An interview with Frank Holmes
For the BIG GOLD
annual gold forecast survey published in January, Jeff Clark surveyed seven
gold experts and nine top economists and fund managers, along with Doug Casey
himself, to provide their best insight on what to expect in 2011 and how to
invest.
One expert he
interviewed was Frank Holmes, head of U.S. Global Investors, which manages 13
no-load mutual funds, many of them recognized for consistently high
performance by Lipper Fund Awards. Last year, Frank's Gold & Precious
Metals fund returned 36.8% - more than triple the Dow - and the World
Precious Minerals fund gained 45.4%, outgunning the S&P almost four-fold.
Read on for
Frank's thoughts on gold and precious metals stocks...
BIG GOLD: Gold was
up 30% in 2010; to what do you attribute its rise?
Frank Holmes: Investors
have to look at gold demand as both the fear trade and the love trade. What
most media focus on is the negativity of government policies to drive gold
prices. I characterize this as the fear trade -- deficit spending and
negative real interest rates for the G7 countries.
More significant is the love trade -
where more than 60% of the world's population is in emerging countries
averaging over 6% GPD growth and 8% rising personal income, and they believe
in giving gold as a gift for birthdays, weddings, religious holidays, etc.
This love trade is entrenched, and it is not going away.
Fears over the European debt crises
were a big driver of gold in the first half of the year, as investors bought
both gold and the dollar for safety. However, by mid-year, the dollar started
to break down as smoldering budget woes in the U.S. began to reignite
concerns over the fiscal situation here.
Gold got a second lift by October as
both the fear and love trade showed up together. We had the season of Diwali lights in India and we had QEII, so gold went to
new highs. By year end almost all the gains made by the dollar were eroded
away, while gold finished the year with a respectable rise of 29.5%.
BG: What forces
will move gold this year? And what's your price projection for 2011?
FH: U.S.
equity strategists are way too complacent and so are risk measures such as
the VIX, which is back to pre-Lehman lows despite government debt levels at
even higher levels. The broad view is that there will be no inflation in the
U.S., as labor markets are slack, with 10% unemployment; however, rising
commodity prices, which are controlled by international demand, will remain
strong.
A second wild card will be whether
the German public will go along with the "transfer society"
concept. European woes are not over.
Third, U.S. lawmakers will have a
bitter potion to swallow, as the vote on raising the U.S. debt ceiling will
be a rallying point for the Tea Party this year. And if inflation, such as
rising oil prices, starts to sap spending, wages in the U.S. may have to
rise, and then the cat would be out of the bag.
It's been a great ten years for gold,
which was fully justified due to the explosion in consumer credit and debt,
but gold may still have a very important role to play going forward. I
believe in the next five years the price of gold will double from current
levels, and that means it has the potential to have a 15% annual compounded
rate of return.
BG: How volatile
do you expect gold to be?
FH: What is
really key in understanding and managing expectations
in the capital markets is that over any 12-month period, it is a non-event
for gold to go plus or minus 15% in a year. This happens 68% of the time. The
stocks of gold producers can go plus or minus 40% over any 12-month period,
so they have greater risk but can also provide substantial returns. It is
thus important to respect and look at volatility as an opportunity.
BG: Gold stocks as
a group did not outperform gold in 2010 - does that change in 2011? And if
the broader markets sell off, do gold stocks fall along with them or trade on
their own?
FH: Actually,
2010 may have been a turning point, as major gold-producing companies,
measured by the Gold Bugs Index (HUI), gained 34.1%. This hopefully has
reversed the trend of the last couple years where bullion outperformed the
stock. Junior gold mining companies, on average, returned roughly twice the
gain of gold bullion, but some of those names were fairly silver rich, and we
know how well silver did last year.
In the scenario of a market sell-off,
gold stocks are still equities and can get pulled down with any surge towards
liquidity. However, the price action since the 2008 credit crises showed us
that gold stocks did very well for investors relative to the broader markets.
In addition, while those of us in the gold business are very close to the
story, there are a lot of people that are still coming around to investments
in the precious metals sector.
When one looks at what has been some
of the best-performing stocks over the last 10 years, gold and gold stocks
may very well trade on their own as a preferred asset class.
BG: Silver was up
81.9% in 2010, but is still below its 1980 nominal high. What's your outlook
for silver in 2011?
FH: Silver
may have gotten ahead of itself a bit. In the coin market, for instance, it
is not uncommon to see certain gold coins sell for a 30% premium to the spot
price, but in the last quarter we saw some collectable silver coins with
asking prices as much as a 300% premium.
Silver does offer exceptional
leverage to gold, almost 2 to 1. Right now, while it looks like the economy
is getting stronger, silver could continue to
benefit from a pick-up in industrial uses.
BG: What's your
best advice for precious metal investors in 2011?
FH: Investors
should consider buying gold as insurance. We recommend having about 10% of
their portfolio in gold and gold stocks, and rebalancing every year.
Two stocks that we like at current
prices are Randgold (GOLD) and Silvercorp
(SVM). Both companies focus on high-quality ore deposits that will be
economic at prices substantially below current spot prices.
In Randgold's
case, their share price has fallen about 20% since the presidential elections
in the Ivory Coast became locked in a stalemate. The company's Tongon mine is their newest project and is currently
being commissioned, but news flow has been slow and hasn't drawn much
attention. Look to see this issue resolved over the next couple of months.
Silvercorp is one of
the few companies that has successfully navigated in China, and our models
indicate there is much more upside available from these assets than where the
stock is currently priced. SVM also has a very attractive relative valuation
to its North American peers, where in some cases we have seen 5% of their
market capitalization turn over fairly consistently everyday over the last
month - those shareholders are obviously not around for the long term.
[To read
the full edition and the interviews with 17 of the world’s leading
investment pros – including Jim Rogers, John Hathaway, Peter Schiff,
and Rick Rule – try BIG GOLD at just $79 a year, with 3-month
money-back guarantee. Act today, and you’ll
also get a FREE one-year subscription to Casey’s Energy Opportunities. Details here.]
Jeff Clark
BIG GOLD
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