‘No limit to the upside of gold’: Midas’ boss
Thomas Winmill says a declining dollar could push the price of bullion sky-high
As long as Wall Street continues to expect a reversal of the historic gold rally, mining and production companies will continue to outperform the market, according to Thomas Winmill, president of Midas Management Corp. and manager of the $140 million Midas Fund Ticker:(MIDSX).
“The theme is that there are gold production companies that are selling at discounts to historic multiples and discounts to the S&P 500, and that is very rare,” he said. “A lot of these companies are surprising the Street on the upside in terms of profitability.”
Mr. Winmill’s portfolio has gained 45% this year by leveraging the 25% rally in the price of gold bullion.
The fund, which holds just 10 ounces of gold bullion in order to keep the custodial account active, has been investing in large fixed-cost production companies that have seen profit margins expand with the rising price of the precious metal.
A couple of Mr. Winmill’s favorites are Barrick Gold Corp. Ticker:(ABX) and Newmont Mining Corp. Ticker:(NEM).
Barrick Gold shares have gained more than 36% this year, while Newmont stock is up more than 31%.
The S&P 500 is up about 11% over the same period.
Of the 30 stocks in the portfolio, 22 fit the definition of mining and production companies involved with gold. And the 10 largest positions in the fund represent 45% of the assets, Mr. Winmill said.
“Right now, everybody is skeptical and the market is discounting a lower gold price,” he said.
However, he added, the basis for his bullish outlook for gold boils down to the simple math of the federal government’s current fiscal and monetary policy.
“The aggregate deficit over the next 10 years will add $9 trillion to the official U.S. debt, and historically, when countries are dealing with massive debt, the most expedient policy is to devalue the currency,” he said.
The latest $600 billion round of quantitative easing by the Fed bolsters Mr. Winmill’s case for a devalued U.S. dollar.
“Based on the fiscal and monetary policy in the U.S., you have to be bullish on gold,” he said. “There is no limit to the upside of gold if there’s no limit to the downside of the dollar.”
Mr. Winmill shrugs off the “gold bug” label, opting instead for the label of “capital appreciation bug.”
His outlook for 2011 is that gold will peak at around $1,500 an ounce, which is only about 8% above where it is currently trading. But that forecast is based on a certain degree of optimism and hope that the U.S government figures out a way to address the ballooning deficit.
“Gold prices will continue going up until we get the economy to a higher [GDP] growth and start to rein in the deficit,” he said. “In this kind of environment, the name of the game is wealth preservation, and for that reason, you want to be in hard assets.”
However, he added, it is important to realize that not all hard assets are created equal.
“Real estate is a hard asset that investors automatically think of as a hedge against inflation,” he said. “But real estate is a trap because, unlike gold, real estate is taxable.”
Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.
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