50 shades of gold – Holmes’ views on precious metals
Frank Holmes, in the opening keynote presentation at Mines & Money in London, presented his thoughts on the current gold and macro economic situations.
Posted: Tuesday , 03 Dec 2013
LONDON (Mineweb) -
Attendance at this year’s Mines & Money London, extended by a full day from previous events, has so far been excellent, despite depressed gold and base metal prices. The event seems to be going from strength to strength as a successful mining investment related conference and exhibition in London – something others have failed to do in the past.
The opening keynote this year was made by Frank Holmes – no stranger to readers of Mineweb – who gave an extremely polished presentation on how he sees the state of the gold price and gold stocks. Holmes pointed out that the whole global fiscal environment has changed dramatically over the past 5 years, with monetary and fiscal policy no longer aligned. This creates opportunities but not necessarily where you’d automatically expect to find them.
There are a number of major anomalies out there in the market. While the fall in gold price for example has encouraged heavy sales from the gold ETFs – or should that be vice versa – for silver, the fall in price seems to have had the opposite effect with ETF holdings booming. Platinum too seems to have seen something similar. Markets do not necessarily follow logic.
As to gold’s specific performance, Holmes noted that, over the long term, the metal (even after its latest falls) has outperformed bonds, the S&P and the dollar – substantially so in the latter case with the purchasing power of the dollar now being only around 17% of what it was when President Nixon closed the gold window.
Does this mean there is manipulation? Although not answering this question specifically, Holmes commented that without doubt manipulation does take place in capital markets with the implied suggestion that this is taking place with gold too – but again who the manipulators actually are remained unanswered,
Holmes has always been a great proponent of gold’s drivers being what he refers to as the fear trade and the love trade. Principally the fear trade comes to the fore when gold is seen as the ultimate safe haven against monetary and market collapse, while the love trade revolves around gifting, so prevalent in Eastern societies where gold is seen as the gift of choice for newlyweds and for gifting at the many festivals that enhance the calendars there. This is increased by rising incomes and a cultural affinity with gold. The Chinese urbanisation and huge increase in the wealth of its people as they move into the middle classes is an example of the massive change of circumstances in this centrally planned economy now embracing much of capitalist thinking in its growth programmes. India too has the potential to at least match this – Holmes pointed out that there are some 600 mlliion people under the age of 25 in that country – significantly more than the whole population of the USA – and, as this element of society aspires to become richer, there will be an obvious, positive impact on the gold market despite whatever the Indian government may try to do to control this.
As to the gold mining sector itself, Holmes noted there are few gold mining companies producing true free cash flow and he castigated the industry’s insistence on highlighting cash costs which he reckons presented a hugely exaggerated perception of profitability which has led to ‘banana republics’ as Holmes perhaps unfairly referred to them taking this as an indicator that the miners have been robbing their host countries of their wealth and has in turn led to swingeing tax, royalty or free participation rises which have in turn cut earnings even more. Holmes also noted that some 20 CEOs of major mining companies have been pushed out due to bad performance by their companies, but he feels that rather it is the chairmen of these companies, who should have been replaced as in a number of cases they end up dictating policies which are then avidly followed by the board and have thus set the seeds of destruction under way.
Holmes ended by commenting that, in his opinion, gold and gold stocks are both extremely oversold and he expects a turnaround, although seemingly recognising that matters could still get worse for the gold and gold stock investor before they get better. And, in a final comment, referring again perhaps to the Eastern wealth building culture, Holmes said that money and wealth are not represented by an absolute number, but more by an attitude and that this is long term positive for gold as demand in Asia in particular continues to grow as overall wealth there increases.