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Frank Talk: US Global Investors on the Gold Rally and Rise of Quants

Frank Talk: US Global Investors on the Gold Rally and Rise of Quants

Frank Holmes, CEO of US Global Investors, and one of the most experienced and successful capital managers in the mining sector, in a series of exclusive market snapshots for Miners & Investors talks about why central bank hoarding is only one of several factors behind the recent gold rally, more targeted approach from investors and how quant analysts are reshaping the industry.

On a more selective approach: Gold is part of the broader mining story: you are seeing supply side issues continue, grades are falling, and bringing new projects on stream is getting harder. Many of the managers are today more concerned about social protests than about actual gradable deposits. So while this morphing is seen in the natural flow of capital, you will see more players drop out, but those who survive this stretch will do exceptionally well, because long-term demand for metals isn’t going away.

That means as an investor, you have to be more targeted and selective. We’ve recently launched a quant-based gold equity ETF, the U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU):  Comprised of 28 names, 3 royalty companies. GOAU has performed exceptionally well against its gold peers since inception and we are very proud of this performance. It is attracting buyers that are “quant-focussed”. They are not looking for price to book value NAVs, they are looking at your income statement and balance-sheet; they don’t care about your mine life. So if you do a merger and dilute your cash flow in a cash-flow per share basis, they won’t buy your stock. That is what we are seeing today.

On Central Banks buying up gold: On the demand side, there are indeed a lot of central banks buying into gold. I believe that Modi in India started a trend of maverick leaders who make bold and shocking moves, like his demonetization, for example. Now we are seeing a hard-nosed leader in China, and Trump is actually behind the curve in this equation; in Europe – Russia, Hungary, Poland – we are seeing conservative, pro-business leaders who are pressing on the central banks to buy gold.

A trillion dollars of non-performing loans are sitting on the balance sheets of Italy, Spain, Greece – where is the underlying support for the currency? So it’s a way of providing a support base for the economies. When Turkey’s economy had a dip last year, and had to sell off some gold reserves, it was Poland that bought it. So this dynamic is likely to continue, because people are voting in more of these leaders, and that will be supportive of gold as an asset class.

On quant investors: One of the more interesting trends is the rise of quant funds and AI in investment. Old guys just refuse to embrace these tools, but young ones do. We invested in a company called GoldSpot because they are one of the leaders in AI implementation. They have scientists that do in-depth assessments of data with algorithms and machine learning at a level that non-quants simply can’t do. They are revolutionizing exploration, de-risking it. They won’t replace geoscientists, but they can significantly de-risk and speed up the exploration process. Quants will play an increasingly vital role in exploration and development of reserves, reduce costs, and also shape how the mining stocks are selected and traded.


Frank Holmes will be delivering a keynote presentation at the Mining & Investment Latin America on the 6th November at the Westin Lima. Visit www.mininglatam.com for more information or download the brochure here

 

About the Author

 Frank Holmes, CEO, US Global Investors

 

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