HardAssetsInvestor

Written by Lara Crigger  |

September 04, 2009

Frank Holmes: A September For Gold

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The CEO of U.S. Global Investors shares his views on gold investing.

• What drives September's price spike
• Which miners he likes right now
• Why deflation is just as good for gold as inflation

 

If history's any judge, fall is a great time to be a gold bug. Over the past 16 of 20 Septembers, the gold price has gone up, says Frank Holmes, CEO and chief investment officer of  U.S. Global Investors, an investment adviser managing 13 natural resources and emerging market mutual funds. On average, he says, gold rises about 2.5% over its August price – not too shabby. But will it be enough to break $1,000 for good?

Mr. Holmes, co-author of "The Goldwatcher: Demystifying Gold Investing" and Mining Journal's 2006 Mining Fund Manager of the Year, often writes about gold stocks for his blog "Frank Talk." He's a regular voice on CNBC and Bloomberg TV, and has been profiled by several publications, including Financial Times, Fortune, Barron's and more.

HAI associate editor Lara Crigger recently spoke with Mr. Holmes about gold investing, including what drives the September spike (and the October correction), which miners he's got his eye on and why deflation is just as good for gold as inflation.

 

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): Historically, September is the best month for both gold prices and gold stocks. Can you explain what drives this trend?

Frank Holmes, CEO & CIO, U.S. Global Investors (Holmes): There are several factors that contribute to good times for gold stocks and bullion. Basically, the stars are all aligned, especially for jewelry and financial.

First of all, let's deal with the jewelry demand. Right now kicks off what I like to call the planet's most potent gold demand drivers. The rainy season is over in Thailand, Vietnam, Bangladesh, India, and people have started going out from the village and buying gold. So you move into the post-monsoon wedding season. Then you have Ramadan, the big Muslim holiday, and gold-giving is very significant during Ramadan. Then, in November, is Diwali season - it's extremely festive, the Season of Lights. There's a tremendous amount of gold gift-giving, like for Christmas time. And then there's the restocking that happens in advance of Christmastime by retailers in the U.S. and Europe. After that, it's the Chinese New Year, which peaks things out by February.

The stronger September is, however, there's usually a big correction in October.

Crigger: Why is that?

Holmes: The dollar, which is the financial component in this equation. Going back over 20 years of data, looking at the correlation on weekly price movements, you see that there is a 70% inverse correlation between the direction of the dollar and the direction of gold. So September and December are two months of the year where the dollar is weaker, although last year was a bit of an anomaly.

Historically in September, the U.S. market is down. But what's interesting is that lately, we've seen the market's actually doing better when the dollar is weak. The market corrects - including even gold - when the dollar is strong. Why is that? Because a weaker dollar helps us export.

So people say that a weak dollar is good for gold, so it's bad for America. But now, it's a weak dollar is good for America and it's good for gold! That's the shift we're seeing.