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Frank (ly) My Dear, He Does Give a Damn. And an Opinion or Two

By Jon Nadler       Printer Friendly Version
Mar 4 2009 4:29PM

www.kitco.com

Good Afternoon,

A further dissipation of safe-haven investment demand brought gold prices to the $900 (and under) level today. A global rally in equity markets turned at least some would-be gold buyers into actual stock buyers, following China's unveiling of another Great Wall (of Money) intended to stem the slippage in its economy. The Dow broke its losing streak and rallied 240 points once the fortune cookie containing the message "Growth Will Come From the East" was read in New York. As a consequence, some of the money that was parked in safe-haven assets was diverted to what appears to be greener pastures in stocks. Thus, we come to record gold's eighth straight day of declines - the longest losing streak in seven months.

Certainly, copper and aluminium showed faith in the Chinese (second stimulus round) plan's eventual outcome, and the two metals rallied substantially on the news. Copper vaulted to a 3-month high, as Rio Tinto saw signs that China could be back on track in the second half of this year. Of course, "back on track" does not necessarily imply the wild and crazy "growth" (mostly paper speculation) we've witnessed previously. The big question remains not whether the country will build more shiny office towers; surely, it will. Rather, the unknown remains how it will fill the already-vacant 100 million square feet of space it is sitting on - nearly enough for a 15-year supply of same. The US continues on the skids, with the Fed's Beige Book showing further damage to the economy over the past two months.

The midweek session in New York brought gold to lows at $898.80 following a jump in selling near the lunch hour. Framed by a US dollar falling to the 88.57 mark on the index (following this morning's ADP jobs report), and by a $3.53 rise in crude oil (following the Chinese stimulus news), gold reacted indecisively at first, but later sank as the immediate need for safe-haven protection appeared to be easing. We may well have a case in the making here, where gold and the dollar do take up hand-holding again; this time, to the downside. Why not? It was certainly not seen as 'harmful' when the correlation was seen in upward phases in their respective prices.

As the greenback and gold are scaled back in hitherto scared portfolios and money starts to flow into recovery-related equities (at first) and then the rest of the battered stock market, their prices might have to 'adjust' as well. To wit, the industrial demand component of silver's price equations carried the day, as the white metal rose 8 cents despite a fall in gold. Platinum and palladium rose as well - the former added $10 to $1041 per ounce, and the latter rose $5 to $197 per ounce. FIAT reps made a trek over to Washington to extol the virtues of a Chrysler-Fiat marriage. Saab had no such luck on the other hand, as it is still looking for suitors high and low. Deutsche Bank has been tasked as the matchmaker. Just hope Borat shows no interest.

For the moment, the gold appears confined to the broader $900-$950 range, but could still move swiftly within in, pending news flows. The apparent February frenzy is starting to fizzle, hampered in part by a cooling of investment demand, and in part by the continuing rise of scrap flows. Turkey can now be added to the list of important demand agents who imported no gold in January or February. The country melted unwanted metal and sent it out for export. Over in India, buyers were seen sporting crossed arms once again, awaiting lower prices with a knowing smile.

A catharsis of sorts appears to be emerging among those most visible in this global maelstrom. Yesterday's performance by Fed Chairman Bernanke was praiseworthy in terms of the anger and frustration it contained when the subject matter turned to AIG. That the firm essentially ran a hedge fund that made wild bets while sucking the lifeblood out of what appeared to be a solid insurer, is about as certain as Mrs. Madoff acquiring her NY penthouse, FL mansion,  and cash in ways 'unrelated' to her clever husband's modus operandi.

In other news of interest, 20% of US mortgagees owe more to the bank than their McMansion are now worth, and the Chairman of UBS said 'farewell' - one more victim of the rolling debacle. Somehow, the two news items are closely related - even if seemingly not. We suspect the overriding reason for the replacement of the Chairman with the former Swiss finance minister is to put Braveheart in front of the US Tax Man for when the epic battle of prying secret accounts open begins. Nothing short of the survival of the Swiss model is at stake.

Last week we mentioned that Frank Holmes (CEO of US Global) will be featured on a panel to be webcast tomorrow. You would be well-advised to watch

http://www.usfunds.com/landingpages/WhatsDrivingGold-Webcast0309/index.asp

You can get a preview of Frank's perspectives from the following transcript of the TV appearance he made on Canada's BNN yesterday, while attending the PDAC mega-conference in Toronto:

BNN's Pat Bolland:

“I’m just looking at the price of gold sitting at $911 down some $29 on the day and I mean I may jest that we were at $100 less than a week ago, I checked it out!  In February in went from $900 to $1000 and it has come right back down.?

BNN's Jacquie McNish:

“Right, a lot of people expected it to push beyond the $1000 threshold.  (We) haven’t really seen that momentum, yet.?

PB:

“Yeah!  And it’s struggled at $1000!  I don’t think it actually closed above $1000.  So let’s get some interpretation of this, not only gold, but all the commodities.  Frank Holmes is joining us.  He’s the Chief Executive Officer, Chief Investment Officer, as well, of US Global Investors.  Frank, good to have you on the show today.?

Frank Holmes:

“It’s great to be here.?

PB:

“Your down at PDAC right now-“

FH:

“I am.?

PB:

“-and I bet you everybody’s talking about the price of gold.  What’s your sense on what’s driving gold right now??

FH:

“Well, there’s many factors driving gold, but what’s most significant in my 20 years in the US has been these gatekeepers, these pension fund consultants like SEI, Frank Russell, Morgan Stanley, etc., all recommending an exposure of 5-8% in bullion and they’ve always looked at gold as heresy.  So I think this is the significant factor where we’ve seen some days of 8 tons going into the gold ETF.?

JM:

“Now you’ve recently written a book, Frank, on gold.  Tell us what you’re strategy is, your approach to investing.?

FH:

“Well we’ve always recommended investors look at gold like they do car insurance.  You want to have it in your portfolio, but you don’t want to collect on it; and the weighting is 5-10% - 5% in bullion and 5% in gold stocks and rebalance each year so when gold does spectacularly well, take some profits off the table and vice versa.  When bonds and equities do well, always keep that 5-10% weighting exposure.?

PB:

“Frank, what usually moves first, or you don’t care what it is as long as it’s 5% on each side.  Is it the stocks that lead the underlying commodity or vice versa??

FH:

“It’s interesting, it’s a great question.  One has to take a look at the currency movement of that country where the gold is being produced and energy prices.  Energy prices are 25-35% of the costs of gold mining companies.  So last year when gold was taking off to $1000, oil was taking off at a faster clip.  Thus, you see that the gold stocks far underperformed the bullion prices.  So this year we are starting to see a better action where gold is out-performing oil prices.

JM:

“Do you think the current global financing crisis has contributed to people’s aversion to gold stocks?  We’re all very concerned about the credit crunch, people’s debt levels, and their ability to raise cash.  Is that one of the factors why we’re seeing people preferring bullion over stocks??

FH:

“I think that’s definitely a key factor because it’s much easier to understand than what the risks are of different individual mining companies.  But what we’ve found really interesting is in the past 10 years of data that the TSX Venture Index is highly correlated to the financial index.  So the confidence in financials leads to confidence levels being up in junior mining companies which is a big factor up here at the PDAC.?

PB:

“You’re down there at the PDAC with all your buddies.  Frank, how do you go picking a stock when you want to get into a gold stock in particular??

FH:

“In my book I talk about the 5 Ms and management is very, very important, the amount of money they have so they could think of the dilution, but the key factors are growth in the reserves per share and growth in production per share and growth in cash flow per share.  Companies that can demonstrate that on a per share basis out-perform the index.?

JM:

“Now Frank you have been a regular attendee to the PDAC for many, many years.  How would you compare the mood and the chatter this year to last year??

FH:

“Humble.?

JM:

“(Chuckle) Keep going!?

FH:

“Humble and subdued.  Gold is the hot asset class and everyone is looking for properties in that space.  But I think what’s interesting for the base metals is that the Baltic Shipping Rate has bottomed and seems to slowly be climbing and it’s another global index – I look at the arteries of the world – as it does well, base metals start to show that there is better activity.  Last year it fell 94%.  I think it is turning up.  Money supply is another important factor.  Last year, in the first 9 months of the year, money supply was contracting worldwide even though rates were falling.  But in October, the spigot was opened all over, in every country.  Now you are starting to see that show up in some of the base metal basing.  It takes about 9 months to show up and the correlation of oil and base metals to money supply is extremely high.?

PB:

“So where do you think, then, the best opportunities will be in 2009 in the commodities, the ones that are beaten up the way they are, the base metals, or will it be oil to lead the charge as you’re somewhat suggesting, or possibly agricultures??

FH:

“I think it will be oil.  Oil is the key factor and then it will be copper.?

JM:

“Now one of the great things about PDAC are the prospectors.  Are they happy this year, are they getting the financing they need to keep exploring?  What’s happening with exploration??

FH:

“Well there is definitely a greater interest in gold and flow-through is still available for any projects in Canada.  But I think the ability for capital formation for base metals or even for energy is extremely tight and difficult.  Gold has been the strongest fund raising sector.?

PB:

“Okay, Frank!  Thank you very much!?

FH:

“Thank you!?

PB:

“Frank Holmes, Chief Executive Officer, CIO, as well, of US Global Investors.?

Frank is one of the 'good guys' and brings a welcome dose of level-headed optimism to the table, wherever he goes. Most of all, he is a true gentleman  and he treats those who might not agree with everything he says, with respect.

Happy Trading.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal

 

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