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Macro and Fundamental Factors Continue to Drive Gold

TOM BUTCHER: Joe, now that the Federal Reserve ("Fed") has announced its plans to leave rates unchanged, how does this impact the gold market?

JOE FOSTER: First of all, gold reacts to what the U.S. dollar does. In reaction to the Fed’s decision to keep rates unchanged, we saw weakness in the dollar, and some strength in the gold market. Now the market is looking to December. We go through similar cycles between every Fed meeting. The market wonders: Is the Fed going to raise rates or not? Now we are looking ahead to the December meeting, and markets will try to anticipate whether the Fed is going to change its policies at that point. Beyond this, what I think we are seeing in the market, and the reason why gold has done so well this year, is investors are losing confidence in the Fed and in central banks generally. Since the financial crisis [2008], we have not seen the level of growth that was promised to us by these central bank policies.

There are increasing concerns about the efficacy of all the radical measures that central banks have taken, including keeping rates extremely low, all the quantitative easings, etc. Japan, for example, has been experimenting with negative interest rates, and at the recent Bank of Japan meeting, it is now experimenting with the yield curve. The Bank is trying to keep 10-year rates higher [at 0%] than one-year rates [~0.1%], and that is something that has never been done before. This brings risks into the financial system, and it is causing investors to lose confidence in central banks and their ability to stimulate the economy.

BUTCHER: I understand you have just come back from the Denver Gold Forum, where you met with industry representatives and companies. What were your main takeaways from the Forum?

FOSTER: The Denver Gold Forum provides a great platform for institutional investors like us to meet with gold companies. Virtually every gold-mining management on the planet is in Denver for the Forum, so it is a great opportunity. One thing we found very interesting this year is that costs have come down considerably over the last several years. Three years ago, in 2012, costs were around $1,200 an ounce. This year, the industry is averaging closer to $900 per ounce. This represents a tremendous drop in costs. What we found surprising is that companies are still finding ways to cut costs even further through efficiencies in procurement, and using technologies to bring more efficient mining methods. It looks like costs could come down another $50-100 per ounce over the next year or two. That was a very positive development to us.

Also, gold mining companies are showing much better discipline in their capital allocation. They are using higher rates of return in their investment decisions to determine whether or not they want to go forward with projects. We are seeing more brownfields projects being developed, meaning projects around existing mines in existing properties. Companies have really sharpened their pencils and are looking closely at what projects and mines they already have, instead of considering other parts of the world to develop new projects. Companies are finding projects that generate good returns right in their own backyards. This was another positive development that came out of the Forum.

BUTCHER: Let’s go back to cost-cutting. How do companies propose to cut costs even further?

FOSTER: One way is through technology, and the one that I can point to most readily is driverless vehicles, or driverless trucks, meaning drill rigs that don't need an operator. We expect this technology to see more widespread use across the industry. Miners are also now using drones for mapping in remote areas. Procurement: companies are integrating operations all over the world so that they use the same parts and materials and get better pricing that way. Miners are using technology to integrate their systems globally. Although it may appear to be just a number of small things, they all add up to significant savings.

BUTCHER: How does the current bull market compare with other recent bull markets, and are there any similarities that might indicate where we are in the cycle?

FOSTER: Yes, there are. In fact, there's two parts to that question. One is looking at gold bullion; the other is looking at gold stocks. As far as gold bullion is concerned, I see similarities with the post-crisis market from 2008 to 2011, when gold went to new all-time highs. The market was driven central banks activities and their reactions to the crisis: the quantitative easing, the zero interest rate policies, the thought that these policies could bring some sort of inflation, or risk to the financial system, because these were radical policies that had never been tried before. We have a similar situation today. Central banks have even gone further out on the risk curve, experimenting with negative rates. Recently, we saw the Bank of Japan trying to manipulate the yield curve, which has never been done before. And this has investors very worried, thinking that this could create unintentional consequences that could end badly for the economy or the financial system. So we see similar drivers between this market post-crisis in 2008.

With regard to gold stocks, we look back to the beginning of the secular bull market in 2001, and the first full year of that bull market was 2002. Gold stocks saw tremendous returns, similar to what we're seeing this year for gold stocks. And 2002 wasn't the end of the line for the gold stocks. Between 2002 and the highs in 2008, gold stocks had many good years of performance. I think this current period is similar. We are now in the early stages of a bull market. Stocks have been so oversold in the previous bear market that you see a reversion to the mean and tremendous performance in that first year, but that doesn't mean it's over. It is a sign that it is just beginning.

FOSTER: Joe, thank you very much indeed.

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