After a lengthy bear market, the prospects for beaten-down gold stocks are starting to look promising. Joe Foster, head of Morningstar’s top ranked equity precious metals fund VanEck International Investors Gold fund, cites geopolitical risk, uncertainty around the Trump presidency, potential inflationary pressure and being in the later stages of the business cycle as factors that could give gold some bullish momentum. In an interview with Barron’s he stated, “In the next year or two, we are going to be faced with an economic downturn and probably a general stock market downturn that will bring out a lot of the warts in the financial system—and that could propel gold much higher.”
End of the Bear Market
Foster, who uses his background as a geologist to take a bottoms-up approach to his analysis, has been managing the VanEck Gold fund for two decades now and has a solid track record of guiding the fund in outperforming its peers for the past five- and 10-year periods. Among some of the fund’s major holdings are B2Gold Corp. (BTG), Newmont Mining Corp. (NEM), Kirkland Lake Gold Ltd. (KL), Continental Gold Ltd. (CNL.XTSE) and Yamana Gold Inc. (AUY).
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Aside from the exceptional gains from Kirkland, the other stocks have performed relatively well over the past year, compared to the S&P 500’s 12.6%, suggesting that perhaps the selling pressure characteristic of the “horrendous bear market from 2011 to 2015” is finally reaching a bottom. Having gone through that bear market, Foster believes that the selling pressure has diminished and that downside risk is now at a minimum. (To read more, see: 3 Charts That Suggest It’s Time to Buy Precious Metals.)
The Bull Case
As the current economic cycle reaches its late stages and with expectations that the equity bull market is coming to an end, gold, which is traditionally viewed as a safe-haven asset in times of economic weakness, should pick up momentum. On top of that, Foster told Barron’s that, “We are seeing elevated levels of geopolitical risk, a lot of uncertainty around the Trump presidency, and more recently there are early worries of inflationary pressures.”
Political uncertainty in Italy has reignited fears over the future of the Eurozone, while the Trump administration’s most recent tariffs on steel and aluminum imports are stirring up global trade worries, and core PCE inflation ticked upward to 1.8% in April, all play into Foster’s bull case for gold.
As for more specific factors driving some of his selections, Foster highlights B2Gold’s solid production growth and strong balance sheet, Kirkland’s strong exploration success, and Newmont’s financial and operational strength. (To read more, see: Return of Volatility Triggers Buying Opportunity in Gold.)
Of course, at least two of Foster’s bullish factors—geopolitical uncertainty and inflationary pressure—could also be interpreted as being negative for gold, or at the very least neutral. The political uncertainty in Italy that weighs on the Euro is good for the dollar, while the higher inflation will give the Federal Reserve even more incentive to hike interest rates and move towards monetary policy normalization, also providing support for the dollar. A strong dollar tends to cause gold to lose its luster.