Legendary investor Frank Holmes took to the podium at SmallCapPower’s Post PDAC event recently to share his thoughts on topics such as Al and peak gold
Angela Harmantas | March 19, 2019 | SmallCapPower: If you want to make money investing in the markets, you have to understand monetary fiscal policies and how they relate to the global flow of capital, according to Frank Holmes.
Speaking at SmallCapPower’s Post PDAC event recently, the legendary investor stood in front of a large audience of attendees and webinar participants to talk about his thesis for the gold price, what the global Purchasing Manager’s Index reveals about the economy and his outlook for commodities in 2019. He also talked about his most recent investment in a junior company that could revolutionize the exploration sector and unlock new discoveries in the mining world.
A key facet of Frank Holmes’ investment directive is simplicity, he explained, taking macroeconomic forces out of government policies and reduces them to simplified terms in order to easily recognize what the “big numbers” mean. As an example, unwinding quantitative easing is good, while rising real interest rates are bad; low corporate tax rates are positive, while trade wars are negative for the economy.
“Any tax or regulation on a system will create a recession,” he said. “It gets more difficult to move money, products and services. There is a transition taking place and it all comes back to (the idea that) government policies are a precursor to change.”
In order to understand what is happening around the world, just look to the United States, China and India, he said. Any trade war between the U.S. and China will have an impact of the economy.
There are already signs that trade war rhetoric is impacting China’s economic expansion. The Purchasing Managers Index, or PMI, tracks several different elements that together can provide investors invaluable insight into economic trends, such as new order, employment levels, delivery times and inventories. The data is released each month and an index reading of above 50 generally indicates economic expansion. Traders then go short or long on different commodities, rebalancing positions as they re-evaluate PMI data points.
As Frank Holmes pointed out in his speech, if the global PMI is above 50 for three consecutive months there is a 52% probability in the next six months that commodities across all spectrums will be higher. However, if it trends below 50 for three months, then commodities like copper, steel and oil are usually lower.
“China and America are nearly 50% of the world’s economic activity,” Mr. Holmes said. “It’s easy to see in a portfolio which you should follow and more important to take a look at the big whale countries and their trends.”
China’s PMI fell below 50 in December 2018 and is currently at 49.9 in February 2019. According to Frank Holmes, that is a negative sign because it means there is a contraction in the country’s manufacturing sector.
Mr. Holmes also talked about his thesis for gold. He is a believer in “peak gold,” and the idea that global output of the precious metal will top out in 2019 before declining. With a lack of new discoveries coming onstream to replace the mega-deposits already in production, “the path to cash flow for a gold mine is still very long,” he said.
This idea ties into his recent investment into GoldSpot Discoveries Corp. (TSXV:SPOT), a technology company that looks to reduce capital inefficiencies in exploration by using artificial intelligence to analyze big data in the hopes of finding new discoveries, or, as Frank Holmes describes, “minimizing exploration risk by eliminating garbage drilling.”
He owns nearly 10% of the company, amongst an impressive list of other shareholders: Eric Sprott is a big investor, as is Hochschild Mining. Together with private equity firm Triple Flag, the titans own nearly 40% of Goldspot.
Mr. Holmes also rallied against the perception of a volatile gold price and encouraged investors to follow the “Golden Rule” by having 10% of their portfolio in gold, referring to the fact that since September 2001, the gold price has outperformed the S&P 500 almost 3 to 1.
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