Gold Stocks Out of Favor, Will it Change?

HAI: Which is more attractive at this point -- metals or miners?

Foster: Miners. Gold stocks have underperformed significantly this year. Valuations are now at the very bottom of the valuation range, at levels we haven't seen since the crisis of 2008. Stocks are very cheap relative to the price of gold right now, and I think miners will give you the best leverage as we go into the next leg-up in the gold price.

HAI: Does that extend to the juniors?

Foster: Yes, I think it does. The underperformance is really across the board. The juniors had a great year in 2010, but all of them have underperformed in 2011. I think it's an industrywide phenomenon that gold stocks have fallen out of favor recently, and I expect that to reverse course across the board.

HAI: What are your top three picks in the miners space?

Foster: I like Osisko (OSKFF.PK). It is starting up a mine in Quebec as we speak, and hopefully that startup will go smoothly and that will be reflected in the price of gold in the second half of the year.

I also like Kinross (KGC), which has underperformed over the past few years and is a real value play right now.

Of the smaller juniors I like Guyana Goldfields (GUYFF.PK). They have a relatively high-grade deposit in Guyana that I think is very attractive, which they are working on developing right now.

HAI: What else should investors be aware of on the horizon?

Foster: The big thing is QE2 is coming to an end, as many investors are wondering how gold will react to that.

With the end of QE2, the economy will have to stand on its own feet, with the support of extraordinary monetary and fiscal stimulus. I'm not so sure it will be able to do that; I just don't see the driver of the economy. Housing is still in a depression, and without a healthy housing market, I don't think the economy will get back on track.

As we enter the second half of the year, I think the market will start to recognize that. And if more stimulus is required from the Fed or the government, I think that will drive more people to gold.

HAI: That's all very bullish for gold. What could derail your thesis?

We'd need to see sustainable US GDP growth in the range of 4 percent to show that the economy is getting back on track. Just looking at the numbers that have come out over the last several days, the economy continues to struggle. And if it's struggling following the intense stimulus the economy has been subjected to, I just don't see it getting out of that mode as long as the housing market is struggling.

If we had 4 percent GDP growth and we became convinced that the federal government was going to reduce the deficit and get its fiscal house in order, all without stimulating inflation, that would be the worst-case scenario for gold. But I see that as a very, very low probability.

Original Article.