A respected gold fund manager still sees gold going to $1,700.00 this year, with a likely year-end price around $1,600.00 per ounce. 24/7 Wall St. got a chance to interview Tom Winmill, portfolio manager of the New York City-based Midas Fund (MIDSX), as part of our portfolio manager interview series. With the name Midas, you know the focus has to be on gold. Gold is still king, and Winmill has some favorite picks and a sector outlook worth consideration.
This interview came at a very unique time. It has been impossible to not notice that many key gold stocks have sold off much more than gold. All you have to do is follow the move in the Market Vectors Gold Miners ETF (NYSE: GDX) with a loss of 15% or so in less than a month. This was after the rapid cratering of silver seen in the iShares Silver Trust (NYSE: SLV) with roughly a 30% fall in less than a month. Tom Winmill did not focus on silver in our interview, but this rapid drop after an equally rapid rise has been an influencing event in many shares tracking precious metals.
Winmill sees this latest drop as a buying opportunity for a long-term thesis in many of the key miners, explorers and producers of gold. He noted, “Equity investors are pricing in much lower gold prices and that doesn’t look to be the case. The companies involved in gold are now trading at lower valuations and I am getting more excited about gold stocks here now that margin expansion is taking place.” Winmill is looking for a peak of around $1,700.00 per ounce in the coming months and he expects that the year-end price is likely to be around $1,600.00. As far as a year average for 2011, he expects that the average daily price of gold in 2011 will be closer to 1,500.00 per ounce.
We always try to offer both sides of critical situations, so we could not ignore that the year-to-date performance of the fund has lagged the market. So far, the drop for 2011 has been about 17.5%. The difference is that Midas Fund is up more than 26% if you use a one-year performance now and that in turn implies that the return was significantly higher at the end of 2010. Rather than just buying bullion or derivations of the SPDR Gold Shares (NYSE: GLD), the Midas Fund invests in shares of the miners, explorers, and producers and we already know how much those have been hit so far this year. 24/7 Wall St. even just gave a list of the most sold-off gold stocks of any size in 2011 this week and that will explain more of the severity of the drop.
The caveat to a rise in the price of gold is a rise in the real returns of short-term interest rates, according to Winmill. The current climate of negative real returns after inflation is helping gold remain high. With more and more currency being created, the move into hard assets is likely to remain. We were also given the opportunity to discuss some key stock picks in the gold sector. We saw the top ten holdings of the Midas Fund and we wanted to know which were among his favorites based upon the current share prices today.
Winmill first noted Eldorado Gold Corp. (NYSE: EGO), even if gold prices were to retreat as he noted it is one of the lowest-cost producers and has a great management team. After looking at the current price of about $15.50, the 52-week range is $14.45 to $20.23. Thomson Reuters even has a consensus price target of about $22.73, so even the consensus analyst group is expecting a move of nearly 50% here in Eldorado shares.
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