Tom Winmill On Investing In Precious Metals

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 the interview with Thomas Winmill next week.

Comments

[EE]

Get ready to witness history or be a part of it if you own silver or gold ETFs You can speed the price rise time table! Here is a part of Ted Butlers June 16th 2008 comments. I suggest you log on butlerresearch.com and read it all along with past reports...............
"So here we had evidence of delays in the delivery of both retail and wholesale silver. Many are loath to utter the word "shortage" in connection with silver. They believe that to be impossible or they think the word means no availability at any price. That definition is silly, as there will always be some quantity available at some price. A commodity shortage doesn’t mean that all the silver (or any other commodity) in the world suddenly disappears. The correct definition of a commodity shortage would revolve around delivery delays, not unavailability. In other words, a delay in delivery of both retail and wholesale forms of silver would constitute a shortage. Maybe not a severe shortage, but a shortage nevertheless. Such evidence of delivery delays, in the face of declining prices, should disturb believers in free market principles.
Although these delivery delays into the SLV well after the shares were purchased bothered me, I chose not to complain. (By the way, this pattern can be discerned by the uneven deposit pattern into the SLV compared to its trading volume). The main thing that bothered me was that the shares were being shorted at all.
I am going to make a very straight-forward statement. I don’t think short-selling of any kind should be allowed in the shares of the SLV, nor in the shares of the two publicly-traded gold ETFs, GLD and IAU. Of all the tens of thousands of different common stock and other traded securities that are regulated by the US Securities and Exchange Commission (SEC), these three metal ETFs are very unique and distinct from the rest. Out of tens of thousands of different securities, only SLV, GLD, and IAU call for a rigid metal backing, 10 ounces of silver behind each share of SLV, one-tenth of an ounce of gold behind each share of either GLD or IAU. Investors buy shares of these ETFs because they are assured that this specific metal backing exists. Investors buy shares knowing that the sponsors and custodians guarantee the metal to be there.
But what happens when someone buys shares in these ETFs and the seller is selling those shares short? Does the short seller deposit metal to back up the buyer’s purchase? No. The short seller just sells the shares short without depositing metal, perhaps borrowing other shares first, perhaps not. The buyer doesn’t know who he is buying from, he gets a confirmation of his purchase from his broker, pays for it and assumes, according the representations in the prospectus, that he is buying new shares issued by the sponsor who has deposited metal, or from an existing shareholder who has decided to liquidate his shares. It never occurs to the buyer that he is buying from a short seller who is not depositing metal. In essence, the short seller is circumventing what is promised in the prospectus. That party is short-circuiting and destroying the promise clearly laid out in the prospectus that real metal backs every share sold.
Here’s the disturbing question - which buyers’ shares are left without silver backing when short sellers are involved in the transaction? Just the hapless and unsuspecting buyer who was unlucky enough to happen to have his purchase short sold, or do all SLV shareholders get shaved proportionately, like a silver coin clipped in olden times? Don’t look to the prospectus for answers, because you won’t find any.
For those who were unaware of this and don’t understand how shares can be sold with no metal backing (or doubt my contention), there is hard proof. There is a short position list reported that proves short selling exists. Currently, the SLV shows a small published short position on the American Stock Exchange of around 250,000 shares, or the equivalent of 2.5 million ounces. On March 11, this reported short position hit almost 1 million shares, or nearly 10 million ounces. So, there can be no doubt that some short selling exists, which raises all sorts of disturbing questions. In my opinion, this aspect of the metal-only ETFs wasn‘t fully thought through before their introduction. Unfortunately, the problem may be worse than just this SLV short selling; maybe much worse.
WHAT’S GOING ON?
Around this past April 15 I began to notice a more pronounced delay of silver deliveries into the SLV. This was for much larger amounts of silver than I previously observed. In fact, the amount of short selling in SLV shares began to look extreme.
Just a short word on short-selling. Please don’t confuse this discussion on the short selling of shares of the SLV (and GLD and IAU) with the short selling I continually discuss in COMEX silver futures. I know this can be a complicated topic, but it is important for you to understand it. In futures, there must be a short for every long. Therefore, the problem in silver futures is not the presence of shorts, but the documented concentrated nature of this short position, namely, an extremely large short position held by just a few traders. Less extreme concentrations in other commodities have always been considered manipulative by the CFTC in the past; just not now in silver (and gold), for some reason.
In securities, there is no requirement that there be a short position for every share of stock. In fact, that would be absurd. But, due to relaxations in the restrictions on short selling over the past decade by the SEC, the new phenomenon of naked short selling has exploded. Naked short selling in stocks doesn’t involve first borrowing the shares in which to sell short. The naked short seller just sells short without borrowing shares. The short seller then fails to deliver the shares to the buyer on settlement date. The punishment for what is essentially a delivery default? The SEC puts out a (long) list of stocks which have fails to deliver. That’s all it does, it makes a list. No fines, no forced buy backs, no identification of who is naked short selling, no staying after school for detention. And yes, SLV is on that list from time to time. To SLV owners, that should be disturbing.
One last kick in the teeth for SLV and silver investors. All investors who purchase SLV shares must pay in full for their shares (or borrow from their brokers at sky-high margin interest rates). Not only do the naked short sellers not have to deposit a dime for their short sales, nor deposit one ounce of real silver, they receive the full cash proceeds that the buyers put up and get to earn interest and deploy that cash until they buy back their short sales. Which may be never, as no one is pressuring them. This is a Wall Street scam and fleecing of the first order".......ALSO CHECK OUT silverstockreport.com/...

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EE, how many investors in the said ETF's are in on the Short selling them self? It makes you wonder, after all Goldmans new it was selling worthless SIV's to all of it's compitition ! Hank the prank Paulson came from Goldmans, & now is working I think with the FED! CFTS's has shown it will not take action,nor will Comex,which raises flags, the Market has become a haven of immoral bunch,that cares not whom is hurt,as long as they keep the game going, but it will blow,when it does,if you have Physical G/S not in the storage coffers like SLV, the Perth Mint,& other Bullion Banks,then you are some what safe.
There is a big movement in the juniors gold miners, you can read it at jsmineset.com , Jim S. has been & is active in takeing care of his customers, I have come to have great respect of his daily updates accross the board.I hope share holders of all these small mineing companys will read about this at jsmineset.com !
It will take more folks like Ted Butler,Jason Hammel,Jim Sinclair to weed out,search thru data, like GATA.org does & get it out to the Public. To much is left out by TV,news papers and even Gov Stats,because of who has a stake in this sort of news hitting Public Ears!!