Streetwise Reports: Frank, thanks for joining us today. Gold, after several months of trading sideways, has recently seen some new momentum. It's been staying above $1,850 an ounce while cryptocurrencies have been experiencing extreme volatility. You're in a unique position because not only do you head U.S. Global Investors, but you're also the executive chairman of HIVE Blockchain Technologies Ltd. (HIVE:TSX.V; PRELF:OTC). What is your perspective on gold versus cryptocurrencies? Where does each go from here?
Frank Holmes: Gold and cryptocurrencies are not exclusive of one another; for me, they've always been inclusive. It's just appreciating that. I couldn't launch an exchange-traded fund (ETF) in the cryptocurrency space four years ago. They just weren't allowing a Bitcoin ETF to happen. So all that knowledge was applied to the creation and launching of HIVE Blockchain Technologies, instead. I seeded it with $5 million, and the institutions came along behind me. It was the first crypto mining company to go public.
What I think is most interesting in the space is that we're the first to have an environmental, social and governmental (ESG) footprint and strategy. We only use green energy, and we're the only ones buying both Ethereum and Bitcoin. So far, Ethereum has been much more enriching as revenue and cash flow than Bitcoin, even though Bitcoin gets all the attention.
When it comes to gold versus Bitcoin, Frank Giustra and Michael Saylor debated, and I looked at that and I said, 10% weighting in gold is just rational and reasonable. It's been around for 5,000 years. Sixty percent of the demand for gold is love, 40% is fear. Bitcoin is predominantly fear. I've said every time gold sells off, the long-term gross domestic product per capita is rising in China and India, which have 40% of the world's population, and is an important factor in the buying of gold. Gold, this century, has outperformed the S&P 500 by 250%. Having a 10% weighting in gold and rebalancing once a quarter have just been prudent and wise, in my opinion.
Now, along come Bitcoin and Ethereum, and they are very popular with Millennials. Millennials are not into gold; they're into digital. And a huge transfer of wealth is going to take place over the next 30 years, the transfer of trillions of dollars from Baby Boomers to Millennials. I see the algorithm behind Bitcoin as a beautiful piece of art. It's masterful. I see this growing, so 2% weighting in the digital space is wise for investors to consider. Many people use HIVE because they were fearful of going on one of these crypto exchanges and reading about hacks and lots of other crises. So HIVE, as I've witnessed, has become a proxy for Bitcoin and Ethereum, and for those gold investors, as well as a lot of new Millennial investors, who wanted to participate in that digital world.
Now, another thing that I feel is important for your readers to understand is what I call the "DNA of volatility" of an asset class. This shows the normal fluctuation, up or down, of an asset class—or its typical volatility. Seventy percent of the time, for example, on a daily basis, the DNA of volatility for gold can be plus or minus 1%. For the S&P 500, it's 2%. But most of these talking heads on CNBC make gold out to be a big bad bogeyman, but really with the volatility so similar to that of the S&P 500, having a 10% weighting as an asset allocation, like Ray Dalio has done at the largest hedge fund in the world, has been remarkably successful.
When it comes to Bitcoin and Ethereum, they're five times more volatile than gold—their "DNA of volatility" is much different, and that is why investors must understand it. If you're a portfolio manager and asset allocator, that just requires a smaller weighting. That's the reason for a 2% weighting, as I mentioned before, to be able to stomach that type of volatility. In fact, their volatility is pretty equivalent to Tesla. Tesla itself has a 5–6% volatility, up or down.
SWR: Let's talk about gold mining stocks. As the price of gold has risen, so have the shares of gold mining stocks. U.S. Global Investors runs the GO GOLD and Precious Metals Miners ETF (GOAU), which is algorithm based. Can you tell us a little bit about how the algorithm works? What categories of precious metal companies are particularly in favor right now?
FH: I'm really proud of this because, for me, the algorithm behind GOAU is like a legacy that will carry on, the approach to it. They call it smart beta 2.0. The reason they do that is not just the factors that we've analyzed, and I've spent 8,000 hours trying to determine what are the best factors for picking gold stocks, it's also the portfolio construction and how it recalibrates using laws of physics.
So with that, 30% of the GOAU portfolio is in gold royalties, the "three big amigos": Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) out of Denver, Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) out of Vancouver and Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) out of Toronto. These gold royalty companies have a very high coefficiency ratio of revenue per employee: Franco-Nevada's is $25 million, just as an example, Goldman Sachs' is $1 million. Franco-Nevada has royalties on Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) and Newmont Corp.'s (NEM:NYSE) operations in Nevada, and their revenue per employee is only $600,000, not $25 million. So it's a very efficient, high gross margin business that looks like a technology stock. That business model has a moat around it, too; I really like that business model. That's why 30% of the portfolio is in those three big stocks. The portfolio rebalances each quarter because you don't know each quarter which one is going to have the better outperformance, and it's to ensure we capture that.
The remaining 70% of the portfolio basically goes from big cap down to small cap. But, again, it's looking at smart beta factors like revenue per share growth last quarter over four quarters, cash flow last quarter over four quarters, free cash flow yield and which one is the cheapest on a price-EBITDA ratio. So it's playing on momentum. It's a very active way of looking at these gold stocks and an expression of high grading. That's what we do each quarter. Seven percent of those names are high graded, that is, if any company does a deal that harms the revenue per share, reserve per share or cash flow per share, it's kicked out.
So let's say gold fell 14% in the first quarter. Well, you'd want to have those stocks where their revenue didn't fall with the decline in the price of gold, that had increasing production or better margins. With those that fell even more so, you find out that there's something wrong with the value metrics on a per-share basis. That's why GOAU has outperformed the GDXJ (Market Vectors Junior Gold Miners ETF: NYSE.Arca) year-to-date through the end of April. Before we launched it we back tested it, and our model showed GOAU outperforming the GDXJ 90% of the time on a rolling 12-month basis for a decade. It's done a phenomenal job year to date and since we launched it.
SWR: From quarter to quarter, are there fairly substantial changes in your holdings?
FH: Yes, about 25% of the time. And if there's a takeover announced, we sell the company being bought. We're not going to stick around to wait for how it digests it, etc. It's better to take that money, whatever the gain, loss or whatever it is. Sometimes, you may own both the buyer and the seller. It's just best to let them figure it out later because research has shown that it takes 18 months to digest a merger. So it's better for us to have the shareholders' money working on those companies that have better value metrics on a per share basis.
SWR: You've mentioned a couple of royalty companies. Other than those three, are there specific precious metal companies, not necessarily royalties, that you think investors should take a look at?
FH: For ones we own in our funds, and you want to have a more conservative role in looking at these stocks, we've been recommending Gran Colombia Gold Corp. (GCM:TSX) notes. It pays you a coupon on a monthly basis, and as the price of gold rallies, it pays you a bigger coupon. So the overall yield to maturity has been pushing 15%. It has very low volatility on down days. Even this past quarter, it remained unchanged, and every month you got a dividend. When you look at that, to me, that's a very important way of looking at this gold space.
Now, when it comes to GOAU's latest holdings, when we take a look at them, where are they today—as I mentioned, they'll be rotating on a regular basis—to give you an idea, we own several other small royalty companies because they end up having good metrics, like Sandstorm Gold Ltd. (SSL:TSX; SAND:NYSE.MKT). We also own Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE). They're each 5% of the portfolio. We kicked out Osisko a while ago because it really hurt its revenue and its cash flow per share with the acquisition of a deposit, and the stock fell after that. It fell down enough so that it became attractive, and it seemed that it improved its returns. So we would look at something like that. High gross margins is an important factor in looking at these stocks.
SWR: Let's switch over to silver. It was the highest performing precious metal in 2020; it went up 48%. It has industrial uses beyond being a store of value, including solar energy. Do you see silver getting a boost from increased industrial demand? Do you think it will continue to shine as an investment?
FH: I think everyone who is a gold and silver investor should buy silver coins and take delivery of them. There's a real shortage of metal coins. I was recently at the Nike outlet store between here and Austin, Texas—we're based in San Antonio—and the Nike store says, sorry, we don't have any cash change, there's a shortage due to COVID. So you think of pennies, nickels, dimes and quarters, I can assure you there's even a bigger shortage [of precious metal coins]. So if you can get silver coins, I think that's wise.
What happens with silver and gold is that any time gold is up 10%, silver is going to be up 15%. If gold falls 10%, silver falls 15%. But what's very different is the industrial use of silver. When we look at the industrial use, in particular solar panels, and you look at global spending, the European Union (EU) is spending $1.7 trillion on green. Of that, $1 trillion is this year. I was talking to a CEO I know in England last week, and he is building a 380-acre place in Romania, and he got $200 million to put up solar energy. So I think that the recipients, both copper and silver, but in particular silver as a precious metal, are going to have a very strong underpinning demand because of solar energy needs.
Now, in the crypto space, we're seeing this also. As money managers launching HIVE, we pushed for an ESG strategy, green only. Now, we're seeing that with some of the other crypto companies. Marathon Digital Holdings (MARA:NASDAQ) has come out stating that it's going to have green energy because of what Elon Musk said. He knocked down Bitcoin due to his comments. Marathon really took it on the chin for not having a green footprint, so management and the board came out with an ESG strategy. In North America, we're seeing this real push for green. It's become a religion in some countries in Europe. It has a great impact. So what can help be a solution to this great concern of global warming and this green movement are metals like silver and copper.
SWR: Are there silver mining companies or copper mining companies on your radar?
FH: Yes, there are. Wheaton Precious has always been originally our big silver play, but clearly Silvercorp Metals Inc. (SVM:TSX; SVM:NYSE) has been a great play for us as having highest gross margins, etc., in that space. There are some other junior ones, but as far as what's in GOAU, it's stocks of that nature.
SWR: You mentioned that when gold goes up 10%, silver goes up 15%. The gold-silver ratio went from a high of 123 in March down to around 67, where it is now. Do you think it's going to stabilize there? Or do you think we're going to see a lot of differentiation or volatility between the two metals?
FH: I think that you're going to see more volatility. I don't think that that's going to go away, absolutely not. Every time we get a bull cycle, we're going to see that ratio increase. We're going to see the ratio shrink in the favor of silver.
So if you look at some of our holdings, we also own Sibanye-Stillwater Ltd. (SBSW:NYSE), which has a play on palladium.
One of our other international holdings that I really love is Hochschild Mining Plc (HOC:LSE; HCHDF:OTCMKTS). It's listed in London and trades over the counter in the U.S. It's a major silver producer in Peru, but it has the largest, rare earth deposit in Chile. So you have lots of upside for that as an asset because as you can look at global Purchasing Managers Indexes (PMIs), the global PMIs have been tipping up since this time last year with all the money printing and have only accelerated. Europe was lagging, and it was only China and America that went over 60. That means a very strong pent up global demand for commodities. I think it's going to be very sustainable partly because of the $17 trillion being spent by China, the U.S. and the EU to fight COVID. As I mentioned earlier, there's over $1 trillion in the EU and close to that number in America going toward global warming, so climate change is the operative word today. I think this is very bullish for many of these metals.
Now, if we take a look at copper in particular, the concern in Chile is it looks like the Communist Party could win the election. What happens is there will be strikes. There will be issues on copper supply that will all of a sudden drop dramatically. I think you could see that show up and have ramifications for rising copper prices.
I think that you have to tie it all together. Global PMIs are a six-month leading indicator for many commodities. They're the strongest leading indicator that relate to oil, iron, gold and copper. And now silver is an important part of that global infrastructure build. So I think that we are in this sort of secular bull market for the need for a lot of these metals.
SWR: Thanks, Frank, for sharing your insights.
Frank Holmes is CEO and chief investment officer at U.S. Global Investors, which manages a diversified family of funds specializing in natural resources, emerging markets and gold and precious metals. In 2016, Holmes and portfolio manager Ralph Aldis received the award for Best Americas Based Fund Manager from the Mining Journal. In 2011 Holmes was named a U.S. Metals and Mining "TopGun" by Brendan Wood International, and in 2006, he was selected mining fund manager of the year by 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. Holmes is a much sought-after keynote speaker at national and international investment conferences. He is also a regular commentator on the financial television networks CNBC, Bloomberg, BNN and Fox Business, and has been profiled by Fortune, Barron's, The Financial Times and other publications.
[NLINSERT]Disclosure:
1) Patrice Fusillo conducted this interview for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She owns, or members of her immediate household or family own, shares of the following companies mentioned in this article: None. She is, or members of her immediate household or family are, paid by the following companies mentioned in this article: None.
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3) Frank Holmes: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: N/A. I, or members of my immediate household or family, are paid by the following companies mentioned in this article: N/A. My company has a financial relationship with the following companies mentioned in this interview: HIVE Blockchain Technologies. Funds controlled by U.S. Global Investors hold securities of the following companies mentioned in this article: Royal Gold Inc., Wheaton Precious Metals, Franco-Nevada, Gran Colombia Gold Corp., Sandstorm Gold, Osisko Gold Royalties, Silvercorp Metals and Hochschild Mining Plc. I determined which companies would be included in this article based on my research and understanding of the sector. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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