NEW YORK (
) -- Gold stocks provide more money-making opportunities than owning physical gold, says one analyst.
The typical belief is that gold mining stocks can rise as much as 20% to 30% more than
making them an attractive investment for those who want exposure to gold without the hassle.
The spot gold price has popped 7% year to date while the
Market Vectors Gold Miners ETF
, a basket of large mining companies, has risen over 8%. Many analysts expect mining companies to profit from higher gold prices over the long term.
is a believer in the gold stock thesis. Its one-year-old Global Opportunities Fund was created to invest solely in small, mid-size and large gold mining companies. The fund rose 7.60% in April while gold prices rose 4.9%, but year to date the fund is up only 0.07%. I spoke with Vedant Mimani, managing partner and lead portfolio manager, to get his approach to the gold market and to find out if he was changing his investment strategy as gold prices surged.
First off, tell me about your fund
Mimani: We're a global macro trading fund. We're focused on precious metals because we think that's where the best risk/rewards lies in the entire world.
What precious metal do you like the best?
Mimani: I like gold the best. And I only consider precious metals really gold and silver.
What stocks do you have in your fund? Top four to five stocks?
Mimani: Well, these are the stocks we hold in the fund I like
Why do you like these big guys?
Mimani: I like the big guys as a whole because they're the ones that have all the money and in a world where money and credit are tight they hold a lot of cards ... I like Goldfields and Harmony because they're very levered to the price of gold.
I like Iamgold and Royal Gold because they're proven winners. They've done a great job of creating wealth in the last nine to 10 years.
Mimani: They're good too. Not to be glib, but you try to maximize the upside. Some of those guys are pretty good too. Barrick is a little bit undervalued say relative to
... but we went a little bit down, a little bit lower in the food chain. There's nothing wrong with those companies in my opinion.
What about the juniors?
Mimani: The juniors offer phenomenal upside potential. The challenge is to find the companies that have good and honest management and the ability to take an idea and a concept
to a real business. You have to really do your homework and dig deep, but there is a phenomenal upside potential for that.
Before we got on camera, we said 90% of the juniors are worth nothing. What are the top two that you do like?
Mimani: These again are companies we own in the fund. I also own them personally,
. I like them both for the same reason. They are run by people that are proven winners and have created value in the last nine to 10 years. In the juniors' space, that's really important.
Are you expecting these companies to be takeover targets?
Mimani: For juniors, what I like are people who can dictate their own destiny. What I don't want are juniors that are banking on the fact that they are going to be a takeover candidate. They need to be able to have the ability to raise money in the market and advance their own projects if a major doesn't come along and take them.
That's one of the reasons why I like majors as a whole. The majors are the ones with all the money and determine which projects are going to get put into play. And like I said that's a powerful hand to hold. So essentially, the two are going to have to marry at some point. The juniors have the ideas, they have the projects. The majors have the money and the ability to raise money to take those projects and make ... real mines and real businesses.
What's your gold forecast for 2010?
Mimani: I have a gold forecast and I'm going to give you a conservative one just so I look like I'm sane, so I'll say $1,500 an ounce. But a point of fact is that I don't really care about the price of gold because what I'm really interested in is gold vs. the price of other things,
which is reflective of margins, of the profitability of the industry. So even if gold stays the same or goes up a little bit but if does better than oil, let's say, and I use oil as a proxy for energy, which is 25% of the input cost for the sector ... that means the profit margins are expanding. As a shareholder ...
that is what I really care more about, the profitability of the business.
How do you allocate your portfolio? Do you go short on another precious metal then long on gold? How do you hedge your risk?
Mimani: It's a great point in this environment. It makes a lot of sense to hedge. Especially after we saw in '08, if you do have bouts of liquidity panic, there can be a contagion effect on everything. In the short term, it could spill over to gold. One of the ways we hedge ...
isI'll be long gold and short copper. Or on the equity side, I'll be long with a basket of gold stocks and be short the general market as a whole. We are looking for gold stocks to outperform stocks as a whole.
How come you don't like copper?
Mimani: I don't like copper because I think it's very expensive and people are bidding it up for two primary reasons as an indirect way to bet on the growth on China and secondly, it's attractive to people who are betting on inflation. In my opinion, it's gotten to the point where it's beyond fully valued.
Mimani: I personally like stocks that just have gold. I feel like the diversification is sometimes is the worst "worsification." I mean, you have a bag of stuff you don't know, you don't want. Maybe people feel it gives them stability because you have earnings coming here, you have earnings coming there. But I like pure plays and I want to be able to make a decision as to how the earnings are coming in. So if I want a copper mine, I want a pure copper mine. If I want gold, I want a pure gold company.
Do you like ETFs?
Mimani: All ETFs are different. GDX is a good ETF in my opinion. And
Market Vectors Junior Gold Miners ETF
is another good ETF. It's a great one-click way to get exposure to the sector. Again, I don't want to put a price on it. You will get an upside. If you're willing to take the time and the effort to do your own homework, maybe you can generate returns that are better than the ETFs. GDX and GDXJ ... are among the ETFs that are very attractive and well-managed.
Does your fund own physical gold?
Mimani: We own a little bit right now, and those ratios will change over time. The reason why we don't own a ton of physical gold right now is because we find the gold miners just more attractive.
Let's talk about performance. In 2009, you were down a little over 3%. Year to date 2010, you were down almost 7%. Meanwhile the gold prices ramped up, double digits in 2009 and we're up about 3.5% year to date. So, are you underperforming?
Mimani: The numbers would indicate that. I would say in 2009 is the first time we had the fund for outside investors. It's a function of time, taking that money and putting it to work. So when you start with 100% in cash, you're not on that first day buying an entire exposure. You have to work it, and that particularly became prominent in '09 because gold became the center of attention.
We look at gold as insurance, and the best time to buy insurance is when nobody wants it. That's when it's cheapest, when nobody wants it. In November-October of '09, it became attractive to almost everybody, especially after John Paulson was interested
and George Soros was interested ... And that caused a lot of followers to get into
gold and that, in our opinion, made it expensive insurance. We were forced to wait until it came down.
Who is your fund for?
Mimani: The primary people who make up our fund ...
are people looking for high returns who are willing to take some risk but they want the high returns. Those people tend to be high net worth individuals who are putting their own money at stake.
Written by Alix Steel in New York
Alix joined TheStreet.com TV in February 2007. Previously, she held positions in film and theater production, management, and legal administration. Alix has a degree in communications and theater from Northwestern University.