Tom Winmill: $2,400/oz Gold In The Next 10 Years

November 20, 2009

The portfolio manager of the Midas Fund gives us his take on the precious metals market.
  • Where gold goes next in the short and long term
  • Have we hit peak gold?
  • Why he likes platinum best of all

 

First there was peak oil, now there's "peak gold." The idea that we may have already passed the zenith of worldwide gold production has never crossed many investors' minds, but now some industry insiders, like the CEO of Barrick Gold, are loudly hailing an impending mining decline. So have we hit the peak of world gold production—and more importantly, if we have, would it make any difference?

Probably not, says Tom Winmill of Midas Funds. Since 2002, Mr. Winmill has served as the portfolio manager of the firm's Midas Fund (MIDSX), a precious metals equity mutual fund that's currently up more than 86 percent year-to-date. 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.

Recently, HAI Associate Editor Lara Crigger chatted with Mr. Winmill about his thoughts on the current precious metals market, including his short- and long-term outlook for gold, why peak gold is not as important as cash for gold and why he likes platinum best of all.

 

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): With gold prices rising so high lately, I think many investors are starting to wonder: Has gold gone too far, too fast?

Tom Winmill, portfolio manager, the Midas Fund (Winmill): Prices have already come up beyond my target for this year, which was $1,100/oz. While I think it's difficult to call short-term prices, whether it's gold or jellybeans, we do think that this run-up in gold prices has not been associated with the euphoria that was seen when it topped out in 2008 and 2007, you know, when it got very spiky highs and then spiked down again. So we're continuing to project an average price of $1,200/oz in the first quarter of next year. It's probably going to correct down, though. I'd say it's going to be in a +/- $50 range for the next two or three months, and it's going to reflect the short-term "fear factor," which will depend on daily headlines. So that's hard to predict.

In the medium term howeverto the extent that the jewelry fabricators have left the market because of the higher price of gold, particularly in rupee terms, and now their inventory stocks are probably lower than average. But people will continue to get married, will continue to have Christmas and Hanukkah and Chinese New Year and Diwali and so forth, so there will be gold orders that need to be filled.

Crigger: Sure, especially since we're only halfway through this normal "gold-buying" season.

Winmill: Right. The other factor that's mildly bullish is that two central banks have very publicly participated in the IMF gold divesture program as buyers, especially India. What's interesting is that the amount India bought200 tonsin dollar terms, that's actually very small, considering world money flows. But as a news item, I'd say that would give support; I'd say that's mildly bullish.

The real big bullish factors that I think will move longer-term prices come back to the very low monetary target set by the Fed in the U.S., and the lack of fiscal discipline in the U.S. Congress. Those two factors will drive the dollar down on the monetary side, and create inflation.

The Office of Management and Budget is currently projecting a $10 trillion cumulative overspend over the next 10 years, and we have about $8.4 trillion in current money supply. So even given that there's going to be some GDP growth over the next 10 years, we're still looking at twice as much money in circulation for about the same amount of GDP. So that simply doubles the amount of dollars it would cost to buy one ounce of gold. It could go higher, if there's a lot of velocity, if this monetary policy continues where money is free and you can borrow at a target rate of zero percent. But when I say "longer-term prices," we're very bullish: Our long-term price for gold, even though some people say it's too modest, is $2,200-$2,400/oz gold in about 10 years.

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