Mid-Year Top Performers: Frank Holmes
07/06/2016 10:00 am EST
At the start of the year, MoneyShow featured its annual Top Picks report asking the leading advisors for their favorite investment ideas for 2016. In the report 85 stocks and funds were recommended. This interview is part of our series highlighting the top performing advisors as of mid-year.
Steve Halpern: Our guest today is Frank Holmes, CEO of US Global Investors and one of the smartest people on Wall Street. How are you doing today, Frank?
Frank Holmes: I'm very well, thank you.
Steve Halpern: Now, first congratulations are in order in our 2016 annual top picks report, you chose Franco-Nevada (FNV) as your favorite stock for the year and since that beginning of the year, the stock’s gained 65%. Can you share an overview of what the company does and explain your original rationale for picking this stock?
Frank Holmes: Well, my original rationale has always been to have a position in gold and have a 5% in gold equities and a 5% in bullion or gold coins and then that exposure to the least amount or risk or upside return to me was Franco-Nevada because it's in the royalty business.
It gets a royalty off the top of gold production and finances these companies and Franco-Nevada has been a wonderful performer.
It outperformed all the gold stocks last year when they were falling and it's outperformed the majority of them coming year-to-date, so it's one of those great stocks in the past five years when the GDX is actually still down 50%, it's doubled.
Steve Halpern: Now, could you review some of the developments over the last six months that have led to the stock's strong gains and perhaps touch on both of the gold sector in general as well as any company specific developments?
Frank Holmes: Well, the big thing is, is when we look at gold, there's two drivers for demand.
One is the love trade as I like to call it and it really comes out of Asia and the Middle East, and India, where people buy gold for family, for loves, for marriage, for graduation, etc., and it's a very strong cultural ethnicity, which is highly correlated to rising GDP per capita in those countries.
The other part of the equation is what's called the fear trade and the fear trade is whenever government policies are imbalanced between their fiscal and monetary policies.
And right now we have a massive imbalance in monetary policies in Europe and in North America where we have zero interest rates and anytime a country offers investors a bond to buy a government bond and you take away the CPI number and it's not a positive rate of return, then gold falls.
Whenever it becomes a positive real rate of return, gold will decline in that country's currency and right now, this year, we're seeing currencies around the world go to negative interest rates and with Brexit, the pound for the first time gone to a 1% yield versus the German 10-year bond, which was zero yield, which means there's a negative rate of return.
Steve Halpern: Now, looking ahead to the second half of 2016, do you still remain optimistic on gold in general and Franco-Nevada specifically?
Frank Holmes: I do. I think that Franco-Nevada is a blue chip gold mining company that was able to raise $1 billion in 24 hours earlier this year and they used those proceeds to buy Glencore, who had huge financial problems and couldn't go and tap into the equity markets — whereas Franco could.
And they bought the royalties which only increased their cash flow per share, so I think that gold is going to maintain, it's going to be an important asset class for investors as these governments around the world have to wrestle with so much taxation and regulation without representation and that's for the reason for Brexit and that makes gold an attractive fear asset class.
Steve Halpern: Now, before we go, perhaps you'd be kind enough to highlight another name or two that investors should consider for the second half of the year.
Frank Holmes: There're other royalty companies I've really focused on, which have done very well and one of them is called Sandstorm. The ticker is SAND, it's pretty easy, and the sand and it's more of a junior, more speculative and the best way to buy that is on down days because it's extremely volatile but it has huge upside potential.
The other one is called Silver Wheaton (SLW), it's listed on the New York Stock Exchange. It is the premier way to play silver stocks because of the high operating cash flow returns on invested capital. It's a silver royalty company.
Steve Halpern: Again, our guest is Frank Holmes of US Global Investors. Thank you so much for your time today.
By Frank Holmes, CEO of US Global Investors