Frank Holmes, the CEO and CIO of U.S. Global Investors, was recently interviewed by Kitco News to get his thoughts on the recent run-up in gold prices. They also asked him about where he sees the gold market headed.
When asked about gold prices lately and the inability to break back above $2,000 per ounce, Holmes said it was simply “digestion.”
“Going through the $2,000 level, the euphoria of Warren Buffett all of a sudden buying a gold stock, it’s the normal process. Going straight up is only going to lead to a powerful crash, so I love this sort of stair-stepping. It’s a perfect market.”
With gold prices pulling back, Holmes said smart investors are buying on the dips. He also mentioned that these investors choose to take profits when gold advances too quickly.
“If you’re not long you’ll be wrong. On every one of these big pullbacks, even the shorter ones, you’ve got to understand the daily volatility of bullion. It’s plus or minus 1% on a daily basis. If it falls 2% or more, 3% in a day, that’s when you want to be buying, if it surges 3% in a day that’s the time you want to be taking some profits.”
The recent slump in gold price is normal, says Holmes. This is given how far gold surged in the last 60 trading days. He now expects a bit of consolidation before companies report their third-quarter numbers.
“Over 60 trading days, it was just normal after going up 2 standard deviations that we would get a correction of 10%. So I just feel like it’s going nicely sideways for me, building, the companies are going to do phenomenally well… the numbers are excellent, high free cash flows, something that the Buffett’s love.”
He said he expects the entire gold mining industry to report incredible numbers when earnings season kicks off.
“Get ready for more free cash flow to show up in this industry, and I think come the end of this quarter, it’ll be even more breathtaking when you compare it to the overall S&P 500.”
Kitco also asked about Federal Reserve Chairman Jerome Powell’s recent remarks that the Fed would allow inflation to creep higher to offset a recent run of low inflation. Regarding this, Holmes scoffed at the idea that only 1% inflation right now exists.
“The old algorithm, the old model for determining what CPI (consumer price index) is, when gold hit $850 and silver hit $50 an ounce in 1980, that algorithm that defined what inflation was has morphed many times. And if we use that model today, inflation is at 8%. What is he going to do to slow down inflation? Housing is up 10%, I could go on with a whole list of things that are much greater than this 1% inflation that they are talking about… why worry? Get long gold on corrections!”
For investors looking for exposure to gold stocks, Holmes mentioned a few that he likes. He also emphasized that the gold mining companies now pay a larger dividend than 10-year bonds.
“When you look at stocks like Newmont, Barrick, and I can go on, now Gran Colombia is starting to pay a dividend, Wheaton Precious, these dividends are higher than what you are getting on a 10-year government bond. So you want to be long those companies that have the capacity to pay dividends in a rising scenario.”
Looking to the future, Holmes expects gold prices to rise for one simple reason. No matter who wins the election in November, “What won’t end is all the money printing.”