PETALUMA, CA –
The Gold Report: Since you launched the Midas Letter Opportunity Fund earlier this year, some might suggest The Midas Letter is beholden to companies held by funds and is not as objective as it once was.
James West: It’s definitely not as objective as it was once. I’m very biased toward the companies I choose to cover because I am invested in them, my retail subscribers are invested in them and now my institutional clients are invested in them. But the caveat is that the companies are now beholden to me-not vice versa-because if they don’t deliver on what they represent, I will ensure that the whole world knows about that.
TGR: You’re developing a Midas brand. Earlier this year, you were forming the Midas Letter Gold Capitalization Fund, which will lend companies capital to bring gold and silver projects into production.
JW: We are continuing to develop infrastructure and partnerships with other entities that can provide the financing-engineering component. For this fund, the money is not really the hard part. There are a lot of funds that are going from company to company and saying, “We’ll lend you some money in exchange for a portion of your offtake.” Everybody’s trying to capitalize on the commodity-stream model.
The difficulty is in identifying the companies to extend those loans to. Companies don’t want to do deals in these conditions because the terms are too onerous. The guy with the money is able to drive a hard bargain because the market is weak.
The fund continues to evolve, but it’s still a ways off yet. The state of the market is such that there is a lot of wait-and-see going on.
TGR: The royalty model has worked well for some companies. Will too many companies in that space kill the model? If they start competing too much, the margins could disappear.
JW: That is largely why the fund is essentially on hold. There are all these firms trying to throw money at various gold deals. Most of the companies are saying, “No, your financing is attractive, but you’re looking to encumber our asset.” They want a portion of the offtake, a warrant kicker, a negotiable conversion rate and they want to be the first creditor on the asset. The gold in the ground is not going anywhere. It’s only growing in value. But companies are going to start running out of money soon and there will be bargain-basement prices in equity financings. That is going to make debt financings more attractive.
TGR: Most pundits think gold is headed lower before it heads higher. The markets would seem to agree. What’s your outlook for gold?
JW: I have unrestrained bullishness for the future of the gold price. I look at the 10-year picture: Gold has increased every year by 21%, and 2011 is no exception. Let’s take the well-known pundit Dennis Gartman, who said on CNBC this week that he has completely exited his gold positions because he thinks gold is going to $1,450 an ounce (oz). If you were to look at all of the times that he has gone on CNBC and said that. . .anytime I hear Dennis Gartman say it’s time to sell, that’s when I start buying gold again! When he says he’s bullish on gold, he’s trying to catch a falling knife. He has done that repeatedly in the five years that I’ve been tracking those statements. He must have very bloody hands and no fingers left because he is consistently wrong.
TGR: You share Eric Sprott’s perspective on silver, which is to say there is roughly 16 times more silver in the ground than gold, thus the silver price will eventually reach one-sixteenth the price of gold. Sprott recently said that silver-producing companies should withhold a portion of their production rather than sell it for cash that just sits in banks and depreciates. What do you make of his statement?
JW: Every company that produces silver should hold it on the balance sheet as opposed to cash. It’s the smart thing to do. If you subscribe to the ideas that the gold:silver price is going to be 16:1 and precious metals have nowhere to go but up because of the debasement of currencies in growing numbers of sovereign jurisdictions, it makes perfect sense.
TGR: Nonetheless, silver companies measure their profits in dollars.
JW: If a company has silver on its balance sheet, then it should be able to count that as part of a liquid-asset holding denominated in dollars.
TGR: There’s not an analyst on the Street that wouldn’t significantly discount a company’s silver holdings given that if it liquidated them all at once that would drive the silver price down.
JW: I agree that there are few analysts who would not penalize a company for that. However, some analysts, and I think they’re the most credible analysts, would actually give the company a premium for such thinking. What that demonstrates to me is a flaw in the thinking of most analysts. It’s a deficiency in generally accepted accounting practices. In the future, we’ll look back to this point in history and say, “Boy, were we ever dumb back then.” We should be valuing gold as money. It should be valued at a premium to cash on the balance sheet, as should silver. Analysts should value those companies accordingly. It’s not conventional wisdom. However, I believe that one day it will be and that it’s a superior analytical perspective.
TGR: What’s your outlook for silver?
JW: Its price is going to be one-sixteenth of the gold price so it’s already undervalued by at least two-thirds. Gold and silver are both going to continue to appreciate. I agree with Sprott when he says that silver is going to outperform gold.
TGR: You’re often ostentatious and outspoken, which are just some of the reasons we like to talk with you. In an interview with BNN last month, you said investors often have the attention span of “gnats.” What did you mean by that?
JW: How many substantial financial crises have there been since the late 1980s? Probably six? In that timeframe, one should become accustomed to the idea that markets go up and down, sometimes drastically. As soon as investors see a market that goes down by 10-15%, such as recently, they dump everything. A successful investor cannot focus on a short time horizon. It is possible to have some success as a short-term trader, but ultimately it’s like Las Vegas-the house always wins. To win in resource investing, take a long view and set an agenda. Don’t let short-term volatility inform investment decisions.
TGR: That is very good advice. Thanks.
Midas Letter is the Journal of Investment Strategy of the Midas Letter Opportunity Fund, a Luxembourg-based Special Investment Fund that specializes in Canadian-listed emerging companies in the resource sector with a focus on precious metals explorers and miners. James West is the portfolio and investment advisor to the fund. Every month, West’s Midas Letter Premium Edition deconstructs the economic and political events of the past and upcoming week, and identifies risks and opportunities to investors seeking to profit while the majority of investors are losing money.
Article published courtesy of The Gold Report – www.theaureport.com