The Gold Report: What are some lessons you have gleaned from the markets in 2017?
Frank Holmes: The past year was a year of disruption. That was an epiphany for me. The culture is changing. In the capital markets, regulations, enacted with good intentions, have gone too far. The number of brokers and brokerage firms has shrunk, while the money supply continues to grow. Millennials, in the age of Tinder, are expecting to get whatever they want quickly. They do not want to wait around for three days to open a brokerage account, and Wall Street has lost their trust since the Great Recession in 2008.
Excess regulations have hurt traditional stocks. IPOs have dropped 75%. An IPO now costs $300 million; it used to cost $80 million. Private equity firms have picked up the slack, but investors are being squeezed out.
It is a different world now. Cryptocurrencies have captured the imagination of the Millennials, garnering $3.5 billion in investments. In three years Coinbase has grown to 13 million users. It took Charles Schwab 30 years to get a similar customer base.
Behind bitcoin is blockchain technology, which is changing the landscape. Blockchain technology makes it possible to move money cheaply every 10 minutes. The old system of moving money takes days and is expensive.
TGR: You are now the chairman of HIVE Blockchain Technologies Ltd. (HIVE:TSX.V; PRELF:OTC). How did this come about?
FH: Genesis Mining is the largest cloud bitcoin mining company and is growing rapidly, adding 50,000 people a day, and now has more than 2 million users. HIVE has an exclusive arrangement with Genesis to operate its data centers, so HIVE offers the opportunity to invest in the cryptocurrency sector without investing in bitcoins themselves.
This rapid growth reminds me of Silver Wheaton (now Wheaton Precious Metals Corp. [WPM:TSX; WPM:NYSE]). When the company started, its streaming model was unique, and the company grew from a $3 million market cap to a $30 million market cap to a $300 million market cap to a $3 billion market cap.
The same thing is happening today in the cryptocurrency sector, but at a much faster pace.
TGR: What other changes are you seeing in the markets?
FH: Another factor is the success of the quantitative approach, which results in very low volatility. Quants have upended the market using artificial intelligence and other algorithms. Using data mining, algorithms will direct trades within seconds. Some 60% of daily trades are now quant driven, and the average holding period of a stock is about four days.
So, things are moving at a much faster pace. Here’s one example: CIBC looked at 200 case studies and found that when a company's press release had one of seven different headlines, the stock would fall 25%. But it used to take two weeks for the stock to fall; in the recent case of Eldorado Gold Corp. (ELD:TSX; EGO:NYSE), the stock fell 25% in just two hours.
TGR: What does this mean for investing in precious metals?
FH: Precious metals are still a good investment. Gold bullion outperformed the S&P 500 this year two to one. Gold is up double digits for the year. The GDXJ (VanEck Vectors Junior Gold Miners ETF) grew so rapidly that it owned over 20% of some companies, which trigger takeover mechanisms, so it had to divest itself of these holdings. Moves like that don't heal quickly and some of those stocks are still suffering.
TGR: What adjustments have you made to the changing market?
FH: This summer we launched our U.S. Global GO GOLD and Precious Metal Miners (GOAU) ETF, which is based on our own proprietary quantitative analysis. We have outperformed the GDXJ and have beaten many quantitative models as well, by a wide margin. GOAU is different because it focuses not just on mining stocks with large market caps, as many funds do, but also seeks high-quality, well-managed producers that have a proven track record of sustainable profitability, even when precious metal prices are down. We invest in companies that have strong balance sheets and attractive portfolios of active mines. In addition, companies that rely primarily on debt to finance their business are eliminated from the fund's index.
TGR: What do mining companies need to do to adjust?
FH: With the rules changing, companies need to change also. They need to be very selective with their projects. They need to keep in mind that data mining is changing the landscape and they need to tell their stories thoughtfully and succinctly. They need to move to brief presentations, similar to those you’ll see at PechaKucha-style events, where 20 slides are presented for 20 seconds each. Crowdfunding raised $50 billion last year, of that $3 billion went to ICOs (initial coin offerings).
I remain bullish on the junior mining space, but investors need to be selective.
TGR: What companies would you recommend to investors?
FH: I like Dolly Dolly Varden Silver Corp. (DV:TSX.V), which owns the Dolly Varden historical silver property in British Columbia. It has a geological footprint that should do well.
I also like TriStar Gold Inc. (TSG:TSX.V), which has the Castelo de Sonhos in Brazil. Then there is New Pacific Metals Corp. (NUAG:TSX.V) and its recently acquired Silver Sands project in Bolivia.
There is also Equinox Gold, a project of Pan American Silver founder Ross Beaty. The company is being formed by the merger of Trek Mining, NewCastle Gold and Anfield Gold. It has potential to create real shareholder value. The company will trade on the TSX Venture exchange under the symbol EQX.
Copper is another area that I am bullish on. It really is the magic metal, and is now priced at over $3 per pound. I believe in the concept of peak copper, and electric vehicles are pushing up demand.
One company I like a lot is CopperBank Resources Corp. (CBK:CSE). Chairman and CEO Gianni Kovacevic is a real copper evangelist. He actually drove a Tesla across North America to help promote his book, "My Electrician Drives a Porsche." Copperbank offers optionality on deposits.
TGR: Thanks for sharing your insights, Frank.
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.