Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up we’ll visit with Frank Holmes, CEO of U.S. Global Investors. Find out how much longer Frank expects the dollar rally to last and what an end to the greenback’s advance may mean for gold. Don’t miss my interview with Frank Holmes… coming up after today’s market update.
Well, the Federal Reserve is up to its psychological manipulation again. On Wednesday, the private banking cartel dropped its commitment to being “patient” when it comes to pushing up interest rates. But in a bit of her usual doublespeak, Fed chairwoman Janet Yellen said that she and her fellow central bankers would not be impatient, either.
Nicole Petallides (Fox Business News): They are trying to please all people all the time. We know that's very tough. They did remove the word“ patient” so now we are one step closer to an actual tightening, but again she said just because we remove patience doesn't mean we're impatient to start raising rates.
Ward McCarthy (Financial Economist): While the word patient was taken out of the policy statement today, they were still there in spirit. They will be ready to raise rates anytime from June 17th on depending on the data, with the inflation data being the key.
Recent strength in the dollar versus foreign currencies and most commodities has put downward pressure on price inflation, not to mention demand for U.S. exports. Nevertheless, the Fed wants us to believe that it will eventually pull out its stimulant injection of zero percent interest rates. But if Dr. Yellen follows through, she risks plunging the drug-addicted patient into withdrawal.
The precious metals markets have certainly been testing the patience of investors over the past several months. Gold and silver started the year strong but have since settled back down near the low end of trading ranges - but they have never dipped below last fall’s lows despite a stronger dollar. This week the metals got a big boost following the release of the Fed’s policy statement.
Even with the removal of the term “patient,” markets interpreted the Federal Reserve’s language as more dovish than expected. Policymakers made note of disinflationary pressures and weakening GDP numbers and reiterated their commitment to being data dependent. Meaning if the data gets worse, the Fed may postpone any rate hikes.
The U.S. Dollar Index swung wildly on Wednesday and Thursday - first a big move to the downside, then all the way back up to near where it opened on Monday. The Index which measures the greenback against other nations’ fiat currencies has flirted with the 100 level multiple times over the past couple weeks - and it seems to be having trouble going any higher. It’s selling off again today and has dropped down to 98.
The gyrations in the dollar worked mainly to the benefit of precious metals this week. Gold prices gained following the Fed’s statement on Wednesday and held firm Thursday. As of Friday, gold has added another $10 or so and is now up 2.1% for the week and trades at $1,183 an ounce. Silver responded more vigorously mid week than did gold and is soaring so far today. Silver has now put together a weekly gain of 6.4%, with prices now coming in at $16.70 as of this Friday morning recording, up a dollar now since last Friday’s close.
The other white metals, platinum and palladium, are lagging a bit. Platinum was little changed on the week through Thursday’s close but is up nicely today along with all of the other precious metals and now trades at $1,136 an ounce, good for a weekly gain of 1.4%. Palladium, meanwhile, sold off hard earlier this week. The eccentric catalytic metal shows a loss of 1.8% even despite a nice gain so far today, coming in now at $781.
Well, in other news, shares of Apple officially became part of the Dow Jones Industrials on Thursday. Apple is the world’s largest company by market capitalization and is preparing to launch its much-hyped Apple Watch.
Apple is offering a high-end version, called the Apple Watch Edition. It features 18-karat gold casing and carries a price tag of $10,000 to $17,000. The amount of gold contained in each Apple Watch Edition is 54 to 69 grams - or roughly 1.9 to 2.4 ounces - depending on the particular model. Given the current spot price of gold of $1,183 per ounce, Apple is charging a hefty markup for its gold watches, which start at $10,000 a pop.
Apple Watches are not an efficient way to buy gold, but the gilded devices will undoubtedly become sought after by some as a fashion statement. Apple hopes to woo buyers of luxury goods in Asia, where gold is seen as an important status symbol. If the Apple Watch Edition proves popular, it could eat up a significant chunk of global gold supplies.
For further insight into how the gold market might be impacted, check out David Smith’s article titled, “How Apple’s Gold Watch Will Keep the Bull Market Ticking.” It was one of our featured articles on our MoneyMetals.com website last week. Just click on the “News” tab.
And finally, today marks the end of an era for the gold price-setting mechanism. The so-called London gold fix is no more. After being the dominant source of gold spot price quotes for nearly a century, the archaic system that was controlled by a handful of bank traders will be replaced by an electronic system that promises greater transparency. Whether the new system roots out manipulation remains to be seen, but we are hopeful that a freer and fairer market will emerge.
Now for more on the gold market... what it will take to get the metals to start moving up again and what one highly respected analyst predicts for the metals in 2015, let’s get right to this week’s exclusive interview.
It is my privilege now to be joined by Frank Holmes, CEO and Chief Investment Officer at U.S. Global Investors. Frank is a well-known market commentator and seasoned market analyst whose firm specializes in investments in the precious metals and natural resources sectors among others. He's also the author of a book titled The Gold Watcher: Demystifying Gold Investing." Frank regularly offers his excellent market commentary at USfunds.com on his “Frank Talk” blog.
It's a real honor to get a chance to talk to him today. Mr. Holmes, thanks for joining us.
Well thank you for inviting me and sharing some of my thoughts with your listeners.
Well I know you're a busy guy and we've only got a short amount of time here so I'll get right into it. First off, the big news this week was the FOMC meeting. Any surprises there for you? What did you make of their Wednesday announcement?
No there really wasn't. We do these mathematical models which I quite often publish on my blog and I look at the stress stretch. I call it the stretch like touching your knees to touch your ankles. The move in the dollar was so great over the past 1 month and 60 trading days, and the price of gold declined, but the dollar was so strong it had to correct. And I didn't believe it was going to happen, that they were going to raise the rates. I think that they have to be very careful. Exports are going to slow down and I think there are other factors so I expected what took place.
You alluded to it there but yeah the biggest headwind facing the metals continues to be this unprecedented advance that we're seeing in the U.S. dollar as compared to the world's other unbacked currencies of course. Do you see that coming to an end here? It sounds like you do but will the continued issues over in the Eurozone and with the euro maybe extend that dollar rally a little further? What is your research telling you there?
Well I don't think it's going to turn yet because what we have to do is take a look at for that fear trade, which is a key component driving gold, is not just a strong dollar. One has to look under the hood at the engine. Why is the dollar strong? Well it's not a war, it's not a fear. The dollar's strong because it has the highest real rates return today.
Now I think in the next 2 months we're going to see the CPI number, which went negative, turn positive and that will put a compression on what they call the real rates return. For your listeners, real rates return is the key factor that drives the fear trade for gold. What I mean by that is that what will the government pay you for a 5-year government bond. Take away the CPI number and you either get a positive rate of return or a negative rate of return.
A year ago, we had a negative rate of return. If you bought a 5-year government bond you were locking and losing money. Now it was +168 basis points. The gold will trade inverse to that. Whenever you have any country, you're seeing gold in euro terms exploding on the upside because interest rates are negative there. You're seeing gold in South Africa terms exploding because interest rates are negative. Japan also 52-week highs, 3-year highs. Why because negative real interest rates.
America, without lifting interest rates, has the highest interest rates.
You follow the mining sector very closely of course being a metals and natural resources guy. What is the state of the mining industry right now given this prolonged period of suppressed metals prices? Are we going to see the production declines and reduced supplies start to creep in? Because from the demand side we still seem to have a significant appetite for physical gold and silver throughout the globe so what do you think about a potential supply/demand gap existing here?
I think it'll take time but I do believe that we're going to start seeing it shrinking like we're seeing it just fall off a cliff in South Africa. I think it will continue. We've had the peak is behind us, and see how the next quarter happens. I think the biggest thing for the stocks is they're at all time cash flow lows. When you do a cash flow multiple looking at what they were, they went up to 35 times at the peak in 2007 times cash flow and now they're single digit numbers so gold stocks are very attractive. What they have to do to become even more attractive is to get the discipline of return capital model.
That's what the airlines were plagued with. They just grew for the sake of growth and they never had a return on capital and they were extremely volatile and problematic. Gold stocks same thing, they just kept acquiring assets of very high valuations and then were unable to deliver them into production. So they've gone through this sort of catharsis which I think is very positive and constructive. I don't think you're going to see new mines coming on stream at any rapid rate for several reasons because the shareholders won't invest if the management's not going to have a return on capital. That's why at many of the big capital stocks the CEOs have been fired. It's a record turnover losing their jobs.
Now the new CEOs coming in they're much more disciplined like CFOs of that return capital.
You note in your book about the importance of having at least 10% or your portfolio dedicated to bullion or mining stocks. From our experience, we found that most people, even those who recognize the importance of having at least some tangible assets in their portfolio, are significantly underweighted in the metals. In fact, the vast majority own none at all.
First off, why do you think that is?
Well the Federal Reserve doesn't keep other countries' currencies. It keeps gold so if they don't trust other governments' currencies, they only trust gold, shouldn’t an investor? I think that is a basic thought process.
Two is that the math of markets is that there will always be imbalances between the monitoring fiscal policies. So when we had gold run to $1,900 if you had -300 basis points on a 10-year government (bond), I mean it was unheard of, and since then it's turned positive, that's why gold is corrected.
You will get these imbalances and gold has these wonderful runs and I think that having a 5% weighting in bullion and a 5% weighting in gold stocks and then the key here is to re-balance. The reason why I share this with you and your listeners is because the DNA of volatility. The DNA over any rolling 12-month period of bullion is about the same as the S&P 500 plus or minus 19%. It's 70% of the time gold can up 19%, fall 19%, same with the S&P, so it's a non-event. It's when it goes twice that rate. When gold hit $1,900 it was plus 30% and it was time for a correction, which we've had.
Now gold stocks are a different animal. They have a plus or minus volatility of 38% so whenever you see gold stocks down 38% then they start becoming quite interesting. If they're down more than that, which we've had this volatility where they fall 70%, the odds of them mean reverting, that is rising 35%, is very, very high.
So what happens is that why you have this re-balancing, you end up catching that volatility. You end up taking your profits of your stock market and your bonds, you buy a little bit of gold, gold has a great rally, then you take the profits from there and you put it back into your bond portfolio and into your general equities. That's the magic of that re-balancing.
Do you find that the general investing public is receptive to this idea of having at least 10% weighting in gold and gold stocks? What are you finding there? Is it a tough sell now given the last few years or are more people opening their eyes to it given all the issues with the currencies around the world?
Yeah I think it's always been a challenge for mainstream to go into the gold space. I think the big play that we had leading up to 2007 was from hedge funds putting big billions of dollar bets on the GLD and that woke up a lot of other investors. I think that that was a big trade that took place and they were very much on the negative rates of return. Whenever the dollar had negative real rate of return, they'd increase their gold exposure. The dollar starts turning positive, they decrease their gold exposure.
But for that retail investor, I think that a lot of them follow moving averages. I think if gold is above the 50-day moving average then they get a little warm towards it, if it's above 200-day then they want to have exposure to it. Vice versa when it goes below the 50-day they become frightful and they're out. It seems that using trend analysis and moving averages and looking at the fund flows of the GLD you can see money going in, money going out all based on the 50-day moving average.
I would think that given the undervalued metals markets and the seemingly over-valued and maybe frothy equities markets that now may be a great time for somebody to take you up on your investment advice to have that portfolio balancing. Am I right there?
Oh totally. I've always advocated it and the magic is to have that 10% weighting and if you're not going to go buy gold coins or GLD then you should be looking at buying estate gold jewelry. You can get great prices. I was just in New York City and you can basically get a very low markup whereas if you go buy new gold jewelry you end up paying a 400% markup. There's lots of opportunity in that secondary market and you can collect beautiful gold coins on these down days. We saw last year a lot of very smart, smart Americans were huge buyers of silver. Silver coins in the Canadian Mint had record sales. I think they sold 27 million 1-ounce coins in the U.S.
Yeah and the U.S. Mint of course set records last year once again for Silver Eagles sales as well. Yeah silver is definitely the metal of choice among the casual investor for sure.
Well Frank, what are you looking for for the remainder of the year in the gold and silver markets? Will we finally see an exhaustion of this long corrective period in metals? On top of that, what is it going to take to get the metals going again?
What it's going to take is the “love trade”. The rising GDP per capita in China and India is very important. We have huge dollar cost programs that are in China today. The World Gold Council has been extremely successful where people buy a gram of gold every month. I think 20 million was one number that I heard had signed up for this program. It's very, very correlated with their GDP per capita. So it appears that GDP per capita in China, was a pivot point last year. It surpassed the U.S. Now their GDP as a macro number is far, far behind the U.S. but on a per person basis it has been growing and we're seeing Chinese have exceptional demand. In fact, the Chinese consumed all the world's gold supply from mines last year.
Then we have central banks coming in and buying. So any liquidations coming out of the GLD or any bricks of gold we're finding that are moving from the U.S., big bricks, over to Switzerland, being melted down to smaller coins and then showing up in China, going to Shanghai. The Chinese have done an interesting financial district they’ve created in Shanghai, a tax-free zone, so that they're going to become the market makers, what they call the price makers not the price takers. The London Gold Exchange is moving and I think that that's their vision.
There is a tectonic shift taking place and it's gradual. It doesn't happen all in one event overnight but I think that when we start seeing a rise in China and India with their GDP per capita rising faster than it was back in 2006 and 2007 that growth rate we'll see a big surge in that gold demand from that end. We're also seeing central banks.
What you’re we’re not seeing where the selling has been is predominantly people playing this negative interest rates to positive interest rates.
Do you expect the sideways action to continue here in the metals over the intermediate to long term or through the remainder of the year?
I think we'll see lots of action the second half of this year. The interesting part, I think gold has actually held up exceptionally well if you use the gold to oil ratio. The oil drop has been significant and there's always been a trade of hedging oil petro dollars back into gold. I think the difference here on that big trade when it happened in the 80s is that we have 3 billion more people on earth.
Under President Reagan when oil had such a big slide, like we just recently had, the difference is that this is showing up as a tax break around the world. The Americans ingenuity and innovation in fracking has left for us a big surplus so we're still price competitive, but this drop in oil is a 500 billion dollar tax break to emerging countries. I think in the second half of this year we'll start to see that economic growth.
Last point for you, Mesquite Gold Mine in California, they said that the drop in oil prices has impacted them by 11 million dollars of free cash flow. One mine, that's how much diesel they were using.
Yeah when you look at it against the backdrop of the big oil correction here, gold has definitely held up pretty strong. It will certainly be interesting to see this all play out. Before we let you go, Frank, can you tell our listeners how they can follow your commentary and also learn more about U.S. Global Investors if they're interested.
Sure. Go to USfunds.com, or phone 1-800-USfunds. USfunds.com and you can sign up for the “Frank Talk” blog and investor alert. We have over 40,000 readers in 180 countries. We publish every Friday night and we do a swat analysis, that is we look at the strengths and weaknesses that impacted asset classes like gold last week and then we forecast what could be an opportunity to trade next week. This seems to have the biggest following. It's always succinct but it's comprehensive.
Well yeah I can vouch for the great content that's there and it's been great chatting with you. We appreciate your excellent insights and I definitely hope we can do it again in the future. Thanks very much for joining us.
Thank you for the opportunity.
Well that will do it for this week. Thanks again to Frank Holmes, CEO of U.S. Global Investors. Check back next Friday for our next weekly Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening and have a great weekend everybody.
About the Author:
Mike Gleason is a Director with Money Metals Exchange, a precious metals dealer recently named "Best in the USA" by an independent global ratings group. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.