ROLAND MORRIS: Welcome. I’m Roland Morris, the Commodity Strategist for VanEck. I’m joined today by Joe Foster, the portfolio manager of our active gold miners’ fund. We’re going to discuss gold and gold miners today. Joe, welcome and thank you for joining us.
Gold really last declined sharply in 2012 and ‘13, and really ever since then, almost five years now, we’ve been in a trading range, which is really from $1,100 to $1,400 per ounce, but mostly between $1,200 and $1,400. What do you think of the current situation in the gold market, as far as the outlook for the commodity, where we’ve been and where we might be headed?
JOE FOSTER: You’re right. We’ve formed, I guess, a massive base in the gold sector. Maybe in the history of markets. I don’t know if we’ve seen such a base-build for the last five years. You know, gold and gold stocks went through a bear market that started in 2011, and it ended in 2015. A lot of selling occurred in that bear market. And because of that, I don’t think there’s a lot of selling pressure on the metal as a result of that. All the weak hands have been cleared from the market.
As a result, there hasn’t been a lot of downside pressure on gold. So, it has resulted in this long base. At the same time, we haven’t had a strong catalyst on the upside. Gold responds to financial risk, especially, geopolitical risk, and other types of risk that affect the global financial system. We haven’t had a strong catalyst to get gold out of that range over the last several years.
How 2018 turned out for global markets
Before we dive into gold’s performance this year, let’s look at the performance of global markets. After having a blockbuster year in 2017, global markets started 2018 on a rough note with markets crashing on the back of inflation fears. However, markets bounced back and had a fruitful year overall.
Global markets earned double-digit returns in 2017. However, in 2018, the pace of returns fell. The chart below shows the YTD performance of global markets.
While the US stock market (SPY) managed to show a slightly positive performance with 0.3% returns YTD, the MSCI Europe Index and the Asia-Pacific Index are down 13.4% and 14.6% YTD, respectively. Emerging markets have also shown a downward trend with a loss of 15.4% YTD.
Has gold lost its shine?
Gold has always been considered a safe-haven asset. It tends to be unaffected during a market crisis, as it has a low-to-negative correlation with other asset classes. The dollar strengthens when the US stock markets surge, and vice versa. And as the dollar strengthens, gold prices fall because the metal becomes more expensive in other currencies.
The chart below shows the movement of gold prices versus the US dollar index. Between December 30, 2016, and November 27, 2018, gold prices and the dollar have had a negative correlation of 0.80, which implies that both move in different directions. While the dollar index is down 2.0% YTD, gold prices as measured by the SPDR Gold Shares (GLD) are up 5.0% YTD as of November 27, 2018.
However, it’s not just the dollar’s performance that affected gold prices this year. There are various other factors that also drive gold and gold miners’ returns, which we’ll discuss later in the series.
Let’s move on to discuss what geopolitical events could help gold get its shine back in the coming year.