Frank Holmes | Gold Stocks Have a Life-cycle Very Similar to Biotechnology Stocks

At PDAC 2019, Frank Holmes shared some of his personal journey regarding how he became the CEO and chief investment officer of U.S. Global Investors.  Frank also offered insights on successful resource investing and discussed two companies he is currently investing in.  Furthermore, as a veteran resource industry professional, Frank shared advice for the younger generation of resource investors and professionals.

Mr. Holmes purchased a controlling interest in U.S. Global Investors in 1989 and became the firm’s chief investment officer in 1999. In 2006, Mr. Holmes was selected mining fund manager of the year by the Mining Journal, and in 2011 he was named a U.S. Metals and Mining “TopGun” by Brendan Wood International. In 2016, Mr. Holmes and portfolio manager Ralph Aldis received the award for Best Americas Based Fund Manager from the Mining Journal. He is also the co-author of The Goldwatcher: Demystifying Gold Investing. More than 30,000 subscribers follow his weekly commentary in the award-winning Investor Alert newsletter which is read in over 180 countries.

0:05 Introduction

1:17 Frank’s background and how he became the CIO at US Global Investors

3:47 Advice to younger investors and aspiring resource sector professionals

5:20 Thoughts on PDAC 2019

6:17 Gold stocks have a lifecycle very similar to biotech stocks

7:39 Could the bullish gold thesis be wrong?

10:17 Two companies Frank is investing in right now

BEGIN TRANSCRIPT:

Bill: You are listening to Money Stock Education. Thanks for tuning in, I’m Bill Powers, your host. Still at the PDAC 2019 and I’m having the pleasure of sitting down with Frank Holmes, the CEO and Chief Investment Officer of US Global Investors. Frank, thanks for taking the time to sit down with me.

Frank: It’s great to be with you.

Bill: Well my understanding of your story is that your dad was an Anglican minister, but here you are, the Chief Investment Officer of a major fund that’s publicly traded. What’s your journey? How did you get here?

Frank: Well my mother also was a nurse that became a social worker and educator in Toronto, and she had the richest area and the poorest area in Toronto. So she was taking care of the social needs and educational needs, and my father was involved in the spiritual element of people’s needs and social needs. I was always fascinated. I was going to go to medical school and I was in pre-med and I pivoted and went into finance. So rather than taking care of the H, health, I changed it to W, wealth.

Bill: Now what’s your journey to where you’re the lead man on this major company? What are some of the steps along the way?

Frank: I think success is non-linear. It’s really important for people to realize that, but you have to have goals and visions, and to get there, it’s easy to lose your faith and your hope. And I love the acronyms H.O.P.E for Have Only Positive Expectations. You’ve got to have that to get through the disappointments and delays as you go for your vision, your goal. For young people I always tell them, make sure you have values. There are some real common denominators of people successful in any common industry, and that is they have more initiative. They just are more curious, and that drives their initiative, rather than being told what to have to do, they’re just in their belly, they just do it.

And just be honest with yourself and Sir John Templeton, he had a great line and it was always, most people buy a stock and then pray, “Oh God, please help it to go up.” And he said, “You should pray before you buy the stock and then sleep well.” And I think that’s important to that, almost like you meditate, you pray, is an important part of when you’re making all these decisions, but people’s money is very important. People do crazy things for money, they sacrifice their health for money. So having a balanced, just like you have for diet, for your health, the same thing with balancing for your wealth.

Bill: So if a younger professional, 21 year old, is listening to us, they’re attracted to the resource space, they’re actually attracted of course to the prosperity that successful resource investing and a finance professional in this space can provide them, what would be some of your advice and what about some of the risks or things they need to navigate as they work their way up?

Frank: Well gold is an asset class, is an interesting asset class because bullion itself has the same DNA of volatility of the S&P 500. Over one day, one month, three months, going back decades, it’s plus or minus 7% of the time 1%. But gold stocks are plus or minus 3%. So that automatically creates a different level and when you’re young, you have to be taking those risks, but you have to understand that there’s this greater volatility and before you go and speculate. And I’ve tried telling people to look at royalty companies. I created a smart beta intelligent product listed in the New York Stock Exchange called GOAU for Go Gold.

It’s outperformed all the gold fund managers. It’s an easy way to buy it, but when you buy something like that and you’re young, just buy 10% and rebalance each year. Because the years that it outperforms, you’ll take profits and you’ll buy the S&P 500 or other stocks you like. And the years it underperforms, take profit of something else and you re buy. Because that type of concept has far outperformed over the past 20 years. So that’s the way, the 10% golden rule.

Bill: We’re at PDAC. What are your thoughts on PDAC this year versus previous year and what might that indicate to the larger, macro perspective of this sector?

Frank: It’s a big smorgasbord here. It’s so easy to lost. Me finding you was like a journey on its own. Thanks for coming out and finding me. No, it’s 25,000 people coming to this event from 50 different countries. I think these type of events are where you hear stories, and part of knowledge, it’s like A and B. You have what they call explicit knowledge. Getting your driver’s license, doesn’t mean you’re a good driver. Tacit knowledge, you know how to drive. So if all of a sudden you’re suddenly in the UK and got to drive the opposite side of the road, you have to get a new test and you have to learn to drive on the opposite side of the road. So explicit and tacit knowledge, these conferences are good for the task and feeling that you come and hear stories, you learn about people and what they’re doing.

I think that’s the good part that I get from it, but I think for these young investors, I really recommend that they go and explore about what they’re looking at gold. Gold stocks have a life cycle that’s very similar to biotechnology. Biotechnology has to go through … Mining has to go through say EPA cycle, and biotechnology has to go through the FDA. They go through three stages, and you know their DNA volatility’s the same. It’s remarkable. There’s a big exploration and discovery, they go up tenfold, twenty fold, they all fall the square root of the top of the stock price. They just fall, and then they go through that period before the new product comes out in biotech, or it starts producing. So you have to really understand the life cycle of a gold mine. In fact, at USFunds.com, we’ve won many awards for education, and we have a four minute video called “The Life Cycle of a Mine.” It’s for young people to understand that wave, and I tell them it’s the same as biotechnology.”

Bill: And it’s one of the first things, I agree. For a new investor in this space, the life cycle of a mining share is one of the first things they need to learn.

Frank: Absolutely. And realize the pattern is not just with gold stocks, et cetera, it’s also in biotechnology where there’s much more money that’s going into finding cures for cancer or asthma, whatever else, the diseases, their affliction.

Bill: Your gold thesis. You’re a gold bull, as am I, but I’ve invested in gold companies and I’ve lost 40, 60% in a year. If you hit it wrong, even if it’s a good company, good management, maybe they have some money, but the gold price goes down, we lose money on our equities, at least in the short term. Could you bullish gold thesis be wrong, at least let’s say for the next three years? Are you willing to entertain that possibility?

Frank:    Well there’s probably a big reason why I’ve always said the 10% golden rule that it should be 10% of your overall portfolio, and gold stocks have different animals to a bullion itself. So that’s why with that, I’m really constructively bullish. There’s many fundamental factors. We’re at a 50 year high on new central banks because of Europe, emerging Europe, Pol’s, the Czech’s, Hungarian’s, they’re all buying bullion and diversifying their central banks, foreign currencies. So there’s something that’s happening there, but that’s only 40% of gold demand. It’s the fear. The 60% is love, and in China and India’s 40% of the world’s population, and it’s highly correlated that they buy more gold if their GDP per capita is rising.

So I think there’s a backdrop of they’re just continuously buying that takes place in the other part of the world, and I also believe that we have peak gold, and we have all this drama. Barrick now trying to take on Newmont, and Newmont taking Goldcorp. Do you know what happens if Barrick and Newmont come as one? 14 million ounces. They can’t replace that in production a year. It’s not happening. We’re at peak gold. We had peak oil until the frackers from Texas and Dakota’s came along and they changed the landscape, but there’s no technological breakthrough that can accelerate from a discovery to product that’s going to change the gold world.

You see a massive drop in discoveries. It’s so hard. When you speculate on junior explorers, it’s really, really tough because no one’s been finding anything and exploration budgets are now dropping. So I think that investors have to recognize, it’s peak gold. And it’s going to climb like palladium. Palladium’s in deficit? “Oh wow, palladium’s up for again best performing commodity last year, hit 1500. Why? Why?” It’s in deficit. The demand for palladium for a clean environment is so great that they missed that it’s climbing, climbing, climbing.

Bill: You mentioned to me pre-record that there’s a company you like that uses artificial intelligence to help explorers find gold.

Frank:    I’m so thrilled to be honored with young minds. GoldSpot Discoveries, it’s a new company listed, and it’s a profitable little business. We raised 10 million dollars, and Eric Spot owns 10%, I own 10%, Elliot Management through Triple Flags owns 10%, Hoth Child, another major investor owns 10%. And you have these kids 29 years old with PhD’s and geo statistical models, and tectonic plates, and history, et cetera, and they can look at data. Now if you are a great athlete, you have a gift that you have better peripheral vision. Like Rod Carew could see the name on the ball spinning coming at him. Everything slows down for you. Wayne Gretzky, the puck was in slow motion for him, it was fast for us. When you use AI, you can process so much more that it’s almost like you’re in the gifted 2%. Now what it does is it minimalizes a lot of wasted money spend on exploration.

It doesn’t find the sweet spot every time, but it gets rid of a lot of wasted money spend exploring. And it’s going to grow and go. It’s young investors, young people behind it. I went to their opening event here and I was the oldest guy in the room. I felt like grandad here, and I go to another event and I’m the youngest guy in the room. So you’re seeing young millennials, they’re more attracted to this and block chain world, the AI. So this is the first actual public company to go public that’s pure AI. And it was in Silicon Valley, those PhD’s are worth between five to 10 million dollars per person. So we have nine of them. That makes a stockholder automatically undervalued. We have 11 other scientists that will take the data, so I think it’s going to become huge boom.

What our business model is to get royalties on these juniors. So they can come to us, but we’re not going to do the work, we don’t want them. We go and look for companies because we’ve done all this due diligence. We’ve downloaded all the data on SEDAR since 2000 and it’s all in the cloud and we all process and look at it. Every director, every CEO, CFO, what their track record, what their discover is, who was a winner, who was a loser? All that data collection, and then look at all the geological data that’s public in the public domain in Quebec and Newfoundland. So, it’s very exciting for me. It’s rejuvenating to be around young bloods, young guns that have great ethics and great values.

Bill: I’ve heard you say, I believe in past years that what would increase gold discoveries, and you had mentioned it would be some sort of technology that could see into the earth to basically identify. Now this isn’t seeing into the earth, but it’s taking existing empirical data, then using machine learning based on historical precedent of finding deposits and seeing if they can see similar things. Is that correct? Basically it’s a human brain that can process quicker where potential targets are?

Frank: So coming back to the gifted athlete, or a gifted surgeon, or gifted architect. They can rotate, the 2%, can rotate a cup three dimensionally in their brain. I can’t do that, but gifted people can. They can see things three dimensionally and slow down the rotation of it. When you have a geo that’s a very good geo, they can look at three different types of geological maps and overlay them and try to say, “This is a better spot.” A young geo might be able to do it too efficiently. The best could use 4. They do 50, 50. 50 different perspectives and views and look for relationships. So I think it’s going to help some of these junior mining think, “Oh, maybe I just go disappear,” because they have moose pasture. They really don’t have stuff which has a high probability of discovery, copper, gold, whatever.

Bill: As we conclude here, any other companies that you’ve seen at PDAC that you’d like to share with my listeners?

Frank: One of the bonds we own is called Grand Columbia, GCM is a stock. It’s producing 200,000 ounces and growing. It’s the largest gold producer in Columbia, it’s high grade, but they floated a gold note, which I was very much instrumental in the creation of. It has collateral in all the assets, it’s well covered, and it pays eight and a quarter percent, and it pays on a monthly basis. Anything above 1250 you get higher payments. So gold runs at 1900, all of a sudden the yield’s going to be over 20%. So you get to participate in the rise of the price of gold by your increasing monthly income. So where can you get a money market fund type of asset that’s paying you that yield, that high, from a company that basically has no debt and is piling cash. Each quarter, their cash position is growing on their balance sheet. So a company like that, it’s a great diversifier in a portfolio.

Bill: Frank, I appreciate you sitting down with me. I know you have another interview right after this, but thanks for coming on Money Stock Education.

Frank: Thank you for the opportunity sharing my thoughts.