Why Gold Prices Will “Just Explode…In The Blink Of An Eye”

Mike Gleason: It is my privilege now to welcome in Frank Holmes, CEO and chief investment officer at US Global Investors. Mr. Holmes has received various honors over the years, including being named America's Best Fund Manager by the Mining Journal. He is also the co-author of the book The Gold Watcher: Demystifying Gold Investing, and is a regular guest on CNBC, Bloomberg, Fox Business, and also right here on the Money Metals Podcast.

Frank, welcome back and thanks for joining us again.

Frank Holmes: It's great to be back in a day that the market is up and it's all good for us.

Mike Gleason: Yeah, exactly. We'll get into that. Well, Frank, we focus a lot on federal debt around here. Of course the numbers there command a lot of attention. The national debt is $22 trillion and has grown exponentially, as we both know, particularly over the past two decades.

But you wrote about something recently in your Frank Talk blog that probably isn't getting enough attention. Corporate debt is also a serious problem. Can you talk a little bit about corporate debt and why metals investors might want to keep an eye on that as well?

Frank Holmes: Just to add to that, what was interesting that came up this morning is that the number of small cap Russell 2000 stocks have almost a record of deteriorating earnings in cash flow, and it's the highest percentage of B-rated debt. So, there's a train wreck coming on those stocks in those industries according to these two dynamics.

But, I think that the debt in the business element ... One thing about business, they sort of adapt and adjust and they go through this cleansing process, and I don't think that that is as big of a worry as when you have some of these quant funds that are leveraged 8 to 1. So, you got a guy with a billion dollars and he is able to leverage himself 8 to 1 because their gamma of their information is good for three days to seven days. So, this is a big issue when you get these unwinds, so all of a sudden you have 200 billion dollars getting unwound and the underlying capital behind it is 20 billion. So, you have 180 billion dollar hitting bids everywhere. And I think that is probably for me a scary thing because I feel that in the markets every day, up and down days. So, that's my thoughts on the debt.

Mike Gleason: You've also been keeping an eye on Brexit and that's a topic we've been interested in since the referendum was passed nearly three years ago. Unfortunately, we find it almost impossible to predict what will happen. The machinations of British Parliament are hard to follow.

It looks just like the politicians there are wringing their hands perhaps hoping to wear people out. If we had to guess the British will wind up throwing in the towel on Brexit, though we hope we're wrong on that, but we’re hoping you might venture a guess on what to expect with regards to Brexit. Is the EU still in trouble or are they going to weather the storm that started a few years back?

Frank Holmes: Well the EU blames England for everything, and the big difference is common law. So the success of Canada, America, Singapore, Hong Kong, they're all based on common law. Same thing with New Zealand and Australia, and so Europe is civil law and that's where you seem to get the hardest core socialists. It always surprises me that most the media is pro that. And that's what happened with Chavez getting into power and destroying Venezuela. So, one has sit back and say where's the media, where's the real thoughts etcetera and England is the second biggest contributor to the EU. They were unfair and unreasonable, and they used bully tactics with them and so the Brits finally got fed up and are leaving.

So, I think that the EU is going to have negative real interest rates, that's why I think the Bank of International Settlements is concerned enough that they are now saying the banks don't have to have discounts on their gold holdings and so they're not treated as illiquid assets. It in fact, gold is the fourth most liquid asset in the world, but we're seeing something that's really significant and that is a 5-year high in new central bank buying of gold. Poland, Czech Republic, Hungary, they're buying six tons at a whack, and we saw gold get stumped a couple of weeks ago and basically the thoughts were maybe that was Turkey because they had a financial crisis the day before, and they’ll sell the gold to try to stem it and then they'll be buying it back later. So, they use gold on a regular basis and last time they blew up their gold, and knocked gold down, it was the Hungarians that bought it all.

So, we're having a new phase of bankers, central bankers around the world, very attracted to gold and then we have the rising GDP per capita. The rising GDP per capita of China and India is really significant, because collectively those two countries are 40% of the world's population. The GDP per capita, the purchasing power parity right now of China and India and America is impacting the world. And if you look at these market forces, the Chinese and the Indians and then you got the middle East etcetera they all get gold for gifts and they buy 24 carat gold, and this has led me into an investment in North America called MENE Gold and MENE is listed in Toronto but you can buy and go the website mene.com and you can buy 24 carat gold for your loved one and then you want to buy some gold coins and silver coins. And so, to me, what you're seeing with companies like this they're disruptive but we have such a big Chinese and Indian population now of young professionals and they want to buy 24 carat gold jewelry and so I think this idea of (how much) Chindia is growing globally and it’s highly correlated to gold jewelry demand and that is 60% of gold demand. So I'm very bullish.

Mike Gleason: Sticking with China here, we’d like to get an update from you with regards to trade. It will soon be a year since the Trump administration imposed tariffs and began earnestly trying to force the Chinese, and others, to renegotiate trade deals. It's pretty hard to gauge the actual progress in these negotiations. Rumors of a trade deal being imminent float out periodically, that's been going on for months now. But as yet nothing has been inked that hasn't kept stock prices from rallying each time one of those rumors appear. What are you expecting in terms of a trade deal and what do you think it will mean for markets, Frank?

Frank Holmes: Well, it's really a great question because, where I was talking about earlier was some of these big numbers you have to look at… macro forces I call them. China and America are 40% of the world's GDP. So, them in a spat is very significant and the more impact that a China slowdown has, and what they start doing is printing money like ferociously and staging the rules that anyone could borrow in January, and all of a sudden, we saw a trough in PMI.

Now why is PMI important? Purchasing Manufacturers Index is a great predictor of rising commodities or falling commodities. There are lots of highly correlated research has been done on that by us, and we report on it. So, what we saw is a huge surge in PMI and whenever the one-month is above the three-month then you start seeing oil up. So, oil’s up, coppers up, so this is very very bullish and you’re seeing gold up too. So, I think the trade war, what it’s really about is a level playing field, tech gets a lot of concern, but it's just unlevel. We have the biggest economy in the world to sell consumers of 13 trillion dollars. They want to sell to us, but we can't sell to them. And I think that's pretty fair what Trump has done. He has taken the task. He did it to the Germans and said, “Look if you want to be able to sell Mercedes and BMWs here then you're hurting GM and Ford selling into Germany, then we're putting a tariff on you.”

And then immediately they changed the rules over there. So, I think this is some of the positive parts of what's going on for the global trade. I feel very confident that the second half is going to much stronger than what happened last year in the selloff (in gold). 

Mike Gleason: Getting back to metals here for a little bit. Gold and silver got off to a pretty start in 2019, it's fallen back in recent weeks somewhat, but they've been pretty fickle, Frank. Positive developments for gold, such as the Fed doing an about face on interest rates, hasn’t really provided the bump that many thought it would.

What do you make of the recent action in the metals, where do you think they might be headed in the months ahead? Will we finally get a sustained upside move and take out some of these major overhead resistance levels, say $1,350 - $1,375 in gold and $16.50 - $17 in silver, what are your thoughts there, Frank?

Frank Holmes: I think it happens in a New York second, and then it's going to go sideways for a while but it's just going to surprise everyone and just explode. And find that new level and hang around $1,400. That's my thoughts on it and it will surprise in the blink of an eye how that happens. There will be some type of event and I believe that the peak gold is here. So, if we have rising in the amount of printing money and GDP per capita is rising around the world and with the cultural affinity for gold… we have peak mine supply, I remain pretty constructively bullish.

Mike Gleason: You obviously talk a lot about the negative real interest rate environment that can be very bullish for precious metals, is that what you're kind of looking for moving forward? Do you see those coming back in spates here? And it being a good tailwind for gold.

Frank Holmes: What’s interesting is that rates peaked last October and then the market really sold off. Rates started coming down and had been falling since October. But what really hurt the market last year in the fourth quarter was the unwinding of QE3, and the selling of bonds that was very destructive even though the rates were coming lower impacted bids everywhere. I think the worst of that is behind us and so I think that that's why we have got more stability in the capital markets and inflation came down, so it was allowed for these rates to come down.

But what really makes it is that Europeans, they're at big negative and they should be backing up the truck and just loading up on the bullion and the quality gold stocks. And that's what I think you'll start to see that as we go further in the year.

Mike Gleason: Well finally Frank, as we begin to wrap up, can you give us any final thoughts here as we look toward the middle part of 2019 and maybe any other comments that you'd like to share that maybe we haven't covered as we conclude today.

Frank Holmes: We have a great product called Near-Term. It's short term munis and it's around a 2 dollar NAV. It's very stable, hardly any fluctuations and you get a higher yield than you're going to get in any bank account for money fund. And I think investors have to look at making sure that they have a good cushion of cash in the muni space, not like when we talked earlier where you brought up and highlighted the small businesses in mid-cap stocks that have debt deterioration and they have greater risk. No, that muni’s are in great financial shape and that's where you get some of the best relative attractive returns. So, from that end that's something for investors.

And if you're going to go into the gold space there's a note on the Toronto Stock Exchange called Grand Columbia, which is the largest gold producer in Columbia – 200,000 ounces, very high grade – and they have a gold note, just under a hundred million. It pays just under 10% yield and pays monthly. And as the price of gold goes up they pay out a higher monthly dividend. Those are sort of the unique investments.

And the most recent invest I made is a micro-cap space that's called Gold Spot and that's with nine PhDs who are doing artificial intelligence for major mining companies and juniors who they take a royalty (from) and do work on it. So, I love having all these young scientists that are just changing the world with AI. And then GoAu, our smart beta gold ETF. It’s demonstrated what it said it would do. It would perform the GDXJ 92% of the time on a rolling twelve-month basis, and it’s done that.

So, we're very proud of that and since the New York – Go Gold, GoAu, if you're into buying gold equities otherwise stick with you and get those beautiful gold coins.

Mike Gleason: Well, thanks as always Frank, we'll look forward to catching up with you again later this year. In the meantime keep up the good work with those Frank Talk pieces and of course before we sign off, please tell listeners more about your firm and your services and anything else that they ought to know about you, or US Global Investors.

Frank Holmes: Well, US Global Investors is a public company, ticker is GROW, listed on the Nasdaq. We’re known for the gold space and so I urge investors and listeners to go to USfunds.com and sign up for Frank Talk, or Investor Alert and if you would like our gold funds and information it’s just easy call 1-800-USFUNDS, the team there will gladly take care of you.

And happy investing, and remember the 10% golden rule: you should always have a minimum of 10% in bullion and gold stocks, high quality gold stocks, and rebalance every year.

Mike Gleason: Yep, rebalance. You've drilled that in very well over the time that we've had you on, and I always make sure to mention that to people because a lot of people do not rebalance.

Well, good stuff thanks again, hope you enjoy the spring and we will catch up with you again soon, bye for now Frank.

Frank Holmes: Thank you.

Mike Gleason: Well that will do for this week, thanks again to Frank Holmes CEO of US Global Investors and manager of the GoAU Gold Fund. For more information the site is USfunds.com. Be sure to check out the previously mentioned Frank Talk blog for some great commentaries on gold and other related topics. Again, you can find all of that at USfunds.com.

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