Frank Holmes, CEO and chief investment officer of U.S. Global Investors, stopped by for Wednesday's edition of Benzinga's PreMarket Prep Morning show to talk about two areas of his market expertise: airlines and gold. The two industries are both seeing one of the better rallies in the market and Holmes provided some valuable insight as to why, as well as whether these trends will hold out.
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Over the past eight months, airliners have maintained on of the most consistent upsides of any commercial sector, particularly when compared to the industry's spotty track record. Holmes acknowledged the disparity, specifically in analyst and fund manager sentiments. He elaborated: "It's actually much better than what a lot of the headlines were, especially in 2016 when Warren Buffett in the summer was buying out his big core position, which was a game changer in the industry. There was nothing but negative headlines from analysts. Now we're seeing growth up 6 percent, 7 percent."
He pointed to successful piloting by company management away from volatile markets and toward regions with strong consumer growth and confidence. "The slowdown in Europe last summer after Brexit,' Holmes explained, "immediately Delta changed their flight schedules of flights going over the Atlantic and focused more on the growth in Asia. They're dynamically adapting to global issues."
Holmes whose own management firm started the JETS ETF (U.S. Global Jets ETF (JETS)), which covers a wide range of commercial airliners cited the broad scope of the industry's expansion, "It's pretty robust, overall global growth in revenue in the industry." He specifically lauded the sharp upward trend in Alaska Air Group, Inc. (ALK) as well as the consistent performance of Southwest Airlines Co (LUV), Delta Air Lines, Inc. (DAL), and American Airlines Group Inc (AAL).
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Holmes was equally bullish on the price of gold, which has been on a steady climb since the start of 2017. Much of that, Holmes claimed, has to do with interest rates: "I think going into the last quarter a lot of people worried about rates rising and what would be the ramification after the rates had risen. All of a sudden gold takes off."
But that isn't the whole picture. According to Holmes, what gold investors should keep in sight is negative real interest rates, which fuel a fear trade that boosts the price of gold. He stated: "last year when gold soared 24 dollars, that's when it went most the negative real interest rates. Then [the real interest rate] started to go positive in the fourth quarter, and now it's negative again. That's always good for gold. It's a play on the dollar, it's a play on the CPI number. Gold is the fourth most liquid asset in the world, it's the alternate of money, so it has a relationship to the cost of money."
Most critically, Holmes believes the rally in gold still has some steam due to a prolonged stint of cost-cutting on the part mining companies, saying, "I don't believe it's over, and if you look at some of these gold mining companies that got their costs down from $1700 an ounce all the way down to $900, this ratcheting up is throwing out buckets of free cash flow."
Tune in at the 16-minute mark to listen to the full discussion in the track below.
Listen to the full discussion in the clip below.
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