When he is attending conferences in India and Dubai, Frank Holmes will often take time out to buy necklaces, ear rings and other gold jewelry items.
The ceo of Texas-based U.S. Global Investors Inc. says it’s a habit that stems from his belief that in a rising gold market any investment portfolio should consist of a 10% weighting in gold, with a mix of physical metal and non-hedged equities (More about the equities later).
“The first rule of thumb is you buy gold jewelry for the one you love,’’ he said during an interview with Stockhouse. “Then if you buy a gold stock and it goes down, you don’t get into much trouble,’’ he said, chuckling at the thought.
Picking up high quality gold jewelry in countries where the markup is a fraction of what people pay on Fifth Avenue, (New York) “is the smart thing to do,’’ according to Holmes, who sits at the top of an investment firm with $3 billion in assets under management and a focus on emerging markets and natural resources.
A native of Toronto he got his start in the industry by working as research analyst and corporate finance executive with Merit Investments, a now defunct firm that underwrote the IPO of the original Franco Nevada Mining Corp. (TSX: T.FNV, Stock Forum), one of the world’s most successful gold royalty firms.
He only became chief investment officer at Global Investors because the opportunity arose at the height of the tech bubble in 1999 and no-one else wanted the job.
“Everyone was a technology guru and the mines were in the gutter,’’ he recalls.
Judging by recent figures from the World Gold Council, Homes is not alone in taking the view that physical gold is a wise investment. According to WGC, overall demand for gold reached a 10-year high in 2010, in part because of rising jewelry demand in key Asian markets.
Holmes said this data is an indication that global demand is being underpinned by the so-called love trade. He was referring to consumption by people who are buying items such as ear rings, bracelets, engagement rings and necklaces, often as a prelude to engagement or marriage.
In India, for example, jewelry demand rose 47 per cent on a year-over-year basis during the fourth quarter of 2010 and 69 per cent for the year.
In China, purchases of gold jewelry accelerated 25 per cent during the fourth quarter, heading into the Chinese New Year.
Rising demand from people who are buying out of love is one of the reasons why Holmes expects gold prices to rally from current levels.
“I think the price of gold can double and so can the price of oil over the next five years,’’ he said.
Aside from physical gold, he said people can also profit from any upside in the price of bullion by purchasing shares in unhedged gold companies, especially ones with rising production profiles.
“I think that Agnico-Eagle Mines Ltd. (TSX: T.AEM, Stock Forum) and (NYSE: AEM, Stock Forum) looks attractive,’’ said Holmes., adding that Red Back Mining Inc. was one of U.S. Global’s big holdings last year before it got taken out by Kinross Gold Corp. (TSX: T.K, Stock Forum).
He also likes Osisko Mining Corp. (TSX: T.OSK, Stock Forum) because it has lot of ounces relative to the number of outstanding and good management. Montreal-based Osisko has outlined a proven and probable reserve of 10.7 million ounces gold at its wholly-owned Canadian Malartic project near Val d’Or, Que.
Osisko has been a “big big win,” for Goldcorp. Inc. (TSX: T.G, Stock Forum) which is a shareholder of the Montreal company.
Medoro Resources Ltd. (TSX: T.MRS, Stock Forum) is another company on Holmes’ radar screen.
“I think it’s attractive because you are buying 10 million ounces,’’ he said. The comment is a reference to resources estimates at the Marmato project in Colombia, which covers 1,198 hectares in the mid-Cauca gold belt.
So far, the company says it has outlined 6.6 million ounces of gold in the measured and indicated category and 3.2 million ounces in the inferred category. Based on the Friday close of $2.02, Medoro has a market cap of $283.64 million based on 140 million shares outstanding.
“When these stocks have a lot of value per share, quite often as gold trades higher, they get taken out,’’ said Holmes. “So I like those types of stories.’’
Holmes is the co-author of The Goldwatcher: Demystifying Gold Investing, a book in which he outlines his views on some of the key value drivers in picking stocks.
In the book, he talks about the importance of the life cycle of the mine, the importance of track record and management’s ability to execute. He also tells investors to anticipate and understand what volatility is so that they don’t become afraid of it.
“Over the last 10 years, over any 12-month period, it’s a non event for gold to go plus or minus 15%,’’ Holmes said. “So any time it goes up 30% then you want to be a seller. If it falls 30%, then you want to be a buyer.”
Here are some of Frank Holmes’s other forecasts:
“I think that in the second half of the year as Japan starts to turn around its economy and car sales are picking up, zinc could be one of the top performers in the commodities sector,’’ he said.
Platinum could be also another performer.
“If the enthusiasm for silver maintains itself, people keep buying the coins, and there is no excess silver coming out of China, then I think that silver has a lot of potential also,’’ Holmes said.
“I think oil is at US$200 a barrel in the next five years.”