For the BIG GOLD annual gold forecast survey published in January, Jeff Clark surveyed seven gold experts and nine top economists and fund managers, along with Doug Casey himself, to provide their best insight on what to expect in 2011 and how to invest.
One expert he interviewed was Frank Holmes, head of U.S. Global Investors, which manages 13 no-load mutual funds, many of them recognized for consistently high performance by Lipper Fund Awards. Last year, Frank’s Gold & Precious Metals fund returned 36.8% – more than triple the Dow – and the World Precious Minerals fund gained 45.4%, outgunning the S&P almost four-fold.
Read on for Frank’s thoughts on gold and precious metals stocks…
BIG GOLD: Gold was up 30% in 2010; to what do you attribute its rise?
Frank Holmes: Investors have to look at gold demand as both the fear trade and the love trade. What most media focus on is the negativity of government policies to drive gold prices. I characterize this as the fear trade — deficit spending and negative real interest rates for the G7 countries.
More significant is the love trade – where more than 60% of the world’s population is in emerging countries averaging over 6% GPD growth and 8% rising personal income, and they believe in giving gold as a gift for birthdays, weddings, religious holidays, etc. This love trade is entrenched, and it is not going away.
Fears over the European debt crises were a big driver of gold in the first half of the year, as investors bought both gold and the dollar for safety. However, by mid-year, the dollar started to break down as smoldering budget woes in the U.S. began to reignite concerns over the fiscal situation here.
Gold got a second lift by October as both the fear and love trade showed up together. We had the season of Diwali lights in India and we had QEII, so gold went to new highs. By year end almost all the gains made by the dollar were eroded away, while gold finished the year with a respectable rise of 29.5%.
BG: What forces will move gold this year? And what's your price projection for 2011?
FH: U.S. equity strategists are way too complacent and so are risk measures such as the VIX, which is back to pre-Lehman lows despite government debt levels at even higher levels. The broad view is that there will be no inflation in the U.S., as labor markets are slack, with 10% unemployment; however, rising commodity prices, which are controlled by international demand, will remain strong.
A second wild card will be whether the German public will go along with the "transfer society" concept. European woes are not over.
Third, U.S. lawmakers will have a bitter potion to swallow, as the vote on raising the U.S. debt ceiling will be a rallying point for the Tea Party this year. And if inflation, such as rising oil prices, starts to sap spending, wages in the U.S. may have to rise, and then the cat would be out of the bag.
It’s been a great ten years for gold, which was fully justified due to the explosion in consumer credit and debt, but gold may still have a very important role to play going forward. I believe in the next five years the price of gold will double from current levels, and that means it has the potential to have a 15% annual compounded rate of return.
BG: How volatile do you expect gold to be?
FH: What is really key in understanding and managing expectations in the capital markets is that over any 12-month period, it is a non-event for gold to go plus or minus 15% in a year. This happens 68% of the time. The stocks of gold producers can go plus or minus 40% over any 12-month period, so they have greater risk but can also provide substantial returns. It is thus important to respect and look at volatility as an opportunity.
BG: Gold stocks as a group did not outperform gold in 2010 – does that change in 2011? And if the broader markets sell off, do gold stocks fall along with them or trade on their own?
FH: Actually, 2010 may have been a turning point, as major gold-producing companies, measured by the Gold Bugs Index (HUI), gained 34.1%. This hopefully has reversed the trend of the last couple years where bullion outperformed the stock. Junior gold mining companies, on average, returned roughly twice the gain of gold bullion, but some of those names were fairly silver rich, and we know how well silver did last year.
In the scenario of a market sell-off, gold stocks are still equities and can get pulled down with any surge towards liquidity. However, the price action since the 2008 credit crises showed us that gold stocks did very well for investors relative to the broader markets. In addition, while those of us in the gold business are very close to the story, there are a lot of people that are still coming around to investments in the precious metals sector.
When one looks at what has been some of the best-performing stocks over the last 10 years, gold and gold stocks may very well trade on their own as a preferred asset class.
BG: Silver was up 81.9% in 2010, but is still below its 1980 nominal high. What's your outlook for silver in 2011?
FH: Silver may have gotten ahead of itself a bit. In the coin market, for instance, it is not uncommon to see certain gold coins sell for a 30% premium to the spot price, but in the last quarter we saw some collectable silver coins with asking prices as much as a 300% premium.
Silver does offer exceptional leverage to gold, almost 2 to 1. Right now, while it looks like the economy is getting stronger, silver could continue to benefit from a pick-up in industrial uses.
BG: What's your best advice for precious metal investors in 2011?
FH: Investors should consider buying gold as insurance. We recommend having about 10% of their portfolio in gold and gold stocks, and rebalancing every year.
Two stocks that we like at current prices are Randgold (GOLD) and Silvercorp (SVM). Both companies focus on high-quality ore deposits that will be economic at prices substantially below current spot prices.
In Randgold’s case, their share price has fallen about 20% since the presidential elections in the Ivory Coast became locked in a stalemate. The company’s Tongon mine is their newest project and is currently being commissioned, but news flow has been slow and hasn’t drawn much attention. Look to see this issue resolved over the next couple of months.
Silvercorp is one of the few companies that has successfully navigated in China, and our models indicate there is much more upside available from these assets than where the stock is currently priced. SVM also has a very attractive relative valuation to its North American peers, where in some cases we have seen 5% of their market capitalization turn over fairly consistently everyday over the last month – those shareholders are obviously not around for the long term.
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