Is It 2003 All Over Again? U.S. Global Investors’ Frank Holmes Predicts a Resurgence of the Love Trade for Gold

Submitted by The Gold Report as part of our contributors program.

Is It 2003 All Over Again? U.S. Global Investors’ Frank Holmes Predicts a Resurgence of the Love Trade for Gold

This interview was conducted by JT Long of The Gold Report

http://www.theaureport.com/pub/na/is-it-2003-all-over-again-u-s-global-investors-frank-holmes-predicts-a-resurgence-of-the-love-trade-for-gold-1

Close your eyes. Imagine India growing and importing gold again freely. China and the U.S. investing in infrastructure. Europe stable. The Middle East conflict-free. What would that mean for commodities? In this interview with The Gold Report, U.S. Global Investors CEO Frank Holmes outlines the developments that could move us toward that vision and the impact that scenario could have on gold, diamonds and steel.

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The Gold Report: You recently wrote an article called “It’s Morning in India” that marked the election of Narendra Modi’s pro-business government. How much of an impact can one man have on the demand for commodities?

Frank Holmes: At U.S. Global Investors, we believe that government policies are a precursor to change. That is why we focus on fiscal policies all over the world to understand the impact they will have on everything from interest rates to money supply. What makes Modi special is that he understands that job growth and creativity come from fiscal stimulus. Creating tax-free zones, breaking up monopolies and streamlining regulations and bureaucracy can unleash intellectual capital. Modi’s track record in the state of Gujarat illustrates his ability to produce significant growth. He is a no-nonsense, pro-business person.

TGR: Let’s look at what you have called the love trade. Its traditional seasonal impact on the gold market was quashed by taxation and import bans. How much of an effect could the pent-up demand have on the gold price if the government eliminates those disincentives?

FH: India is a big market and it can have a big impact. There is a high correlation of rising per-capita GDP in China and India and rising consumption of gold for gift giving. In the past three years, global GDP has shrunk from 5.5% to 3%. This year, it looks as if it is going to be back up to 3.5%. Growth and prosperity in America creates an economic sounding board that creates money around the world. Add to that the demand created by the religious holidays in the second half of the year?first Ramadan and then wedding and Diwali seasons, followed by Christmas and Chinese New Year?and it looks very positive.

Even JPMorgan Chase’s Global PMI, the Purchasing Managers’ Index is looking up. The forecast of the next six months of economic activity shows the 1-month above the 3-month average. When that happens, consumption usually increases significantly in all commodities.

TGR: Let’s quantify the term “significantly.” Are we talking about a 2% increase? A 10% increase? More?

FH: Well, that’s hard to say, but I have a suspicion that gold can easily jump 30%, up two standard deviations, because it’s been down two standard deviations. Meanwhile, gold stocks are cheaper today than they were during the crisis of 2008, relative to the price of gold. So if we have a 30% increase in the price of the gold over the next 12 months, the gold stocks could rally 60%. For that to happen, we would have to see peace and prosperity in China, India, Southeast Asia and the Middle East, because that really triggers the consumption of gold.

TGR: How do you determine what companies in your portfolio are poised to do well if the gold price increases?

FH: Quality of management is a key factor. We look for technical engineers and geologists, but also at whether leadership understands the capital markets and has relationships with newsletter writers, buy-side and sell-side analysts. Those companies that have those relationships when they come out with news will enjoy a better response in the capital markets. So the quality of senior management is very important.

Our investment philosophy is driven more by the quality of the company rather than by leverage to the gold price.

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