{"id":4246,"date":"2014-04-08T16:37:41","date_gmt":"2014-04-08T16:37:41","guid":{"rendered":"http:\/\/juniorminingnews.com\/?p=4246"},"modified":"2014-04-08T16:37:41","modified_gmt":"2014-04-08T16:37:41","slug":"frank-holmes-whats-abuzz-about-gold","status":"publish","type":"post","link":"https:\/\/juniorminingnews.com\/?p=4246","title":{"rendered":"Frank Holmes: What\u2019s abuzz about gold?"},"content":{"rendered":"
\"In
In Hong Kong, Andrew Driscoll (right), Head of Resources Research at CLSA, leads a discussion between Frank Holmes (left) and Robert Friedland (center) during an event for the Asia Mining Club.<\/figcaption><\/figure>\n

By Frank Holmes<\/strong>
\nU.S. Funds<\/em><\/a><\/p>\n

Recently I visited the breathtaking city of Hong Kong to speak at the seventh-annual Mines and Money conference, Asia-Pacific\u2019s premier event for mining investment deal-making and capital-raising. During my time in Asia I had the additional privilege of addressing the audience of the Asia Mining Club, alongside my good friend Robert Friedland, Executive Chairman and Founder of Ivanhoe Mines.<\/p>\n

Asia Still Wants Physical Gold<\/strong><\/p>\n

<\/strong>The mission of the Asia Mining Club is to promote education among its members, and one way to achieve this is by hearing from experts in the financial markets, notably those focused on resources and commodities. During the club\u2019s sell-out event, I too, confirmed a great deal about the commodity \u201cbuzz\u201d on that side of the world, especially on gold.<\/p>\n

The demand for the precious metal in Asia is truly phenomenal! In smaller countries like Indonesia, Thailand and Vietnam, consumption of gold totaled 300 tonnes in 2013, and according to Bloomberg, in 2014 mainland Chinese buyers purchased a total of 125 tonnes in February (including scrap). This number tops the 102.6 tonnes purchased in January and 97.1 tonnes purchased a year ago.<\/p>\n

As I wrote about in February,<\/a>\u00a0Switzerland plays a role in the movement of physical gold into Asia as well. Home to many of the big gold refiners, Switzerland released monthly gold trade data this year for the first time in over 30 years, with the report showing that 80 percent of shipments went straight into Asia. If we continue to see these large movements of the physical metal, especially from the West to the East, it\u2019s only a matter of time until these supply-and-demand factors lift the gold price.<\/p>\n

Is Janet Yellen Yelling?<\/strong><\/p>\n

<\/strong>I often say there are two sides to the gold equation: the Love Trade and the Fear Trade. While Asia\u2019s cultural affinity for gold continues to feed the Love Trade, concern over government policies which increase inflation and devalue currencies, fuel the Fear Trade. The Fear Trade demanded attention again on the back of Janet Yellen\u2019s talk of the Federal Reserve raising interest rates in the next six months.<\/p>\n

While low interest rates make it less expensive to borrow money, measures to keep rates low also chip away the value of the dollar and cause concern of accelerating inflation.\u00a0 Once real rates start rising, gold isn\u2019t as attractive to those who trade on fear.<\/p>\n

As I\u2019ve\u00a0written about recently,<\/a>\u00a0a key driver in gold prices is the real interest rate environment \u2014 the real rate of return taking into account the level of inflation. When real interest rates are negative to low, gold prices historically turn positive because there is no opportunity cost to hold the metal. The lower the real rates, the better gold tends to do. So, Yellen\u2019s initial hint of rising rates sent gold prices falling.<\/p>\n

On Friday the March U.S. jobs number came in at 192,000. While the number is in line with expectations and clearly shows that hiring in the U.S. is rising, it fell a bit short of the 200,000 jobs projected.\u00a0 The number was just enough of a miss to disturb investor confidence and drive some to seek refuge in hard assets, spurring the price of gold again.<\/p>\n

\"Tesla
\nclick to enlarge<\/small><\/a><\/p>\n

BCA Research believes that after Friday\u2019s report, the current pace of employment will be sustained.\u00a0 Although the movement is gradual, hiring is going up.<\/p>\n

BCA continued by commenting that,\u201cThe data will underscore the Fed’s view: that the need for quantitative easing or other non-conventional tools is waning, but that there is no rush to normalize interest rates.\u201d<\/p>\n

In my opinion, even with job numbers in line with expectations, the Fed is still going to focus on long-term job creation and keeping interest rates low, or at least not rushing to normalize them as BCA research stated. If inflation starts to rise while these rates are low, we could see a higher movement in the price of gold.<\/p>\n

The Osisko Deal is Sweet and Sour<\/strong><\/p>\n

<\/strong>Another headline-maker for gold last week was Yamana Gold\u2019s purchase of 50 percent of Osisko\u2019s mining assets. I think our Portfolio Manager Ralph Aldis said it best\u00a0in a recent BNN interview with Howard Green<\/a>\u00a0regarding the takeover; \u201cThis deal is both sweet and sour.\u201d<\/p>\n

The sour part is that by our models, which look at relative value of assets, it appears that both Osisko and Yamana are paying too much on this deal. On the flip side, the sweet part is that this bid caused companies like Mirasol, Pretium and SEMAFO to immediately rise. The structure of the entire deal is a complicated one, but witnessing these stocks finally waking up, is a change in the sentiment for the gold sector that, in my opinion, needed to be seen.<\/p>\n

At U.S. Global Investors we are always watching for opportunity, while concurrently managing risk. Along with the \u201csweetness\u201d of the Osisko deal, I find additional encouragement for the broader commodities space, as well as for gold, from Stifel Nicolaus\u2019 Barry Banister. His strategy for the second quarter of the year is that we may see a one-year rally in commodity-related stocks.<\/p>\n

Based on the breakout of the Continuous Commodities Futures (CRB) Index, along with the movement in the U.S. dollar, he forecasts that commodities could rise 15 percent year-over-year in 2014.<\/p>\n

\"Tesla
\nclick to enlarge<\/small><\/a><\/p>\n

HFT: The new buzz word<\/strong><\/p>\n

<\/strong>High Frequency Trading became a household word overnight when bestselling author Michael Lewis gave an interview to 60 Minutes in advance of his new book, \u201cFlash Boys.\u201d\u00a0 Lewis\u2019 allegations of high frequency trading practices that result in a rigged stock market have prompted a firestorm of support from Charles Schwab to Mark Cuban.<\/p>\n

I agree with Schwab, chairman of Charles Schwab Corp., who said \u201chigh frequency trading has run amok and is corrupting our capital market system by creating an unleveled playing field for individual investors and driving the wrong incentives for our commodity and equity exchanges.\u201d I\u2019m glad to see this issue getting the attention it deserves.<\/p>\n

From short selling<\/a>\u00a0to overreaching regulation, over the years I\u2019ve shared my opinions on practices that harm individual investors and create unjust advantages in our free market system. I believe that investing is key to long-term wealth creation and that investor confidence in the system is key to capitalism.<\/p>\n

The first quarter of the year has certainly provided surprises for the gold market, but remember that every coin has two sides. Every downward data point has an upside opportunity. Follow the smart money, stay diversified and remain a curious investor.<\/p>\n

p.s. Don\u2019t miss my new show on Kitco. Each week I\u2019ll talk about the strengths, weaknesses, opportunities and threats in the gold market on\u00a0Gold Game Film<\/a>.<\/p>\n

\n

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Past performance does not guarantee future results. The Continuous Commodity Index (CCI) is a broad grouping of 17 different commodity futures, which is a benchmark of performance for commodities as an investment.<\/p>\n

The following securities mentioned in the article were held by one or more of U.S. Global Investors Funds as of 12\/31\/13:\u00a0 Goldcorp, Mirasol Resources Ltd, Osisko Mining Corp., Pretium, Resources, Inc., SEMAFO, Inc., Yamana Gold, Inc.<\/p>\n

Diversification does not protect an investor from market risks and does not assure a profit.<\/p>\n","protected":false},"excerpt":{"rendered":"

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