Frank Holmes Watches Public Policy for Investment Direction

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"'Negative real interest rates are usually bullish for gold. And the cost of war and massive deficit created a tipping point for the USD,' says Holmes."

Frank Holmes and his team of fund managers closely monitor government policies—fiscal, monetary and otherwise—in countries with both the largest economies and populations.

This helped U.S. Global Investors move quickly to be on the ground floor of a number of investments that provided big returns over the years, such as a Colombia's largest oil producer and the more-than-five-fold rise in gold over the last decade.

U.S. Global Investors uses "top-down" macroeconomic models and "bottom-up" micro stock selection models to determine weightings in countries, sectors and individual securities around the world. The company also monitors government policies as a "precursor to change," and Holmes even travels to observe this first-hand. As an example of the payoff, he pointed to shares in Pacific Rubiales, a Colombian oil and gas company.

A while back, he became aware that the country was dropping barriers to foreign investment, wanting development of oilfields that would mean tax revenues and create jobs. Conversely, Holmes said, he felt Mexico was discouraging foreign development of the oil and gas sector, although it allowed foreign development in mining.

Holmes also pointed to the U.S. in the period since the Sept. 11, 2001 terrorist attacks to illustrate the importance of government policies for markets.

"Any time a government has negative real interest rates, that's usually bullish for gold," Holmes said. "And with the cost of the war on terrorism being layered on top of the massive deficit spending for entitlements, there was a tipping point created for the direction of the U.S. dollar."

Holmes and his staff anticipated the start of a "super cycle" that could last 20 years, and gold has risen more than 500% in the last decade.

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