Tom Winmill On Investing In Precious Metals
This segment was taped at the American Stock Exchange, which offers trading across a full range of equities, options and exchange-traded funds.
Mike Norman, anchor, HardAssetsInvestor.com (Norman): Hello everybody.
Welcome to HardAssetsInvestor.com. I’m your host, Mike Norman. Today I am here with Tom Winmill of Midas Funds. Tom, thanks very much for joining us.
Tom Winmill, portfolio manager for Midas Funds (Winmill): It’s a pleasure to be here Mike.
Norman: I appreciate it. Listen, the Midas Fund, when I hear that, there’s only one thing I think of and that is Midas gold, precious metals; that’s what you’re into, right?
Winmill: It sure is. We invest primarily in precious metals. That would be gold, platinum and silver. We also invest in other types of resources where we think there’s the most value.
Norman: Now do you buy the physical commodity or are you investing in the companies and the stocks that produce these metals?
Winmill: We do both. We currently both own gold bullion and we own the equities of companies that get involved in these natural resources. Right now we see that the operating leverage offered by equities probably exceeds the potential of holding the bullion itself.
Norman: Has the equity arena performed as well as the physical commodity? Because I know in some cases, with some gold companies, when you look at the performance of the metal, it hasn’t kept pace. Why is that?
Winmill: It certainly has not. Fortunately Midas Fund in 2007 did outpace the metal performance. In 2008, it’s been a different story. I think the general market malaise has really held a lot of the gold equities back, even though their operating margins have been quite good. In the first quarter, for example, the average operating margin of the large-cap gold mine is up about 30% on gold equity; gold bullion appreciation about 17% or 18%, so we think there’s historically low valuations in the market right now – very attractive opportunities.
Norman: Interesting. Well, you’ve certainly had a great run since 2002 when gold was at $265 and metals were much cheaper. How does it look now to you given the outlook for a slowdown in the U.S. economy, perhaps a slowdown in Europe, and maybe the global economy as well? Are these companies going to perform as well? Will the commodity markets themselves continue to show the same strong gains?
Winmill: Well Mike, that’s really the question of the hour. It depends on your view. We call it the old breath mint/candy mint question. If you see gold as a commodity – say it’s the candy mint version – yes it’s probably going to go down because there’s not going to be as much wealth pursuing those ounces of gold.
Norman: How far can it go down to, do you think?
Winmill: I think it probably could go down quite considerably, to perhaps $700 an ounce, and that would be when I think the jewelry fabrication demand would come back in, which is usually about 60% of the market, and industrial demands about 15%. Investment demand is the balance there now. Investment demand could come back very strongly, and the dollars there are far in excess of those for the commodity department, the jewelers. If you see gold as the breath mint, that is an alternative currency when all the other currencies go down in value.
Norman: But if it’s the candy mint?
Winmill: If it’s the commodity, then it’s probably going to go down; we’d see $700.
Norman: Now what about some of these other metals? What about more along the lines of the coppers, the zincs? They’ve also had great price run-ups, but are they a little bit more susceptible to the economic cycles?
Winmill: Well, copper is a very interesting case in point. It hasn’t gone back to the 2006 highs of over $4 a pound, but one thing to remember is that the U.S. is responsible for about 11% of global copper consumption. If the U.S. comes out of recession – which we think it will eventually – that’s going to make for a very tight copper market, and we think copper prices will go up sharper.
Norman: Now how does China factor into the equation? We hear a lot about China as, I think now, the largest consumer of copper. Haven’t they surpassed the United States in terms of copper consumption?
Winmill: They’re certainly the leader in terms of the marginal growth. Their growth percentages are far in excess of the U.S. which has actually declined somewhat. Now we’ve talked about the other commodities. You mentioned oil and zinc. Zinc has gone down actually; about 50% in the last 12 months. Oil is up almost double in the last 12 months. So you have to be very specific, and that’s one of the things we do at Midas Funds is look at each type of resource for the fundamental supply-and-demand characteristics.
Norman: Now a lot of your investments are overseas; they’re in companies that operate outside of the United States. They’re multinational clearly, but in regions where you have major production of these resources.
Winmill: Yes, and that is a whole new overlay in trying to understand the commodities markets. Not only do you need to know demand but also the supply. How does the local political situation affect supply? The Congo has been very unstable lately in terms of its government-announced policies and that’s affected the valuations of mining companies operating there. Khirgiz in the Far East has also been a very difficult environment; Mongolia, Russia for the oil companies, all over the place. As we see higher commodity prices, local governments want more of the profits.
Norman: How much of the commodity price rise, in your opinion, has been as a result of speculation? Do you think it’s a bubble? We’ve been hearing that now - at least with oil - a lot of folks are saying it’s a bubble, it’s going to burst.
Winmill: We don’t know. The more people say it’s a bubble, the more I’m confident, because we look at the underlying demand. One of our themes is global GDP growth, which is now about 4%.
Norman: Which is still pretty decent, despite everything. All right, folks, we’re going to stop here but we’ll be back for another segment where we will explore some of the political developments going on right now which could pose a threat to the commodities boom. Folks, don’t forget to stay informed by watching here at HardAssetsInvestor.com. On June 24, we will have a live webinar debate between myself and Peter Schiff on the great commodities boom, so check in here on June 24, right at this website and be a part of this debate. Stay tuned.
This is Mike Norman; you’re watching HardAssetsInvestor.com.
Be sure to check Part II of our interview with Tom Winmill.
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