Mike Gleason (Money Metals Exchange): We are fortunate today to be joined by Frank Holmes, CEO and Chief Investment Officer at U.S. Global Investors. Just recently Mr. Holmes received another award from the Mining Journal and was named America’s Best Fund Manager for 2016, one of many awards he’s received now in the mining industry for his fantastic track record. He is also the co-author of the book The Gold Watcher: Demystifying Gold Investing and is a regular guest on CNBC, Bloomberg, Fox Business, as well as right here on the Money Metals Podcast.

Frank Happy New Year to you and it’s great to have you back with us and thanks for joining us again.

Frank Holmes

Frank Holmes (U.S. Global Investors): It’s good to be with you all and yes, Happy New Year and wishing everyone buckets of laughter and gold this year.

Mike Gleason: Well to start out here, we’ll talk about gold specifically and I want to get your comments from a technical analysis standpoint in the gold market as we begin the new year. I know you’re pretty optimistic about where prices may be headed saying that gold was significantly oversold at the end of the year. You wrote a great piece recently for your website on the subject. So, if you would please share with our listeners why you’re looking for a reversal and a move higher in the metals.

Frank Holmes: One of the things we like to do is try and remove the emotions of markets and apply some basic statistical analysis. One of the most simple ones is the oscillator and it’s looking at the rate of change over a specific time period. In 60 trading days, which we published on and that’s looking over a basically 90 calendar days which is a quarter. You go back over 10 years, 20 years, and it doesn’t matter if gold was in a micro-rising trend or a falling trend, things will overshoot both to the upside and to the downside.

There are these extreme pivot points that investors should look at and what we’ve seen here is that gold is down two standard deviations. That’s just forecasted over the next 60 trading days, the odds are they have a 90% of a probability of a reversal back to the mean. It also comes at year end and usually gold rallies in January going into the Chinese New Year, so it appears that we start this rally.

Mike Gleason: Yeah we’re certainly looking good here as we’re speaking on Wednesday of this week. The first week of the year does appear to be positive for metals which of course is a nice sign for many folks who’ve been worn out over the last few months with the price action. On one of the fundamental drivers you watch carefully when it comes to the precious metals is real interest rates. We’ve talked about that a lot with you. All other factors aside higher real interest rates tend to weigh on gold prices because gold doesn’t generate a yield.

We’ve seen yields move higher since November and that is one of the factors weighing on the metals. We have the Fed targeting three to four rate hikes in 2017 but we know that what they say and what they do are often two very different things. Last year at this time, Janet Yellen was telegraphing four hikes and delivered one and that was in the final month of the year. So, what is your outlook for interest rates in 2017?

Frank Holmes: I think that they backed up very quickly and I think that we’re going to have inflation. Historically whenever you have such a big fiscal stimulus and its very demand focused domestically, domestic demand, and we’ve this short in the small cap stock arena, then the odds favor that inflation will be higher. Here the magic is, how high can rates stay ahead of inflation without stifling a recession? And I don’t think they can go much higher, and I think that’s the inflection point.

Right now, if you take a look at the spike in the short two-year government bond, which most currencies trade off of, you see an extra 80 bases points – an unexpected rally in that yield. And that would have basically on a debt rollover take the debt servicing up to 3.5% of GDP. So, I think that that would be fragile to say the least. I think the other things where investors need to recognize is that if Trump does go with his tariffs and doing all this stuff, some of these thoughts are out there, this will trigger inflation and we’re going to see gold participate in a big rally.

The last thing I want to share with the investors was that this time last year when everyone was so bearish and bleak and gold started this rally. The gold stocks that cleansed all themselves to balance sheet and started on a spectacular run. When they were up 40% most of Wall Street was telling me, “Oh, it’s up too high.” I would do interviews and it’s up 80% and, “Oh that’s up way too high.” Now, our funds are up 100%, “That’s just impossible.” And still we’re up, or gold (stocks) were up 70% I think for the past year and that was still too high.

We still have this per base of negativity towards gold and talking down gold as an asset class. I think that that’s another factor that lends itself that we can get this surge of short covering in gold stocks.

Mike Gleason: Leading me right into my next question. Last year was a real rollercoaster for the mining industry. You obviously follow that sector very closely, so will 2017 look more like the first half of 2016 for the miners where they ascended rapidly and the environment was very positive? Or will it look like the second half of the year when they pulled back and gave back much of those gains? Basically, how are things setting up for the mining sector this year?

Frank Holmes: It’s a good question. When you do time series analysis that is, what is the core relation over 20 trading days between gold and the gold stocks? We’re talking about a 95% core relation. So, if you want to understand the gold stocks you really have to understand the price the gold and where the direction it’s going. Our forecast in gold stocks most times is a forecast on gold.

What the difference is currencies and right now the cheapest gold stocks in the world on an operating cash flow enterprise value are populating in South Africa and Australia. If you take a look at to the multiples as compared to North America and if you look at just having a basket of those names last year and rebalancing them and being a scavenger even though the gold rally was taking place, buying the cheapest operating cash flow to enterprise value, you far outperformed everything, the top 10 names.

In running a mutual fund, we have to have at least 21 names and it ends up being more. Coming

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