Frank Holmes Exclusive: Bitcoin Needs Electricity, Gold CONDUCTS Electricity

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Mike Gleason: It is my privilege now to welcome in Frank Holmes, CEO and Chief Investment Officer at US Global Investors. Mr. Holmes has received various honors over the years, including being named America's Best Fund Manager for 2016 by the Mining Journal. He is also the co-author of the book The Goldwatcher: Demystifying Gold Investing and is a regular guest on CNBC, Bloomberg, Fox Business as well as right here on the Money Metals podcast. Frank, welcome back and thanks for joining us again. How are you today?

Frank Holmes: Excellent. Thank you, my friend. Thank you.

Mike Gleason: Well, to start out here, Frank, I know you recently attended and spoke at the Denver Gold Show and I always like to talk to insiders like yourself following those sorts of events because you can always glean some good insights on the mood of the industry and how things are really going in the precious metals community. Now the mining industry has taken a pretty good beating over the last few years and it continues to struggle a bit even as we seem to be in a new bull cycle that began in late 2015. You've got your new gold fund now, GOAU, so you've got lots on insights into the mining industry and know lots of gold bugs. So, what did you glean from the conference Frank? What was the mood in general? Give us some highlights there if you would.

Frank Holmes: Well I think my presentation was well received when I explained how the quant world and data mining, and these other what they call alternative investment research companies, are providing new insight the way investing is taking place. Understanding the paradigm shift on that data collection and that analysts love their old reports on mid asset value, are irrelevant. They're not relevant to picking stocks today. And you have to go with the forces of physics either as electromagnetic rebounding to the mean is a cheap stock and math says it will rebound or has strong momentum. And you can take a universe of 88 gold stocks and take it down to 28 and far outperform the GDX or GDXJ.

Using data that was foreign to a lot of these analysts and recognizing ... the other thing I think worth commenting on was gold and this whole thing on Bitcoin, is it a competition for bullion? It is not. First of all, without electricity Bitcoin is not worth any money. It needs electricity. Gold is always gold. It conducts electricity and it will always have its materiality for currency in addition to being jewelry. But I think that's really important is to recognize that it's so much easier, this idea of crowdfunding, to go and open up an exchange and trade 24/7 all these different currencies all around the world than it is to open a brokerage account. And I think that this excessive regulations is basically seeing people migrate over to angel investing, crowdfunding such as into cryptocurrencies, et cetera. And I think that's the bigger danger is to overall investing in trading in the capital markets. So, they're the comments that I made and that seem to have come back with many written messages to me regarding the quants and how they're changing the landscape.

But I think the other part that's important for your listeners is that there were 1,100 people there. Now they don't allow investment bankers in. Research analysts, traders, CEOs, gold analysts from the buy and sell side, they're allowed to participate and there were 1,100. The week before there was a big event for the juniors (junior miners) but this event is the premiere event of the world. And I was impressed with it. The conversations looking for companies that are going to be taken over. What's the probability? Because the seniors are desperate for future production and where is that growth going to come from because they're just not finding the gold as fast as they're mining. So, the Newmonts of the world have to go and strike deals like they did with Continental in Columbia to get a foothold into high grade big geographic footprints. So, I thought that was interesting. I think that in the next 12 months there's going to be lots of M&A work. And the other part was the royalty companies seem to get a new sort of respect for how their positioned in the capital markets in that gold space.

Mike Gleason: Yeah definitely. Sounds like there is a wave of optimism there and some good things ahead. Now I wanted to get back to some of the cryptocurrency conversation here. Your firm, Frank, US Global Investors, recently made an investment in HIVE Blockchain Technologies and you have been appointed chairman of the board there. Given you are heavily involved in the cryptocurrency space now, we'd like to get your take on a topic of growing interest in the metals community. You alluded to this a moment ago but cryptocurrencies, Bitcoin in particular, have been seen by many as another form of honest money. You've obviously maybe shot a little bit of a hole in what it is that is needed in order to continue the cryptocurrency world, that being electricity. But since you’re a fan at least in part of both metals and blockchains. What are your thoughts on how metals might fit in with this emerging technology, Frank?

Frank Holmes: Well let's just focus on this emerging technology. We go back to the internet and it was actually very boring when it first come out because it was very slow and it used to be a joke that it was just porn and dark things. And now it's fast porn. No, I'm kidding. But the real catalysts for the internet exploding in usage were emails, AOL. And long before Yahoo came out to give you free email. And then people saw the incredible capacity for this channel of distribution of information. Well I think that the Bitcoin and Ethereum are doing that for blockchain technology and that there's a huge scramble to be able to apply this so that you'll be able to trade stocks 24/7.

And when I was doing my research and I went to the largest cryptocurrency event, that used to be where the gold show used to be held in New York at the Marriott. I was just shocked to see how many young people were there. Many more than ever when gold was peaking. And two is that they weren't drinking scotch and whiskey at the bar and beer, they were drinking Pepsi and coffee. That really threw me off to just watch those young people and how they're looking at it. And then to find out that the keynote speaker was a CEO of Fidelity. Fidelity is a massive multi-trillion dollar asset management company and they have all their employees on Bitcoin. They have a wallet and you can buy goods in the store. And seeing that she's the keynote and that the New York Stock Exchange when it was launching GOAU they were commenting that they had put money into Coinbase along with USAA in San Antonio.

So, at Coinbase you can open an account so easily and they will now let your 10,000 or 50,000 or 100,000 of coins show up as an asset over all in your portfolio. USAA and all that should do that at Fidelity. So, I said well it's something really that's not mainstream and then in the summer it came out in the Wall Street Journal that Fidelity is doing it. But really it didn't seem to captivate a lot of people's interest. And I think that the big part with the New York Stock Exchange is just their worry of being Uberized the way taxi cabs were with having stock trading 24/7 and a lot cheaper.

So, I think that that's the big trend and along I was trying to launch a cryptocurrency, ETF, or a product with that and I just kept bringing up cul-de-sacs. Had to back that car out, back that truck out. It didn't matter if it was the U.S., the SEC, or Canada with the OSC. They're just so consumed that AML (Anti Money Laundering) supersedes, even though you can track Bitcoin, supersedes anything else. So that's why you've not seen anything come out directly where you can trade Bitcoin into an ETF.

So, I've been working on this and then all of the sudden I hear from my friend Frank Giustra saying, "Look, we have this deal. Do you know much about this space?" And I said "Oh, yes. I've been working on it. And I just keep running into cul-de-sacs." And he said, "Well, why don’t you explore it” and explored it and I said, "You know what, I'll be come your third biggest shareholder, and I will go on the board,” because I think that HIVE is so special and unique because it's the mining business.

And the company behind HIVE is Genesis Mining and Genesis Mining is the largest cryptocurrency miner in the word. They have a million people give them 500 bucks a year and one of the things I learned was that if you want to do mining of cryptocurrency you need to have cheap energy like two cents a kilowatt hour. So, you find that a lot of these big dealer centers are in Iceland where it's cool and you have cheap electricity. Google is there. Facebook is there and so is Genesis. And you need to have computer graphic cards because the processing power to validate a transaction. So, you found that NVIDIA stock has taken off because the cryptocurrency companies like Genesis have been massive buyers of their computer graphics cards.

And so, with that, I said, "You mean, we're going to be investing in a company that's mining and validating transactions all over the world, and we create new coins, fresh coins, mint coins, virgin coins” … however you want to characterize them. We are not trafficking on the silk road. We are not buying and selling a coin that could have been painted et cetera. No. We're the creator because we validate transactions and you get paid every time you validate a blockchain transaction. So, I became extremely excited about this opportunity and so far, we've made for our shareholders more than 500% on their money.

Mike Gleason: That's fantastic. Now I'd like to get your take on the U.S. dollar. The dollar had a miserable performance through the first eight months of the year and bottomed in early September at 91.5. The greenback then bounced and has enjoyed a very good rally since then. What is driving this rally in your view and are you expecting the dollar to keep moving higher in the months ahead, Frank?

Frank Holmes: Well, historically it does get a bit of a rally going into the year end. That's one. Two is the 5-year government bond. The 5-year government bond is positive now, the yield. So, the CPI number is 1.9 and you just take whatever the government is trying to entice you to buy their 5-year government bond, subtract the CPI number… it recalibrates every month and it gives you a good idea for where fund falls are going for real rates return. And whenever the five year government bond and the two year government bond are negative, gold is positive. And so, we went from a 1.4 to 1.5 5-year government bond to a 1.93. Now it's just slightly positive but that was enough to sort of have the dollar rally and gold come off in the past month.

But I think that unless you really get change, you get fiscal change, trying to get the tax code streamlined and trying to get other parts of the legislation body in its Beltway to streamline regulations. We need to have the TSA preferred, how you can fly much more quickly now, rather than those two hour waits to fly and to go and catch your flight. You know most people in San Antonio were driving to Houston rather than going to wait two hours for an hour flight. And so, you're seeing now this TSA preferred. That's just streamlining processes and this has to be done for the movement of money, for opening a trading accounts, for opening up investment accounts, et cetera. If we don't get those things, we're going to have to have negative real interest rates to keep the economy going. Or you're going to have to a very weak dollar to drive exports.

And I think that Trump has been a master disrupter. He's so disruptive to the Beltway Party, which is the regulatory regime that's been their professional regulatory. I've listened to other people like Bernanke spoke about the difficulty for Jimmy Carter and Trump to take on the Beltway Party. But he's different and so he's trying to push for the streamline of regulations. If he can, rates can trade higher and I think that the dollar will just trade with the real interest rates relative to the rest of the world.

But I remain very positive on gold. It's amazing to see how well gold has done this year. The gold stocks have had a great run until the GDXJ blew up. Basically, they captured 95% of all fund flows. Therefore, they had to be concentrated owning more than 20 companies 20% means they had to do a force takeover. They had to back out of that one and they blew out three billion dollars. They brought in five billion dollars over 12 months and then they did an exit in only a matter of weeks of three billion dollars. And that really damaged the bid side and bruised people. It's like getting hit by Mike Tyson. You just don't heal quickly when he hits you and it's the same thing with the gold stocks. But I think there's some just fabulous gold stocks out there that are ripe to be taken over, that have very strong positive cash flow. The weaker dollar in the U.S. and the higher gold prices, there's very strong margins for companies like Klondex.

Mike Gleason: Yeah, certainly can be interesting as we go towards the latter part of the year here to see what might be sustained in this correction in gold or if it can rebound and get back to where it was maybe a month ago or so. We did have a good first half of the year in the metals but the markets obviously have hit some of those headwinds here recently, a rising dollar and so forth that you alluded to. If you would, give us your bull case for metals in near term and then also if you would maybe a bear case as well and then kind of expand more on which side you're betting on, as we begin to wrap up here.

Frank Holmes: Well, there's the two drivers for gold: love trade and fear trade. And the fear trade dominates the psychic of Americans and the same thing with Europeans in that’s predominantly negative real interest rates. So, whenever the government has to monetize most of their debt, and basically negative real interest rates are losing money and buying their government bonds, gold does well. I don't think that they can raise rates significantly without a massive streamlining of regulations and the government is doing everything to try to stop Trump from doing that. So, I think we're going to end up still living with negative interest rates.

Now, the other positive part, for the U.S., is that the dollar is down but the exports are up. So, we have our strong industrial base. And it's showing up in PMI, that's Purchasing Manufacturer's Index, which is a forward looking index. It's not like GDP, which is looking out the rear view mirror. This is like looking with headlights looking down six months. And the one month is above the three month, and that's really positive for global growth. So, I remain positive and constructive towards it. What could derail it? North Korea could derail it. China's policies could derail it. And I think that if rates were to surge dramatically in the U.S., that could derail it.

But I don't think that's going to happen. We're in a very constructive mode and it's a great opportunity for stock picking. I just spoke at a conference in Vancouver yesterday, and I commented on ... By the way, I commented on HIVE. I was asked and I said, "You know, if you're a value investor, HIVE is extremely overvalued.” But if you are a first mover advantage in the first public company where funds can go by and get exposure to crypto-mining. It is not. It's like Tesla, it's like Amazon. They will always trade at lofty valuations. And so, it's extremely attractive that way when you look at it as being first mover advantage.

Mike Gleason: Well that's great stuff as usual. Thanks as always for joining us. It's a real honor to hear your thoughts and we appreciate your time as always. Now before we let you go, please tell our listeners a little bit more about your firm and your services and then also mention the Frank Talk Blog so people can learn more about that if they're not already checking it out.

Frank Holmes: Well, we are USfunds.com, makes it so easy, just go to USfunds.com, sign up for investor alert. It's right in the middle of the page. And we write every week and we do a game film analysis, three strengths or weaknesses for last week and opportunities and threats that can come out next week. Sort of forward looking like game film and looking back.

And the Frank Talk is my global travels and I try to be insightful and learn about how we've applied quant math. What's called quantamentals to stock picking. And especially we launched our GOGO Canadian gold ETF and we've launched one here in the U.S., which we're really proud of because the ten year index based on those smart factors, both performs of GDXJ say 94% of the time are rolling 12 month periods. So, we think that GOAU, we'll write about it, we'll tell you about the changes. And we also have unique products like JETS which is also an ETF listed on the New York Stock Exchange.

Mike Gleason: Yeah, it's great stuff. Certainly, the Go Gold fund is looking very good from what I've been reading about. Obviously performing just as you were hoping it would and continued success there. We always appreciate it and good luck with the other endeavors that you have going on and keep up the good work on those market commentaries and we'll certainly look forward to our next conversation. Take care, Frank.

Frank Holmes: Take care, my friend.

Mike Gleason: Well that will do it for this week. Thanks again to Frank Holmes, CEO of US Global Investors and manager of the recently launched GOAU Gold Fund. For more information, the site is USfunds.com. Be sure to check out the previously mentioned Frank Talk blog while you're there for some of the best market commentary you will find anywhere on gold and other related topics. Again, you can find all that at USfunds.com, and you can also go to GOAUETF.com for more information on that new gold fund.

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Mike Gleason

Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 50,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.

Pure gold is so soft that a strong man can squeeze it and shape it.