-- Posted Tuesday, 20 September 2011 | | Disqus

James West has gone from writing the audacious and controversial newsletter Midas Letter to raising over $1 billion for a series of funds called Midas Letter Funds based in Luxembourg. The Gold Report caught up with James in Colorado Springs at the Denver Gold Forum, where he was searching for quality companies to include in his next newsletter. He agreed to sit down with us to find out how this juggernaut of rapid financial evolution came about, and where it is heading next.

The Gold Report: James, it seems every time we talk to you, something new is happening. You started off with the Midas Letter in 2008, started the Midas Letter Opportunity Fund this year, and now, you're embarking on the structuring of two additional funds before you've finished raising the money for your first fund. What is your objective in all of this?

James West: Well, first off, let me say that I'm just walking through the doors that seem to be opening for me as a result of the good luck and success of the Midas Letter. When we began circulating the idea of the Opportunity Fund, we envisioned raising no more than 10 million (M) Euros, which is roughly CAD$13.6M, because we only wanted to participate in selected seed and pre-IPO investment rounds of TSX Venture–listed resource deals. We found the participation appetite from our immediate universe was easily double that. Then an investment advisor who represents Chinese groups approached us with the idea of mirroring the Luxembourg fund in China for Chinese high net worth investors. That just wasn't feasible, given the obligation we now have to our unit holders in the Opportunity Fund. Plus, the Chinese investors wanted to put in a starting figure of $200M. We put on our thinking caps, and came up with a fund framework that serves the objectives of all the involved parties. My stated mission for Midas Letter all along has been to use the letter to establish and perpetuate a global platform for the marketing of high performance financial products of any stripe. With the Opportunity Fund, we have the small, high-speed Formula 1 vehicle we need to position our group in the best early stage deals, and provide unit-holders with the first right to finance follow-on financings. For the resource company entrepreneurs, involvement of our fund means non-brokered financings held by much longer time-horizon, European high net worth private family offices. That, in turn, means lower average cost of capital, and at the end of the day, better valuations and retained earnings.

So now, with our Chinese partners and some others, we are developing the Midas Letter Gold Capitalization Fund, which will lend capital for last-mile construction, or pre-feasibility stage, resource projects that are repaid from the commodity stream of the project. For example, we lend company x, which is building a gold mine, $80M to get through bankable feasibility and carry it to the point where it can access conventional debt financing, and we are repaid in a portion of the gold production.

So then we decided to create the Midas Letter Gold Bullion Trust, which will be held in a vault on Guernsey Island, and which will purchase the gold from the Capitalization Fund, refine it ourselves, and hold it in tax-optimized, independent yet British-protected Guernsey Island, in a Bank of England-approved, Lloyds of London-insured vault, with in-and-out fees of 1% and annual management of 0.5% annually. It will be the lowest cost physical bullion trust in the world where owners will be the registered owners of the gold held.

So by participating in the precious metals asset class from exploration to bullion trust, we will be optimally positioned to bring financial products to investors as the global economy moves closer and closer to a gold and silver-linked single currency. That is what we think is the inevitable result of the race to devaluation that is currently underway among all formerly prosperous nations.

TGR: So it sounds like you are quite bullish on gold.

JW: My outlook for gold is best categorized as "Unrestrained Bullishness."

TGR: So just gold, or gold and silver? What about base metals?

JW: For me, the risk of the bloom coming off the copper rose is too high right now, and so our funds have liquidated all copper holdings. Codelco is seeing order cancellations from European customers, and the Chinese demand for copper is not expected to grow, which means the former shortage of copper is quickly going to become a glut of supply and excess of production, no matter how much Goldman and J.P. Morgan and HSBC bury in their warehouses.

Now I caveat that with the recognition that Goldman Sachs has come out very positive for copper, despite global weakness. And now that Helicopter Ben has taken it upon himself to stimulate every other economy in the world with U.S. dollars as his hair-brained solution to solving his own simmering debt crisis, there is likely a strategy being rolled out here that essentially means all that excess U.S. dollars are going to be used to stockpile commodities like copper, because what else is there?

I think copper price weakness is the canary in the coalmine showing that even the Chinese machine is starting to seize up.

TGR: So no to base metals, yes to gold. What about silver and platinum?

JW: Well, first and foremost, I love silver. I agree with Eric Sprott in his assessment that silver is the investment of the next decade. At some point, the daily interference of government-sponsored market manipulation in the futures and options markets of commodities, and most recently stock index futures, must come to an end. As it does, silver will finally be free to reflect the pent-up investment demand that the compromised futures marketplace masks. Silver should explode to the upside, and I have no hesitation in predicting a near term 30:1 price ration in terms of number of ounces of silver it takes to buy an ounce of gold. That implies a silver price of $60/ounce (oz.) if gold is trading at $1,800/oz. And I think we'll see that at some point in 2012.

There is going to be an explosion in demand for monetary metals, and many people forget that platinum is a monetary metal as much as gold is, and, at its current price, is seriously lagging its decade-long trend of out-pricing gold by a large margin. Platinum has averaged around $400-$420/oz. higher than gold in the last 10 years, but while gold has risen by 32% this year, platinum has increased in value by only 5%. And let's not forget that the political situation in South Africa is becoming increasingly hostile to foreign mine ownership, so you can expect investment in mine-dependent infrastructure to go wanting where it is already in a decrepit condition. That will negatively impact global supply, and thus put upward pressure on platinum prices, in the long term. If the demand for gold is based on value preservation, then platinum serves that function just as well.

But for gold, the demand is steady and relentless. Large capital positions are realizing that the very best wealth preservation strategy lies in holding physical bullion. People who say gold doesn't return an investment profit are incredibly myopic. Its just rubbish to say something like that about a commodity that, if invested in 2001, will have returned 500% over the last decade.

TGR: Okay, what about the stocks? It seems the producers have been underperforming gold, and the explorers and near-term producers have been losing value steadily.

JW: Yes. . .in terms of the producers, we're starting to see the advent of a phenomenon that essentially demonstrates the idea that, after a certain point, a gold company can't really deliver a lot of shareholder value on the speculative side, because they've got to constantly trade in their equity to replace the ounces they produce, which creates a perpetual wall of paper that tends to limit price beta to gold. So if you're trying to look for less risk by exposing yourself to producers, look to the smaller, up-and-coming producers for better bang for the buck.

TGR: What about the juniors?

JW: Well it is true that the TSX Venture index has been drifting downward steadily since the May highs. And, yes, the senior producers have been underperforming gold. But this past week's sell-off in gold precipitated primarily by Bernanke's "Choke the East with Dollars" campaign is exactly the kind of price action in gold that delays movements into senior miners. Holding the metal is one thing when the price dives—producers seem to react with a greater beta to gold when the price tumbles—so investors are wary.

But in the juniors, despite the general decline of the TSX Venture index, there are some shining examples of incremental price appreciation, and last month's market plunge has inadvertently taken some very high quality companies with it. So there is going to be a pile of money made in the juniors, I think, in the next 12 months, but investors need to be extremely selective.

TGR: Thanks James. Your newsletter is still available to subscribers?

JW: You bet, but the price is going up at the end of October!

Midas Letter is the Journal of Investment Strategy of the Midas Letter Opportunity Fund, a Luxembourg-based Special Investment Fund that specializes in Canadian-listed emerging companies in the resource sector with a focus on precious metals explorers and miners. James West is the portfolio and investment advisor to the fund.

Every month, James West's Midas Letter Premium Edition deconstructs the economic and political events of the past and upcoming week, and identifies risks and opportunities to investors seeking to profit while the majority of investors are losing money.

With a track record extending back 10 years in precious metals-related assets, Midas Letter provides actionable, accurate and unbiased information every week that saves subscribers losses from exposure to misidentified trends, and directs them to high-performance investments.

Streetwise - The Gold Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

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Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

-- Posted Tuesday, 20 September 2011 | Digg This Article | Source: GoldSeek.com

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