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Grinch Stealing Christmas Cheer on Wall Street

Frank Holmes Predicts Gold Explosion to the Upside in “Blink of an Eye”

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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up Frank Holmes of U.S. Global Investors joins me and shares why he believes this past quarter has been a very constructive and encouraging one for gold -- and he also gives us his outlook for the equity and metals markets in 2019. Don’t miss another great interview with Frank Holmes, coming up after this week’s market update.

Heavy selling in the stock market this week is stimulating demand in the future markets for safe-haven assets, most notably precious metals.

Stocks plunged on the heels of another rate hike by the Federal Open Market Committee on Wednesday.  The FOMC raised its benchmark rate by a quarter point and signaled it intends to hike two more times in 2019.

That wasn’t what investors wanted to hear. The Dow and S&P 500 each sliced through critical support levels to make new lows for the year.  December is now set to be the worst month in 10 years for the major equity averages.

December is normally positive for stocks, especially around Christmas.  But no Santa Claus rally appears to be forthcoming this year.  Instead, Fed chairman Jerome Powell decided to play the Grinch who stole Christmas cheer on Wall Street.

Not all investors are getting lumps of coal in their portfolios, however. Those who are diversified into physical precious metals are seeing some glitter. 

A rally in the gold market took prices to a 6-month high on Thursday. As of this Friday recording, the monetary metal shows a 1.7% gain for the week to bring spot prices to $1,260 per ounce.

The silver market is again knocking on the door of its stubborn resistance level at $15.00 per ounce. Silver prices currently trade at $14.73 after advancing 0.8% this week.

Other alternative currencies are also rallying this week.  Bitcoin surged nearly $1,000 to trade back above the $4,000 on Thurdsday.  However, the cryptocurrency remains more than 75% below its all-time high from last year.

Renewed interest in alternative currencies comes as online fundraising platforms such as Patreon expand their purges of prominent right wingers to now include center-right, centrist, and classical liberal activists who transgress against political correctness. 

Alternative fundraising platforms that allow greater freedom of speech have emerged, but they have gotten shut down one by one by their credit card payment processors.  We all should be alarmed by these developments – the de-platforming, blacklisting, and public shaming of increasingly large groups of Americans and organizations that won’t toe the leftist, globalist line. It’s a rigged system – one in which bankers are colluding with big tech to restrict our political speech.

Prominent center-right psychology professor Jordan Peterson is vowing to help set up a new crowd funding platform for independent content creators who have been banned elsewhere or are tired of self-censoring to avoid getting banned.  It remains to be seen whether it comes to fruition and whether it will be allowed to run credit card transactions.

Other voices in the alt tech space are getting behind payment platforms that rely on cryptocurrency. That way they can bypass the controlled banking system entirely.  Bitbacker.io is one such platform. Other systems are in development.

At stake is the principle that third parties and intermediaries shouldn’t be able to prevent voluntary, legal transactions from taking place on the internet. Offline transactions conducted directly in physical coins or paper currency require no permission from banks or Silicon Valley overseers. 

But once currency becomes digitized, it becomes subject to being controlled. That is why big tech, big banks, and big government forces want ultimately to make all transactions digital. They want to ban physical cash.

The Treasury Department could one day declare that minting coins and printing notes is too expensive.  Therefore, every citizen will be issued a digital wallet – perhaps linked to some biometric authentication system.  That would be the end of financial privacy involving any transactions priced in dollars.

But even in such a worst-case scenario, the government couldn’t stop underground barter economies from developing. People could still offer something besides dollars in exchange for something they might want. People could trade their labor, they could trade something tangible, or they could trade alternative forms of money.

Cryptocurrencies face an uncertain future in terms of how they might be attacked by regulators and whether they can maintain market value without anything tangible backing them. Hard currencies such as gold and silver coins offer more certainty. They will never become worthless.  They are impossible to hack and difficult for governments to track.

Physical coins do have some practical limitations in this internet age.  They will probably never surpass the transaction volumes of digital payments.  But in some real world situations, they may be indispensable. 

Even if your gold and silver bullion is never actually used as currency in direct barter or trade, it still performs the vital role of serving as a sound, tangible store of value. That’s something no fiat currency or unbacked cryptocurrency can do.

Well now, without further delay, let’s get right to this week’s exclusive interview.

Mike Gleason:
It is my privilege now to welcome in Frank Holmes, CEO and Chief Investment Officer at US Global Investors. Mr. Holmes has received various honors over the years, including being named America's best fund manager by the Mining Journal. He's also the co-author of the book The Goldwatcher: Demystifying Gold Investing and is a regular guest on CNBC, Bloomberg, Fox Business, and also right here on the Money Metals Podcast. Frank, welcome back, and thanks for joining us again.

Frank Holmes: Mike, it's great to be back with you at this time of the year, a year of thankfulness and gratitude, even with sloppy markets. We're all listening and talking, and we're alive, and we have many to be thoughtful and thankful for.

Mike Gleason: Absolutely. Very well put. Well, first off here, Frank, we just heard from the Fed as we're talking here on Wednesday afternoon. They are raising another quarter of a percentage point as most were expecting they would. That hike was sort of in the cards for months now. But the language in their statement was more hawkish than many of the experts thought it would be. They appear poised to forge ahead with more hikes next year, maybe not three or four, but likely two more is what they're predicting. So what are your thoughts here, and how did you interpret what they had to say about monetary policy moving forward?

Frank Holmes: Well, I think that low unemployment is probably one of the biggest factors, giving them the confidence to raise interest rates. And it's also probably one of the biggest factors for President Trump to go with the trade war. You don't want to do a trade war in a weak economy, you want to do it in a strong economy.

Mike Gleason:
Frank, the big story in the financial press is the sell-off in stocks. These markets have gone from hero to zero over the past two months, with P/E valuations in record territory back in September and stocks priced for perfection, even a small blip could be dangerous. Now the question is just how serious the correction is likely to be. Some pundits think the selling is already overdone, and there are folks on the other end of the spectrum who think stocks have a very long way to fall still. What are you expecting for U.S. equities in the months ahead?

Frank Holmes: Well, we're pushing this in the Holmes Fund like 20% cash, to give you an idea. And we also have puts, so I would say that I'm very, very cautious regarding markets. And let me just give you a couple views that we write about this every week, and in particular every month, I like to highlight the PMI, which stands for Purchasing Manufacturers Index, which is a forward looking index. And it's a great tool looking out six months of where the economic activity will be. And it relates to you're going to be manufacturing cars, so therefore you're going to have a demand, you're going to have to get zinc, you're going to have to get iron, you're going to get steel, you're going to get all these ingredients to manufacturer a car, and you're going to use electricity, and if you feel confident, then usually six months down the road when you're delivering that car, there's a stronger economic activity.

When the one-month is below the three-month, usually there's a 55% probability of commodities being weaker. But when it goes below for three months in a row, that is the global PMI, there's about an 80% probability copper falls, steel prices fall, and oil falls. And what's interesting is that it all started deteriorating in the late spring, the global PMI. The U.S. PMI stayed relatively strong, but the global PMI has been very negative, and particular China. And I like to highlight that because China's 50% of all commodity demand. And when China's PMI is flashing negative for three months, five months in a row, there's something not happening that's good for commodity demand. So, that's me very cautious. And that's one of the best leading indicators I like to use.

But I think the big headwinds, to try to explain it for your listeners, is that we always talk about government policies that are precursors to change. And there's two types of policies, is a fiscal policy or some monetary policy. And a fiscal policy also bifurcates. And what we're having right now is usually tax and spend are the fiscal policies, and monetary policy are rising or falling interest rates, and money supply. So the monetary policy is rising interest rates. Well that's very negative for overall sustainable economic growth and the stock market. After 18 months of rising interest rates, the stock market starts to get very jittery. And that's what we're experiencing.

And then we have money supply, 25 trillion dollars here, 170 trillion globally. It's just breath taking numbers, and that's very good for gold, because they're going to have to try to unwind that, and devalue that currency. So we have a headwind that's rising interest rates. And then we have fiscal policies, which is tax and spend. Well, tariffs are a form taxation. Trump was remarkable in getting the tax break through, which helped corporations and spending economic activity, but that year-over-year boom ends this December. And so going forward in the next quarter, and the next quarter is going to start showing negative big change in positive growth and profits, and I think that that's going to be an impact for the stocks.

And I think that the trade war was timed when (we had) a strong economy, but trade wars are never usually good for economic activity. And particularly with a strong dollar, we're not going to be able to export our high-end products, so that Euro Bus is going to start to outsell the Boeing as an export. So these are important headwinds to appreciate. And underlying all of that, which really I find most remarkable is how strong gold remains. We're are interpreting that selloff of crude and copper, that's all part of that PMI. It is not changed.

Mike Gleason: Since we last spoke, we have now the November elections behind us. The Democrats took back control of the House of Representatives, the Republicans maintain a narrow lead there in the Senate. How do you feel about governmental policy moving forward now that Trump doesn't have both the GOP led House and Senate to help push his agenda?

Frank Holmes: You know historically, you know the Democrats have got control of the Congress, but just by a small margin… and Republicans have the Senate and the President, usually that's pretty good for the stock market. So I'm not bearish of that, and I think that President Trump is a master of game theory, what he did with North Korea, and then how he's played that against China. But I think the pain of that is going to all find us, a crescendo in the first six months of 2019, and we should get some type of a market bottom.

But I think when it happens, in a blink of an eye gold could be $1,500, because I think that when rates start to roll over that gold is going to just explode on the upside. And for many reasons. And what I really find remarkable, and I mentioned before on your program, on a relative basis how strong is gold. And we have to remember, since the year 2000, gold has appreciated two times over the S&P 500. A 200% better appreciation. And having that golden rule, I've always advocated 10% in gold and rebalance each year, has done well. And because right now going into this year, I think gold's going to outperform the S&P 500. So, we're going to have one of those another sort of flat years, but on a relative basis.

But when we look at interest rate differential, and that's what really important when looking at gold. What would the euros pay you? What would they pay you for two year, five year, ten year money, and what will the Japanese pay you? Well what's happened is that they pay you next to nothing. It's a negative real interest rate. And when we look at the negative real interest rates in Europe and Japan, and the triangle is perfect with the U.S. at the top of having such high positive yields, any time we've had that differential so great as we have today, gold would be $700, but gold's not. People are lamenting where it's trading at right now, but I'm sharing with you that gold at $1,246 is actually really strong. And any type of a correction in the U.S. dollar with rates falling here, in a blink of an eye it'll be 13, 14, $1,500.

Mike Gleason: We agree. The metals, gold in particular, have held up very well in light of some serious headwinds over this past year. Now metals, and silver in particular, can trade like commodities. We talked about copper and crude, both are somewhat in free-fall mode here in recent days. We are looking for metals to get some safe haven buying as investors flee the equities markets. But the truth is that gold and silver have some proving to do. In recent years, the metals haven't gotten much attention, though there have been moments of fear in the markets. They really need to live up to their billing as go-to assets when there is trouble. And to really get something going to the upside we're going to need a big surge in interest from speculators. So what, if anything, do you see coming to make believers out of investors who are either currently ignoring or perhaps a little bit jaded by the metals markets Frank?

Frank Holmes: Well, I’ve always advocated this balancing factor. And, you know, if you want to live a healthy body you have to balance the three. That is your carbs, and good carbs versus bad carbs, and protein, and fats. And there's good and bad fats. So you have to balance. And those that run where they're having a 10% weighting in gold and rebalancing, and having equity exposure, and then there are also short-term bonds, which I've always advocated, they're okay. Overall their portfolio, their wealth is protected. And I think if you're 60 years old, it should 60% in short-term tax-free bonds, or short-term government bonds, and 30% into equities, especially those they're paying a dividend, that income is always beautiful. And 10% into gold. And I think that rebalancing that portfolio each year, it's just noise in the marketplace.

But if you're trying to trade in and out, now that's a different story. And I think that anyone who wants to try to trade today has not to be afraid of high frequency trading, because that's just noise. It's the high frequency research. It's the quants that have taking over the capacity to read material. So every time there's a government filing, a 10K, they read that filing in one minute, and they could read the past six years of filings and compare and do financial analysis all in minutes that would take before days for analysts to figure out. And then they can compare it to other companies in that industry. And they're looking for filings, and they're doing word analysis, sentiment analysis. So, something like 70% of the daily action in trading is quant funds, and the short-term trades of these quant funds is predominately sentiment.

So, if there's a whole lot of negative words in the media. Then there's a bias on the stocks, whatever, to knock it down if it's all of the sudden turned positive. And investors have to be aware that if they're trading, that they have to confront this high frequency research. Google on steroids. And when you've done that, then you can sit back and not get caught up with these short term vagarities and look at bigger cycles in the stock market.

Mike Gleason: Yeah, we always advocate for people taking a long term view, and you've always advocated for that rebalancing. That's a very important financial strategy and people need to heed your advice there. What about the real interest rates? Obviously you say that's always the big driver for gold. Where are we at real interest rate wise? How do you see that moving forward, and could that potentially be a catalyst as real interest rates maybe turn negative?

Frank Holmes: Well, the real interest rates are positive, and gold is still where it is. I mean look at this quarter. Real interest rates are positive this quarter, and gold is up 5%, and gold stocks are up 12%. That's an incredible quarter. And the S&P is off 12%. So for this quarter gold has done phenomenally well, and gold stocks too. So, I think that it's really important to take a look at, and appreciate those parts.

Mike Gleason:
Well finally Frank, as we begin to wrap up, give us any final thoughts here as we close out the year and look towards 2019, and then maybe any other comments that you'd like to share with our audience about certain market related events that maybe we haven't covered yet that you are focusing on.

Frank Holmes: There are some great stocks, and speaking from a biased position. Grow's a company that's in the gold business. And it has investments, and it's under pressure and these types of stocks. I think you want to go pick them up. I think the phenomena on the big banks no longer allowing investors to buy stocks under $10 or under market caps of $200 million will provide some great micro-cap opportunities in this tax loss selling.

Not only are we getting a market correction in this small micro-cap, you're getting a tax loss selling, which only exasperates it. So, I think you'll get a bounce in those stocks going into the first part of the year. I think that that's where you've got to be nimble. And you've got to trade them this way. You've got to take that position. And just be thankful, (it’s) really important. MIT did that research years ago that when you're grateful and thankful and thoughtful, then you actually see better opportunities for picking stocks. Not only do you feel better about yourself internally, you actually see opportunities faster and easier. So, that's my biggest advice for everyone. We're all blessed to be in the greatest country in the world. We're just blessed to have our friends and relatives and people like you, Mike, taking the time to share with people my thoughts, and then I listen to other people's thoughts that you produce. I think we just got to be thankful for all of that and wish everyone the best in 2019.

Mike Gleason:
That's a great way to close, and we certainly appreciate it and couldn't agree more. Thanks as always, Frank, and keep up the great work with those Frank Talk pieces that we've enjoyed so much this past year, and in prior years. We look forward to talking to you more about those in 2019. And as we always do here, before we sign off, please tell our listeners a little bit more about your firm and your services and anything else people ought to know about you or US Global Investors.

Frank Holmes: We're a public company on NASDAQ, GROW. And we have a website called USfunds.com, it's really quite easy. You can also phone 1-800-USFUNDS and sign up for our funds and get information on our funds. I have a total blog, Frank Talk and Investor Alert, et cetera. It's well over, close to 50,000 readers in 180 countries. And I write and publish every week, along with my investment team help me in this great production, giving you my thoughts about capital markets. And I like to look at the history of capital markets, and I like to have what they call a quanta-mental approach towards these markets, a statistical approach. And I hope that people can go to US Funds and sign up to Frank Talk and explore the opportunities that we offer.

Mike Gleason:
It's very valuable information. We always enjoy following it and definitely urge people to do that. Good stuff. Thanks again, Frank. Have a Merry Christmas, and we'll talk to you in the New Year. Thanks for the time and take care.

Frank Holmes: Take care, Mike.

Mike Gleason: Well that will do it for this week. Thanks again to Frank Holmes, CEO of U.S. Global Investors and manager of the GoAU gold fund. For more information, the site is USfunds.com. Be sure to check out the previously mentioned Frank Talk blog while you're there for some of the best market commentary you will find anywhere on gold and other related topics. Again, you can find all that at USfunds.com.

And check back here next Friday for our next Weekly Market Wrap Podcast. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening, and Merry Christmas everyone.

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