Frank Holmes of U.S. Global Investors drops in for a wonderful interview on why he believes Fed chair Jerome Powell’s recent comments make it even more imperative for investors to own gold and tells us why he sees similarities in what we saw last year in palladium and what we’re going to see in gold and silver. He also comments on a number of other topics as well.

Mike Gleason: It is my privilege now to welcome in Frank Holmes, CEO and Chief Investment Officer at U.S. Global Investors. Mr. Holmes has received various honors over the years, including being named America's best fund manager by The Mining Journal. He is also the co-author of the book, The Goldwatcher: Demystifying Gold Investing and is regular guest on CNBC, Bloomberg, Fox Business and also right here on the Money Metals podcast. Frank, welcome back. And thanks for joining us again. How are you today?

Frank Holmes: I am great. Thank you. It's great to be back.

Mike Gleason: Yeah, it certainly has been a while. A number of months since we had a chance to talk and suffice it to say a lot has changed in the world and the market since then. We've got COVID-19 wreaking its havoc on world economies. We have race protests and rioting. It isn't the sort of backdrop you would expect for the stock market which has been moving relentlessly higher, but the Fed is not about to let prices fall it seems. The intervention is off the charts, starting with trillions of dollars to prop up the repo markets last fall. Then in March, they pulled out all the stops and began buying everything including ETFs and junk bonds. So, what's next for the equity markets? We aren't sure which dynamic is more important for investors in the months ahead; the lousy real-world fundamentals or the artificial stimulus being pumped in by the Fed? Give us your thoughts here.

Frank Holmes: Well, I think this is bigger than the fed and that's a thing to recognize. And I think I've said previous times in your program that after 2008, 2009, the government in the U.S. along with other governments around the world, they became the finance ministers and the central bankers basically became a cartel. The G20 became synchronized taxation and regulation. And that was a real big part, now they physically can't fly between countries. All of a sudden moving money became very difficult for everyone. And AML costs have continued to rise since then. So, now we have this calamity of a pandemic and you're seeing this sort of collectivism taking place amongst these ministers. So, they're all printing collectively and they're all taking their leads, so it is unprecedented when you hear Powell speak today…. I don't know these words which he used, he said, "We will continue to use powers, forcefully, proactively, and aggressively. We will continue."

So, I think that that just sets up a gold theme. It's just so important to have a gold theme if investors do not have some exposure to it. There's fundamentals on peak mine supply, etc., but I just think this is concept of owning gold as an asset class.

And I still get the pushback from CNBC, New York. It's just a regular negative on gold. If it's up it, it's going to fall and if it's down, I told you so attitude. And I think this unprecedented explosiveness that's taking place in the Fed's balance sheet and the money printing coming in and buying bond ETFs to try to get corporate rates down. Rates went to zero and mortgages you can get cheap, but you couldn't get them in capital markets. Guys are telling me in the Mezzanine real estate world, they had commitments for 4% rollover money and it jumped to 14%. So, the government's now come in to try to use ETFs as a way to get rates down in the corporate sector.

So, they're going to use everything they can and this is the same thing in Europe, it's the same thing in Japan. So, I think that before you would run from one jurisdiction to another, it's just not going to happen this time. And that should mean gold is going to become more and more attractive and silver as asset classes globally because in particularly on gold, peak supply, we're in it now. And we're going to continue to see a drop in supply coming from mines. Newmont has had no new production increase per share. Fortunately, they've got free cash flow with debt or capital discipline, but there's been no growth over five years.

Mike Gleason: Yeah. That's certainly going to be a dynamic that should improve the fundamental picture if it's not already good enough with all the currency devaluation that's going on. Before we get a little bit more into gold, so, do you view the recent move higher in the stock market as an indication of the good things are ahead for the markets and the economy, or is this just a bull trap?

Frank Holmes: Well, your question did start off with the stock market at the beginning, but I think that a lot of this that's moving the stock market is money coming from all of this printing. And, and so what we've been seeing in the past eight years in particular, Japan, Switzerland, they go and print money at a zero cost of money and no one buys it so they buy it themselves. Then they go buy Apple. The Swiss Central Bank is one of the largest shareholders of Apple. Why was the dividend higher than they can raise money with? They can create funny money. They buy Cadburys so the largest shareholder of stocks in their own country is a central bank. And, that's a real different thought process. The largest holder of Japanese stocks is the central bank. So these central banks, as I mentioned earlier, are colluding altogether. They can print the money and they buy good corporations.

And the big thing that's been a big push is this ESG. So it starts out of Europe and it's a very big expense of the environment and sustainability and good corporate governance, which I realize, but the burden of poor government policies by these socialist countries have said, "Oh, we're going to push it on successful corporations, that cost and etc. And if those stocks aren't there, then we're not going to allow them to go into our pension funds." And so a meeting at Black Rock and these other organizations, they maintain trillions of dollars of money management. They have to turn around and say, "Okay, we have to comply." And, so we're seeing is this sort of morphing of the formation of capital. We're seeing the priorities where capital has to go changing and one has to sit back and say, "Okay, where's the growth going to be, and where are the risks going to be and how do I de-risk it?"

So, in that zero interest rate environment, dividend paying stocks, which have stocks like say Clorox, especially after a pandemic, I would say that's a growth profile wouldn't you?

Mike Gleason: Yeah, certainly.

Frank Holmes: Certainly. And the dividend yields’ higher than you are going to get paid on any money market fund. And certainly the 10-year government bonds, the dividend yields higher. You can buy Newmont and its dividend yields higher than a 10-year government bond and they have free cash flow. So, I think that the stock market has done a great job where money has actually gone into those stocks which had the ability to pay dividends and sustainable growth from dividends, where those stocks have been able to respond to this pandemic such as Amazon. Amazon stopped all the overtime payment and they basically went out and hired 100,000 people to deliver goods every day. And so they've had revenue growth and you've seen their stock prices go up.

So, I think that this shift in what we're seeing is a lot of domestic companies that were able to stay profitable. I know, as I said earlier, we saw a big drop in our assets. I was very concerned the first week of March. And then all of a sudden we saw unprecedented money coming into our Jets ETF, which was a game saver. And our assets fell from a billion dollars down to less than half a billion dollars and now they're to two billion.

I mean it's incredible that a crisis like that would all of a sudden see all this money go into a contrarian product like the airlines industry. And so there's investors are coming in looking for that bounce because of the wind behind their sail is the $7 trillion. I think when it's finished, this is an election year, it's going to cost $10 trillion and the stock market is going to remain strong.

Mike Gleason: Certainly the unprecedented demand or amount of stimulus that they've put out does not seem to likely to be ending anytime soon. And yeah, investors do seem to know that.

Well, you alluded to gold earlier, and the fundamental picture there that looks very strong. What about silver? It's really a tough metal to forecast because it is both economically sensitive given the industrial component. And then it can also act as an inflation hedge for those seeking hard asset protection for safe haven purposes. So, what is your outlook for silver, Frank?

Frank Holmes: Well, silver is always the warn on gold. And so if you look at just math of markets, a 10% move in gold on the upside historically sees a catch up of 15% move in silver. It's always that 10% drop in gold, you're going to get a 15% drop in silver. And it's interesting psychology that gold goes up for enough months in a row, then all of a sudden silver starts to have this huge surge of interest for it.

And when you look at companies like that, my favorite company is Hochschild because they also have the largest rare earth asset in Chile. It's the largest in Western hemisphere the Chinese want to get a hold of because you need rare earth for all of this new technology we're using like the iPhones and other tools. So, when one looks at that, that's one of those stocks that give you a two-one. I call it a Tesla silver.

Mike Gleason: How about platinum, Frank? A similar situation there as silver. It's been a beaten down metal and its way off its pre-financial crisis highs from over a decade ago. Any thoughts on platinum? What are you expecting there?

Frank Holmes: No, I think it'll do a sort of a catch-up as the economy starts to turn. But, I think the bigger part is the supply of platinum is not as stressed as palladium. And it's interesting for me is that you can only go so many years and all of a sudden it explodes on the upside and that's what takes place. I think that that's very, very positive for us. We're going to see these explosive moves. Very few people forecasted in 2019 that palladium would go from $1,000 to $2,700.

Well, if you go for enough years you don't have supply and you have basic GDP growth, then all of a sudden you get this huge move. And I think you're going to get in gold. I think that gold is going to ignite and go through $1,900 and go up like palladium did last year, $2,700. And then all of a sudden silver is going to have this massive move to $50 that everyone will all of a sudden be surprised over.

One of the things about the airline industry, when it went through its worst times in March, April, a lot of physical gold, as you know and you follow that market so well, is moved in the belly of the airplanes, the commercial airplanes. But, those commercial flights basically all stopped. We went from moving 2.7 million Americans a day through TSA down to 90,000. It was a huge drop. So, what happened is that the airplanes all stopped flying and the cost for a private airplane jet to go from New York to London, that cost of commercial versus going private went from $30,000 to $300,000 and gold got $134 premium on it for the physical movement. And Anchorage became the busiest airport in the world moving medical supplies from Asia over to North American and to Europe. And that's changed now and we've had some falling in the prices so physical gold is easier to move around. And I think we're going to live with these things as we go forward that physical gold and having it in your hand is going to have a greater value.

Mike Gleason: Yeah, that was a very interesting dynamic when we saw that major divergence between London, where the spot market is very active and the physical market and U.S. futures and we saw huge divergence in price there as refiners around the world were scrambling to get metal to the U.S. to satisfy futures contracts and make a nice spread.

How about the mining sector? You spoke about that a little bit earlier, but how's it shaping up there, Frank, and give us your thoughts on the miners?

Frank Holmes: Well, it's a great question. I'm very, very bullish compared to a year ago in the miners. And I'll give you a couple of reasons why. The CEOs now and the board of directors of a lot of these companies are much more sensitive and focused on the value metrics per share. And that's one reason why I launched the GOAU because I just got fed up with this value destruction by dumb mergers, dumb financings, and you saw that 46% of the GDXJ's stocks in that ETF had done diluted financing. So, they diluted the revenue per share, the cash flow per share and the reserves per share. And that's one reason why it didn't perform as well. And we go back to the year 2000, we've got a 20-year history that bullion has been up 80% of the time. It's outperformed Buffett by two to one.

And now we take a look at gold stocks and in gold stocks my favorite of the royalty companies like Franco Nevada, they've outperformed for the past 10 years, Berkshire Hathaway by two to one. And so what was the reason for that? Well, these stocks have free cash flow. And what's interesting is that free cash flow of the S&P 500 was running like 2 1/2% at the end of December. And by the end of March, because of the meltdown, it was gone except for gold stocks. The gold royalty companies threw off a half a billion dollars in the first quarter in free cash flow. Newmont all of a sudden starts talking about their free cash flow. Newmont was one of the best performing stocks in the first quarter of this year and why was that? Because of free cash flow.

And now they market their story along with your Yamana and Barrick that they have free cash flow. That means they can increase their dividend. And, so why is that really important? It's because the non-gold stock buyer, the generalists, most of them out there buy stocks that have free cash flow and the capacity to grow free cash flow. The concept that we're going to have peak mine supply, but we're going to have this constant demand growth at a couple percent a year, means that gold prices are going to trade higher. And we could get this spike just off of basic supply and demand – forget the fear of all those money printing – that gold could propel itself to $2,700, $5,000, $10,000. And so I think that the gold stocks for this last quarter of March 2020 was the first time that 100 gold producers in the world we follow that the average or the median was plus 1 1/2%.

So, gold stocks became much more attractive year-to-date than a lot of the stocks in the S&P. And those companies that showed revenue growth last quarter for (the last) four quarters like the Amazons, etc., those stocks were superstars. And those stocks like the gold stocks, even though the coronavirus may have slowed down some of the production, the higher gold prices they were net ahead. So, I think that the one year and the three-year numbers for gold stocks are at that inflection point. And those that continue to demonstrate free cash flow will see their stock prices go to a premium.

Mike Gleason: Well, thanks as always, Frank. Have a great weekend. Enjoy your summer and we'll catch up soon. Take care.