Frank Holmes, CEO of U.S. Global Investors was recently interviewed by Kitco News. There, he gave his thoughts on how the winner of the November presidential election will affect gold prices. He also shared why he’s still bullish on gold and why investors now care about gold company margins.
He was asked why he’s still in a good mood despite gold moving nowhere over the last few weeks. To this, Holmes said it’s because despite gold slipping back below $2,000 an ounce, it is now forming the perfect bottom before the next move higher.
“The bottom you’re seeing in gold is like a perfect bottom. Gold will go up and will go down. We’re now in that perfect bottom time of accumulating, and math also suggests the seasonality of gold that it rises in October.”
Seasonality of Gold
Holmes said the seasonality of gold combines Diwali in India, Christmas in the US, and Chinese New Year into a massive period of demand.
“In India, it’s a season of lights and Diwali season, we then have Christmas, and it peaks with the Chinese New Year. So this is a very auspicious time for consumption of gold and it’s most highly correlated with GDP per capita growth. And what we’ve seen in 30 years is China and India’s GDP per capita wasn’t on the table. And they were only consuming less than 5% of the world’s gold. Now they’re 53%. Why is that? Because their GDP per capita, their purchasing power parity, is up with the US. It’s India, it’s China and America.”
He added that he doesn’t think it matters who wins the election in November. Gold will rise no matter what. He believes this simply because of all of the money printing and debt that other countries are carrying.
“There’s some betting on blue, some betting on red, and I’m betting on gold,” said Holmes.
“I mean they are talking right now, a debate, is it going to be a $1.7 trillion, or a $2.2 trillion stimulus, additional stimulus, if that goes through that $2.2 trillion, my numbers are right on that this is going to be a $7 trillion expansionary program to get the economy going in America. When we look at China, I think the total debt in China is 500% of the GDP. I mean it’s massive. Japan’s the same way. Look at the macro forces of what is going on and the money printing.”
Gold Industry and Free Cash Flow
When it comes to gold equities, Holmes said he believes that the gold industry as a whole will report some of the highest free cash flow numbers ever. That’s why smart investors like Warren Buffett invested a significant amount of money into gold companies.
“This September end will most likely be the highest free cash flow the gold industry’s ever generated. Even with the selloff in gold slightly under $2,000 (per ounce) this quarter will be phenomenal. Better discipline by management, even with COVID, the price of gold rallies, the price of oil doesn’t do anything to affect cost, we’re going to have record free cash flow and that’s why Warren Buffett bought Barrick,” said Holmes.
This surge in free cash flow will draw the interest of pension funds and other institutional investors as other investments, like the S&P 500, pale in comparison.
“So what you’re going to see is a change in psychology from pension funds and institutions going into this last quarter as the numbers populate, as the S&P doesn’t have the free cash flow it had a year ago at the end of September like gold stocks have. So I remain extremely bullish, next time gold surges through $2,100, gold stocks will go 3-to-1,” Holmes added.
His final thoughts were on the gold industry maturing in general. He understood that what matters to investors is margins and free cash flow. He gave an example of a company that figured this out before everyone else and saw their stock price surge.
“If you look at Kirkland Lake, when it had its spectacular run when the gold industry was flat on its back, it’s because it had rising, the highest margins of all the gold stocks. Its revenues last quarter was above its four quarters, its cash flow was rising, it had free cash flow, smart people just started piling into it, whereas the other gold stocks they weren’t really piling into. Now you are seeing more and more companies consumed with that, and this is very good for the industry.”