Return of the Gold Bug

How about supply? [Partly owing to environmental concerns], it is becoming tremendously difficult and costly to spur production and replace reserves. The cost of getting gold out of the ground is more than $300 an ounce. You don’t make much profit with gold around $320. So we are going to see a tremendous contraction among mining companies and a 60% drop in production over the next 10 years.

Do you only invest in mining issues? No. We own Tiffany & Co. It controls the richest diamond mine in Canada and moves more with consumer sentiment than with gold.

Morningstar has called Gold Shares “one of the world’s worst mutual funds.” What’s your reaction? The costs of maintaining small gold fund accounts–many of them under $1,000–were killing me. So our gold funds had huge expense ratios. I told the small shareholders that unless they were cost-averaging, they’d have to pay $6 a quarter. So a lot of them bailed out. We are back down to 100 basis points in management fees.

What prompted the Royce mutual funds to become U.S. Global’s largest shareholder? They own 14.99% of U.S. Global. After 9/11, they went 10% into gold. We were a value play with a huge leverage to gold.

How are you turning around U.S. Global? I fired people all over the place. I instituted price-risk management of our stocks. I want a control sheet–like a Value Line report–for every time we buy a stock. All the metrics, who the analyst talked to, and so on. I created standardized controls for macro analyses and company earnings. And we now use a SWOT model–for strength, weakness, opportunity, and threat. We look at strengths and weaknesses [of stocks] over 5, 20, and 60 business days, and one year. We update our earnings model every morning. Every Monday, we do a top-down analysis of the 11 sectors in the S&P. And we look for correlations. For example, we download DRAM [computer-memory] valuations every day and put them into our pricing model.

Editorial Director William Glasgall can be reached at [email protected].