Interview – Midas Fund Manager: “We’re Very Bullish on Gold & Silver, and Extremely Excited About Mining Equities”

February 10, 2012 | By Tekoa Da Silva | 1 Comment

I had the great pleasure a few days ago of interviewing Thomas B. Winmill, President of Midas Funds. Midas Funds manage over $250 million in client funds, and offer three different mutual funds, two of which carry significant exposure to gold, silver, and mining equities. Tom has been in the unique position of being an early adopter of the precious metals bull market, and his clients have been generously rewarded. Here is the written form of our short, but very interesting interview:

TD: What are your philosophies toward precious metals and the mining equities?

TW: Our take on both of those is that they are a very good place for individual investors to look towards to achieve diversification in their portfolios. Gold has been in a bull market now for ten years, and the question I often get is “How long can the bull market last?” and our response is, “How much longer can the government continue to run deficits and create currency in excess of economic growth?”, and I think the answer to that is essentially forever. What we’re seeing currently is the fourth straight year of deficit spending exceeding one trillion dollars in the United States, and that will ultimately require the creation of additional currency to honor the overspending. So we think the appreciation of the gold price is well in place for the foreseeable future, likewise, we see gold mining shares in a really interesting place currently because the mining shares have sold off like general equities, but their revenues will be increasing with the increase in gold and silver prices. So we’re very bullish on gold and silver, and we’re extremely excited about the gold and silver equities.

TD: What goes through your mind as a portfolio manager Tom, when you see junior miners demolished the way they’ve been here in this market—and how do you take full advantage of the space right now?

TW: Well the old saying is you want to buy low and sell high, and it’s starting to get really interesting in the junior sector right now. We’re seeing a number of really good valuations, but it’s really dependent on the risk tolerance of the individual investor. If one is only able to accept low levels of risk, I would stick with senior companies that are producing gold or silver because they’re enjoying healthy margins that aren’t being recognized in the market at least compared to historical valuations. The thing that I think is overlooked by the general market is that with these higher prices, a lot of the resources on the balance sheets of these companies that have large land packages can come into reserves over the next couple of years as they use a higher average price to determine their reserve statements and as they drill out their properties. So I think that balance sheet impact is yet to be seen. For those investors that can accept more risk, go to the juniors because as you pointed out, they’ve been demolished recently and they often have the kind of exploration programs that the senior’s would like to have if they didn’t have to make their own cash flow projections, so a lot of juniors can be quite interesting. However, I would take a broadly gold1 diversified approach to juniors, because until an engineering study has been completed on the property you really don’t know if they’re economic.

TD: Tom what stage of the bull market would you say we’re in on the mining equities in terms of, when you look at the types of investors participating in the market—is any of the general public investing yet? How will the later stages of the bull market look in your opinion?

TW: Well, one of the things I look at Tekoa, is the trading volume on the TSX venture exchange as a proxy for retail participation in these smaller cap markets, and it’s way down from where it was a year ago. When it’s at the lower end of the range of the average daily volume it’s probably a good time to invest, when it gets to the upper range it’s probably a good time to lighten up. One thing I can say about retail participation in the small cap market is that it tends to come in at the wrong time, and it’s also very volatile. Looking historically, I don’t think there is a moment when the public will participate other than when the prices have already run considerably—and then the financings come, along with companies that were formally vending machine companies becoming gold mining companies—that’s when the public tends to participate, and that’s at the worst possible time.

TD: In your mind Tom, is there an appropriate exit strategy down the road for mining equities, and what might that look like?

TW: I would say when confidence comes back in the market in terms of government policies for both monetary and fiscal arrangements, in other words, if the government decides to raise target interest rates to historical levels relative to the inflation rate so we have a real interest rate of say 2-3%. Also if we get back to balanced-budget federal, state, and provincial spending. However, at that time, the precious metals markets will have already been crushed. So what you’re really looking for is resolve among central bankers to have non-emergency level rates, rates back up where they should be, a trend in reduction of deficit spending—then it will probably be time to think about rotating out of the sector, because at that point financial assets will probably have a better return than hard assets.

TD: Who tends to get hurt the most by inflation in society, and how does that happen?

TW: The thing about inflation which can be so disruptive as a social measure, is that inflation hurts only those things that are not indexed to it—so you have to look around the economy to see what isn’t indexed to the inflation rate, and those will be the groups that suffer. For example, the biggest single actuarial obligation of the U.S. federal government is Medicare, which is around $34 Trillion dollars. So it’s almost more than two and half times the U.S. GDP, but it’s just not recorded on the balance sheet because the U.S. doesn’t report its obligations in GAAP. That obligation is essentially indexed to a level of care, and its cost and burden will exceed the inflation rate. I think that’s probably the single most disruptive influence to occur societally, and I think the major losers in an inflationary environment will be savers—the middle class who have savings in a bank that are not indexed to inflation. I think that group will be wiped out, and people receiving Medicare benefits will be benefited disproportionately.

TD: Tom Winmill, President of Midas Funds, manager of $250 million in client funds, thank you for sharing your comments.

TW: You’re welcome, thank you very much.

To learn more about Tom and the Midas Funds visit: MidasFunds.com

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Thanks,
Tekoa

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