Fifty shades of gold

It’s not only about job growth. Housing is also not rebounding as strongly as some people think. I told Reuters that many people don’t realize that the real estate market boom has been narrowly focused. According to USA Today, almost half of the homes purchased in July were bought with cold hard cash. In places like Florida, “nearly two-thirds of home sales were completed without a mortgage loan,” says USA Today. In Nevada, about 65% of buyers paid with cash, followed by Maine, where nearly 60% of house sales were cash. Perhaps regulation in the banking industry has made the process of getting a mortgage too burdensome for families?

Housing is one of the biggest multipliers for jobs, where $1 spent in housing results in about $16 in related economic activity. When interest rates are low, more people apply for mortgages. They build houses, employ moving services and buy new furniture, which in turn employs more people in multiple industries.

But after interest rates rose quickly, the housing market came to a halt. People who once qualified for a mortgage to build a new home no longer qualify at the higher rates, meaning a potential inventory of new housing may quickly build.

At the same time, big banks are announcing layoffs in mortgage lending. Just today, Wells Fargo announced it was going to lay off 1,800 employees as refinancing activity continues to slow. The company had already told 2,300 workers to stop coming to work as rising interest rates curtail demand for new mortgages and refinancing.

So instead of the Fed quickly tapering its bond purchases and raising rates, this process will likely be very gradual. I believe the government will have to keep interest rates low to stimulate the economy.

And that’s positive for equity markets as well as for gold. If interest rates remain low, real rates could remain in negative territory. In my presentation on opportunities in resources and emerging markets, I told the crowd at the Toronto Resource Investment Conference that 2 percent has been the tipping point for gold. Historically, gold and silver performed well in a low or negative real interest rate environment.

Regardless of where analysts think the gold price will be a year from now, we believe gold and gold stocks can be an excellent portfolio diversifier. We’d rather hold quality gold companies that are experiencing a growth in resource base, growth in production and growth in cash flow instead of trying to time the market. Our in-depth analysis helps our team seek the best returns for our shareholders.

In-depth analysis is why we’re headed to the Denver Gold Forum. Portfolio managers Ralph Aldis and Brian Hicks as well as one of our analysts, Sam Palaez, will be attending, meeting with some of the new CEOs about the state of the gold mining industry. I look forward to sharing updates from the conference with you.

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About the Author
Frank Holmes

Frank Holmes is CEO and chief investment officer of US Global Investors. This first appeared in his Frank Talk blog. For more updates on global investing from Frank and the rest of the U.S. Global Investors team, follow on Twitter at www.twitter.com/USFunds or like on Facebook at www.facebook.com/USFunds. You can also watch exclusive videos on what research overseas has turned up on the U.S. Global YouTube channel at www.youtube.com/USFunds.

US Global Investors, Inc. is an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world. The company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients.

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