Frank Holmes #01 - Controlling The Masses

August 20 2020, 02:17 GMT+01:00
A conversation with Frank Holmes, CEO of US Global Investors.

What is the best way to become a better investor? Learn from the best. We've spoken to all manner of renowned investors and market commentators on the Crux Investor platform, from Rick Rule to Peter Grosskopf, and from Jamie Keech to Ross Beaty, to Stephen Rudofsky. Each one has their own systematic, proprietary approach towards making good investment decisions, and a great many lessons can be learned from each of their insights. Most recently, we conducted an interview with US Global Investors CEO, Frank Holmes. He is a seasoned investor with an eye for the small details, and he is also a straight-talker with both a great level of gold-focussed market knowledge and general geopolitical dynamics. It was a really enjoyable, fascinating conversation.

Matthew Gordon talks to Frank Holmes, August 2020

So, US Global Investors: what do they do? It is an 'innovative' boutique investment management company that specialises in actively managed equity and bond strategies. The firm has a track record that exhibits immense expertise in the precious metals space, particularly gold, and natural resources. It is also involved in emerging markets like the Emerging Europe Fund and is seemingly very agile.

Holmes himself has a history of real intrigue. As the oldest of 7 children, an entrepreneurial instinct embedded itself in Holmes very early on. He wanted to prove himself and envied those who lived in the best areas of Toronto and attended the best universities. His adversity as an asthmatic taught him how to overcome obstacles (running the equivalent of a marathon each week at 65 isn't half bad!). Holmes also expressed a keen interest in history, which was aided by an Anglican Priest and "true scholar" of a father. History and human psychology is a great indicator of the future, and this has influenced Holmes' strategies in later life.

Who is Frank Holmes? A man of intellectual curiosity, the Toronto-native eventual obtained a bachelor's degree in economics from the University of Western Ontario, having originally studied to be a doctor. This clearly played a large role in his appreciation of systems, statistical analysis and international financial markets. He started out his career learning from the majors, working for large investment firms as an investment banker in Canada, and he took several companies public, including what is now the largest royalty company in the world, an investment class he has a particular affinity for. Toronto is the world capital of mining, and it is home to 60% of total global mining finance: it is a hub of intellectual capital and money. This was the ideal proving ground for Holmes to learn before he set off on his own adventure.

Once he had sufficient faith in his ability and the confidence to go out on his own, he decided to branch off to work with a small group of "highly-successful entrepreneurs." He purchased a controlling interest in US Global Investors in 1989 and became the firm’s chief investment officer in 1999. The firm is based in San Antonio, Texas, and Holmes has spent the last 30.5 years there. He wanted to get away from high-taxes and he is a big fan of the heat. He really hasn't looked back, becoming the 2006 Mining Journal mining fund manager of the year, a US Metals and Mining "TopGun" by Brendan Wood International in 2011, and receiving the award for Best Americas Based Fund Manager from the Mining Journal in 2016. His award-winning and often gold-focussed Investor Alert newsletter and Frank Talk blog are read in over 180 countries by 50,000 subscribers. He also regularly finds his presence requested by major news broadcasters like CNBC, Bloomberg, BNN and Fox Business. Moreover, he has been profiled by the FT and is a regular contributor for Forbes, Business Insider, Seeking Alpha and Wall Street Journal’s Experts Corner. What can we investors learn from it?

Let's start with that big red dinosaur behind Holmes. It might look big and cute, but it actually represents a social/political statement designed by a famous Chinese sculpture artist. Essentially, China makes everything in the world, and the T-Rex represents China "eating" the world. We hear this from most American investors we talk to; the Chinese appear to be monopolising all manner of commodities and industries such as rare earths, construction, production and industry amongst others. This is the GOP's overt sentiment, and it will be interesting to see if America's behaviour changes come November and a possible Biden presidency. Interestingly, Holmes thinks a Biden presidency will bump taxes up because of immense pressure from "radical left politicians," and he thinks the democratic administration would be bad for the stock market. He is still not confident on the outcome of the election, despite the polling numbers, and it is clear to see why. They are almost mirroring what happened when Clinton went against Trump. There is clearly a large proportion of Trump voters who aren't vocal and don't want to openly declare their support for the controversial figure; this must hinder accurate polling significantly.

Back to China, investors need to decide if they want to bet with China or bet on a company they feel can disrupt the monopoly; Energy Fuels is an example of a US-based company that is trying to disrupt a Chinese (REE) monopoly. We regularly hear from other commentators about Chinese demand, and the country's current reflation package is eating up base metals, battery metals and more as it tries to stimulate its economy in the wake of the COVID-19 lockdown.

In terms of a possible COVID-19 vaccine, Holmes acknowledges that it would be a real "gamechanger." However, he doesn't think it would affect the outlook for gold. Some have speculated that a vaccine would bring certainty and stability, which could be detrimental to the traditional safe haven that investors flock to in times of volatility and doubt. However, he doesn't think gold market sentiment will change all too much and he expects the rise to continue.

On the geopolitical side of things, a weak dollar is having some really negative consequences for America, but Holmes thinks the country's unique DNA of adaptability will see it through. The main issue right now is that all of the G20's finance ministers and their central bankers are functioning like a currency-defacing cartel. We'd love to hear your thoughts on this prognosis.

Nowadays, the world of investment is almost entirely digitised, but it wasn't always like this. Back in the day, it used to be about promotion, reputation and recommendations. Indeed, a really area of focus was the stock picks of famous investors. Investors can now carry out their own detailed due diligence and can apply algorithmic learning to all manner of statistics and charts. Holmes was a real pioneer of this approach. He never bought into the boast and bluster of promotional entities. Instead, he made use of scientific approaches and a systematic quantum approach towards investment decision. One area that was particularly interesting was Holmes' declaration that investors should a portion of their portfolio to be mean reverting. It is simply how the world of investment works. Investment classes will rise and fall, but they will always return to the mean eventually.

Moving on to gold, an area of real expertise for Holmes, he touched on the history of everyone's favourite commodity. There have been 2 recent gold rushes/peaks of note before this one: 2011 and 1980. How are they relevant today? Holmes states that if we are to look at the 1980 gold peak, the definitions of inflation and Consumer Price Index (CPI) have changed 3 times since. If one was to use the CPI number in 1980 to calculate today's gold price, they would get a figure of US$7,000/oz he argues.

So, how can we predict what the gold price will do? Holmes's approach is maths and quantum driven. He looks at the centre deviation moves over a rolling 12-month period, going back over a decade, and he looks at 60 days going back 5 years. We are up "two standard deviations over 60 days," and we are up "one deviation over a rolling 12 months." Mathematically, this means there is an 80% probability that we will have a 10% correction over the next 60 days. It is likely to trackback to c. US$1,800/oz, but Holmes thinks the long trend will continue. This is what we've heard from a lot of gold analysts, with only a few thinking the gold price will continue to soar without a hiccup and some thinking gold is in for a more drastic adjustment.

Holmes is keen to ward off sensationalism. In May, he labelled US$4,000/oz as a practical figure after analysing how the debt markets, their percentage of GDP and the federal reserve balance sheet changed in 2008/09. The "war" against COVID-19 might be sensationalist, but it is a very real and pressing threat that Holmes believes will continue to drive value into the safe haven of gold. Quantitative easing is yet another factor that could contribute to gold's rise. Crypto is another great indicator, with Ethereum soaring. Right now, investors should be looking to commodities, investment classes and companies that will do well in the time of the COVID-19 crisis. For example, Chiptole (food delivery), social media, online video calling platforms and Amazon are growing rapidly right now. Individuals might expect a vaccine to solve our plight, especially with the Russians controversially approving Sputnik B, but COVID-19 has mutated over 14 times now Holmes tells us (not sure about this). It is an RNA virus that vaccines might not necessarily solve. In his opinion, the vaccine will have to continue to evolve as the virus evolves.

Towards the end of the interview, we touch on Trump's legacy. While he has bullied many and embarrassed himself on occasion ("Thigh-land"), he speaks to a deep American fear of the lunge towards political correctness The West is currently experiencing. His success is a representation of how communication has changed for good. Trump can communicate with his followers directly on social media, and regardless of what he says, they are listening to him rather than the mainstream media. Once the dust has settled in a decade-or-so, we might have a better understanding of how this man experienced such a meteoric rise that may not be over just yet.

What did you make of Frank Holmes and US Global Investors? If we get him on the show again, what would you like us to ask him about next time? Comment below and we will respond.

Company Website: http://www.usfunds.com/

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Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

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