Kitco news special coverage of the precious metal summit is brought to you by Corvus gold, Rebecca, the precious metals summit and beaver Creek with TAVI Costa portfolio manager at Cresco capital. Welcome back to the show. Thanks for having me. Good to see you again. Let's establish your thesis with a little game.
All right. Sure. False. We all know the game. Um, just say true or false. You don't have to give a rationale. You can, if you want. So let's just get started. Minors are undervalued. True. Equities in the U S are overvalued. True. Gold has more downside from false, false. Okay. Um, inflation has peaked at 5.4% in state false, false.
The emerging markets have more opportunities than domestic markets. I don't have a view on that so much. So I don't know. And the fed is likely to taper by the end of the year. True. Okay. So it looks like you're in agreement with, uh, not as strong, true, by the way. All right. All right. So those are all the questions that I have from the beginning, the statements, rather.
So that establishes a few things. You think that, uh, you think that miners have more upside stocks are in danger. Gold is you're obviously bullish and, uh, and, uh, you're dovish on the fed. So, or actually more or less hawkish on the fed. Okay. Well, I am overall very dovish on the fed. However, I think that they will try to, you know, if, if you were trapped, you would try to get any exit possible accident.
You, you would, uh, have that as an opportunity. Um, I do think that given what's going on in regards to valuations, we've got record valuations that. Almost any sector in the economy, not only that risky assets, corporate bonds, um, the markets in terms of housing, treasuries, everything looks so overvalue. So when you look at the amount of leverage in the system, it's, it's hard to believe there's going to be any significant tapering or any relevant tightening or less loosening that we've seen so far.
Yes, they may try to go that route. Now, can they sustainably taper? I highly doubt that. So I do believe strongly that the federal reserve is, is trapped and we're in a vicious cycle. Where we see this growth of inflationary force is picking up and then the federal reserve has to act on it, which is kind of what we're seeing that creates a financial shock most of the times.
And I think it will this time around, um, that then immediately is accompanied by a large amount of stimulus, uh, fiscal and monetary stimulus. And, and that is what. Reinforces or feeds into this inflationary problem. Long-term inflationary problem. We're seeing, uh, which we can get into twos, but, uh, that's basically where I think we are.
I think the inflation is, is, uh, is, is now the gene of inflation is really out of the bottom right now. Um, and I think it's going to be difficult to what, to stop that from, um, from building up in a system, what type of an investor would you characterize yourself as being like a value investor or growth investor momentum?
So a good question. Um, I think, uh, if I would put myself in a box, I would put myself as a macro value investor. Right. I definitely have a macro framework that I use, uh, in regards to building my macro models as a whole to guide myself into, uh, creating and developing macro themes. But I use a lot of the value principles, which I think a lot of value investors don't and I think that helps us.
Acknowledge and identify opportunities in the markets. The minors is a great example of that. All right. So we're going to be talking about minors, equities, gold, and any other asset classes that you prefer to invest in. Uh, that will be the focus of our interview today. First let's establish your background framework, starting with growth in the us.
So GDP has, according to the Atlanta, um, tracker, they're actually projecting lower GDP for next quarter. Do you think growth has peaked so far? I think short-term peak. Yes. Uh, I think we all started seeing issues in China that most, I would say investors have been focused on that mostly as an independent factor, given the CCP crackdown.
So domestic companies and issues with ADR compensation. Uh, there are Chinese companies, um, but that started to spread to emerging markets. So, uh, emerging markets is beginning to have issues. And when you look at the annual change or the Delta of emerging markets as a whole, in terms of equities, it tends to, uh, be, have a very strong correlation with, uh, not only PMI.
So ism, PMI, manufacturing, BMI's in the U S but macro data in the us as a whole. And so I think. We are, uh, it suggests is that we're may see a deceleration of growth here in the U S. And so I am on the camp of a, sort of a, more of a stagflationary environment in the next six months or so it's difficult to see stagflation over a long period of time.
I think I said this on your show before. It's possible to have periods of that. And I think we're getting into one. When you say deceleration or growth, do you mean lower growth than even pre COVID levels of GDP growth? Yeah, I think it's very possible. Yeah. Um, again, I, I, I think that the markets are going to lead away, uh, in, in terms of.
We're seeing we solve, uh, on an annual basis. Uh, the, the CSI 300 of China, the index, uh, it just are negative right now. So it's a 0.1% negative. Um, emerging markets are turning, um, and I think the next is developed economies in general. So. Um, it's, I think it's a matter of time for us to see that well, okay.
So the emerging markets and China, I'm putting them in two separate buckets that they have their own problems of their own. The U S has their own problems. Uh, the U S has actually led the in terms of recovery, uh, similar. Similar to what happened in 2009, the USO's will let them way in recovery for developed countries.
Why do you think that the G the U S and the G seven developed, developed nations will slow down and growth this time, uh, independent of what's happening in the emerging markets. What are the problems domestically that you're watching? Well, it starts with as an investor. If you want to take risk, you buy the risk stuff.
And so we're not seeing that as a leadership in emerging markets tends to lead. And when you have a prosper, uh, type of economy where everything is growing and doing well, which is kind of what we saw recently with emerging markets doing very well and commodities and all that cyclical, commodity suspects.
Um, not the case right now. So those are beginning to turn, you know, you could look at our lower prices, for instance, you know, this has been in a, in a steady decline now in a very steep decline, I would say, um, you look at the numbers coming out of real estate markets in China, for instance, uh, clearly we're seeing a lot of.
Um, currency markets or others that I would watch for, you know, the, uh, a lot of the Asian currencies have been having a lot of issues, especially I would say Asia Pacific, including Australia as well in that pack, uh, where I I'm seeing a lot of issues there too. You know, all of that tends to lead to Laska, less positioning on risk on assets.
And, uh, at some point E it will, it will boil it into a lot of issues here in the U S too. So that's, that's the way I'm seeing this. I think that we've seen a lot of the fiscal civic who kind of have a fiscal overhang over. Um, that will translate into more fiscal stimulus later on, but we're in that window where they're trying to exit from an issue where I don't think it's going to be possible, but it's going to lead to deceleration of growth.
You mentioned that you don't think inflation has peaked. How much higher do you think it can run? Um, I think we're going to see in the next, uh, so my longterm, uh, views on inflation is, uh, you know, it's going to have a significantly higher, uh, from here. I do think the next print or two, there's a possibility.
We may see things go below expectation. It's important to look at the CD, um, inflation surprise index, where it's basically at a peak right now. So, you know, how, how long can inflationary forces continue to surprise analysts? Um, it's difficult to see that at some point analysts will catch up with their estimates and, and it's difficult to beat those, uh, uh, those, uh, those estimates.
And so. Inflation has been doing that for a while. And I think we may see one or two reports that may come down as a negative surprise, which would be seen as positive for precious metals, because it would appear to be transitory, but I don't think long-term, this is going to be transitory at all. Okay.
Right. Gold. You mentioned that, uh, I asked you if you think gold has, uh, has, uh, more downside. He said no false. So let's talk about that. Um, why do you think gold is founded bottom right now? Current. Well, I think there is a lot of reasons to believe in that breakevens have been doing very well recently.
Um, if you look at the new year, breakevens is starting to move higher. And I think that that's very encouraging with add a big move on gold and silver consolidating for so long. Um, and not only relative to equity markets and crypto assets, but I would say first and foremost, relative to commodities, look at silver relative to commodities as a whole.
Um, it seems to me like we're very near a bottom, so I like to buy precious metals relative to either even other commodities, too. Right. Um, I think there's a lot of reasons to think that at some point here, if there is a risk of a reverse, so it's important to think. Well, first yeah, the fed meat start to taper at some point here.
Uh, but long-term the reversal of those policies would be, you know, drastically, uh, bullish to, uh, things like precious metals. And so markets tend to look ahead, remember 2018. Uh, 2020, uh, we saw a 75% move on goal that basically proceeded all of this issues that we saw monetary and fiscal disordered in 2020.
So markets are always looking ahead and I think that the risk reward of buying gold right now, it's, it's really interesting as a setup, technically, uh, macro wise, I think all the, the thesis is really. Okay, now gold did again. I think we've talked about this before now. I'd like to revisit the topic of gold correlation with inflation historically seen as an inflation hedge.
Didn't really do that this year. Did it? No. And it's, it's, it's quite interesting when you look at even gold relative to the city, uh, index, uh, when you look at Goldie over year change, uh, it's been diverging significantly as inflation has been surprising to the upside. Not only numbers being higher with surprising.
Uh, we're seeing a divergence with. That's kind of interesting. Um, however, I think gold really acts on and performs. Well, when you have one Attarian fiscal disorder as a whole, I don't think that's a theme that is ending here. I think, I think we're going to see further, uh, issues with that. Um, and when you go back to other periods in history, especially when commodities have performed so well, Uh, usually that is linked to, uh, where we see, uh, especially inflation expectation running above yields of any other asset.
Uh, and so owning tangible assets is becoming sort of a, uh, a need for capital protection and growth as a whole. And so, uh, I really like precious metals as being the lead way now, given the fact it's been lagging, huh. But, um, but I think all commodities look very attractive, uh, for the next. You've talked about minors before now you said the miners have the best free cashflow of any sector.
Right now they look undervalued on a several valuation metrics. You've mentioned, which, um, what types of minors do you prefer? Gold, silver base metals, uranium, any particular underlying metal that you would have a preference for? You can break it down into the all sorts of commodities. And so if you look at the precious metals and you create a rank by looking at that as, as in different ways, from a quality perspective, balance sheet, Um, leverage it as a whole growth, uh, clearly precious metals look more balanced than the others.
You know, we've had a big move in base metals. And so some of them look a little bit more expensive on a free cashflow yield relative to other commodities that still cheap, um, energy, um, is more levered. You paying for a higher amount of leverage and higher. Uh, but they also look really cheap now.
Precious metals, uh, brings a big attention to me because it's also a monetary asset. Uh, so I like the underlying factors behind, uh, actual metals and owning those metals. Um, to your question initially, I like to own the explorers. I think the depletion of reserves that we're seeing among the majors in regards to.
Uh, in order to look for, to replenish their production, uh, is going to be a problem. Here is very soon. Um, we're seeing a very large increase of free cashflow. There have been depleting those reserves, but not actually replenishing them. And there is a line of we're in the conference of mining companies.
There's so many high quality products. That no one is looking at. And so at some point, we're going to see this floodgate of liquidity coming from, in my opinion, specially a net cash balance being built up by the majors to a point that we'd never seen before. No, you look at the balance sheets and the margins are talking about more M and a more M and a, I think.
Which is one of the, the, the signs of early, you know, being at the early innings of, uh, or earlier innings of a precious metal cycle. I don't think we've seen that at all. Well, effectually, we have not, um, M and a has been now, I would say very boring in that last, uh, 12 months, 24 months or so, uh, we saw some increases in backing 2016 or so, um, nothing new, anywhere close to what we saw back in, in the last cycle, uh, at the end of 2011, for instance, You know, a very large amount of, uh, of M and a.
So I think, you know, the cash, the net cash balance that is being built up is going to create, uh, the possibility of M and A's. But also I would say there's also possibility of higher dividends. Uh, we may see those miners beginning to, uh, pay those dividends in order to attract higher, uh, capital, uh, from, from large capital locators.
Well, we're at a mining conference and, uh, we get to meet a junior. Some seniors. And also more importantly, investors let's talk about sentiment right now. Yeah. So valuations are fantastic for miners for gold companies. Like you've mentioned. Do you see that reflected in the sentiment for investors right now?
Do you see investors share your optimism for buying at optimal prices and valuations investors are tired? Uh, that would be the best way to describe it. They are tired because it keeps saying that real rates are negative and gold and silver are going to go up and. You know, if God, uh, central bank sprinting, money Watsu and nothing happens.
And no, if there's no price reaction, that behavior of golden silver has been this Mo in the last, uh, you know, 12 months or so. But it's important to remember that as fundamentals begin to grow, we're seeing a big, uh, this, this trend of higher inflation has changed the whole environment when it comes to security selection.
We've had the last decade or so where I would say a lot of investors focus on, uh, top line growth revenue. As we start to move into a world where I would say bottom line growth begins to become more relevant. Uh, I would say folks, will we start really screening, uh, value screens in general? And I think minors will be one of the top companies in that space.
I would say natural resource industries look very attractive in that bucket. They all look for profitability to some role-playing here because, um, it's interesting how the miners have some of the best fundamentals out there of any sector yet generalist, generalist. Are kind of ignoring that sector.
Would you make that, would you agree with that statement? Oh yes, there are definitely let's do some role play. Let's say my wall street analyst, I'm an investor of a broad equities, or maybe I'm a sell side analyst. And I said to you, I'll tell you, I don't understand minors. Uh, they're they're boring.
They're old companies. They represent something from the past. Uh, they've been underperforming even the S and P 500. Um, I understand they're cheap right now. That could be a liquidity trap. It could be a valuable. Walk me through the thesis of why I should invest right now. Well, first of all, in order to, for us to go from the old economy to the new economy, commodities is the highway to go there.
I think that tangible assets, the reinforcement of folks buying tangible assets is going to feed into the inflation teases where prices of commodities rise. It also creates an inflation inflationary problem. Um, and so I would say that that is the first thing that comes to my mind. The monetary and fiscal dilution that we're seeing right now, especially on the monetary side of central banks.
I don't think that's going to stop anytime soon. It's important to remember the suppression of rates is one of the most important things that we may seem to follow years here. And so, um, all those points together in terms of the macro looks to me that the underlying should benefit from that. I personally like to be contrarian.
I liked that the fact that no one is looking at this and I'd like to be somewhat early and position myself in high quality projects while everyone is paying attention to crypto, nothing wrong with crypto. But I don't like to mess with things that are very popular. You know, I don't go to a social event and people telling me they they're buying miners.
They tell me they're buying crypto us. And so I liked that. I think that that. You know, th that seems to be the right way to invest in you buying a low levels, uh, with a lot of embedded growth as I like to save. So me being a wall street skeptic, I would say, well, TAVI, just because something is at a low level doesn't mean it can't be even lower in terms of levels.
Right? Well, you can say that about a lot of sectors that have had issues such as the coal industry, um, or you can talk about the banks. Um, I think there's a lot of industries that perhaps could be value traps. I don't have a strong view on that. They could potentially value traps. I think it's important to go back in history and see, especially at times like the forties, that seventies and 1910s when tangible assets actually perform very well.
And why is that? Well, first of all, there's a financial repression happening right now in terms of rates, uh, financial conditions being so low. Uh, relative to anything that we've seen in history. Um, and at the same time, there's a limitation from, from central banks to do anything about inflationary forces creeping up here.
Uh, why is that? Well, we've got a Mount it's amounts of debt that you could never, ever raise rates. I mean, if inflation really gets to double digits in a CPI, what would the fed do? Raise rates to 2%. They're going to shock the world. If they do that, it can't even do that. So let's, let's draw a parallel to the eighties.
Obviously high inflation in the late seventies due to the oil crisis from OPEC, the fed raised rates to double digits that can happen again ever. Well, there's a big difference between the seventies and today, and that starts with leverage. There was no leverage in the seventies compared to now, now in the forties, there was a lot of.
Let's let's step back and look at the two times in the seventies, what we saw was a weight spiral growth year, and it's kind of similar to now where we saw a growth of wages and salaries, where I would say workers were demanding that given the fact that the cost of living was rising, we saw that 1910s too.
And that is one of the, the structural changes that perhaps could be happening right now. In my opinion, the forties, we had the financial repression situation given the fact that was a lot of debt. Uh, so we had a. Um, and so that, to finance that war, we took on a lot of debt, uh, and there was an issue where inflation was rising, but the federal reserve was not capable of raising rates.
And so monetary policy was not volatile at all. Meaning it wasn't moving along with inflation. Like we saw in the. But there is another catch here. Um, if you look at the tax rates that we saw back in the days, you know, let's just look at it. The highest tax bracket was about 96% at its peak. Today is about 37.
So it's significantly lower than it was back. Then. Let's look at another side of this. I think it's even more important. What about valuations of risky assets? You know, you can raise rent rates as much as you want, but what justifies valuations be where they are in equity markets today is first and foremost.
And low inflation too. So what if that changes, you know, can that change is the other question and if he can change, what does it mean to inflation over long-term? So that is where my concern is in regards to. All right. Well, let's put all this together then investment strategy. Let's say I have $50,000 help me allocate that capital.
So I like to have a core position on inflation. As I said, I believe inflation is here to stay. So I put a lot of money on commodities. A larger portion of that is an exploration of precious metals. Um, obviously we have base metals and other commodities that we like even energy in some, some portfolios that we manage.
Um, and then I like to hatch that with other investments that are short equity markets. Uh, a lot of people listening. It's very difficult to even get your arms around a shorting equity markets. No one has been doing that for many years, but we like to have that as a hatch. I think that commodities will outperform equities.
I don't know which one is going to do best in the next six months, but I think that we're going to continue to see an opera forms of that. And again, it's going back to. And how tangible assets tends to perform better than financial assets as a whole. And so I liked that as a trade in. I like to pair that with, uh, a few asymmetric bats on currencies that I think are also overvalued.
The Chinese Yuan is an example, which costs us one, 2% of the portfolio. And I think that that's an assurance that I don't have to be right on those traits, but if I am, I could, you know, it could make up the whole year of. Final true and false and we'll end it. There crypto's will replace gold as money in.
Can you give me a timeframe? Um, in the well it's um, no, because, because this is this Oklahoma. Okay. All right. So that's interesting how you brought that up. So it's conditioned on, right? Well, it could be, I think fact skin, you know, if, if the facts change my peanut key change, um, if you ask me in the next five years, which is how I'm posing.
My answer would be no, I think that there is, um, it's a very interesting question. I was talking about this with a few smart guys yesterday, too, and leads to me to this conclusion of there is a need of improvement of quality of international reserves amongst central. As we entered this world of monetary and fiscal indiscipline.
And as a whole, I think, I think we're going to see a demand from investors of can, you know, of improvement of those reserves. And what I mean by that is not owning us treasuries, but owning actual, tangible assets, such as gold, which has been one of the things into question for you. Do you think Bitcoin is going to be one of the assets that central banks will bind?
I'm talking about large central banks. My, my answer would be, I don't think so. In the next five years, I still think gold would be the most important would play a larger role in terms of that. So answer your question next five years. I don't. And that's why I'm positioned accordingly. Now, if the facts change, I'm happy to change my views, but right now that's the way we're positioning.
Okay. Excellent. Well, we'll have you back on again and talk more about this topic and other things. Thank you very much. TAVI sounds great. It was great. Thanks. Good to see you again. Thank you for watching kicker news. We'll have more on beaver Creek. Kitco news special coverage of the precious metals summit is brought to you by Corvus gold.