment demand. We therefore witnessed a record high demand for coins, bars, Gold ETFs and also speculation in futures market which was reaching new highs.

Outlook for 2011

Mr. Joseph Foster said that many of these drivers which were in place in 2010 appear in 2011 as well. He continues to believe that the sovereign debt crisis is not going away and there seems to be no resolution. Countries like Greece and Ireland need to default on their debts and if they default it will result in a banking crisis. The sovereign debt issue will remain with us unless they reach a permanent resolution, which looks difficult.

The US economy is still in a difficult shape; the housing market in the US is still in depression and it looks difficult for the US economy to get back on track until there is a turnaround in the Housing market. Another issue in the US is the finances among state government and municipalities; they are having a difficult time servicing their pension and healthcare mandate. Many states are essentially bankrupt. They owe more than they take in and this will create more stress on the economy.

In Emerging markets, two countries like India and China are taking steps to curb food inflation but it remains to be seen whether those efforts will turn out to be successful. Crude oil is over $90/ barrel and some grains are at record high prices, so overall there remains immense stress in the financial market coupled with a lot of imbalances in the global economy. He adds that it is a tricky situation where on one hand you have countries like Japan, US and Europe fighting deflationary pressures and emerging market countries on the other hand fighting inflationary pressures. So there is a lot of friction and stress and this will continue to drive industries to gold as an alternative currency and as a safe haven asset.

Mr. Joseph Foster was of the view that, we are in the middle of a bit of correction in the gold market. We have not witnessed a good start to the year 2011, gold is off about $70 from its highs and the gold stocks are down 10% so far this year. We are in the midst of a correction mainly for two reasons.

  1. The profit booking that is taking place owing to the steep rise in prices we witnessed from August 2010 to December 2010.
  2.  The general market in the US has a very healthy outlook for the year 2011. The mood in the US is that quantitative easing will help the economy get back on track.

Mr. Foster did not seem to agree with the outlook but at the same time added that investors have started taking profits out of gold and are investing in other places; so that remains the current source of correction in the gold market. He continues to believe that there are many risks and as we move forward these risks will come to the forefront and drive the investors back to gold market thereby raising the prices again. Once we get through this current consolidation we will see gold reaching new highs again.

Falcon Gold Equity Fund – the feeder fund for AIG World Gold Fund

 The fund is fully invested in gold and silver stocks. The main drivers of the fund’s performance in 2010 were the following:
  • The fund invested 30% of its corpus in junior gold mining stocks throughout 2010.The juniors outperformed last year and currently form 31% of the fund. The fund house believes that in the long term in gold market they will continue to remain fully invested and will have the same allocation to juniors.
  • The other driver was successful Merger and Acquisition strategies. The fund lost 8 of its companies to merger and acquisition activities. Since these companies were acquired at a premium their Merger and Acquisition was a positive for the fund.
  • The fund invested 14% of its corpus in silver stock last year; silver performed well last year and silver stocks too did well. The fund has maintained their portfolio in a similar position in the year 2011.

In this year, as far as the gold companies are concerned Mr. Joseph expects a good performance across the larger producers. These companies like Kinross Gold Corp and New Mart have not been performing given the record high gold prices. However at these gold prices these companies are expected to generate tremendous cash flows. Their bottom line profitability, their return on equity and other investments, etc., should make this industry look very attractive. So he believes that at some point this industry should become very profitable and hopefully that should get reflected in the share prices of these producers.


iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.

 


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