Frank Holmes Exclusive: Gold Could Hit $1,500 in 2017 Amid Imbalances & Weak Supply
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Mike Gleason: We are fortunate today to be joined again by Frank Holmes, CEO and Chief Investment Officer at US Global Investors. Mr. Holmes has received various honors in recent months including being named America’s Best Fund Manager for 2016 by The Mining Journal and received two more Lipper awards just last month in both the three year and five year precious metals equity funds categories.
He’s also the co-author of the book The Goldwatcher: Demystifying Gold Investing and is a regular guest on CNBC, Bloomberg, Fox Business, as well as right here on the Money Metals podcast. Frank, welcome back and thanks for joining us again. How are you today?
Frank Holmes: I’m well, thank you.
Mike Gleason: You mentioned back in January when we had you on right before Donald Trump’s inauguration that the first 100 days of his presidency would be a key on several fronts. Give us your thoughts on what these first 100 days have looked like. What have you gleaned from the last few months as you’ve been evaluating his policy decisions and the market’s reaction to those?
Frank Holmes: Well, I think it’s really difficult to grasp the difficulties of getting change in Washington. There’s just so many people that are addicted, from lobbyists to whatever on regulations and more rules and regulations. Regulations for taxation for every agency there is. It’s been much more difficult for him to tackle that than it was expected, and that’s recently showing up with interest rates falling back below and giving a negative interest rates, gold rallying from that. I think it’s hard for the average investor because something like 70% of the media is biased, and they’re pro-Democrat no matter what it is, and so you find the narrative from even so many business columns are wanting Trump to fail.
I find that really saddening because a great investor, the greatest in the world, Warren Buffett, who bet on Hillary Clinton and then when Trump won he said, “Well, I’m behind the President and if he does well we all do well, so that’s what I’m going to do,” and I’m more of a Buffett cheerleader in a thought process, so I think it confuses a lot of people that how difficult it is, and I think that to really read through his message, that he wants bilateral agreements, he wants to renegotiate agreements with the benefit to the middle class of America. I think that that’s very positive, but no matter what he does, we’re just getting skewed with a negative sentiment.
Government’s basically have two levers to manage the economy. One is monetary policy, the other is fiscal policy. Monetary policy is money supply and real interest rates. Fiscal policy is tax and spend and regulations are an indirect taxation on a sector of the economy. When it comes back, what we witnessed under Obama was an administration that was on steroids in every department on new regulations. It was a massive increase, and the only way to have economic growth with this massive increase in regulations which has always been a drag on the economy, is to have cheap money. Low interest rates, and to a point where they went negative. When I say negative, is that every month we get what’s called the “CPI number.” The CPI tells us what Consumer Producer Index of inflation is.
That inflation index is an important factor because if it’s 2% and the government wants you to buy their 10-year government bonds, and they’re only going to pay you 1.5%, you’ll say, “Well, that’s a bad deal. I’m going to lose half a percent every year for 10 years.” Whenever that happens, gold becomes a very attractive asset class, and so do companies that are paying dividends and have the capacity to raise dividends. That’s the other part where you see in the stock market rally for the past eight years predominately, and we’ve had negative interest rates. And you see gold fall and rise every time we’ve had this positive/negative.
For your listeners, every month the CPI number comes out, and you deduct that from whatever the government wants you to pay for their 5-year and 10-year government money, and the core relation is immense. Anytime they’re paying you more than the CPI number, gold falls. Anytime they’re paying you less, gold rises.
Mike Gleason: Yeah, very well put. It is obviously a big thing that we look at, and we’ll need to continue to look at. What are you expecting for that situation here going forward? Do you expect a negative real interest rate environment to persist here, Frank?
Frank Holmes: Yeah, I think that as long as you have this massive burden of regulations, you’re going to have to have cheap money. Raising interest rates right now is only going to hurt the economy, and there’s some parts that are already trying to show up with that. The concerns, stay away from auto parts. Automakers have a huge inventory, and a lot of the recent cars have been financed with basically junk paper, because a lot of people can’t qualify. It seems to be a very risky sector. So, what happens if that short-term interest rates now, I remember I wouldn’t call and ask some car dealers locally, and if you want to use their services, it’s 4% for a car. If you can get one of the credit unions here, you can get it down to 2%, but a year ago it was one and a quarter.
Mike Gleason: Yeah, I think that as long as you have this massive burden of regulations, you’re going to have to have cheap money. Raising interest rates right now is only going to hurt the economy, and there’s some parts that are already trying to show up with that. The concerns, stay away from auto parts. Automakers have a huge inventory, and a lot of the recent cars have been financed with basically junk paper, because a lot of people can’t qualify. It seems to be a very risky sector. So, what happens if that short-term interest rates now, I remember I wouldn’t call and ask some car dealers locally, and if you want to use their services, it’s 4% for a car. If you can get one of the credit unions here, you can get it down to 2%, but a year ago it was one and a quarter.
Frank Holmes: I was in London also and I had a lovely lunch with Nicholas Vardy. Very insightful. He’s a newsletter writer that went to Stanford and then did his law degree at Harvard, and was there when President Obama was there, and our new Supreme Court judge. So, he’s very insightful and talkative, and gave me lots of color, and whenever I travel to these places, I always ask the taxicab drivers what do they think, and the thoughts of Brexit, it was ubiquitous. Everyone was happy for Brexit to go through, and they felt that the unions have taken control of