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Remarkable Value in Junior Miners & Oil Stocks - Frank Holmes Interview

 -- Published: Wednesday, 30 July 2014 | Print  | Disqus 

By Vanessa Collette

Vanessa Collette: Welcome to Cambridge House Live. I’m Vanessa Collette here at the Sprott Symposium–I’m joined by Frank Holmes, CEO and Chief Investment Strategist at US Global Investors which also trades on the NASDAQ under the symbol GROW. Welcome Frank , nice to see you again.

Frank Holmes: It’s great to be back.

VC: Now Frank, you’re a big fan of following global indicators. What are you seeing right now?

FH: One of the most important indicators when looking at resources as a whole, is what they call the Purchasing Manufacturer’s Index – the PMI – and the PMI is a forecasting tool, it’s what is anticipated 6 months out – and each month it is updated. It’s highly correlated to the demand for commodities. When you look back – it’s industrial production- it’s where money is being spent. So with that, PMI’s have turned positive. They were positive, they faltered with Japan, in April, in May, now they’ve turned positive for the world. That’s very powerful for underlying a belly of demand for resources.

VC: And why is that?

FH: Because the Purchasing Manufacturer’s Index is basically a high paying jobs that manufacture various goods and products and services. And that means there is global economic trade. 

VC: So you are seeing the PMI’s rising, and recovering, globally. Are we seeing a global recovery?

FH: Yes we are, and it’s important – what we like to look at is the one month- for the global PMI, versus three months. So when the averages – the trend is your friend – when the one month is above the three months, usually, the mathematical models say copper is up, oil is up, it’s all apart of that global economic activity.

VC: So what does this all relate to gold?

FH: Well with gold, it comes to the love trade. Because what is so important, what took gold to $1900, half of that whole move, is the rising & GDP per capita of emerging countries. And they have a cultural affinity to give gold for weddings, graduations, etc.


VC: So we just kicked off the seasonal, love trade in gold.




VC: And that continues from now until Christmas ?


FH: It’s Chinese New Year. So it starts with Ramadan, then we have Indian wedding season, and then we’ll go into the season of lights in India, then we will have another wedding season, then we’ll have Christmas, then we’ll have Chinese New Year. Until February.


VC: And how are you seeing it play out this year compared to other years?


FH: Well last year there was a big import duty imposed in India, to try to get everything to slow down gold and all it did is make it go illegal – and smuggling took place. They’ve laxed those and we just witnessed last week, a 65% increase on a year over year basis of gold imports going into India.


VC: I mean a lot of people have been watching and waiting, for this new Prime Minister coming into office in India, and people have been waiting for him to reverse this 10% gold import duty. So did we see a change, is that what you’re saying, last week? Has any announcement been made?


FH: Well, there are some – making it easier for the banks to facilitate the movement of gold and distribute gold. So that is in place – the exact 5%, 10%, 20% - that is not put in place – but the ability just to move gold.


VC: Now you’ve said that this year platinum and palladium are your favorites. Are they still your favorites?


FH: They are – because you if you have rising PMI’s – That’s highly correlated to car sales. And now we are seeing China with car sales, and now they are imposing North American standards for platinum and palladium to be in cars, so there is a pent up demand taking place there. And in North America, with the higher energy process, and the cheapest prices in history to borrow money – you can borrow money inexpensively to buy a brand new car – and it helps offset the higher energy prices because the new cars have much better mileage – 30% more than what a car ten years ago would deliver.


VC: Right and with this incredible urbanization happening in China, for example, a lot of people are buying their cars for the first time.


FH: They are.


VC: And more than in the US actually– the numbers are higher in China than the US with annual car sales?


FH:  Correct. And as fast as they build highways, they start packing them with cars.


VC: Now what is going on in South Africa with the strikes there?


FH:  What we have seen in the past, since 2011, when there are blocks in the supply of any commodity then we get a big rise in them. So the problems in South Africa are causing a supply situation, a constraint, for platinum and palladium. SO the two big issues with platinum and palladium are Russia, Putin, is a big supplier of the world’s palladium, and South Africa is for platinum. I think the global economic activity will remain, and that will both see platinum and palladium trade higher.


VC: And is that why palladium recently hit a 13 year high?


FH: We did. Every time there are problems in Russia, it can be a supply restriction for palladium.


VC: Now you’ve said that people should hold about 10% of their portfolio in gold? Can you elaborate?


FH: Well, looking back on studies, it is just prudent to have insurance – I like to call it portfolio insurance. It’s like car insurance- you don’t go and have an accident so you can collect. So you want to always have gold in your portfolio, and having 10% seems to be just a prudent process. So last year the stock market was vibrant, up spectacularly well, so you would have taken profits because gold was down and bought gold at a discount, and year to date, gold has had a wonderful run. So this idea of having 10% helps balance your overall portfolio against currency volatility, and also participates in the huge consumer demand that is taking place in the Middle East, India and Asia.


VC: Right. Now are you buying gold right now, gold stocks? Are you excited about the sector? You have said in your sector rotation model the peak of the last bull market in metals was December 2010 – and it is very unusual for any sector to be in for more than 2 or 3 years – and we are now in our 4th year?


FH: Three years – so it’s only 3 times in thirty years that you have had gold stocks fall 3 years in a row. And what took place in 2011, that peak, was GDP globally. We look at GDP as the world’s – flying at 50,000 feet, watching it rotate and spin, we will see that real global GDP peaked at 5.4% and fell to 3%. So if it has fallen almost 50%, guess what happens to the metals stocks – and even energy stocks – they are off dramatically. So you are seeing great value in this space.


VC: So you are seeing a lot of value right now in maybe some of the companies that are here at the Sprott Symposium or that you are looking at right now? 


FH: Yes. And it not just gold stocks, or base metals stocks, copper stocks which we love, it’s also oil – I mean it is remarkable that oil stocks are priced  at where they were when oil was $12 a barrel. It’s hard to fathom that. And junior oil stocks – they were trading at $120,000 per barrel of oil production, they fell down to $20,000, now they are back to $30,000 on takeovers that are worth $50-60,000 – so I think there’s many wonderful small cap energy companies – in Colombia in particular, they’re just going to get bought out because we are seeing these roll-ups -and when the M&A activity takes place, there are 100% lifts in these stock prices.


VC: What are some of the other drivers behind that? We’ve looked at some of the drivers behind gold – gold purchases coming from India and China- what are some of the drivers for the oil sector?


FH: Just global GDP – the correlation is so high with PMI- Purchasing Manufacturer’s Index – when it’s rising, oil demand picks up- - and they are just not finding enough production to come on-stream. In particular, in North America we have been blessed with fracking as an innovative process – but they do not have this in Russia – or Eastern Europe. And Russia has done everything to prevent – one of the biggest funders for anti-fracking comes from Putin’s regime – comes from Gasprom. And they’ve been sponsoring movies – same thing with Qatar, they’ve been sponsoring this disinformation about fracking - because it impacts their sales.


VC: Well yes and Gasprom has all of Europe dependent on it – they have a monopoly.


FH: But let’s say America – Canada has cheap gas prices and makes oil sands more attractive – also chemical companies because to make chemicals you need gas as an input, and then you have refineries – so the input of natural gas being so inexpensive relative to Europe is helping boom – and so last year we saw refineries up 70%- the year before up 60% - so there are these wonderful pockets of opportunity.


VC: So that is where you are seeing a lot of opportunity right now– excellent. Well thank you so much for joining us again Frank, it was great having you here.


FH: It was great being here, and hopefully everyone is buying some of that nice gold jewelry for that love trade.


VC:  Fantastic.  



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