Taylor Thoen in Conversation with Frank Holmes on Commodities

As part of a series, I’d like to share with investors some of the more fascinating interviews I’ve conducted over the past few months. Recently, I had the chance to visit with Frank Holmes, CEO of US Global, here are some excerpts from that insightful conversation:

What did you see when you recently visited India?

Robust activity everywhere. It’s amazing to see that even going to the low end gold jewelry manufacturers and distributors; they’re paying as much as $1,600 an ounce for gold!

What was your biggest takeaway as far as opportunities?

What you do see is this push – the subway system, a push for infrastructure, building and as long as is maintained then that level of spending and focus you’re going to see is continuous. I would say demand for a lot of the commodities and I think that is positive.

What’s your outlook for gold for 2014.

Whenever you had negative interest rates the government’s going to pay you to lose money, gold starts to take off. And since 2001 until this year you predominantly had a negative interest rate cycle. So when I put it all in context and I look at the big picture in three decades this is the third time we’ve seen this. Not for gold but gold stocks fall for three years in a row.

You also mentioned economic indicators maybe you can elaborate on PMIs.

PMI, Purchasing Manufacturer’s Index is one of the most important indexes that politicians track because it’s highly correlated to manufacturing jobs which have a much higher salary worker and that’s important in that whole process for getting a pulse on job creation. So last year we saw in the US the purchasing manufacturers what today call in the US a different name is ISM, same thing. And the ISM in the US it turned positive and guess what? Boeing was up almost 90% last year, manufacturing aircrafts and you see airlines stocks also were up dramatically last year. They’ve increased the prices and now they have spending power to buy new jets. What we’ve seen in our research is that it’s important to follow global PMI which JP Morgan publishes.

What do you track at US Global?

Now we track all the G7 countries in the E7 countries but what are they interesting for simple math is that whenever the global PMI is positive – when one month’s data is higher than the three months and the one month data is higher than the 12 months. So it means you have either a secular raising market and demand for job creation which uses metals, they use oil to manufacture any product, is highly intense with energy and metal consumption. So that’s why it’s highly correlated to resources and what happens whenever that PMI turns positive within six months you see energy prices raising, energy stocks, there is an 80% probability of raising. There is almost a 78% probability of copper rising.

So when I go through all the commodities and go back over the 20 years, 30 years of data and I can create a probability model with it and its powerful.

So with that you saw snap back up in a lot of the commodities sell off for fear, creating a spectacular buying opportunity and guess what ? Most people are underinvested in resources and energy and then the S&P index of 500 of the biggest market cap companies has ten sectors, basically fuels and energy are both 13% of the overall economy of America, they were up 25%. That’s just a huge win, when everyone says how bad commodities are.

Any final words of advice for investors in this market today?

Be diversified, appreciate the seasonality and the volatility of all these asset classes. The DNA of gold over any rolling 12 months is plus or minus 15%. Gold stocks plus or minus 35%. So any time gold stocks fall 35% is to become an opportunity to buy, when they fall 60% and 70% it’s a screaming buy.

And they will rally and they will raise and same thing with other asset classes. The S&P – 70% of the time it goes plus or minus 20%, anytime it goes up 40% you’ve got to take profits. So the only way to win is to have that discipline but we have these emotions that take over. The DNA of greed and fear, they call that the reptilian mind, fight or flight.

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