Gold Isn’t Just for Gold Bugs Anymore
Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors, Inc.

What is really significant in my 20 years of being at U.S. Global is that the pension fund consultants and other financial gatekeepers for the first time are advocating an exposure to gold. These gatekeepers have influence over managers of many hundreds of billions of dollars in retirement funds, and they are advising a 5 percent to 8 percent weighting to gold, which is similar to the long-term allocation suggested by U.S. Global. I think this is why you are seeing such a strong underlay of support into buying the gold ETFs and why collectively at the peak, gold ETFs around the world hit $1 trillion in valuation.

We like to look at the 60-day rate of change for gold and at the money flows coming into gold. Gold was up three standard deviations and then it has corrected. This move in gold is fascinating to us because the gold stocks did not go up two and three standard deviations like they have in previous moves. That is predominantly because the gatekeepers have been recommending that pension funds, wealth managers, etc. have this exposure to bullion and bullion-based ETFs.

One of the other reasons why I believe that the gold stocks have not taken off like the price of bullion is because of gold equity financings. In the past couple of months there have been 50 deals and over $5 billion raised, and that is significant. It has basically put a short-term cap on many of these gold-mining companies that have made statements that they are going to start buying the juniors. The cheapest reserves in the marketplace are listed on stock exchanges.

Historically there is a strong inverse relationship between gold and the dollar – about 80 percent of the time when gold is performing well, the dollar is weak, and vice versa. However, since the gatekeepers have responded to the trillion-dollar-plus deficits around the world by advising a long position in gold, we have seen strength in gold and the dollar at the same time.

Part of the reason is that many hedge funds borrowed in dollars and yen, and then invested that inexpensive money all over the world. Now, in this period of de-leveraging, these funds have been selling those investments and buying dollars or yen to pay back their loans. This makes the dollar strong and the yen strong versus other currencies. There will be a point when this de-leveraging stops, and I believe that would be a big, significant factor to the dollar declining and the price of gold holding at price levels or even rising to $1,200 or $1,300 an ounce.

Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors, Inc