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Frank Holmes: As Spring Follows Winter a Bull Market Will Follow a Bear Market in Gold

We’re continuing our relaunch of Palisade Radio. After our interview with Marc Faber last week, we’re bringing on returning guest Frank Holmes to discuss the emergence of a new bull market in commodities. Frank is the CEO of US Global Investors, and is regarded as a top expert on the global economy and global trends.

Frank’s analogy of the 4 season metaphor of fall and winter (symbolizing a bear market), and spring and summer (symbolizing a bull market), is highly applicable to today’s market, where commodities have been in a long down trend(a fall, followed by winter).

Frank says that when we come out of a winter (bear market), we start looking for the commodity ‘leaders’ who will lead the new bull market, be it base metals, energy commodities or precious metals.

Many junior resource investors have been decimated during the last 3 years. Frank says that every investor now needs to analyze the juniors, first of all we need to find out what the burn rate is, and find out if the company would need to do another financing down the road.

What is the value if the company does a new funding? There can be a massive dilution after a financing in a junior. Frank recommends, to access a great way to analyze junior gold stocks. There you can find out how much cash the company has, and if it’s likely survive the coming years ahead.

We ask Frank to elaborate on his research regarding what type of mining companies get the highest valuation. He reveals that the market rewards the highest valuations to companies that are mining gold ONLY, while the lowest valuations can be found in companies mining gold, as well as base metals.

Frank explains that gold is scarce, mining costs are high, the capex for building mines are high, and there has not been any significant 3 million ounce gold discoveries with grades high enough for production, found in the last three years. This is why gold-only-mining companies receive such high valuations.

Next, speaking on the ISM index, which monitors 300 manufacturing firms in the US, Frank points out that this performed very well. This makes the dollar very strong. Positive news is that the US remains very strong and the global PMI index (a global indicator of the economic health of the manufacturing sector), is still positive. However, China has gone into the fading zone, so everyone is looking for stimulus which may come from Chinese authorities.

Finally, Frank touches on the ‘Love Trade’ from Asia, where the Indian and Chinese population bought gold jewelry. That is one of the reason why gold went to $1900 in 2011. The slowdown in GDP per capita in these countries, the last three years, has impacted the ‘Love Trade’, India is on the way up now, so that is a positive for the gold price moving forward.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., a boutique investment advisory firm based in San Antonio that manages domestic and offshore funds specializing in the natural resources and emerging markets sectors.
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