INTERVIEW: Watch Energy Prices, Food Inflation – Frank Holmes

INTERVIEW: Watch Energy Prices, Food Inflation – Frank Holmes

08 March 2011, 1:49 p.m.
By Debbie Carlson
Of Kitco News

TORONTO (Kitco News) -Frank Holmes, chief executive officer of U.S. Global Investors, said it’s important to keep an eye on crude oil prices, which have been rising during the current unrest in the Middle East. He also said it’s necessary to watch food inflation as rises in price for food can spark social movements.

Holmes was interviewed by Debbie Carlson of Kitco News on the sidelines of the

Prospectors & Developers Association of Canada.
Even though China might be slowing its economy, that shouldn’t necessarily hurt gold prices, which he said will continue to trend higher, he said.

An edited transcript follows:

The interview:

DC: The mining industry is enjoying a boom time with prices at record highs and values likely to stay high. But there’s been talk that costs are rising whether its labor or energy – what are the headwinds for the industry?

FH: The three factors – energy is a real, significant factor. Currency volatility can have a big impact on profit margins. For instance, there’s a time to buy South African gold stocks and there’s a time not too. In 2002, the best-performing gold stocks were in South Africa because the rand was weak. The following year, gold went up, but they were the worst performers because the rand went up faster and wrecked their profits. It’s also important to watch government policies in emerging markets. 

DC: We’re starting to see interest rates creep up with China and India raising rates, and last week European Bank President Trichet talked about the possibility of the ECB raising rates. Is that something a precious metals bull needs to worry about?

FH: Two percent real interest is the key. The math says its 2%. Over many, many countries you have to offer more than a 2% deposit of real rate of return. Then commodities as whole start to slow down as a fear-trade hedge. It doesn’t slow down the emerging market demand cycle, the love trade. What’s important for the love trade is that incomes are rising on a per capita basis. I don’t see real rates rising any time soon. (Rises in) a few isolated places are not material. I can’t see the U.S. going to 3% T-bill rate, especially with gas jumping up to $4 a gallon. That’s a precursor to an economic fiasco.

DC: Do you look at the Treasury Inflation Protected Securities for a sense of how Treasuries might be reflecting underlying inflation?

FH :We look at the TIPS to a certain degree. They’re interesting to look at to validate the thought process. But it’s a percentage of the deficit that is entitlement programs that is a key factor.

DC: You probably have a better understanding of social unrest than most from your work as an adviser with the International Crisis Center. I’d like to get your thoughts on the unrest in the Mideast & North Africa. What does the mining industry need to understand about what’s going on there and how can they apply those lessons?

FH: I think that the issue is how much is Iran causing trouble because Brent (crude oil prices) is $20 higher than sweet Texas (crude oil prices) and it gives them a decoy from their own social problems and it gives them lots of currency. They’re classic global market manipulators. The Shias causing trouble with the Sunnis in Iran, how much of that is money coming from Iran to instigate those groups? You can’t rule out this factor.
I believe Al-Jeerza has had a significant impact. A lot of (people) North Africa and the Middle East didn’t believe that the BBC and CNN. (They believed) that they were biased. Didn’t matter what their rhetoric was, they didn’t believe it. Along comes a knock off of CNN, and there’s credibility. And that poor young kid is seeing America in a different light. They see Canada, they see Dubai, they see China on their nightly TV programs and go ‘wow, what a beautiful city, I want that too.’ They see kids with all their toys, etc. I think that’s been a real key factor in waking up youth (who) want change. The real sensitive part for mining companies is food. Food inflation started the French Revolution. Tiananmen Square (protests in 1989) was over food inflation. The Chinese are always fearful of this. The two pillars (for China) are peace and prosperity. Policies for peace – if you have food inflation you disrupt the peace, the harmony. That’s what we saw in Northern Africa. The envy of seeing their leaders having all this money and they’re starving for food. They’re watching television - there’s something better over there. That’s a key component. If the Iranians aren’t causing trouble, then you can have a positive creation for change.
In Libya it’s different. There’s a political vacuum. It takes time to groom politicians, just like it does athletes. You can’t say, let’s have a democracy tomorrow and think things will work out. You have to have the intellectual athleticism for political parties to debate and process. That’s one thing that makes me reluctant that that’s nirvana.

DC:  Where do you see gold prices going this year?

FH: I think gold went through its correction. After the Chinese New Year was over all of a sudden demand started picking up. We have to be careful if the Chinese GDP slows down from 11% to 7% will that impact the bulk of the population? If it doesn’t, if they (workers) don’t see salaries drop, then you’ll have a healthy gold trade. The rise of the middle class is significant. China is very sensitive over the migrant workers. They pushed through salary increases. Now they’re trying to push for co-op housing. That’s 1 million units a month they’ve proposed. That’s 12 million a year. Do you know how much copper is needed for that? How much zinc, iron ore? It’s just unbelievable. They’re very small apartments; they’re maybe 40 square meters by 80 square meters.  But now they have a chance to buy something, they can afford it. It’s a co-operate arrangement.
China is doing policies for hope. That’s the real magic. You’ve got to look for policies for hope. You have to look for governments that have policies based on hope and not policies based on fear. I think some countries where we saw the rebellion they felt humiliated by their own government. No longer could they blame Europe or America, it was internally.

DC: What are you watching this year? What do you think will make 2011 different from 2010?

FH: The reflation of the stock market. Historically the third year is the best year. It might get slowed down by the rising of fuel. 2012 is going to be more challenging year. But the stock market is on.

DC: What is your forecast for gold?

FH: Gold can easily rise $200 from these price levels. I think over the next five years gold will double and grow at 15% compounded.