Mr Foster, Portfolio Manager for VanEck’s active gold equities strategy, said, “The fall in the gold price this week is a result of a strengthening US dollar and more hawkish views emerging from the Fed. There are also lessening fears about the impact of Brexit and perhaps most importantly, Chinese markets are closed this week which has no doubt impacted the support for gold.

“Gold has been trading in the US$1,300 – US$1,350 price range and has now broken below US$1,300. Despite recent events, our view hasn’t changed that gold is in the early stages of a long-term bull market,” Foster said.

“The gold price will be supported by a number of factors. The global economy is weak and is in no condition to withstand higher policy rates. A Fed rate hike could work against gold initially (stronger dollar), but in practice could be seen as a misstep that increases the risk of recession and financial stress. In addition, it creates imbalances if the Fed is tightening policy when every other central bank is easing.  If the Fed fails to raise rates in December we expect dollar weakness and the gold price to strengthen. Nonetheless, another potential rate hike will likely be a repeat of the one last December where there was significant stock market volatility that drove investors to gold as a safe haven,” he said.

“In the short-term, we believe the gold market will stabilise following this Friday’s US jobs report. Price weakness will also likely spur seasonal demand out of India and Asia.  These countries typically buy on price weakness and they are also about to begin their festival and wedding season,” he said.

“For gold stocks, we believe the current market is similar to the 2001 to 2008 bull market where mining costs subsided, profit margins expanded, and equities significantly outperformed gold. Other mining sectors ― coal, copper, iron ore ― are depressed.

“We believe higher gold prices will encourage increased mining activity, but the gold sector alone cannot generate cost pressures without increasing activity in other mining sectors. In fact, we would use copper as a barometer of inflationary pressures in the mining business. With copper currently at US$2.09 per pound, we would not anticipate inflationary pressures until copper trades above US$3.00 per pound,” Foster said.

“Mining companies are generally focused on cost savings across mining practices, technology implementation, procurement, and contractor costs. Companies are more focused on organic opportunities – lower gold prices have forced companies to look inward at existing operations and projects. Companies are looking at projects that require less capital with higher rates of return and phased expansions,” Foster said.

The following table shows the previous six bull markets in since 1971. The bull markets are classified as secular (long-term) or cyclical (bull phases within an overall bear market). According to Foster, the current gold bullion bull market bears similarity to the 2008 – 2011 secular bull market because this was a period of heightened financial risk due to unconventional central bank policies. During this period the gold bullion price increased by 145%.

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