JENNA DAGENHART: Hello and welcome to Asset TV. Gold just set yet another record, cruising past the crucial $2,000 mark. And, VanEck CEO, Jan van Eck, thinks that price could climb a lot higher. He joins us now with his quarterly outlook. Jan, you rarely set price targets, yet you recently set a very bullish one on gold, $3,400 an ounce. What would it take for gold to get there?
JAN VAN ECK: Well, Jenna, thanks. It's good being here. What happened earlier this year was really almost unprecedented, which is the amount of stimulus that the Fed threw at the world economy to adjust to this COVID virus. The actionable investment implications we think are twofold, and gold is the more interesting one, maybe exciting one. Which is just, especially when you throw that much money at the economy, gold will do well.
We looked at history. We didn't kind of make up a number ourselves, but we looked at history and said: "Okay, look at gold bull markets. Now that it's broken through to all-time highs, how high could it go?" And we basically said: "There's two eras." There is the inflationary era of the 1970s and the more deflationary era of the last 20 years. Base case, we still think we're in a kind of deflationary environment.
Gold goes up about two to three times in those environments. In the '70s, it went up five to seven times, which was really exciting. $3,000 an ounce may sound exciting, but it's not that much of a move in percentage terms. That's kind of our base case, a deflationary bull market for gold.
What we ask investors to think about and focus on is negative, real interest rates. It's basically, you're losing the purchasing power of your dollar of fixed income. Now in the '70s, you might've gotten paid 5% on your fixed income and you had 11% inflation, so you were losing that value by about negative 6%. It's not that dramatic today, but that kind of explains why we're sort of in the price range that we are for gold.
DAGENHART: In addition to gold, growth has been doing extremely well, but you've a bit of a contrarian call when it comes to growth versus value. Why are you leaning towards value when a lot of growth in tech stocks keep hitting all-time highs?
VAN ECK: Well, the second actionable step from the Fed stimulus was financial assets are going to do really well. It's almost what happened during the financial crisis, so both stocks and bonds should do very well. Growth, however, has had its biggest outperformance against value stocks in history. It's about a 30% gap over the last 12 months.
Basically, I'm not saying that growth isn't a good place to be, but I just think that level of outperformance is extremely unlikely to repeat itself over the next 12 months. I just caution investors for being overexposed to growth plays going forward and just understand if they have different funds and different kinds of strategies that they're not too exposed to growth.
DAGENHART: Looking at fixed income now, we've already seen a record volume of new fallen angels this year. What's next, Jan? Do you think we'll see a lot more downgrades and what's your outlook like for bond markets?
VAN ECK: Well, we're kind of in a recession, which means that bonds are going to … Some are going to default, and some are going to be downgraded. It's sort of a typical recessionary cycle, I would say, except that you have this big Fed stimulus again. Fixed income markets generally started recovering after the Fed announced that they're going to intervene.
Fallen angels. There's been a record amount of issuance that we're expecting this year. There's already been a lot. It's really a lot of repeat of 2016 when a lot of energy companies got downgraded, and that's happening this year. The fallen angel strategy of buying those downgraded bonds has started working again, so it's about 5% of the high yield indices.
I guess the question is: “Have you made all your money in the fallen angel strategy? Is there more money to be made?” Our argument is maybe you're halfway through the game. So, it might not be as dramatic a recovery, but as long as the Fed is supportive, we do think that that kind of strategy should continue to do well, and fixed income should do well. Because look, you're getting almost nothing if you keep your money in the bank, right? The U.S. 10-Year is at about 0.6% interest rates right now. That's just not a lot. You're being paid to take risks.
DAGENHART: Turning to China, Jan, what can we learn from their recovery so far?
VAN ECK: Yeah, well, I kind of gave you our base case scenario, which is stick with your financial assets’ exposure, maybe add some gold. There are a couple of risks to that. One is actually too much global growth, which sounds crazy, but China's recovery from the COVID virus has been very strong. If you look at commodity prices, I like to look at copper, they're actually higher than they were before the year started. So, there are signs.
Now, some people call that inflation. That's not our base case, but if you did have inflation, that kind of global growth is a little bit of a worrisome sign on the horizon. That's one potential concern.
The other concern I have about the markets, and it's just a risk to be aware of, it's not a reason to go to cash, is that I think the return to full employment is going to be bumpy. Even though the GDP numbers or Amazon sales numbers look great, people are not going to come back to work to the numbers that we had in January. If policy makers get concerned about that, there may be additional policy steps that may or may not work, and that may trouble the financial markets.
Those are my two concerns: kind of excessive global growth and heating up and maybe inflation and then a speed bump that causes a revisiting of stimulus and maybe political gridlock comes into effect there.
DAGENHART: Finally, Jan, what should investors be watching for when it comes to the 2020 election?
VAN ECK: Well, we now know who's running. We have both tickets with Biden and Trump. The way I like to say it, it's very hard to invest according to politics, but look at the underlying policies and see if they're going to change. You know what I've been talking about so far is the Fed. I really don't see a big change in Federal Reserve policy, no matter who's elected in November. So, that part of the equation is set.
Then the question is: “Will taxes increase a lot under a potential Biden presidency?” I think that there would have to be quite a sweep and quite a degree of confidence in the economic recovery to have a big fiscal shock in terms of a big tax increase. That's what investors should be looking at. As I said, in general, ignore all the political noise and make sure you're confident there's going to be a policy change before you start shifting your assets.
DAGENHART: Well, Jan, always great to have you. Thank you so much for your time.
VAN ECK: Thanks, Jenna.
DAGENHART: And thank you for watching. That was VanEck CEO, Jan van Eck, and I'm Jenna Dagenhart with Asset TV. To receive regular updates from VanEck experts, please visit vaneck.com/subscribe.
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