A Win-Win for Gold Miners?

Frank Holmes CEO and CIO, U.S. Global Investors, Inc.

Frank Holmes, CEO of US Global Investors, discusses the outlook for gold and gold miners, highlighting some favorite stock positions, helped by US Global’s various metals and resource-related funds.

Steven Halpern:  Our guest today is Frank Holmes, CEO of US Global Investors.  How are you doing, Frank?

Frank Holmes:  I am very well, thank you.

Steven Halpern:  Well, thank you for joining us.  You recently noted that, for the first time in several years, gold mining stocks are outpacing the yellow metal itself which you consider a win-win.  Could you expand on that?

Frank Holmes:  What I think the big thing, Steven, is that we’ve seen, by the end of December of 2013, where gold stocks fell for three years in a row.  Now over 30 days of data, that’s only happened three times. 

Mathematically, we were down what they call two standard deviations, which meant that we’re due for a substantial rally.  That is just based on price and historical movement. 

What we’ve seen, also, that’s important, that’s taken place this year is stocks far outperformed bullion because many CEOs have lost their jobs.  Companies have restructured down, basically, to streamline their operations and focus on profitable reserves, profitable production, rather than growth for any sake.

Steven Halpern:  Now you recognized that there are challenges in the gold mining sector, particularly, the specific price levels that need to be in be in place in order for these mining companies to be profitable.

Frank Holmes:  Yes, they ran their costs up, because what we saw on—looking at data points—is that the cost of mining equipment, the cost of engineering to comply with all the environmental demands—and the environmental rule making—grew faster than the price of gold, so they had external factors that were driving up their cost structure faster than their revenue line. 

Now you’re seeing this reverse, where they cut back on development, et cetera, and focused on only high-quality production and the companies that we really like are the ones that demonstrate on a fundamental basis. 

Now on our Web site, we have a cube, we like to call it, and we have found that the three key factors of looking at gold stocks, or resource stocks, is growth in production, growth in reserves, and growth in cash flow.

And what we do on an individual name is compare that so, say to all the stocks that are in the HUI and the GDXJ and what is the average in that index.

We then take a look at the individual names, which have a catalyst, a management and a momentum that they’re increasing over the next 18 months their production faster than the index, their reserves faster than the index, and their cash flow potential will be faster than the index’s overall growth.

Steven Halpern:  So, in terms of individual stocks, one company Comstock Mining (LODE) is a position that you hold in your Gold and Precious Metals Fund, could you tell us a little about that?

Frank Holmes:  Well, it’s a US based mining operation that looks like it has the potential—and based on press releases and financials and feasibilities they’ve sent out—their production profile is faster than any gold index. 

CIBC recently came out with a piece of research showing that they expect gold supply from mines to actually be falling for the first time over the next five years.  This is a company that has a very constructive growth profile.

The other one, which we recently commented on, that’s in our portfolio is Klondex (KDX), and Klondex also has a very robust growth profile compared to any index and it has excellent sponsorship, like Franco Nevada (FNV), which is a royalty company. 

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Royalty companies are companies that we love, because they have high margin business, like Royal Gold (RGLD) and Franco Nevada. It seems that each year one of these stocks outperforms the other, but overall, these companies have better performance than any index, any major gold index. 

Well, Franco Nevada basically has a royalty on some of Klondex’s operations and the chairman of Franco Nevada, Pierre Lassonde—who used to be the head of the World Gold Council and used to be the CEO of Newmont (NEM)—has spoken very favorably in interviews regarding Klondex.

Steven Halpern:  So, for an investor who doesn’t want the risk of an individual stock, US Global offers a variety of mutual funds that would allow them to gain these kinds of exposure and, in fact, some of the companies you’ve mentioned are holdings in your Gold and Precious Metals Fund, the World Precious Minerals Fund.

Can you just briefly tell us about the various fund options at US Global for a gold investor?

Frank Holmes:  Sure, if you’re looking for a little more growth and even for exploration, we have about 15% in developing gold mining companies and that would be in our World Precious Minerals Fund (UNWPX) is the stock symbol for that fund, UNWPX

Now if it’s just pure gold producers, then it’s the first no-load gold fund in America and that’s known as Gold and Precious Metals Fund, and that’s (USERX). 

If you are looking for a more diversified portfolio, which would—energy names in addition to gold, etc.—then that’s our Global Resources Fund and the symbol there is (PSPFX).

Steven Halpern:  Now, finally, on, in terms of your overall outlook for gold sector, I know you’ve got a bullish long-term position, but you’ve also pointed to autumn as a particular time for investors to watch.  Could you explain the timeframe there?

Frank Holmes:  Sure.  On our Web site, we have gone back and shown with visuals and explained that there’s a very strong cyclical seasonal pattern to gold prices, and we see that they peak just around Chinese New Year. 

They fall, rally, and they basically bottom, somewhere between June and August and then you just have this run that takes place and it’s all tied to religious holidays in Asia and the Middle East, so the first major holiday is over and that’s Ramadan and you have an Indian wedding season that ended in the mid-July. 

Then we’re going to go into—the next season will be a “Season of Lights” in India where gold demand picks up dramatically—then we’re going to have Christmas in Europe and North America, and then we have the Chinese New Year.  That sort of pattern is very robust and there’s about a 70% probability of gold and gold stocks rebounding from the summer bottoms. 

Steven Halpern:  Well, we really appreciate you taking the time to join us today.

Frank Holmes:  Well, thank you, Steven, and then the last thing I just want to really comment to everyone is to make sure that they look at 10% weighting in gold and rebalance, so last year gold was down, you would have taken profits off the stock market and bought gold inexpensively in a relative basis and when gold is up phenomenally well against the stock market, take the profits and maintain that 10% level.

Steven Halpern:  It’s great advice, thank you.

Frank Holmes: Thank you.

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