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Pullback will be opportunity for generalist investors

A pullback in precious metals prices will be an opportunity for generalist investors, who might have been surprised by the recent run up in gold and silver prices, to return to junior mining stocks, Joe Foster, portfolio manager and strategist for gold and precious metals strategy at VanEck, told Mining Journal at the 2019 Precious Metals Summit in Beaver Creek, Colorado.
Pullback will be opportunity for generalist investors Pullback will be opportunity for generalist investors Pullback will be opportunity for generalist investors Pullback will be opportunity for generalist investors Pullback will be opportunity for generalist investors

Joe Foster of VanEck

Paul Harris in Beaver Creek, Colorado

"No one outside the specialist investors in this sector, of which I am one, anticipated this price move in the last three to four months and I think it caught the generalist investors off guard. People are looking at this big run in the gold price and wondering if it is real or a false start. There will be a pull back and that will be the entry point for them. The risk for them is whether the pullback will be at US$1,500/oz or $1,600 or $1,800," he said.

Foster continues to have the same outlook for gold as he has held for several years: that global economic factors will see the gold price rise higher. "The reasons driving the gold price have been around for several years and the market is beginning to see the risks of a weak economy and too much debt. I was saying that early on and I have been positioned for this for a long time," he said.

However, Foster said the share prices of many junior mining stocks had not responded to the move in the previous metals prices and at some point they too would move to reflect the higher values of the underlying commodities they were involved in.

"We have not seen a move in the share prices of the juniors at this conference [2019 Precious Metals Summit] commensurate with the move in the gold market. There is some catch-up for them coming," he said.

While the industry talks about the lack of new discoveries which will challenge the ability of major producers to replace the ounces they are mining, the increase in the gold and silver prices will enable producers to reprice their resource calculations and bring back resources they previously drilled but didn't make the cut during the lower precious metals price environment of recent years. Foster thinks this may start to happen in 2021.

"As soon as the producers are convinced we will have a sustainable higher gold price they will put ounces back on their balance sheet. This gold move began in June and it takes about six months for people to believe it is real. I doubt companies will use a significantly higher price deck for their resource statements at the end of the year but if prices stay north of $1,400/oz through 2020, the next iteration of their resource statements will use higher prices," he said.

Foster cautioned, however, that as an investor in gold stocks, he wanted to see management teams maintain financial discipline and a focus on generating cash flow and increasing margins.

"Those lower grade ounces don't come with the same margins. As investors, we want to see margins preserved or increased throughout the rising price cycle. I am waiting to see how companies react to the higher gold prices. Will there be the same financial and operation discipline we have seen at lower prices? If we see them go back to the bad practices of the last cycle, we will stand up and express our views on that and we hope other shareholders will too," said Foster.