This is an archived article that was published on sltrib.com in 2016, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.
After years of losses, funds focused on gold and gold miners are up sharply this year as investors snapped gold for protection from a turbulent stock market.
Gold-focused funds were among the best-performing mutual funds in the first quarter. The precious metal is up nearly 17 percent this year and 2.4 percent over the past 12 months.
But now that the broader market has bounced back from its rough going earlier this year, what are the prospects for further gains in gold miner funds?
Van Eck International portfolio manager Joe Foster believes that the five-year bear market for gold is over, despite a recent pullback.
He manages the International Investors Gold Fund (INIVX), which is comprised of gold-mining companies and is up 37.3 percent this year, as of Wednesday, and up 2.1 percent from a year ago.
Foster makes the case that gold mining companies make a better bet for investors looking to ride the rebound in gold, especially if gold prices remain above $1,200 an ounce.
Foster spoke with the AP about where gold and gold miner stocks are headed. Answers have been edited for length and clarity:
Q: Should investors anticipate more gains for gold after the big first quarter? Does this rebound have legs?
A: I can say with pretty high conviction that the bear market that has been going on for five years is over. All of the changes in dynamic and market psychology we're seeing this year are a big shift that's supportive of gold.
Right now gold has pulled back a bit. It's been a strong year, now we're getting the inevitable correction and that's going to tell us how robust this market is.
If prices can hold up above $1,200 in this correction, that would be a very bullish sign to me. That's what I'm watching right now. How deep is this pullback going to be before we resume an uptrend.
If gold continues to rise higher, I would expect that good performance to continue as more generalists and hedge funds and others come into the sector.
Q: Why invest in a gold mining fund versus gold itself?
A: Gold companies are really leverage proxies for gold. They tend to outperform gold on the upside and underperform on the downside. We've seen a major turnaround in the market this year, and if you believe it's going to continue, you're much better off in gold stocks with that leverage than you are in physical gold.
The mining companies, like all companies, aim to create value. So, if they're successful, then you don't just get exposure to gold, you get exposure to the additional value that the company is creating by finding and developing mines.
You get operating leverage to the gold price, where say, a 10 percent rise in the gold price might translate to a 50 percent rise in a company's cash flow, so you get that kind of leverage.
Q: Gold prices tend to rise when investors look for alternatives to stocks during a volatile market. Does that mean a less volatile market is bad news for gold mining companies and the funds invested in them?
A: Every period is different. The general stock market has been weak this year and gold has been up, but the correlation between the general market and gold is about zero. Sometimes they correlate and sometimes they don't.
From 2009 to 2011, the stock market was up and so was gold, both making new highs.
Elevated levels of financial risk drive the gold market. And so, right now a volatile, down stock market has something to do with it, but even more so the market is spooked by central banks going to negative interest rates in Europe and Japan.
And we haven't seen those types of worries about financial risk for a number of years now.
Q: Any red flags for gold miners ahead?
A: A strong dollar usually spells trouble for gold. This year we're seeing the dollar topping out and going sideways, so that's one of the reasons gold is doing well this year.
So, if we get some strong economic growth here in the U.S., or the Fed decides to increase rates more aggressively than what the market currently believes, that would probably lend strength to the dollar, and that would be hard on gold.