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What’s Driving Gold Prices, According to CEO Frank Holmes

from Streetwise Reports May 23, 2019

CEO and Chief Investment Officer Frank Holmes was recently interviewed by Streetwise Reports on what he sees as the driving forces behind the gold price so far this year. Below are some excerpts from the interview.

Streetwise Reports: Since the beginning of the year, gold has been trading fairly narrowly in the $1,300 range. What are some of the macro factors working behind this and how do you believe they’ll affect the price moving forward?

Frank Holmes: When we look at macro factors at U.S. Global—and we write about them every month, in particular the Purchasing Managers’ Index (PMI)—we try to take this complexity and simplify it by dividing it into big chunks.

The first is commodities; 50% of all commodity demand is China, so China is very, very important. When you add the populations of China and India—”Chindia”—you get 40% of the world’s population. That’s a lot of food. That’s a lot of clothes. That’s a lot of airplanes they’ll be buying for India.

Next we look at global trade. Interestingly enough, if you put China and America together, that’s 40% of the world’s global trade.

Then we take a look at gold demand. That’s predominantly China and India, but more generally from the Middle East to Southeast Asia. Sixty percent of all gold demand is for the love trade.

So we get these chunks, and we try to understand the movement of those chunks. One of the things that contributes to those big numbers is rising gross domestic product (GDP) per capita seems to be one of the strongest correlations for the love trade of gold, in particular for Chindia. Today, China, America and India have the largest GDPs per capita. China’s GDP, on a per capita basis, has surpassed America. That may mean a continuous consumption of gold. Rising GDP is highly correlated to grams of gold. That’s an important long-picture demand cycle.

Then we have supply. There have been no major gold discoveries. There have been no technological breakthroughs as there have been in oil and gas with fracking. A lot of the mines are low grade now, so it takes more and more dirt to get an ounce of gold out of them. Then you also have political risks around the world where you have rich deposits. So the supply of gold is basically slowing down.

Another thing that’s interesting is that gold now, with the Bank for International Settlements, has become recognized as money, and banks can use it as collateral.

In the past year, we’ve had some really serious new buyers of gold—Poland, Czech Republic, Hungary. China and Russia continue to consume gold, but they are joined by many new countries. And gold got knocked down dramatically the other day because Turkey has a currency crisis, and blew up its gold. But then the last time it did this, we found out Poland bought it. Not since President Nixon have there been so many central banks as net buyers of gold, a 50-year peak.

So we have rising GDP per capita for the love trade, and for the fear trade gold is money. An increasing number of central banks own gold.

This is all behind why gold is trading higher. I am amazed that with the real rates of return in America, gold would normally be $1,200, $1,150, not where it is. So that’s a very positive sign that with any real drop in interest rates as the Federal Reserve tries to make sure the economy stays okay, gold is going to $1,500. I remain bullish on it.

SR: How is the U.S. Global GO GOLD and Precious Metal Miners Exchange-Traded Fund (ETF) (GOAU:NYSE.Arca) doing?

FH: I’m really proud of it. It’s unique because it has a portfolio structure that recalibrates every quarter, and then there is the stock picking element. Half of the portfolio is looking for momentum, and the other half is looking at the cheapest stocks for that quarter. As stocks appreciate, the fund sells them out and looks for the next cheapest.

SR: What are some of the best performers in the fund?

FH: What’s unique is 30% of the fund is royalty and streaming companies. One of the things I like about royalty companies is they preserve their values per share. In fact, when you own a royalty company like Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) or Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) or Franco-Nevada Corp. (FNV:TSX; FNV:NYSE), they have royalties in many junior miners. You basically get tremendous exposure to a lot of juniors through their portfolios.

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The fund does not invest directly in gold.