The Gold Report: We appreciate the opportunity to talk with you fresh from site visits in Mexico and the BMO Global Metals & Mining Conference in Florida. What do you see for gold in '09 and '10?

Joe Foster: Our outlook is quite favorable. We're into a new phase of this bull market that's been going on since 2001. The credit crisis, everything that's happening to the global economy and the reaction of the governments and the monetary authorities set up a very, very positive environment for gold, not only in the near term, but going out many, many years.

TGR: What launched this the new phase?

JF: Earlier in the cycle, it was more an inverse dollar play. We've had a bull market in gold. The dollar had embarked on a bear market and gold reacted to the inverse of that. What's changed is that the level of risk to the financial system has elevated dramatically and we've come into an environment where even if we have a strong dollar, we can also have a strong gold price. Investors are genuinely frightened and it's brought a whole new dynamic to the gold market.

TGR: Where do you see this taking gold?

JF: I'd have to split it into a near-term and a longer-term outlook. First of all, looking at the near term, gold is finding support now because we are in crisis mode. The financial system has not been fixed yet. The economy is in decline. In that environment, investors are seeking gold as a safe haven. They're also seeking out the U.S. dollar as a safe haven. So that's creating investment demand for the metal.

Jewelry demand, however, has fallen off a cliff-it's almost non-existent right now and a lot of scrap is coming into the market. Two dynamics in the gold market are pulling against each other: strong investment demand and very weak jewelry demand. I would see gold somewhat range-bound as long as we're in crisis mode, being pulled by these two factors. We test $1,000, we pulled back, we're sitting here around $940 an ounce. It wouldn't surprise me to see it range-bound between $800 and $1,100 an ounce for the next six months or so until we see some sort of resolution to the situation.

As we look further out, you have to wonder if everything the government is doing will work and whether the laws of unintended consequences play out down the road. Will all this stimulus create inflationary pressure looking out into 2010 and beyond as the economy starts to get back on track? I happen to think it will. At some point, it will come time for the government to withdraw the liquidity they've put in the system. However, I think we'll be in a slow-growth environment that will make that very, very difficult.

We won't have the access to credit that we had in the past. Credit creation fueled a lot of the growth over the last decade. That will be missing in the next growth phase, so I think we'll be faced with a low-growth environment that will make it difficult for the Fed to raise rates and rein in liquidity. As the velocity of money begins to pick up when the economy starts to grow a bit, I think we will see some serious inflationary pressures. That will give gold the next leg to stand on and lift it to the next level, which I think will be much higher than what we've seen so far.

TGR: In essence, aren't we going back to an inverse play based on the U.S. dollar? That was the first phase. Now we're in this crisis phase. As we move into an inflationary era, aren't we just hedging against the dollar at that point?

JF: Yes, that's another aspect of what I'm talking about, too. How does the dollar play out in this scenario? As long as we're in crisis mode, people think of the dollar as a safe haven. As soon as we see a bit of light at the end of the tunnel, equities and other investments will begin to attract investment dollars. At that point, I think money flows out of the dollar. So the dollar could resume its downward trend with a better economic outlook and that would be positive for the gold market.

TGR: So we'd go back to dollar going down, gold going up.

JF: Yes, back to that situation. And then when you layer some inflationary expectations on that, you get gold firing on all cylinders.

TGR: Is that when we begin to see mania or is that the next phase?

JF: As markets go, there probably will be a mania in the gold market as well, but I would guess that's a number of years off. Who knows? But at least several years off.

TGR: What will trigger the mania? If we've made it through the banking and financial and economic crises, and are looking for money to fly back into equities and devalue the dollar, why is mania several years off? Why wouldn't it be happening as these other shifts begin to occur?

JF: The economy needs to be doing better. Money is too tight. I just don't think there's enough liquidity, frankly, to support a mania in the current environment. We need a more positive economic environment to get a true mania going and pull everybody from mom and pop up to the high net worth investors to the institutions, everybody jumping in with both feet. I don't think there's enough liquidity in the system at this point, or perhaps it's all on the sidelines.

TGR: How interesting. So maybe fear won't spark the mania. You're almost saying the mania will start when there's a little bit more optimism.

JF: That's right, if it happens it will probably occur with more optimism and more entrenched inflationary expectations.

TGR: When you talk about gold, are you talking about bullion or gold stocks?

JF: I'm talking about both, definitely. There's a different dynamic playing out with the gold stocks because we have to look at earnings and operating risk and political risk and all these other things, but historically there's been a very high correlation between gold and the gold shares, and I expect that to continue throughout this market.

TGR: Will we see more of that in inflation or in crisis mode?

JF: As far as gold shares go, their crisis was the second half of 2008. They got caught up in the downdraft of the credit crisis and the equities collapse. The stocks have roughly doubled since they bottomed in October of 2008. Gold is up roughly 25% to 30% and we're seeing money come into the gold sector. A lot of equity financing amongst the gold companies lately tells you there are investment dollars available to the sector. So I think the gold market and gold equities are out of crisis mode. They're being recognized as an alternative, as a safe-haven hedge.

TGR: And an inflation play, I imagine.

JF: Yeah. The inflation play, or at least a flavor of it, will be with us. People see the Fed printing money to support the financial system, which creates a level of inflationary fear already-and it's very, very early days. Then the next phase will be if and when we get evidence that inflation is actually taking place, when we see various economic measures telling us that inflation is starting to pick up. Those fears will intensify then. Even though we're in a deflationary environment at the moment, the seeds of inflation it are already there.

TGR: How do you see silver reacting relative to gold?

JF: Looking at its performance over the last three or four months, I think it's shown itself to be a currency hedge and a currency alternative like gold. Silver had a tough time last year. It tumbled with the base metals. But again, since October, the performance has been good and we're seeing high demand for the silver ETF, a shortage of coins and bars. So it's acting as a currency alternative just like gold now.

TGR: What do you make of the shortage of the coins and the premiums to the spot price?

JF: It's a small but growing corner of the market, so to me it's an indicator of investor sentiment. It's not that big a demand driver. When you look at the tonnage, it's modest. But it tells me that the sentiment among investors, especially individuals, is very positive. From what I hear, it's mainly high net worth individuals who are buying the stuff up with a long-term view. It's quite a leap to go out and invest in physical gold. If a few are actually doing it, then many, many more are probably considering it.

TGR: Would you like to talk about some companies you currently own and think other investors should be considering?

JF: There's a range of companies in the gold space. You want the big ones, little ones or something in between?

TGR: What you might be suggesting is that investors should look at each category. Various newsletter writers and analysts talk about buying a basket of equities. There's a big difference between a producing gold stock, a soon-to-be producing stock and a company that's getting excellent drill results. It would be great, Joe, if you'd maybe touch on a couple of situations in each area.

JF: We have 60 companies in the International Investors Gold Fund. We invest across the spectrum from the junior small-cap companies all the way up to the largest companies and try to put together a portfolio of those that we think will outperform.

TGR: Is that a publicly traded fund?

JF: Yes. It's a U.S. mutual fund. The ticker is INIVX. We have A shares, C shares and an institutional class, so however you like to play it.

TGR: No load or load?

JF: A shares are load, C shares are no load, and then the I shares are for institutions.

TGR: Does the international there imply worldwide coverage? Or does the fund focus on North America?

JF: I guess the term's an artifact that goes back to how the fund originated. It was the first U.S. gold fund. John van Eck started it back in the late '50s as an international equity fund. In 1968, he converted the mandate to a gold fund, so it kept the international in the name and that was the start of International Investors Gold Fund. It's been a gold fund ever since. And yes, we still invest globally.

TGR: Do you want to start with some producers in that fund?

JF: Growth is a common theme among the larger companies that we overweight. We like a growth story because good news flow comes with growth. Hopefully, we can find managements that can deliver the growth and meet expectations for production and costs. Among the large caps, one of our favorites in that category would be Goldcorp (TSX:G) (NYSE:GG). They're mining mainly throughout the Americas. Most of their mines are in politically safe areas. They're great operators and are developing some deposits-one in Mexico, called Penasquito; and the other one in a JV with Barrick Gold Corporation (NYSE:ABX) in the Dominican Republic, called Pueblo Viejo. They're going to drive Goldcorp's growth for the next several years, and we see some good numbers coming out of Goldcorp looking forward.

TGR: And moving down the ladder?

JF: Going down into the mid-tier group, I guess Randgold Resources Ltd. (Nasdaq:GOLD) would be our favorite in that category. Their operations are in West Africa. Randgold's growth has come organically, which is really the best kind of growth. They discovered the properties where they're mining and developing, and that's the cheapest way to add ounces to the portfolio. Currently they've got a developing property in Senegal, which is early days but we see it turning in to a significant mine. Perhaps looking out three or four years, that will add significantly to their bottom line. It's another internal discovery, so very cheap ounces coming on line for that company. Also, we've been to West Africa and Randgold is probably the best connected, knows the Continent probably better than any other company out there. So they're one of our top mid-tier companies.

Going down to the small caps, we're seeing exciting plays in several areas with the small caps, mainly in the Americas, particularly Canada. There's been a resurgence of activity in Canada in some of the old mining camps. We're seeing new discoveries and new developments that we're very excited about. Mexico and other parts of Latin America look very favorable to us as well.

In Canada, one of the emerging producers would be Lake Shore Gold Corp. (TSX:LSG). In the Timmins camp, they've made a discovery where nobody thought to look before. And Timmins is historically one of the largest producing camps in North America, so there's still gold to be found there. Lake Shore is developing an underground mine there that we think will be very profitable and should come on line over the next couple of years.

Another Canada small cap is Osisko Mining Corp. (TSX:OSK). They're in the Val d'Or camp, an old mining camp. They've found a very large low-grade deposit that they're developing there and I guess it will be the first large-scale, low-grade, world-class deposit that's been developed in Val d'Or. The company just raised enough money to develop it. It's going to be expensive, costing north of a half a billion dollars, but investors have shown confidence in the company and that they raised over $300 million just this month to build it. They're well on their way to becoming the next gold producer.

TGR: Does Osisko have a 43-101 on that Val d'Or property?

JF: Yes, it has. After going through several iterations of their resource estimate, more recently they found a new zone they call the Barnett Zone. It's higher grade than what they've found in the past, so it appears to be shaping as a sweetener that will enable them to get a more rapid payback once they begin production. The project is getting better as it moves along.

TGR: Any companies in Mexico that come to mind on the small-cap side?

JF: Sure. In Northern Mexico, Capital Gold Corp. (TSX:CGC) has started a mine outside of Caborca, in Sonora. In fact, I visited the property and just returned from Mexico a couple of weeks ago. Very well-run, very clean operation, very-well managed, and they're producing gold for less than $300 an ounce in cash costs. So it's a simple, very efficient low-grade heap-leach operation and it's set itself apart from some of the others in Mexico.

It's not always easy to get these mines going. Everybody thinks of heap leaching as being simple, but you can count the companies that have had problems getting their projects going. This one has had a smooth startup; it speaks to the management team that has put this together.

TGR: Is that John Brownlie?

JF: Yes, John's company. As we look across Mexico, a number of other one-mine or one-property companies look very profitable in today's gold environment; that could be the next consolidation area for this gold market. We might see some of these companies merging to look toward creating the next mid-tier company.

TGR: What is Capital's annual production?

JF: Roughly, they're producing somewhere around the 50,000- to 60,000-ounce level right now and are looking to expand to 70,000 or 80,000 ounces, somewhere in that ballpark. With a little bit of drilling success, they could even push it higher than that.

Another company, Castle Gold Corporation (TSX.V:CSG), is actually similar to Capital Gold in that it's a low-grade heap-leach operation. It's favorably located near the road, near infrastructure, and all those good things. We can see Castle possibly following in Capital's footsteps as the next low-cost heap-leach producer. Castle's already producing, but they're not to the level that Capital is at this point.

TGR: Any other areas you're looking at?

JF: We like a company called Andean Resources (TSX:AND) (ASX:AND) in Argentina a lot. In fact, they're drilling a low-sulphidation vein system there and getting spectacular results. The thing about Argentina that's interesting is that they don't have as much of a mining history as other Latin American countries, so it's the first time anybody is looking at a lot of these properties. Forget the old timers. There were no old timers. Many of these are fresh, brand new properties that have never been prospected before, and there's been a number of discoveries made that tell us the geology is favorable. The deposits are there and Andean is one company that's tagged on to a high-grade epithermal system that looks very, very promising.

TGR: Are they producing yet?

JF: No, they're working on a scoping study and I would imagine looking to start a pre-feasibility study sometime this year.

TGR: Any activity in Nevada that you like?

JF: Over to the east, toward the Utah border, AuEx Ventures Inc. (TSX:XAU) has a very interesting new discovery. It looks like a Carlin-type occurrence. There hasn't been much in Carlin proper that I know about. Aside from Cortez Hills, which Barrick is developing, that area's been pretty well picked over. The only thing truly new that I'm aware of is this AuEx discovery in eastern Nevada. They've got two properties JV'd there with Agnico-Eagle Mines (TSX:AEM) and Fronteer Development Group (TSX:FRG) (NYSE.A:FRG). That looks like a great discovery and it's growing, although it's divided up between the three companies involved there.

TGR: Is Eastmain Resources Inc. (TSX:ER) in your fund? Or does it still interest you?

JF: Yes to both. We do have a position in Eastmain. The reason we like the company is the same as with most-if not all-of the juniors in our fund. They are companies that we believe will turn their properties into profitable mines. That's sort of the criterion. We don't invest in early-stage exploration. We don't really come into a company until we're convinced that their property can be developed at current gold prices or even lower gold prices. Eastmain is adjacent to Goldcorp near Eleónore in Quebec. That's another positive. Goldcorp will bring the infrastructure, so we see Eastmain as a property that is robust enough to eventually bring to production themselves, if not a target for Goldcorp.

TGR: Does your website list the stocks you're invested in?

JF: We publish the full portfolio twice a year with our semi-annual and annual reporting, so for the most recent you'd have to pull up our December 2008 report. Also, our website publishes our top 10 every month.

TGR: Do we do that through the site or we can find that on the site?

JF: Just go to and you can bring up a PDF. ( )

Joseph M. Foster is a member of Van Eck Associates hard assets team, which rates as one of the most experienced investment teams in the business devoted solely to the natural resources asset class. He joined Van Eck as precious metals mining analyst in 1996, and now currently serves as lead investment team member for its flagship fund, Van Eck International Investors Gold Fund.

Interview published courtesy of The Gold Report -