TIM WOOD: Welcome to the inaugural interview on Resource Investor Radio, I'm Tim Wood and joining us for this very first broadcast is Frank Holmes, chairman and chief investment officer of US Global Investors, based in San Antonio, Texas. Frank was recently a delegate to the Cr'edit Lyonnais Securities Asia Investment Forum that was held in Hong Kong and he's here to share with us some of the insights that he gleaned from the event.
FRANK HOLMES: Cr'edit Lyonnais Asia does it every year, in fact they have a couple of conferences. This is the largest one. It had over 1,200 analysts, many from the US and from Europe. It's quite fascinating to see over 300 companies and the concentration for a whole week from 7 o'clock in the morning to 7 o'clock in the night. It was intense, it was rich and it gave great perspective from how Japan down to India of what issues are critical to the countries and the whole region.
TIM WOOD: So it wasn't just China focused, it was more regional in emphasis?
FRANK HOLMES: Correct. What really was interesting was that Japan, which is the second largest GDP in the world; the thought process is that it's changed. That the inflation cycle is over and it's growing, and Japan can have a major impact in the overall growth of Asia.
TIM WOOD: In the sense of being a consumer or an exporter, or both?
FRANK HOLMES: Both. The basic recycling of yen back into the currency of the countries they're invested in. Spreading their manufacturing, going into China and then buying the products back into Japan. That's definitely the cycle that you have in the US and the idea of being able to manufacture cars and distribute them everywhere.
TIM WOOD: Obviously China would have been a big theme but we'll come back to that in a moment. Just tell us a bit more - there hasn't been as much focus on India but evidently it's growing gangbusters and I think it is probably not as well recognised as a thriving market.
FRANK HOLMES: Well there was a lot of discussion. Significantly, with India, it is a serious component of the global market. The fast tracking of policy embracing capitalism is very significant for long-term growth. When you're looking at resources then you have to key in on China. That's what I found most interesting, except when it comes to energy and China and India are both net oil importers. While their GDPs are growing +6%, there's going to be a continuing need for energy.
TIM WOOD: Is there any way that they could substitute oil for another energy source?
FRANK HOLMES: Well the least expensive is uranium and there are ways of doing that, but other countries are reluctant. I also think the biggest thing I saw was LNG it's very difficult to build a LNG port in the US, however in Asia, in Korea you're seeing LNG ports being built.
TIM WOOD: Have you made investments in LNG companies?
FRANK HOLMES: No, we have not made any directly, we are participating in LNG plants though.
TIM WOOD: The Chinese commodity boom that's going on, is it a bubble, is there anything that we need to be worried about or is this simply a case of "rational exuberance", to borrow a phrase from Allan Greenspan?
FRANK HOLMES: I think it's interesting is that most people are still sceptical, I wouldn't try to define what is wrong with China over here and once again listening to the press this morning has been invited to participate in the G7 meetings and there's pressure for them to unwind their currency. Take away the peg to the US dollar and the Japanese have said no, we keep coming back to this negative perspective of what China is doing.
TIM WOOD: It is interesting in the sense that when you seem to read the press and certainly from a commodities perspective, isn't there a sense that China is being given the benefit of the doubt in terms of its banking problems; the way it seems to be funding some of its consumption whereas there's this continual nitpicking of every aspect of the American economy, looking for faults?
FRANK HOLMES: I think there's nitpicking everywhere. I think that there's a tremendous war on capitalism. That's how I feel in listening and watching the press and everything's wrong in America, everything's wrong over there. Rather than trying to find out what's taking place, I think it sets up the precedents that you need more rules and regulations, more and regulations in every sector. What you did see in Asia compared to here is that it is the rules and regulations if you're going to stifle economic growth and job creation you've got to change something. The pendulum is to deregulate in a cautious approach whereas North America is re-regulating everything and I think that that's one of the differences in global economic policies.
TIM WOOD: Frank to what extent is this Chinese demand for commodities a factor of loose American monetary policy and the fact that China is buying US bonds to maintain the current currency parities?
FRANK HOLMES: The biggest buyer has been Japan. Japan has been by a wide, wide, wide margin the biggest buyer of US debt, last year, earlier this year in fact Russia was buying US debt too along with the Chinese but I think they're a significant trading partner, exporting cars, companies like Nissan is the second biggest company in America now, that currency swing difference is significant for them.
TIM WOOD: If you were an retail investor, how would you get into China without getting yourself into trouble?
FRANK HOLMES: You can buy eight shares which list on the Hang Seng Index which basically are more liquid, there's more disclosure and you're Jhenshi Copper is one of the top resource buying investments, it's the largest copper gold producer in China. It's extremely volatile, it went from the low of a dollar Hong Kong to five, down to 2.10 and then back up to almost five again. But that's, as I said a major share that remains very liquid. You can buy the ADRs in the US if you're looking at individual stocks or you can look for professional money management and look at our funds, we have China Region Opportunity Funds which invest in the region exclusive of Japan.
TIM WOOD: And in that conference, which particular speaker stands out in your mind as having delivered the best address - something to take away that you can apply in your business?
FRANK HOLMES: You know to me it was fascinating the spectrum of speakers were very invigorating and challenging. There were speakers on terrorism, Harvard Professor Stern has recently written a book and has interviewed over 100 terrorists around the world and talked with that as an issue for economic growth. Then they have someone that's anti-global that's attacking MacDonald's, he's written a book on it, Fast Food Nation, addressing that. These were all very diverse and fascinating comments and then there was a professor from Harvard, a speaker that talked about disruptive technologies and processes that all of a sudden old economies and sectors have become redundant very quickly. What I thought was fascinating was that applies to the Asia and "Chindia" [China + India] as a group versus the North American model, has that been disruptive and looking at a new industry such as Dell Computer was disruptive to Compaq when it made computers how fast they grew is Asia's growth model and basically the fact that Asia, when GDP falls below 6% they panic. In America when GDP grows more than 6% they panic. So disruptive technology was fascinating in applying it to Asia. The most probably entertaining, witty provocative directly dealing with Asia was Marc Faber's presentation, it was absolutely spectacular, his delivery, his insightfulness and the position he took. He was the head of the Chinese government and he was commenting on how the war against America will be fought economically because America's superiority was military force so they're going to do it economically. That was very, very witty and I think that shocked a lot of people, how they were assessing the differences. I also think the speaker that stirred interest, an equity strategist, his perspective is that you should be having 15% of your investments in bullion, that shocked everyone in Asia; 10% in unhedged gold stocks and then 50% in Asian stocks.
TIM WOOD: Frank, mixing with all those fund managers, I presume you were in the minority in being fairly au fait and comfortable with resource investments. What do you think the view was by the time the conference had finished, the consensus attitude if you will, towards resources and particularly the precious metals?
FRANK HOLMES: We saw a great presentation on the global economic growth and the need for a commodity such as nickel, it was a great presentation so you saw a lot of interest all of a sudden filter into the other industries. There's still cautiousness as Posco [PKX] basically said, China sneezes and they catch pneumonia so there's a cautiousness but what you did see is market buy-ins and money flowing into the resource sector was extremely strong two weeks ago Friday.
TIM WOOD: so it did have an impact, excellent and obviously you've just come back from the Denver Conference or the Denver Gold Forum rather. Again, no new projects really of any size that we saw brought to market. Anything particular that stood out for you at that forum?
FRANK HOLMES: It was subdued. I thought that was interesting. Policies for a gold company - Newmont is using credits from their copper production to lower the overall cost of production as the gorilla of the industry. That's a significant trend and in fact showed the genius of Seymour Schulich and his ability to look at a company as a portfolio which he does, all these different types of gold mines are a portfolio. To hedge higher oil prices and that was a big concern that every dollar rise, the recent rise in the price of oil is going to affect it by $10 of cost of production, Seymour's going into a company Newmont focused on energy and having a massive energy project in the tar sands. I thought that was brilliant, they've already realised about $60m of asset growth and he did a fantastic job in building Franco-Nevada. Seymour is a great strategist and Pierre Lassonde; both of them were extraordinary money managers and they're applying those financial disciplines to the portfolio of investments at Newmont. What that does is because it's the flagship it sets a trend for other people to emulate and reassess what they're spending their capital on. So I thought that was quite interesting. There were some juniors that had interesting results, exploration results. Coeur d'Alene dropped its bid takeover for Wheaten River and that was a relief so we saw a big lift in Wheaten shares and I think things like that in the conversations that were taking place.
TIM WOOD: Well that's all we have time for today. Once again that was Frank Holmes, chairman of US Global Investors which is based in Texas. Thank you for joining us today Frank.