"Go to Gold"

Why – and when – Gold Mining investors should switch to solid Gold Bullion instead...

With SO MANY Gold Mining stocks out there, picking the right one for your portfolio can be a daunting task, says Lara Crigger at Hard Assets Investor.

How can you tell the stars from the stinkers? Easy: Look for the three P's – people, pricing and projects, says Tom Winmill of Midas Funds.

Winmill has served as the portfolio manager of the silver and Gold Mining investment fund since 2002. He is also the chairman of the Investment Policy Committee, where he helps establish general investment guidelines, and a member of the New York chapter of the American Institute of Mining, Metallurgical, and Petroleum Engineers.

Here he shares his thoughts on gold and Gold Mining with Hard Assets Investor, including his short-term outlook for the yellow metal, why gold is like a breath mint, and why investors should switch to Gold Bullion from the mining stocks just when everyone else moves in...

Hard Assets Investor: Tom, where do you see the price of gold going in the next 6-12 months?

Tom Winmill: By the end of the year, we estimate a $1400 per ounce US Gold Price. Then over the next 18 months, we foresee the price probably meandering up about $100 per quarter.

The reason we say that is because we see the gradual increase in creation of US Dollars is going to continue for some time. That will result in inflation news, we think, and the perception of that inflation is what investors need to focus on.

Price-wise, historically, gold is a volatile metal and the near-term factors are influenced dramatically by what we call 'Fear Factor': political news, geopolitical disaster, worries that European banks will fall, etc. These things tend to affect the short-term price. So I think we'll be quite spiky over the next 18 months.

HAI: Is gold starting to trade more like a currency than any actual commodity?

Tom Winmill: Well, at Midas, what we've said for many years is that gold has these two attributes: the currency attribute and the commodity attribute. We compare it to that old advertisement of whether Certs is a breath mint or a candy mint.

So as long as it trades as a breath mint – that is, as a currency – then you'll see it being influenced by these aspects of US monetary fiscal policy. Ultimately, we think the breath-mint aspect of gold, as an alternative currency, will carry the day, because the money flows are that much bigger.

Now gold as a commodity is influenced, at least in the medium term, by fundamental supply and demand factors, such as central bank buying and selling, jewelry manufacturer orders, and of course the famous 'Fear Factor.' I think that that's a very valid way to look at gold; it only depends on your timing outlook. At Midas it tends to be longer-term investors, so we're focused on the breath-mint factor of gold as an alternative currency.

HAI: I have to say, I love the analogy of the breath mint vs. the candy mint. It's very true.

Tom Winmill: It adds some levity to the usual doom and gloom gold discussions.

HAI: And certainly there's a doom and gloom mindset that pervades Gold Investing. But gold has benefits aside from end-of-the-world scenarios, too.

Tom Winmill: I think you do have to look at gold as a potentially positive role for US investors. It's neither an evil thing nor a blessed thing – it's just one thing that US investors need to keep in their kit bag to prosper over the years ahead.

You know that for the decade leading up, as we all know through 1999/2000, equities were the place to be, and then it turned into a scenario where bonds had the best performance. Now gold has had the remarkable performance over the past decade, but we think that the best is yet to come for those with gold exposure in their portfolio. Bullion will have a very good rise, but we think gold mining equities will actually outperform even the metal itself.

HAI: Along those same lines, are there some market environments in which certain Gold Investments make a better choice than others? Is there a better time to invest in bullion over stocks, or junior miners over large diversified concerns, and so on?

Tom Winmill: That's a very good question. I think there absolutely is. At some times, various sectors, even within the general Gold Mining sector, will outperform. The way we look at it at Midas is that in a bull market, it tends to be that the big mining companies with cash flow derived from ongoing operations who see the most immediate effects through margin expansion and revenue increase. So initially in bull markets you want to go for big-caps.

But then as euphoria comes in through the Gold Mining equity market, then you see the smaller-caps come along. And some of them will be junior project developers with revenue, but as the euphoria increases, you see what we call the "Turkeys Will Fly" season. Even the turkeys will fly. So the last stages of the equity bull market is the time when mining companies are analyzed based on the number of acres that they have in their exploration package. It's like comparing buying an Internet company based on the eyeballs that have visited the site.

So at this point, investors should just switch out of equities into bullion. And the reason we advise that at Midas is because investment bankers can create an unlimited amount of gold mining equities, but they can't create unlimited amounts of gold. So they can add a couple zeros, they can authorize stock of any mining company and spin things out on IPO, you name it. When the Gold Price spikes, they flood the market, so that's a time when investors should think defensively. Investors should think about gold or other precious metals, like silver or platinum or even a base metal.

HAI: I think that advice is counter to how most investors behave: They'll buy miners throughout an equity bull market, then only go to bullion after stocks tank.

Tom Winmill: Right; we say go to Gold Bullion, although of course at some point in asset crazes, it all "comes to smash," as our English counterparts might say. So you want to be in something a lot more defensive, perhaps an attractively valued world gold company that has actual distribution, has dividends and so forth.

HAI: The Midas Fund has the ability or the flexibility to invest in a range of securities besides gold, including silver miners, platinum miners, copper miners and all sorts of other commodities, fixed income, and so on. To what extent have you been doing that lately?

Tom Winmill: At Midas we're not gold bugs, we're capital appreciation bugs. We don't view gold as the be-all, end-all; it's really a tool to provide our stockholders with capital appreciation. So just like any other sector, you have seasons where you go in and out, and we see the base metals, oil, food and so on perform differently under different economic scenarios.

So we made investment in the underperforming platinum companies, because platinum has not been near as high as gold has. The price hasn't really moved, even though there was a new ETF just for platinum, because the economic cycle remains stalled; it didn't go into a full recovery the way we had estimated.

On the other hand, silver – gold's little brother – tends to have a beta to the Gold Price. Its expected store value has increased. Even though the silver ETF has not added ounces to its holdings since December of last year, the amount of silver hitting the market was not what was projected, because the base metal companies who produce silver as a byproduct have restricted production. So there wasn't as much silver as was anticipated, and that has boosted Silver Prices substantially to date. So our silver mining companies have done quite well.

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