The veteran investor believes that the current market presents an opportunity for investors to diversify and bolster their portfolios.
The price of gold rocketed 3.8 percent over the long weekend, climbing from US$1,680 per ounce last Thursday (April 9) and opening as high as US$1,745 on Tuesday (April 14) morning.
Massive job losses in North America and seemingly never-ending stimulus packages have contributed to the yellow metal’s allure since the beginning of the month.
Since April 1, gold has increased 10.7 percent and is expected to move higher, driven by adjusted guidance from miners, along with mine and refinery closures.
Frank Holmes expects coronavirus-induced lockdowns and project shutterings to lead to significant supply disruption in the short and mid term.
“There’s no doubt a production slump is going to happen,” explained Holmes, who is chief investment officer at US Global Investors (NASDAQ:GROW). “For the majority of (gold producers), they’re going to have to do a reset, but the stocks have all basically recalibrated down to a lower multiple for that.”
Holmes went on to note that a good barometer for investors to use when evaluating miners today is the amount of free cash flow the company has on hand.
“If you just look at the stocks that had the highest free cash flow on the S&P 500 (INDEXSP:.INX) and you separate them, they fell substantially less,” he said. “So that means those companies that have free cash flow can weather this massive economic slowdown better; they can also turn on a dime rising up.”
For example, Holmes pointed out that Newmont (TSX:NGT,NYSE:NEM) has a 4.5 percent free cash flow yield, and while it is ramping down output it will likely fare better than some of its sector counterparts.
In terms of mid-cap companies, the market watcher sees value in Gran Colombia Gold (TSX:GCM), which he believes will do well in the market correction.
“They had six months of supplies for everything,” Holmes noted. “Their production still will come off slightly, but nothing compared to so many of the other producers in the world.”
When asked about whether the market turmoil could result in mergers and acquisitions, Holmes made several key observations.
Citing a presentation earlier in the year by Barrick Gold (TSX:ABX,NYSE:GOLD) CEO Mark Bristow, Holmes stated that peak gold is here and people have to appreciate it.
Unlike peak oil, which was reversed due to fracking, Holmes doesn’t see a technological disruption occurring for gold — in fact, he said the oil cycle is much shorter than that of a mine.
“I don’t think you’re going to get big supply coming out. And I think investors have to take a look at what happened to palladium,” said Holmes. “We had five years of palladium supplies shrinking, shrinking, and all of a sudden we have an upturn in the cars that (caused) 2 to 3 percent growth every year, and bingo it goes to US$2,700. Well, gold can easily go to US$2,700. And it will ignite all the juniors.”
The veteran investor also pointed out that the current market presents an opportunity for investors to diversify and bolster their portfolios. Most notable for Homes is the “unprecedented growth” that the US Global Investors Jets ETF (ARCA:JETS) has experienced.
“It was languishing going nowhere,” he said. “Then Trump came out saying he’s going to bail out the airline industry, and it fell 60 percent and US$300 million came into our ETF. So it went up 600 percent in assets … this used to trade 15,000 shares a day, and now it trades a million a day.”
Silver, which experienced a steep price drop in mid-March, has exhibited strength, climbing 13 percent since the beginning of April. Holmes expects the white metal to maintain its upward trajectory as supply issues create a silver coin shortfall.
“As gold starts to ratchet up and go through the US$2,000 level, then all of a sudden silver will be in big demand,” said Holmes. “The physical demand for gold (increased) as you saw because refineries shut down in Switzerland — I think that we could see a shortage of physical supply of silver coins going into the next two years.”
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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.