Gold
Could Double over Five Years – Headed Higher with Government
Resentment: Holmes By Daniela Cambone
Of Kitco News | 03 September 2010, 3:02 p.m.
Gold has the potential to double within
the next five years, and if governments stumble with their
policies, it can go even higher, said Frank Holmes, CEO
of US Global Investors.
“When Obama gave money to stimulate
job creation, a lot of that money went to State governments
and not into the private sector, where it was really needed
most. Now we’re dealing with a high unemployment rate
that won’t go down, which is leading to increasing
anger that you can see in the approval numbers. If that
was to accelerate then you could see gold taking off faster,”
Holmes said in an interview with Kitco News.
“I think that gold can double over
the next five years, comfortably; that is a 15% compound
on rate of growth. And that is what I’ll stick to,”
he said. “There are not many asset classes that can
demonstrate that,” Holmes said.
He said, “If you are a linear person
and you use linear models - gold should be at $50,000 an
ounce. If you go to inflation adjusted prices then gold
should be at $2,300,” he said.
Holmes’ firm tracks government social programs to
determine whether they are based on social investing or
social welfare.
“Giving out food stamps does not create
jobs; it creates a society addicted to government checks.
That’s not sustainable – a society that turns
around and starts updating all their roads (and )airports
is,” he said.
“Why not update the L.A airport? Build
a speed-train from LA to San Francisco and create 1 million
jobs. Why not re-do the roofs in New York so that they are
white and not dark asphalt and they will use less CO2 and
create a million green jobs?” he questioned.
When you create programs such as these you
have job creation, said Holmes.
“That is what the Chinese have been
focused on; social spending for infrastructure versus social
welfare.” They're very conscientious in fine-tuning
social stability and job creation year after year, he said.
Instability
The operative word for investors is “instability,”
said Holmes. “When fiscal and monetary and social
policies are misaligned then the currency goes through a
period of inflation or deflation and if that is strong enough
that all of sudden gold performs.”
During 1997-1998, when President Clinton
was in power the U.S. had a surplus and maintained positive
interest rates, said Holmes.
“President Clinton had 3% interest
earned above the inflationary rate and you had a surplus
budget, gold was $250 an ounce, unattractive as an asset
class,” said Holmes. “Today, we have the opposite,
we have massive deficits and we have negative real interest
rates.”
Holmes also subscribes to an opposite view
that many analysts hold, that the gold price will not rise
without inflation. “I know it is concept that opposes
the conventional opinion,” said Holmes.
“When you are earning less on your
90-day piece of paper or a five-year note and it is less
the inflationary rate, then all of a sudden gold is attractive
as an asset class,” said Holmes.
During these periods, governments usually
need to increase their deficits by escalating their borrowings
to support the economy. This also supports gold as safe
money, in addition to its beauty as jewelry, he said.
The twin engines of negative real interest
rates and government deficits tend to make gold a very attractive
investment.
“If deficit spending looks like it
is sustainable and you have low interest rates to fight
deflation then gold performs, because you get currency devaluations.
History is just replete with it,” he said.
Emotional Buying
Holmes said it is in the seven most populous
countries in the world where you find the strongest emotional
attachment to the metal.In September we usually see the
emotional buyer emerge during Ramadan, Diwali, Christmas
and then Chinese New Year.
“You have a different proclivity.
Now we are half-way through the holy month of Ramadan and
then we go into the wedding season, these are very significant
factors,” said Holmes.While some analysts are concerned
that the high gold prices might discourage buyers, Holmes
said it is more important to look at price volatility.
“We have seen that any time gold spikes
$100 dollars, the demand drops. Anytime gold drops $100
dollars quickly, the demand heat picks up and these countries
act on the emotional giving factor,” he said.
Central Bank Buying
India’s central bank gold buying was
a pivotal point for the metal last year, said Holmes.
“Not only are they huge consumers for retail, all
of a sudden they are making another decision and moving
from price takers to price makers,” he said.
Holmes said that there are two types of
buyers of gold: one, he terms the price takers, who are
"basically a buyer of gold for jewelry." The second
group, he calls the price makers. These are people who are
buying gold as an investment.
“Gold is clearly becoming an important
part of that, and I think that phenomenon will grow. As
it does, we will see gold trade at higher prices,”
he said.
Another tipping point for gold was in 2005
when Russia decided to take 5% of foreign exchange revenue
from oil and redeploy that back into gold as a reserve,
said Holmes. “Gold basically hasn't traded below $500
since then.”However, while some comments have been
made that gold is currently acting as the ultimate currency,
Holmes does not agree.
“I don’t look at it that way.
I look at it as having a diversified portfolio, having exposure
to gold and rebalance – don’t try and chase
the performance. Don’t buy gold to get rich. Just
like you don’t buy car insurance to hope you can get
into accident just so you can collect.”
Editor's Note:Catch Frank
Holmes at the upcoming Kitco Metals eConference September
12-13, 2010. A not-to-be missed event featuring Ron Paul,
Marc Faber and other industry heavyweights. The eConference
is free with Pre- Registration www.kitcoeconf.com.