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Should Gold Investors Head for the Hills?

Jeremy Glaser
Joung Park, CFA

Jeremy Glaser: For Morningstar, I am Jeremy Glaser. Gold is almost always in investors' focus. I am here with Joung Park, an equity analyst at Morningstar, to see what's happening with gold prices and the best way for investors to play it.

Joung, thanks for joining me today.

Joung Park: Thanks for having me, Jeremy.

Glaser: So, let's start briefly by taking a look at where gold prices have been recently. Certainly gold is seen as a safe haven. We've had plenty of financial worries recently. Has that played out in the price of gold?

Park: Yes. Even with recent worries, you have seen gold prices actually head lower over the past 12 months. The price is down more than 10% or so, and much of that's driven by weaker exchange-traded fund and jewelry demand. You have to remember that inflows into ETFs were what was really driving gold prices higher, and those inflows have slowed to a trickle. Also you've seen jewelry demand kind of ebb, and I think part of that is due to the Indian rupee really losing ground against other major currencies and making gold for Indian consumers much more expensive. And you've seen India, which really is the largest jewelry consumer for gold, kind of taken out of the picture, and that's really impacted the global demand for gold.

Glaser: If gold prices come back a little bit, do you expect over the long term that prices will come back to where they were before? What do you think the price of gold looks like into the future?

Park: I think that over the near term gold prices could head higher, and if they do, it will be because central banks are really ramping up their purchases of gold. You've seen central bank demand for gold really kind of help to stabilize gold prices, despite the weaker ETF and jewelry demand. And if these central banks in China, India, other emerging countries, and even Europe, start to really ratchet up their purchases in a major way, that could really impact prices, given that these guys are really the 800-pound gorillas in the gold market compared with regular consumers like you and me.

Over the long term, we still think that gold prices will head lower to our forecast of $1,200 per ounce, and the major reason for this is that gold is a commodity that's not consumed and there are already huge above-ground stockpiles. So, if you add up all the central bank holdings of gold, that already equates to more than 11 years of annual mine supply. Since gold does not spoil or tarnish or is consumed, as you purchase more gold, your stockpile just gets bigger and bigger, and at some point, when your stockpile is so big, I mean, there is less need for you to accumulate even more gold.

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Glaser: Given that we could see some increase in prices in the near term and maybe some softening in the long term, what's the best way for investors to think about a gold holding? Should they be out there buying bullion now? Do some of the gold miners maybe make sense for investment? What's the best way to make money from this?

Park: That's a great question, and my answer would be that it depends. If you just want exposure to gold prices, then the best way is of course through low-cost ETFs, such as SPDR Gold Shares. I would say that [gold-mining company stocks] don't necessarily track the gold prices as accurately, but there can be some upside for the miners for investors who are willing to do a little more digging. This is because if you're getting into a gold miner with low costs and attractive growth potential, you not only get some dividends, but you get additional value created when they expand their production and still manage to keep their production cost profile low.

Glaser: What miners do you think are the best-positioned right now?

Park: So the two miners I like the most right now are Yamana Gold and Eldorado Gold. The reason for that is that they have the features that we're looking for in an attractive gold-mining investment, so an attractive growth profile, while still maintaining their low costs. Both of these companies have costs that are in the lowest quartile of the industry. I think another important feature that you have to look for when you're looking into gold miners is a good management team. You have to have a good management team in order to keep these projects going on budget and on schedule. Right now, gold miners have had a hard time because investors have been worried about surging cost inflation, capital-expenditure costs that are going out of control. These two companies have management teams that have a good track record of delivering projects on time and on budget. They have a good pipeline of projects. Yamana purchased a very ultra-high-grade deposit called Cerro Moro in Argentina, and Eldorado still has the attractive growth projects that it purchased through the European Goldfields acquisition. So I think those will be able to generate some attractive returns for shareholders.

Glaser: Joung, thanks for the update today.

Park: Thanks for having me.

Glaser: For Morningstar, I'm Jeremy Glaser.