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Gold Rebounds in 2016

TOM BUTCHER: Joe, since the beginning of the year, it looks as if gold has broken its links with both the U.S. dollar and commodities. Is this correct?

JOE FOSTER: Yes, we've seen many changes in the financial system just this year, and one of them is the relationship between gold and the U.S. dollar. Throughout the bear market, a strong dollar has meant weak gold prices, and we've seen the normal situation where there's an inverse correlation between gold and the dollar. This year, however, there's been more financial risk driving the gold market. People are worried about what's happening in Greece, what's happening in the Middle East, negative interest rates, Federal Reserve [“Fed”] policies that are essentially not as effective as they should be.

Investors have a heightened sense of financial risk, and in this type of environment, people also look to gold as a safe haven. The U.S. dollar is the first safe haven of choice, but when it looks a bit shaky, people then turn to gold. Thus far in 2016, the dollar was firm in January and the gold price was rising. In February, we saw a selloff in the dollar -- a selloff that we haven't seen in many years -- and that benefited gold. And we've seen many days where both the dollar and gold have been strong, as both are being used as a safe-haven investments. As far as commodities go, that's another shift that's very interesting to us and we are watching it closely: The link between gold and commodities. Weak commodities prices have been a drag on gold for a number of years now. This year, we've seen new lows in crude oil, new lows in copper and other commodities, yet the gold price has been strong. So gold is, again, performing as a financial hedge and a currency hedge, and not so much as a commodity. That's a very positive change in the gold market this year.

BUTCHER: How has the Fed’s December rate increase [on 12/16/2015] affected gold?

FOSTER: I think we'll look back at the Fed rate increase as a turning point in many markets. We're in a post-crisis economic environment, and a Fed tightening cycle is different now than it would have been in past cycles. The tightening cycle actually began back when the Fed started tapering; and then it talked about raising rates. And then the Fed finally increased rates in December. It appears through market action this year that the economy probably wasn't quite ready for the Fed to start tightening yet. And that's introduced financial risks that the market is afraid of, and it's resulted in gold trending higher on safe-haven demand.

BUTCHER: What have the technicals been doing this year?

FOSTER: The gold price has been in a technical downtrend for several years now, since 2013, and it had been slowly trending lower. That trend was broken this year, when gold broke through the $1200 level. With this break in technicals, that's another shift in the financial markets that are going in gold's favor for 2016.

BUTCHER: What is your outlook for the second quarter?

FOSTER: Our outlook is favorable based on both the technicals and the fundamentals. Fundamentally, for the first time in a number of years, investors are worried about the financial system. We have negative rates in Europe. We now have negative rates in Japan. Investors are worried that monetary policies just aren't having the intended positive effects. We are not seeing the economic growth or the prosperity that has been promised by the central bankers. With this increased financial risk, we're seeing more people looking to gold as a safe haven, as a hedge against these types of financial risks.

On the technical side, we've broken the downward trend that's been in place for a number of years. Gold has risen through $1200. Now that it's passed through that technical level on the upside, the next challenge will be to maintain that level. In other words, will $1200 become a floor instead of a ceiling in this market? This is what we're looking at in the short term. In the longer term, I think the perceived financial risks will probably grow. I think we'll look back on the Fed rate increase as a significant turn in the financial markets, but unfortunately, for the worse, not for the better. But this will benefit gold as an alternative investment and safe haven hedge.

BUTCHER: Finally, what are gold stocks doing in this environment?

FOSTER: Gold stocks are performing very well, as we thought they would in a rising gold market. Gold bullion is up about 17% this year [as of 02/24/16]. Stocks are up roughly double that amount. The gold miner's index is up roughly around 35-36% this year. So we are seeing the leverage come back into these gold stocks in this rising gold price environment. And that's brought on by a couple of things. First, gold company stocks were oversold in the bear market, so the valuations look attractive. And also, fundamentally, they are much better-run businesses than they were a few years ago. Gold mining companies have been controlling costs and doing a much better job of managing operations, making them both more efficient and profitable. This translates in to better leverage to the gold price.

BUTCHER: Joe, thank you very much, indeed.

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