Resources Sector Undervalued – U.S. Global's Holmes

By Debbie Carlson of Kitco News
Friday December 6, 2013 11:30 PM

Frank Holmes, chief investment officer at U.S. Global Investors.

(Kitco News) - The resources sector was hit hard in 2013 by slumping commodity prices, but the sector offers good values for investors seeking to rebalance portfolios heading into 2014, said the head of one investment firm.

Frank Holmes, chief executive officer and chief investment officer at U.S. Global Investors, said investors who look to diversify can keep a simple model of 25% invested in international  markets, 25% in blue-chip U.S. stocks, 25% in the resources sector, which  includes an allocation to gold, and 25% in a short-term money market fund or a short-term bond fund.

“What you want to do is rebalance,” Holmes said.

The idea behind rebalancing is to keep a consistent weighting. When prices rise, investors sell holdings to get the weighting back in line, and buy assets that have lost value.

“I like the idea that right now the most undervalued asset class, relative to bonds, relative to the backdrop of the world, are resource companies,” he said.

Meanwhile, blue-chip U.S. stocks have seen sharp gains, while short-term bond funds are flat on the year and the international sector has had a small pinch from swings in currencies. Based on the idea of rebalancing, Holmes said take profits in the blue-chip names and buy up resource stocks and gold to restore the 25% weighing.  

How much gold? Holmes said they continue to advocate for a 10% gold weighting and a 90% equities weighting.

He also doesn’t think that the broader stock market is in a bubble, despite record highs in the Standard & Poor’s 500 stock index or the Dow Jones Industrial Average.

“That’s not true. Why? On a historical P/E (price to earnings) ratio, on a historical cash flow ratio, they’re not overextended. Not even close. Based on a dividend yield, they’re still undervalued. The other factor that goes with that, (there’s still) cheap money. Look at 10-year government notes. When you look at that yield and CPI (consumer price index) number, and compare to dividends and growth, stocks are still cheaper,” he said.

Holmes said after the credit crisis of 2008, people want to see a bubble in every investment.

“Everyone has bubble-ology. Everything is a bubble. Now the bubble is art. That’s the latest. True bubbles are only created with leverage. Is art a bubble? Only if someone is going to the bank to borrow money to buy art,” he said.

Holmes said he continues to see growth in emerging markets and as Europe’s economy starts to improve. That will help China’s economy improve as Europe trades more with China than it trades with the U.S.

“It’s important that Europe has turned the corner, or bottomed. And they’ve dropped rates lower, to help the economy. That will be beneficial for countries like China,” he said.

With emerging markets like China and India looking to develop their domestic infrastructure, it will mean continued demand for industrial commodities. Holmes said he’s watching the commodities that have been most beaten up, on a rolling basis, especially as economies improve.

“You’ve seen iron prices pick up. Met (metallurgical) coal will pick up. Thermal coal will feel more and more competition from natural gas,” he said.

The growth of the shale-gas industry means growth in improving infrastructure, such as pipelines to transport natural gas and liquefied natural gas, he said.

Improving global economies help commodities across the board, Holmes added.

“The big commodity booms take place when you have the engines of America, Asia … and Europe all positive. That’s when you have a huge demand for commodities. (But) the cost to explore, extract, process is going up at an inflation rate higher than anything published by any government. Environmental regulations are driving it up. We all want clean air and water….  Now that everyone is wired they all want that American dream. That creates a dynamic longer secular market,” he said.

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By Debbie Carlson of Kitco News dcarlson@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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