Hedge Funds Review talks to Frank Holmes, CEO and chief investment officer of US Global Investors and investment team leader for the Meridian Global Gold and Resources Fund, about prospects for gold.

“I’ve always advocated that people should consider 5% into bullion and 5% into unhedged gold stock and to rebalance,” explained Frank Holmes, CEO and chief investment officer of US Global Investors. He was talking about how investors should evaluate the difference between putting money into a hedge fund with exposure to gold compared with gold exchange traded funds (ETFs) or commodities (ETCs).

Holmes is also investment team leader for the Meridian Global Gold and Resources Fund. The investment adviser to the fund is US Global Investors, headquartered in San Antonio, Texas. US Global Investors was established in 1968 and now manages over $2.5 billion in offshore accounts and US mutual funds specialising in gold and natural resources, emerging markets and global infrastructure.

The fund, with just over $30 million in assets under management, invests primarily in a diversified portfolio of junior and intermediate companies involved in the exploration, development, production and transportation of gold, silver, diamonds, and other precious and base metals as well as energy-related resources such as oil, gas and coal. Since inception in August 2004, the fund has achieved an annual compounded rate of return of 37.7%.

On the subject of a gold bubble, Holmes dismisses the idea. He believes bubbles occur when there is innovation, people then copy the innovation and leverage to exploit it. “In 1980 when gold went to $850 an ounce from $400 in a short time it was done on the futures market. It was very leveraged. Most of that run was built on fear but the leverage was 10-20:1. When buying ETFs the margin is 2:1, if there is a margin. A lot of pension funds are diversifying into it. It’s a cash trade. So you’re not seeing this huge exponential move like you’ve seen in previous bubbles,” he explained.

Holmes also believes the ‘love’ trade for gold has been a stronger story than the ‘fear’ trade. His interest is in the “huge structural change” he expects to see.

“Look at the Middle East. If you have rising GDP per capita, you have rising gold demand. That’s the love trade. Of these two trades to gold, most attention is on the fear trade. But the love trade is a much bigger component. So what you find is that gold bottoms in August every year for the last 30-40 years. Why? Ramadan is the tipping point,” he said.

Gold for religious holidays, birthdays and for presents to loved ones, has a strong impact on gold. Last year the Diwali season and quantitative easing two (QE2) happened at the same time creating what Holmes calls a “traffic jam: fear and love trades at the same time".

He adds: "The love trade is highly correlated to two things: cultural affinity and rising GDP per capita. So if North Africa and other parts of Middle East start to see rising GDP per capita, then I believe we’ll see strong demand for gold.”

Looking ahead Holmes forecasts a doubling of the gold price from current levels to around $3,000 in 2016 with oil rising to $200 a barrel.