December 2, 1999 – This is to let you know that Kjeld Thygesen and I are no longer managing or advising the Midas Fund. As of yesterday, our contract was not renewed. That’s the bad news. The good news is that we are trying to purchase the Midas Fund management contract, and thereby re-establish our position as managers of the fund. If we are successful in doing so, I believe the best interests of the Midas Fund shareholders will be served, which has always been our most important objective.
Because he has served as the fund’s Portfolio Manager since January 1992, Kjeld’s name is synonymous with Midas. With his long tenure, he has seen good times and bad. Nevertheless, he has always been relentlessly driven by one objective – to serve the best interests of the Midas Fund shareholders. Moreover, since I joined him in 1994, we have both worked hard to make Midas one of the industry’s leading Gold funds.
All of that is water under the bridge, but this story is not finished in one important respect. Both Kjeld and I remain loyal to the thousands of shareholders who joined Midas during our stewardship, including many of the subscribers to these letters. And Kjeld and I still feel a strong responsibility to all of those shareholders. Consequently, because of this responsibility and loyalty to you, the shareholders, I have prepared this report to update you.
There is now one important matter at hand. Will the interests of the Midas shareholders be best served without Kjeld and me at the helm? Let me give you some facts, and then you can decide. But first some disclosure,. After all, it is impossible to say anything about stocks today without at least some disclosure.
I am speaking in this report only for myself. I have never attempted to put words in Kjeld’s mouth, and I’m certainly not going to start now. If you want to hear his thoughts on this matter, to be fair to him you’ll hear them directly from him, not from me. Having said that, here are the facts.
In recent weeks I have received more than the usual number of inquiries from Midas shareholders. But it was clear to me that two common themes emerged. First, what risks were being incurred by the mining companies that hedged? I was getting these questions even before the Ashanti and Cambior disasters were known, and readers to these letters know my anti-hedging stance and the reasons for it.
Second, why was Midas underperforming other funds? This last question was particularly troublesome to them because Midas is known for outperforming the other funds in rising markets. And since the Gold rally began from the July lows, Midas did not meet their expectations.
The short answer is that beginning in mid-July (July 19th to be precise), which more or less was the bottom of the market, our boss at Midas sold a chunk of the portfolio. He did this against the recommendations of both Kjeld and me.
The fund was fully invested at the time, and Kjeld and I both felt comfortable with a fully invested position. We had been selectively adding to the portfolio, and did more buying than selling in the first half of the year picking up what we believed to be exceptional values. The last thing we wanted to do was have Midas sitting with a pile of cash when we both understood (and I documented my thoughts on Gold at the time in these letters), that the market could turn at any time.
Nevertheless, we had to accept this decision because the boss had the authority to override our recommendations. Moreover, I consoled myself by thinking that these stocks could be bought back and the fully invested position re-established without much harm if we acted quickly to buy as soon as the break-out in Gold occurred. Since June, I had identified in these letters and elsewhere the $262 level to be an important break-out point, and that level would be my buy signal when Gold broke through it.
In August both Kjeld and I discussed with our boss the possibility of a squeeze, which had the potential to drive the Gold price higher (again, as I documented in these letters at the time). Further, as conditions ripened for a big rally after the September Bank of England auction, I began preparing my recommended buy list. Once $262 was broken, the downtrend would be reversed, and that would be the signal to again get fully invested.
I spoke about the $262 level to whoever would listen. It was also a key break-out point that I discussed in these letters. However, we never had the chance to act on that break-out. On Monday, September 20th, the day before the Bank of England auction, Kjeld and I were told that our services were no longer needed. I’ll have more to say about what we have been doing since September 20th, but let me first finish explaining the under-performance.
As a consequence of this message from our boss, on the break-out above $262 there was no buying by Midas to invest the surplus cash raised in July. But it gets even worse. Immediately after the Bank of England auction, our boss started selling stocks when bullion was in the $260’s, just as the rally was getting underway. Despite Kjeld’s reasoned arguments against selling, the selling took place nonetheless. All the cash raised in the next few days assured that Midas would under-perform as the Gold price rocketed higher.
The selling made no sense in another way as well. Let me
give you two examples of what was sold. One of my favorite mining companies is River Gold. It’s a small Canadian producer that among other things, offers two important reasons why it should be owned. First, it has a strict policy of not hedging any production, a factor that makes it very attractive when the Gold price is rising. Second, even at the current low Gold price, River is generating positive cash-flow. This stock was sold right after the Bank of England auction, as was the next example, Pangea Goldfields.
Midas had owned Pangea for awhile, and is a typical stock that fits the traditional Midas profile in that it is a development company with interesting prospects. As shareholders know, Kjeld has clearly demonstrated his stock picking abilities many times, and Midas to a large extent owes its success over the years to small-cap stocks that multiply in price because of mineral deposits that prove to be economic.
Pangea fits that profile. It has everything it needs to make it a great stock – well respected management, a good balance sheet, and property with great prospects and potential. Not only had Pangea weathered the bear market that crushed so many stocks, including some good ones, Pangea was riding high. It had signed an agreement with Barrick Gold to explore a highly prospective Gold deposit Pangea was developing in Tanzania.
In fact, Kjeld and I met with Pangea’s management in May to discuss their joint venture project with Barrick. I in particular wanted to talk to management to see whether the potential was as good as it seemed. I left the meeting very satisfied that this was a stock to be owned, and Midas was well positioned as one of the biggest shareholders in the company.
On September 22nd, without prior consultation to Kjeld or me, the stock was sold. The lucky buyer received a gift. It went for around C$2.80, and the stock never looked back. Just two weeks ago Barrick announced that they were buying one million newly issued shares of stock for C$4.00, thereby putting C$4 million into Pangea’s treasury. Barrick recognized the value of Pangea, even if our boss did not.
Decisions like this one on Pangea raise questions. Had the boss ever met with Pangea’s management? Did he even try to familiarize himself with the company before selling it out? Why wasn’t Kjeld’s advice sought before the decision was made to sell? In short, why sell a stock like Pangea? And most importantly, how were the Midas Fund shareholders supposed to benefit from this sale?
If I seem highly critical, I guess it’s because I am. Let me tell you a little bit more about our former boss and his published track record.
For over two years he has been managing a Gold fund formerly called Bull & Bear Gold Investors. According to the most recent quarterly mutual fund survey in Barron’s, Investors has the worst record of any Gold fund in almost very category.
A direct performance comparison with Midas is telling. In the third quarter, Midas gained 12.41%, even though it was under-invested, carried too much cash, and had some winners sold out from under it. This result contrasts to Investors, which lost -1.05% in the quarter. And the person managing Investors is now managing Midas.
I suppose you are wondering how it is possible that someone with that poor track record can let go two well regarded and experienced mangers, who are knowledgeable about Gold and mining companies, and then put himself in charge? Good question, but I don’t have a good answer.
Now, I have nothing against change as long as the Midas Fund shareholders benefit from it. But in this case, I don’t think that they do. But Midas shareholders don’t have to take this decision laying down. They have two alternatives.
First, the management contract is controlled by the Midas Fund shareholders. If they believe that the current manager is not acting in their best interests, shareholders can vote the contract from the old manager and award it to some other mutual fund management company that the shareholders believe will better look after their interests. However, this process takes time, and while you may win the battle you may lose the war if your Midas Fund investment goes nowhere if the price of Gold rises in the months ahead.
The second alternative is to close your account. Pull out your money and place it with a different fund that will better serve your interests.
Because I personally have no confidence in the person now managing Midas, I recommend to all my family, friends and others who have invested in Midas because of my and/or Kjeld’s management, to close your account.
Of course, this is just my recommendation. Each of you have to satisfy yourself that closing the account is in your best interests, so I recommend that you may want to do more research first.
If you close your account, what do you do with your money? Presumably you will invest the money you had in Midas in another Gold fund, to take advantage of the opportunity ahead of us. If you believe that Gold is cheap, good value and should be accumulated, you need a Gold investment. If you are expecting the Gold price to rise, you need a Gold investment.
In commenting on markets in general, Warren Buffett recently said: “The fact is that markets behave in ways, sometimes for a very long stretch, that are not linked to value. Sooner or later, though, value counts.” I believe that Gold’s value will be increasingly recognized in the months ahead.
I have two recommendations for your Gold investments, and both are no-load funds. If you prefer an index type of fund, place your money with American Century Gold Fund. This fund is designed I understand to track theFinancial Times Gold Mining Index.
If you want to place your funds with an experienced manager, then invest in the Sogen Gold Fund. It is run by Jean-Marie Eveillard, who is an experienced and knowledgeable fund manager with a bullish outlook on the price of Gold.
Finally, I promised to answer the question, what have Kjeld and I been doing since September 20th? Several things to try keeping Midas on track, but most importantly, we are discussing the purchase of the Midas contract. It is our hope that these discussions will be successful, and that within a matter of months, we will again be managing and advising the Midas portfolio. I will keep you posted on developments in these letters as to whether or not we are successful.