Market Dynamics, Gold, and Bitcoin: Insights from Frank Holmes

In a recent Money Metals podcast, host Mike Maharrey interviewed Frank Holmes, the CEO and Chief Investment Officer of U.S. Global Investors, and Executive Chairman of HIVE Blockchain Technologies. 

Holmes shared his extensive knowledge of various financial and market trends, providing insights into the current economic climate, the impact of the Japanese yen carry trade, and the future of alternative assets like gold and Bitcoin.

(Interview Begins Around 6:43 Mark)

Who is Frank Holmes?

Frank Holmes is the CEO and Chief Investment Officer of U.S. Global Investors, a company he has been leading since 1989 when he purchased a controlling interest. Under his guidance, the firm has become a prominent name in the financial world, with mutual funds that have received recognition from organizations like Lipper and Morningstar. Holmes is also the Executive Chairman of HIVE Blockchain Technologies, the first cryptocurrency mining company to go public, highlighting his forward-thinking approach in the rapidly evolving digital asset space.

Holmes is a well-known figure in the investment community, regularly sought after as a keynote speaker at national and international conferences. His insights are shared with over 100,000 subscribers through the Investor Alert newsletter and his Frank Talk blog, which is read in over 180 countries. Additionally, Holmes is the co-author of The Goldwatcher: Demystifying Gold Investing, further cementing his expertise in the precious metals sector.

In 2015, Holmes led U.S. Global Investors into the exchange-traded fund (ETF) business with the launch of the U.S. Global Jets ETF (NYSE: JETS), which focuses on the global airline sector. Two years later, the firm launched the U.S. Global GO GOLD and Precious Metal Miners ETF (NYSE: GOAU), targeting gold royalty companies. His strategic investment in HIVE Blockchain Technologies in 2017 marked his venture into the cryptocurrency industry, where he continues to make significant strides.

The Japanese Yen Carry Trade and Market Volatility

Holmes kicked off the discussion by addressing the recent market volatility, attributing it to the "Godzilla trade," a term he uses to describe the Japanese yen carry trade. He drew parallels to 1997 when Japan pulled back $250 billion, triggering financial turmoil across Asia, with countries like Indonesia experiencing a 70% currency devaluation. Holmes highlighted a more recent version of this scenario when Silicon Valley Bank collapsed due to a mismatch between long-term bonds and rising interest rates. He pointed out that similar carry trade phenomena continue to impact global markets, leading to extreme volatility in assets like gold and Bitcoin.

Holmes emphasized that Japan’s decision to raise interest rates made its markets more attractive, causing speculators worldwide to unwind their trades in alternative assets. He believes that gold and Bitcoin are now moving from "weak hands" to "strong hands" as these cycles play out. However, Holmes noted that the current situation differs from 1997, as the U.S. has been slow to drop rates, whereas other countries have already begun doing so. He predicted a 90% probability of a rate drop in the U.S. by September, which could further influence global markets.

Recession and Soft Landing Predictions

When asked about the possibility of a recession, Holmes expressed his belief that the U.S. is already in a recession but heading towards a soft landing. He pointed to data from the airline industry, noting that despite increased prices, demand remains high, particularly due to post-pandemic psychological factors. 

Airlines, trading at low multiples (six to eight times earnings), have seen negative sentiment despite their relative affordability. Holmes also observed that consumers are shifting spending patterns, with more people using cash due to maxed-out credit cards, indicating a broader economic adjustment.

Holmes supported his recession prediction with data from the global Purchasing Managers' Index (PMI), which currently sits below 50, indicating a contraction. He explained that when the one-month PMI is below the three-month average, it signals a recession, reinforcing his belief that the U.S. is in a soft landing phase.

Comparing Gold and Bitcoin

Holmes delved into the comparison between gold and Bitcoin, explaining that both are alternative assets with unique characteristics. He likened Bitcoin to gold in terms of its decentralization, with over 18,000 nodes validating the cryptocurrency worldwide. He highlighted the generational shift in how people view digital assets, comparing today’s youth’s familiarity with digital currencies to the older generation’s experience with airline points.

Holmes pointed out that while gold remains a key driver of other precious metals, Bitcoin has captured the imagination of younger generations. He recounted his experience launching the first crypto mining company, HIVE Blockchain Technologies, and noted that the introduction of Bitcoin ETFs has been a significant development, attracting substantial capital. He believes that Bitcoin’s capped supply of 21 million coins differentiates it from gold, which still has a supply, and that both assets have a place in a diversified portfolio.

The Importance of Freedom and Civil Liberties

Towards the end of the interview, Holmes expressed concern about the growing threat to freedom of speech and civil liberties, particularly in the context of protests and social media censorship. He criticized the government’s response to organized protests, such as those involving Antifa, and warned of the dangers of centralized control by non-elected officials. Holmes stressed the importance of maintaining the balance between security and freedom, drawing parallels to financial regulations that restrict what he can say as a securities professional.

Closing Thoughts and Personal Insights

Holmes concluded the interview by discussing his personal life and reading habits. He shared his experience of rediscovering youth through his nine-year-old daughter, with whom he read all seven Harry Potter books and watched the corresponding movies. He also mentioned his latest reading material, a book titled Midas, which focuses on identifying entrepreneurial CEOs for investment.

Holmes invited listeners to follow his work through the U.S. Global Investors website, where he publishes a weekly Investor Alert newsletter and his blog, Frank Talk. He also highlighted HIVE Blockchain Technologies as an educational resource on cryptocurrency.

Final Takeaways

Frank Holmes provided a comprehensive analysis of current market dynamics, drawing on historical parallels and data-driven insights. His comparison of gold and Bitcoin, along with his predictions for a soft landing in the U.S. economy, offer valuable perspectives for investors navigating today’s volatile financial landscape. Holmes also emphasized the importance of staying informed and maintaining a positive mindset to seize emerging opportunities.

Key Questions and Answers:

What did you make of the recent market volatility and the recovery? Was it an overreaction to isolated events or a sign of things to come?

Holmes explained that the recent volatility was influenced by the "Godzilla trade," a Japanese yen carry trade phenomenon. He drew parallels to 1997 when Japan's demand for capital led to significant market disruptions. Holmes emphasized that such carry trade phenomena continue to affect markets today, particularly in assets like gold and Bitcoin. He believes that while volatility may continue, gold and Bitcoin are moving from "weak hands" to "strong hands."

What's your take on the recession? Are we heading towards one, or are we experiencing a soft landing?

Holmes stated that he believes the U.S. is already in a recession but heading toward a soft landing. He cited data from the airline industry, noting high demand despite increased prices, and discussed the shift in consumer spending patterns. Holmes also pointed to the global PMI, which indicates a contraction, supporting his view that the U.S. is in a soft landing phase.

How do you compare and contrast gold and cryptocurrency?

Holmes compared gold and Bitcoin as alternative assets with different appeals across generations. He noted that while gold has historically driven other precious metals, Bitcoin has captured the imagination of younger generations. He emphasized that Bitcoin's capped supply of 21 million coins differentiates it from gold and discussed his experience launching HIVE Blockchain Technologies, the first crypto-mining company to go public.

What is something that many investors are missing in the current market environment?

Holmes emphasized the importance of freedom, particularly freedom of speech and protest. He expressed concern about increasing government control and censorship, particularly in response to organized protests. Holmes warned that centralized control by non-elected officials could threaten civil liberties and urged investors to remain vigilant in protecting their freedoms.

What are you currently reading, and how do you stay informed and inspired?

Holmes shared that he is reading a book titled Midas, which focuses on identifying entrepreneurial CEOs for investment. He also discussed his experience reading the Harry Potter series with his nine-year-old daughter, which has helped him stay youthful and connected with the next generation.

********