Joseph M. Foster's View On Gold And Its Impact On Gold Mining Companies

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This is a brief outline of conference call by Joseph M. Foster, Portfolio Manager for Van Eck International. The topic of the call was Gold and its impact on Gold Mining Companies. The conference call was arranged by AIG Global Asset Management Company(India) Pvt. Ltd

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Joseph M. Foster's View On Gold And Its Impact On Gold Mining Companies

  1. 1. Joseph M. Foster’s view on Gold and its impact on Gold Mining Companies Author: iFAST Research Team This is a brief outline of conference call by Joseph M. Foster, Portfolio Manager for Van Eck International. The topic of the call was “Gold and its impact on Gold Mining Companies”. The conference call was arranged by AIG Global Asset Management Company (India) Pvt. Ltd. Key Highlights • Current rally in gold is led primarily by investment demand , followed by demand for jewellery, de- hedging by gold mining companies and buying of gold by Central Banks across the world • Gold can touch US$1500 / ounce in 2011 but there may be a technical correction in gold prices in the next 6 months • With dollar depreciating against other major currencies on account of quantitative easing, the central banks are inclined towards parking reserve funds in Gold Reasons for price rise in Gold Joe Foster is of the view that the following factors are leading to the steep rise in the price of gold: 1. Since the growth in US economy is still sluggish with a high level of unemployment, there are fears that the US Federal Reserve will announce Quantitative Easing* (QE) for the second time on 3 November 2010. Moreover, this easy monetary policy will be followed in 2011 and probably, even in 2012 due to high unemployment, low housing demand and low inflation 2. Japan, Thailand and other emerging economies are trying to keep their currencies from appreciating against the US Dollar and in fact, many countries are devaluing their currencies 3. The looming concerns over sovereign debt issues faced by the European countries and possibly, a slow recovery in these markets 4. The seasonal demand from Diwali and wedding season in India, holiday season in US, and Chinese New Year will increase the consumption demand for gold. Mostly, in the last quarter of each year, we witness a sharp increase in the gold prices and this year, again doesn’t seem to be an exception 5. Currently, large institutional investors like pension funds have very low exposure to gold. For example, the pension funds have only 0.3% of their assets exposed to gold. Mr Foster expects there is a lot of room for institutional investors to increase their exposure to gold 6. The central banks across the globe prefer Gold as an alternative to US Dollar as the reserve currency Outlook on Gold Mining Companies Gold companies are expected to have record cash flows in the fourth quarter of 2010 mainly because of the rally in gold prices. Foster opines that the Gold mining companies tend to make more cash when gold is over US$1000 / ounce. Owing to the strong cash flows, many Gold mining companies are declaring
  2. 2. dividends. Hence, the return on investment in Gold mining business looks very attractive at the current juncture as the positive earnings will get reflected in the stock prices of Gold mining companies. Falcon Gold Equity Fund – the feeder fund for AIG World Gold Fund The fund is completely invested its corpus in the current rally with 12% allocation to silver mining companies and the rest to gold mining companies. As far as the allocation in terms of market capitalisation goes, about 30% of the fund is invested into small-cap companies, 31% in medium-cap companies and 34% in large-cap companies. The performance of the fund has also been boosted on account of six Mergers & Acquisition deals of Gold mining companies. *Quantitative Easing is process whereby the central banks increase excess reserves in the banking system to buy back government bonds, mortgage-backed bonds etc. This results in excess supply of US dollar in the system. Disclaimer This article is for information purpose only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products /investment products mentioned in this article or an attempt to influence the opinion or behaviour of the investors /recipients. Any use of the information /any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

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