US Global: Gold, Airlines and Safe Havens

04/27/2016 10:00 am EST

Focus: FUNDS

Frank Holmes

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

We talk with Frank Holmes on the first anniversary of his first-of-its-kind ETF focused on the airline sector. The CEO of US Global Investors also discusses his outlook for gold as well as some safe haven funds designed for preservation of capital.

Steve Halpern:  Our special guest today, and one of Money Show’s popular speakers, is Frank Holmes, CEO of US Global Investors.  How are you doing today, Frank?

Frank Holmes:  Outstanding.  

Steve Halpern:  Now, US Global has long been known for its expertise and resources.  Do you think the up move we’ve been seeing at gold is a temporary bounce with a start of a more enduring bullish phase?

Frank Holmes:  I think it's the start-up of a more enduring bullish phase and the biggest reason for that is real interest rates are negative again.  If you go back and look at the peak of gold in US dollar terms of 1900 in September 2011, the 10-year government bond, and that is in real interest rates, was a negative 3% yield.  

Then, it went to +2% yield and we are all full because we didn't see what they're calling normal interest rates, prime interest rates changing.  With that, the dollar is strong and however now it's reversed itself and we are seeing rates are now negative here and the more negative they become, the higher the price of gold will go.

Steve Halpern:  Now, you have a number of funds that focus on gold.  Can you briefly tell us some about US Global’s funds that are available for investors?

Frank Holmes:  Sure.  Well, we have two funds.  The first no-load gold mutual fund US Global Investors Gold and Precious Metals Fund (USERX), which is only producers.

And then we have US Global Investors World Precious Minerals Fund (UNWPX).  That particular fund has more speculated 15% will go into the junior space and emerging development companies.  

Their footprint has been all over the world and I think what's important for investors is that we've had the lowest downside risk.

The volatility and how we’ve been able to manage the volatility, and then over the past 12 months it's up 40-some-odd percent and its far outperformed the ProShares Ultra Gold Miners (GDXX) or Market Vectors Junior Gold Miners (GDXJ) — and then here to date they’re up about 40%.

Steve Halpern:  I know your funds are widely-diversified, but I was just wondering if there aren't any particular stocks in the gold sector that you might point out as interesting for our listeners who might want to invest in a particular company.

Frank Holmes:  When we look at individual names, we've always stayed with the royalty companies.  They would be Franco-Nevada (FNV), Silver Wheaton (SLW), and Royal Gold (RGLD).  All these are in New York. These companies have a unique feature in particular.  

To highlight this for you, your listeners, is that the revenue per employer/the cash flow per employee — its 30 people over at Silver Wheaton and they do $600 million of cash flow.  That means you're talking about $20 million of revenue per employee.  Newmont Mining (NEM) is $300,000 of revenue per employee.  

You take a book at Franco-Nevada, its $60 million of revenue per employee so they have higher returns on capital, they're not stuck with all the political issues, all they care about is the revenue coming off the top of the production.  They’re up 53% year-to-date, the three royalty companies.  

Over the past 5 years, whereas most of the gold indexes have declined, they've all declined in fact; however, Franco-Nevada has doubled in that time period. I think that when you want to pick big blue-chip stocks, I'd rather buy Franco-Nevada than Newmont or Barrick (ABX) because Franco-Nevada has the royalties on all of Nevada’s production.  

Now, when it comes to the mid-cap, the sexy little stories everyone likes to hear, a company that’s called Klondex (KDX).  Klondex is in Nevada.  

Franco-Nevada did a royalty with them and they are one of those companies that are undervalued, very frugal management, and it has one of those very few stocks in a space who truly have growth profile and they’ve delivered on everything they said they were going to do.  

Steve Halpern:  Now, interestingly, I’ve spoken with you for the MoneyShow interview exactly one year ago, because at that time you were introducing the first ever exchange-traded fund focused on the airline sector.  Now we’re at the fund’s one-year anniversary.  Could you highlight the developments over the past year for US Global Jets ETF (JETS) and what you see ahead for the airline group?

Frank Holmes:  Sure.  I was very happy.  It was my first EFT of learning the value of the proposition for investors.  It's a smart beta fund; it’s an intelligent process, a dynamic set of rules-based thinking that did, I would say, substantial regressional work of looking at bear markets, bull markets, and the jet industry and airline industry was going through in the past 10 years, bankruptcies and reorganizations etc.  

This dynamic model, it’s outperformed what was a previous index that they were using.  With that, it’s done well, I think, in a very sloppy past 12-month stock market.  

It's modestly up a couple of points and it is, even with the price of oil year-to-date, rising to 24%; the fund is up 2%, and I think it shows that it's diversification and its structure is a great way to play the industry, and the industry remains to be extremely undervalued.  

On a relative basis to other transports, if you look at trucking companies that trades at half their valuation, if you look at railway companies that trades at a third of their valuation; so the airlines industry is very, very inexpensive relative of the stock market or just the transports.  I think that it remains bullish.

Steve Halpern:  Are there any particular areas within the sector or any particular stocks that you find particularly intriguing now?

Frank Holmes:  Well, I think some of the mid-caps are going to be doing these acquisitions and we just saw Virgin get bought out by Alaska Airlines, who are both great airlines and have a great culture, a similar culture, so I think that you're going to see some of these mid-caps get taken out.  

I know that when we go look at a lot of diversified names foreign, that there’s still M&A activity there.  From that end, you saw that Atlantic jumped 46%, so these stocks are very undervalued.  

Steve Halpern:  Now finally, for investors who were concerned about the general outlook for stocks, US Global offers two funds that are designed specifically as safe havens; the Near-Term Tax Free Fund (NEARX) and the US Government Securities Ultra-Short Bond Fund (UGSDX).  Could you give us an overview of these two products and whom their best suited for?

Frank Holmes:  There’s a big rage now on robo-allocation and robo-allocation basically takes an asset class and makes sure that you get rebalanced, and for simple idea in concept is if you’re 30 years old, you should be 30% invested in short-term income; if you’re 70 years old, you should be 70% invested in short-term income.

And each year your portfolio gets readjusted and rebalanced so that you take your profits in one asset class and you go into another.  Now, what makes this particular product so unique is that it's been positive for 21 years.  

In the past 21 years, we've had 9/11, we’ve had the stock market crash — we've had two massive crashes in the stock market — and we've had two substantial rate hike periods and the fund has still been able to provide a profit each year for investors.  

Steve Halpern:  You’re talking about the Near-Term Tax Free Fund?

Frank Holmes:  Thank you, that’s correct. NEARX is the symbol and I think that when I take a look at the two funds, NEARX is probably the best place for traders who need short-term, ultra-short-term, — that want to have a yield higher than money funds and go in and go out it’s very liquid because it’s buying nothing but government.  

Whereas Near-Term is tax free, the yield is higher than buying on a piece of paper.  If you visit our website at USFunds.com you can get more disclosure, more information.

But it's a wonderful product to diversify looking for a safe, what I call, safe short-term yield and the price of a bond is interesting because we made a $2 NAV so there’s hardly any price volatility, which is important when people are parking their cash.

Steve Halpern:  Again, our guest is Frank Holmes of US Global investors.  I always enjoy talking to you.  Thank you so much for your time.

You can meet Frank Holmes and learn more about his JETS ETF and his outlook for gold at the upcoming Las Vegas MoneyShow, May 9th-12th. Register here.

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