Tom Winmill on Legislation and Speculation Limits

by: Hard Assets Investor posted on: July 07, 2008 | about stocks: GCC / GSC / GSG

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Tom Winmill, portfolio manager for Midas Funds (Winmill): Well, I think it will probably have some impact definitely, right away. There’s no doubt that there’s financial speculation in the commodities market, which we basically think is a good long-term trend. For investors to have exposure to commodities means that they’re going to have a well-represented, diversified portfolio.

Norman: Yeah, but haven’t commodities historically not been very strong performers? Take gold for example. Adjusted for inflation, in constant dollar terms, gold right now is still probably 50% lower than where it was in the 1980s. How good of an investment was it really?

Winmill: Well, gold historically has been a way to preserve the value of your purchasing power. It has a negative cost to carry, so only in certain times do you want to own gold. Unfortunately for Congress, it’s about a dollar late and a day short. The time to have banned speculation in certain commodities probably would have been at the bottom. Here they’re now banning at the top and, if it’s going to go down from here, it’s probably too late to have banned. Typically they’ll aggravate the market cycle by forcing sales into the market.

Norman: You’re implying that Congress acts beforehand, when in fact we know it takes them a long time, those lawmakers up there on Capitol Hill, to even get what’s going on. So you think there would be an impact? How likely do you think some sort of regulatory control or an outright ban … how likely do you think that possibility is?

Winmill: Now that’s a horse race that we would not be able to handicap. We’ve looked at a lot of different types of legislations - tobacco legislation - all kinds of legislation, and the backdoor deals … I just don’t know, so I really couldn’t answer. But I would say that were the Congress to ban ownership by pension funds and commodities, Midas Funds would be shorting those commodities, and we think we’d make a lot of money for our stockholders.

Norman: Oh, so you go both ways? You’re not just a long-only approach to commodities; you play both sides of the market?

Winmill: The nature of commodities is that it’s very volatile, and investors should limit their own personal investment to no more than 5 to 10%; that’s what our story is at Midas Funds. But at the same time, when things get way overdone, we take a view on that - we look at the fundamental characteristics of that commodity, that resource, and make a decision in order to optimize returns for Midas Funds’ stockholders.

Norman: Now when you talk about fundamentals, there are folks out there now who say one of the big fundamentals is monetary policy, the Federal Reserve, the exchange value of the U.S. dollar. It seems more like you focus on, “Hey, this particular company, it’s my operation, what sort of a profit is it going to return?” But what about those macro factors, those monetary policy factors? Does that come into play in your decision-making process?

Winmill: It certainly does come into play, Mike, and partly in the way we allocate the funds. So right now one of our favorite allocations is the platinum mining companies. Platinum - currently the worldwide demand is about 7 million ounces - there’s only about 6.5 million ounces produced worldwide; 80% of that comes from South Africa, and the demand for platinum primarily is in diesel auto catalytic converters.
In other words, every diesel engine that’s put into service - including some off-road vehicles like bulldozers - start to require more admissions controls, and that’s where platinum comes into play: more demand on the horizon for platinum, higher platinum prices, great returns for our platinum mining companies.

Norman: It factors in with the whole entire theme of reducing carbon emissions and all that, and alternative energy … the new technology in cars, as we all know. Overall now, where are we? This rally has been ongoing now for the past six years. A lot of investors just seeming to wake up to this … although it’s sort of long. Do you think it’s near the latter stages or is there a lot more to go?

Winmill: I think there’s more to go. I’d say we’re in the fifth or sixth inning of a nine-inning game, mostly because the commodity cycles are long. It takes now about 10 to 12 years from finding a deposit, getting through the permitting process, financing and making a stockholder money.

Norman: All right, so we’re in the fifth or the sixth inning. You heard it here. Tom, thanks very much for joining us on the show; I appreciate it. Folks, see you for now. This is Mike Norman. Stay tuned right here to HardAssetsInvestor.com.