Is gold still undervalued, even after hitting record highs? Tavi Costa says yes, and makes the case for $20,000+ gold. In this insightful interview, Crescat Capital’s macro strategist Tavi Costa joins Trey Reik to explain why we’re in the early stages of a “Great Rotation” out of overvalued U.S. equities and into hard assets like gold, silver, and commodities.
Tavi lays out why traditional 60/40 portfolios are set to underperform for years, how U.S. debt levels and deglobalization are pressuring the dollar, and why central banks (and possibly even the U.S. Treasury) are quietly turning back to gold.
He also reveals:
- Why the 2-year Treasury yield could collapse
- Why the S&P 500’s best years may be behind it
- Why silver may be “the cheapest metal on Earth”
- And how AI, onshoring, and infrastructure needs are creating a boom in commodity demand
Volatility got you concerned? Get a free portfolio review with Wealthion’s endorsed financial advisors at https://bit.ly/3SBaGpv
Hard Assets Alliance – The Best Way to Invest in Gold and Silver: https://www.hardassetsalliance.com/?aff=WTH
Tavi Costa 0:00
The government debt in the US is backed by about less than 2% of gold reserves. Okay, this is valuing gold at today’s price. Is Not, not the ridiculous, you know, $40 an ounce that we hear from, from the Treasury mark, from the treasury secretaries. So what I think it’s likely to happen if you, if you just revalue at more appropriate levels, let’s say 10 15% which we saw back in the 70s. You get a gold price somewhere close to $20,000 an ounce or so.
Trey Reik 0:35
Greetings and welcome to our wealth beyond show. My name is Trey Reich, a Bristol Gold Group, and we’re here today with a very interesting fellow from a very interesting firm, Tavi Costa, macro strategist at crescat Capital, a Denver based asset management firm with a uniquely macro bent Tavi is actually joining us from Brazil today, And we thank you very much for taking the time to visit with us.
Tavi Costa 1:03
My pleasure to be here trade looking forward to this conversation. Excellent.
Trey Reik 1:07
So lots of firms claim to be macro oriented, but everything crescat does actually has a distinctly macro bent. And over the years, I’ve read your stuff, and your contributions are frequent and provocative commentaries on macro topics with an emphasis on monetary affairs and precious metals. As I said, I’ve read your stuff for years, and I think your special talent is construction of truly unique charts in developing your case. So your charts are ubiquitous, I think, out there in the monetary sphere, always fun and informative. But for viewers who may not be familiar with your firm, I thought you could start us off with a brief overview of crescad and your three primary investment strategies, sure.
Tavi Costa 2:03
First, thanks, thanks for having me. And it’s a it’s great to to be back in this channel. Well, cresca is is really focused on three strategies. We have a global macro where we can invest on any asset, and then a long, short fund that is only equity focused, and then the precious metals fund that we launched in mid 2020, right after the COVID recession, with the idea of really investing in deploying capital in the mining industry, of which we have very strong views. And we did a whole unique sort of way of investing in that space, particularly investing in exploration and small cap stocks. Of it’s almost like a hybrid venture capital approach, of which we are taking risk of investing in small companies that we believe have, you know, securing mineral deposits that are incredibly valuable, and by doing that, we also improve our at odds by by doing activist approach towards those companies to help them in their drilling seasons. My My work is mostly in the macro side, so I’m very focused on always identifying long term trends. Since 2018 2019 I’ve been very constructive on gold and the metals. I think that has, has done very well. And it’s, it’s great, but I think that there is a lot of other ramifications that will come from this particular long term trend. I believe gold is just at the beginning. It’s, you know, a lot of people see this as the potentially the end. It’s obviously not the very beginning. Now, we’ve seen some of that move, but there’s a lot of other assets that need to catch up to the metal of which historically tend to lag a little bit before we see the bigger moves. And so I’m extremely excited about some confirmation of the thesis, but personally, I think there’s a lot more to go great, and what’s the relative size of the macro versus the gold strategy versus the long, short to the firm? What? Where would you say your primary focus is the macro Fund and the the precious metals fund are about the same size and and I would say that a lot of the assets that we own in a global macro fund is actually do have a lot of precious metals, and so there’s an overlay of the strategies, of which, when we were running global macro we thought, well, we’ve got all these assets in the precious metal space. Why not make it, break it, a whole sleeve of that and created an entire strategy out of it, because a lot of people were, you know, not in agreement with some of the other views we’ve had. And I would say that it’s, it’s much easier to create a niche strategy and into one small space. I mean, I love macro. I think macro is one of the most attractive ways of investing when you compare that with value investing. However, the big, the big complexity of it is, for a lot of people, they have issues understanding what you’re long and what you’re short overall. And you know, when you’re trying to be a large institution hedging an exposure to a macro fund, it becomes, it could become a little bit challenging, because that exposure is somewhat unknown. And so when you’re creating these sort of pockets of strategies on the side that then, you know, generate, you know, just as good as of an asymmetry. From my standpoint, I think it’s, it’s quite attractive. So that’s just a you know, why? Probably precious metals have grown so much as a fun for us and but, but I think there’s a lot more to go. We’ll get
Trey Reik 5:43
back to the precious metals fund, specifically more at the end, because I think your activist approach definitely deserves a little bit of attention. It’s fairly unique in the precious metal sector, but I think the best way to to explore your general views, is your firm has a overarching macro theme, which you call the Great rotation. And there’s a few components to that philosophy. Do you want to give us a few minutes on that?
Tavi Costa 6:17
The great great rotation is, is the idea of how we may see you can call a rebalancing rotation, use any name you want, but it really comes from the fact that we’ve seen financial assets become extremely overvalued. And you can kind of dive into that. You know, the beginning of all this was looking at equity markets in the US, relative to commodities, relative to hard assets, and clearly we’re seeing one of the most undervalued periods for hard assets relative to financial assets, probably in history, when you dive into the financial assets problem and you want to understand where that’s coming from. Yes, there’s some broad, broad issues as well, but it really is specifically coming from the US. It is specifically coming from technology here in the US as well, or there in the US. And so I think, I think that this is, this is quite normal. No, we see leadership take place in some parts of history, and then that changes. And I think what people are missing is that, you know, these types of of outperformance from one sector. They don’t last forever. Those things change over time. And taking a step back and thinking, okay, maybe it’s too much hubris to think about what causes the rotation and macro in macro, from my understanding, humble understanding, of how things work, is, you know, certainly all these things you don’t have happen abruptly. No, it’s you can kind of see these things from signals coming. It’s almost like the gold market now you think about how miners have been lagging gold started the move. It’s like the less the least risky way of investing in hard assets. When you think about it’s probably gold, it’s got less volatility. It’s got a lot of liquidity. It’s a huge market. So that’s where people went for it. And then as they feel comfortable and make money on that idea, they start thinking about, okay, where else can I take more risk and more asymmetry, hopefully, in order to, you know, accomplish my goals and and that’s when you start seeing this capital movement into the seniors and then finally into the other parts. And I think we’re in the process of seeing this rotation, this great rotation already happening. I mean, we’re seeing mega cap companies starting to struggle. We’re seeing other sectors of the economy starting to do better, people questioning earnings and other things that are supposedly supposed to grow forever. But, you know, we all know that there’s an end to those, those fundamentals improvements, and so we’re kind of in the middle of, you know, in some parts of the rotation are happening much quicker than others, but, but if you think about it, there are other parts of it, like the dollar. You know, the dollar is highly linked to gold. In terms of, when you have $1 a gold secular bull market, the dollar tends to also peak, and you have this sort of long term downward trend of the dollar versus other fiat currencies. Nothing to do with gold, but all to do with the fact that people are starting to sell their US based assets, buying international assets, and also buying other things that are supposedly not connected to any sovereignty, so hard assets and so I think all these things are unfolding currently, and not to mention what we’re seeing in terms of De globalization, of which countries are going above and beyond, to secure their boards and also make sure that they have all the necessities of metals and commodities. And, you know, there’s a reason why you’re seeing Chinese copper imports surge and all sorts of things. You know, everyone is looking inwards and and trying to protect themselves. And. So, you know, this is not new in history. And you know, what I try to do is just learn from the past and see what applies. Of course, things are different, but a lot of things are going to be very similar as well. Well,
Trey Reik 10:12
picking up on that thought, I happen to notice that your three funds have pretty gaudy year to date performance. I think they rank in the like two, three and six, without going into specific performance numbers in the prequel hedge fund universe. So can you share with us what are the reasons? What are the themes you know in terms of portfolio attribution, what themes are working out for you, and the funds that have you so high in the performance tables,
Tavi Costa 10:44
say 1/3 of that came from the mining space. You know, mining has done very well this year. A lot of mining companies are at their 10 year highs and but the juniors have lagged and but they still performing well. So we’re still have that level of of of of performance attribution, coming from that industry. Secondly, I would say that a lot of the short positions have maybe done the other two thirds of this, essentially. And then we had another other smaller, I would say, smaller trades that have done well. On the short side, there’s a, you know, a separation of things that worked well, I’ll explain a few. One of them is the technology side. And technology was a big no. We’ve had a lot of shorts on the technology front. We’ve been Meg seven mostly, you know, the apples, Microsofts and Googles of the world, and later on, or in combination with that, we’d also have a very long trade on credit spreads, of which essentially is betting on interest rates and the government’s yields to fall relative to corporate bond yields that are likely to rise. And so you have the spread widening and the risk being priced into the corporate debt curve, and so that that worked really well this year. And so, no, that’s another portion of it. And I would say one thing, I have very strong conviction. Now, of course, we had some trades on the dollar as well. The dollar did quite well. And that on that on the back of all these changes. But also, you know, one thing that I even wish we had a much larger position in, you know, I think there’s high conviction that that could be at its early stages, still potentially of a movement, is the two year yield. No, I do think the two year yield, you know, could potentially be reduced even in half as the Fed plays sort of a stubborn, you know, role into the economy. And we see things completely changing. I would, I would think that the contraction of the economy, or even a slowdown would reward a two year yield at least in a two handle. And so I think there’s long ways to go on that, on that trade, and so it’s that could be very attractive, but at the same time, the fat pitch, to be short, the market was very difficult few weeks back because of the how big of a move we had, and so therefore we just had a rebound. But now, now it’s starting to look a little bit more attractive. Of course, it’s not as attractive as he was at the beginning of the year, but, so you have to size it appropriately, but, but, yeah, I mean, I think there’s, you know, ultimately, there’s a lot of other things that have not worked yet in the portfolio that I think could potentially be part of it. So
Trey Reik 13:36
another tenant, I think, of the firm, if I understood it correctly, is you’re pointing out that the 6040 portfolio over time has, you know, cycles of decades where it does well and decades where it doesn’t. You have a chart the earnings yield cycle of a 6040 portfolio. But can you talk a little bit about why you guys perceive such a difficult, say, five to 10 year period for that approach? Well,
Tavi Costa 14:07
just looking back for the last 15 years of performance in S, p5 100, it’s just quite unusual to see another 15 years of this level of performance. And so starting from that point, you know gravity still works. And so I it’s hard to be extremely bullish after one of the most outstanding performances for overall equity markets we’ve seen in history. And so it’s really difficult. In fact, when you looked at corporate earnings, I believe that the last 15 years was by far the best corporate earnings growth we’ve seen, all the way back to the 1900s the last time we saw something close to that was in the 1920s and then that led to the Great Depression. Now I’m not here to say we’re going to see the Great Depression either. All I’m saying is growth, like of that level, you know, is quite extreme, and usually people. Start extrapolating that we’re going to see more of that. And it’s just not not usual, that that’s actually the unusual part of the cycle. And so, you know, it’s just, it’s just looking at things from a risk standpoint. And when you think about the 6040, allocation is is kind of embedded in this view that, you know, treasuries will always come for the rescue when the equity markets fall, and this recent change of behavior in the macro environment is absolutely critical. What we’re seeing in terms of equity markets falling in the treasury market also falling, is something to be aware of. Now, I do think there’s a short, near term opportunity in Treasury markets, as I presented on the two year yield front. But ultimately, you know, it does question where interest rates are in terms of the valuation of equity markets still. I mean, equity markets don’t usually bottom at a 30 plus Cape ratio, you know, of which is what’s been used in that chart that you’re referring to. And so I don’t understand this overall bullishness and level of conviction that the market would just keep going up. When you have this, this, you know, these types of valuations, I just, I just can sleep, and I very well owning things that I know are fundamentally cheap, and if they fall in prices, I feel comfortable stepping in, purchasing more. I mean, that’s the virtue of value investing. It’s being able to identify, in my view, Legacy industries or legacy companies that have these types of or at least the way I view, how to mix the idea of value investing with macro, with the potential change fundamentally likely ahead that is not reflected in the price yet, of most of these things, and a lot of these hard asset businesses are falling into that category today, excellent.
Trey Reik 16:47
So again, along these lines, you’ve talked about commodities a bit. Another chart we’ll put up is your chart on the relative valuation of commodities to equities. And we’re, I’ve pretty darn near historic lows in terms of the relative valuation of commodities. Can you talk a little bit about that?
Tavi Costa 17:10
Yeah, that’s, you know, there’s a two stories. When you look at that chart. I mean, there’s a story of the fact that we’ve had commodity prices go into one of the worst periods in history, all the way down to all the way back to the 2020, levels. And then, after the response from the policymakers that we’ve had from the COVID recession, that sort of unleashed the hard assets thesis in a large way, what we haven’t seen is that real transition from equities overall equities into commodities in terms of valuations. I’ve always called this environment sort of the trifecta of macro imbalances. You have the inflation of the 1970s you have the debt problem of the 1940s and at the same time you also have the valuation issue that we saw in the late 20s and also the late 90s. And so, you know, how does it all unfold? I can’t think of, you know, a rotation that will happen more than the money flowing out of equity markets in the US into other places in the world, and also finding its way into natural resource industries. And so, hence why I think it’s, it’s such a an important aspect to be focused on that part of the market. And you know, this chart is also, if you think about it, one of the things I learned is that, you know, a lot of people look at the commodities to equity ratio and say, this thing hasn’t moved in many years, in maybe a decade. Why would I even pay attention to this? And the main reason for it is because we’re finally seeing, you know, the dollar being challenged. You know, we’ve had one of the longest periods of the appreciation of the dollar, and I don’t think that’s going to be the case moving forward. Now, clearly this administration has a big focus into trade deficits and fiscal deficit. How do you fix that? Two ways you lower rates? Because, yeah, that’s your interest payment to GDP. It’s one of the highest we’ve seen in history. So all you got to do is lower rates. This is why Scott Basson and his in his his colleagues are focused so much on lowering rates. And number two is the dollar. You don’t fix the trade balance issue by strengthening your currency, you do it the other way around. And so to me, when the dollar changes, and this is what happens, just like it happens in your house, with your friends, with your families, when you’re trying to fix one thing, you may trigger another issue that you’re not aware of when you’re trying to fix all these trade agreements we’ve had for over decades, in some cases even centuries, what you may cause is a complete change or a turning point of your own currency. And I think we’re in the brink of seeing the dollar actually. It’s not the end of the dollar, anything along those lines, but just like we saw in the early 2000s and the 70s. Where the dollar was really depreciating versus other fiat currencies, and just on the back of the fact that people were selling their US asset assets to buy assets elsewhere, that’s really where this, this whole commodity to equity ratio, may fit into and keep in mind, I mean, if you look at the MSCI index, we’re about 70% weight on the US, and no other country has double digits weights and in that index alone. So it’s a it’s a real troubling situation that I think it’s unfolding in front of us.
Trey Reik 20:34
Interesting when we look at Gold and its role in your portfolios. I think it’s fair to say that gold’s monetary characteristics are what bring investment in gold so in concert with your macro focus, I would call them tightly aligned. And after being up 27% last year, I don’t think anybody really expected to strengthen the gold price that we’ve seen so far this year. And I’m sure you’re well aware, on April 2, we spent a nano second at 3500 announced, which was a 33% gain in the first four months. So today we’re at, you know, 3200 up 23% year to date. When you look at the fundamentals that you think are driving this, because it’s that’s another thing about gold, is it’s never one thing. What would your rate as the top three fundamentals that that are unfolding to drive the gold price? You know this strongly,
Tavi Costa 21:41
that’s a good question. I think it’s central bank, central banks being forced into acquiring the metal in a situation of where, you know, clearly, there’s de globalization trends that are forcing folks to buy a neutral asset. I think that’s probably the most important one. I think it’s the knowledge that we’ve the Secondly, I would say, the knowledge that we have so much of a debt imbalance that the only way out is inflating ourselves out of this, and also the fact that we may see a, you know, potentially an inflation problem, you know, entering an inflationary decade that is also accompanied by suppress interest rates, either through manipulative policies that are forcing interest rates lower or not. And my view on this is that that’s a supercharged environment you get into for hard assets when you create that scenario. And thirdly, which as maybe less to do with, with other things. I mean, there. I mean, you can, you can point to a lot of things. I mean, the fact that gold has been, you know, under allocated as a, as a capital for, you know, in terms of portfolio construction, 64 to portfolios, all these things I know certainly that has to be one, one part of it. No, the capital flows that have completely ignored the metal as a defensive asset, and now people are being forced into learning a history lesson about the credibility and the importance of owning gold in your portfolio. And I think we’re still in the beginning of that. I know a lot of people are saying, well, we’ve had too big of a move. I wouldn’t, I wouldn’t be touching gold right now. And I don’t think that’s that’s a very strong thesis at all. I think that’s, you know, applying technical analysis into what we’re seeing, which is, in my view, a real monetary realignment, using Scott Basin’s term before even being appointed as a treasury secretary. I think that’s really what we’re facing right now. And so, you I think owning gold is absolutely critical in this environment. And so I’m, you know, I’ve, I highly, you know, I would speak very highly of the metal, just because, you know. And more importantly, if you think about it, with gold prices, where they are, you know, it’s hard to ignore the fact that you also have companies that produce the metal, and they’re not seeing their cost rise anywhere close to gold prices. And so to me, this is one of what we call the golden age of mining. You know this is a wonderful environment to be producing hard assets, particularly gold, when you can produce it almost double your cost to produce, to to to extract the metal from the ground.
Trey Reik 24:34
So another chart that we’ll throw up is your history of gold cycles, which has the three big moves in the 70s, the 2000 to 2010 and then, I don’t know where you’d start this one 2018 and you list the sort of fundamental reasons in each part of a cycle. And the list in the current environment is as long as the other two put together and double so. So what, what specifically is coming together here that gives you that confidence that we’re early in the cycle. We’ve covered some of that, but you have that long list of things that have come together that haven’t been around in prior cycles. Well, you
Tavi Costa 25:17
know, the initial part of this chart was just first I realize how there has been not much of a conversation about the supply of gold, and the fact that we usually see before or in the middle of a bull market for the metal, we tend to see production actually in a declining trend, certainly is what we’re seeing today. We saw that in the 1970s in the 1970s and today had a lot of similarities, from the standpoint of, you know, lack of discoveries, lack of exploration budget across most of the mining companies. And so there were no, not a lot of new gold deposits being created, new projects of gold. And so after that, in the 1980s we saw the opposite of the 70s, we actually had a ton of new discoveries. It was one of the most prolific periods of finding gold. This gold deposits in the world, and so, which is in line with the fact that gold prices fell significantly. It was also a period where the Treasury market became really cheap. Imagine you’re getting double digit interest rates at that time. Inflation is at its peak, and the whole sentiment on gold, gold prices are trading at, you know, historical high levels relative to other assets. And so, you know, of course, it’s time to be looking at other things. And so I think that the difference, however, when something I wanted to emphasize is that there were other trends that we saw the metal do very well that had nothing to do with some of the factors that are driving Today’s gold environment. Like in the early 2000s there were no central bank buying gold. In fact, it was selling, net selling of central banks of gold. And still, gold prices did very well, but that’s because we saw rotation out of the market, right? The market was too overvalued in the US, and then investors had to sell their US based assets start buying other things. So we saw rotation out of US equities, and ultimately that capital found itself into something that was really cheap. Gold prices were down substantially from their peak levels. So markets will also, you know, find its way into things that have value. And so gold was, was that instrument that attracted that capital. On the other side of this, we did see China becoming, you know, which didn’t happen in the 70s, China became a manufacturing plant of the global economy. It was, it was importing metals like it was entering a war or something. It was very strange how much of a demand China was sucking into that period, and still is the case today. However, what we’re seeing on top of all this is the onshoring, you know, thesis unfolding as well. Unshoring is one of the most important things happening in the world right now. It’s, it’s the fact that countries are again going above and beyond to build their back, their their infrastructure, you know, revitalize their industrial capabilities. And that comes at a cost, and the cost is higher electricity costs. You have more metals in my view, I’m in the process of writing a letter about this. In my view, there has been a lot of conversations about AI, artificial intelligence and on shoring all that. What people don’t understand is, is that this is not a chicken and an egg. Question of you know which one comes first. We know that in order to build AI, in order to build data centers, in order to build industrial capabilities, we need metals? No, it’s not the other way around. That one is not a chicken and egg question. It’s pretty simple. You need that first. And so to me, there’s almost like a lack of understanding of how the society is facing potentially a threat, as we have all these new things emerging, and we’re about to add one US equivalent of electricity consumption in the next five years because of AI. And how is this going to do with this whole mining industry, right? And so gold fits into all this. That wasn’t the case in the 70s or the early 2000s so it’s a very unique place. It’s a beauty of macro. It’s an art. It’s not a science. You have to be open minded to new things that are coming along. And of course, there’s things that we’re facing. They’re very similar to other times in history, like the rebalance, the cycle, the leadership in markets, that changes, like those things we’ve seen in the past. They’re not different. De globalization. This is not unique. I mean, we’ve seen de globalization in the past. They happen to happen when you are at all time highs in debt as well. So you know, it’s they’re not they’re not a coin. To this. So
Trey Reik 30:01
let’s take your enthusiasm, which I is in contagious, I must, must tell you, and turn it around a little bit, because people ask me all the time, you know, do you think gold is a permanent investment? And similar to what you just said, I always point out there’s decades, you know, like the 80s, interest rates were high and falling, inflation was high and falling, productivity was high, GDP was growing, and savings were still large in the United States. Now, all of that reversed in 2000 so you get decades where it makes sense to own gold, and decades where it’s less compelling. So my question is, is there a combination? I think gold is all about imbalances, global imbalances, and how they’ve been built up and reinforced by the Fed, etc. Do you guys talk about the fact that there could be a time what has to happen for gold not to be a mandatory portfolio asset? Do you envision? You know what we’re looking for? To tell us, maybe the gold bull market has run its course. Oh
Tavi Costa 31:13
yeah, I not a gold bug. Do not like when people characterize me as a gold bug, because I think there is going to be a moment where you want to sell your gold and and I think that
Trey Reik 31:27
define that moment. What are we looking for? How do we rate where we are? What are the fundamentals to watch on, on sort of timing, because we’ve all been through the drawdowns, and I’m too old for the next drawdown, so I, I want to make sure that we, you know, round this up a little bit more elegantly than we did in 2011
Tavi Costa 31:47
Well, I think deleveraging is going to be a big one, you know, the economy and global economy, you know, we’re going to see the delaveraging that’s going to have to happen. You know, I will use a term from great value. It’s going to be beautiful or a disaster, I don’t know, but at some point the economy will have to devalue. We’re going to have to reduce the amount of debt to GDP, either through a contraction of of or or just, you know, defaulting on the debt or inflating our way out. I mean, there’s so many different ways, not too many, but there are some ways you can do that. And inevitably, we’re going to have, you know, get to a point where the debt to GDP ratio won’t be as elevated. There’s, you know, not a lot of reasons to own gold in that world. I’ll tell you that. And, and so Secondly, I would say, especially looking at the Cross valuation measurements among different asset classes. You know, right now gold still really cheap relative to equities, relative to to treasuries and and so are commodities as well, very cheap relative to those other assets. Once that flips, you know, of which you will see in the chart. I mean, if you know, we’re probably going to be at historical highs at those, those situations, it’s time to start, you know, waiting into this other part of the market and and starting to pay attention to, you know, the general economy, as far as other other companies that provide great value. I also think that this is a transition that is related to a lot of other patterns, like the growth to value, you know, like right now you want to be favoring value for the next probably five out of 10 years, there’s going to be a moment to favor growth again, I’m sure, you know, and it’s the same thing with gold. So there, you know, another, another thing is, is efficiency in general. You know, if we do see some level of change in the growth environment that we have today, like right now, given how much debt we have in the economy, it’s going to be really difficult to increase growth. Gold does not like certainty. Now that’s that’s for sure gold. Gold likes uncertainty. And so if we’re able to somehow efficiently in 10 years from now, five years, three years or one year from now, able to make that change and and, and start to see growth again? Yeah, I’m going to change my view, not on the back of inflation. I’m talking about real, real growth. And so, yeah, I mean there, I think there’s going to be all the signs are going to be on the wall, just like they are right now. And a lot of people will say now we’re going to keep going. And it’s, you know, it’s a question of, you know, for instance, sometimes you show charts like the cape ratio, okay, that’s a great example. Cape ratio, right now, it’s at around 33 or so, 33 times earnings. That’s a 10 year average earnings, and so. And then when you show some folks that are bullish the equity market. They will look into that chart. They’ll tell you, Well, look at the nine, the early 2000s we went all the way to 40. So you’re telling me you’re going to take the risk from 3334 to 40, versus just stepping, you know, and or stepping back and saying, Well, look, there’s too much risk here. I am the type of guy that’s not willing to take that type of risk. I’m. The type of guy who’s willing to move in a different direction and start looking at other things. I really don’t think that’s the time right now. I think that you’re going to see other things. So, you know, for instance, m&a in the mining industry, that mining industry will manifest a lot of the fruffiness in the gold market like you’ve never seen before. You’re going to see companies throw in, you know, big capital into the projects that are not worth any money. And those are going to be more signs of why, you know, Cap tax is going to be at all time highs relative to what they earn in cash flows and so forth. Like, those are going to be the big signs. Of course, it’s not one or two metrics, but, like, if we start seeing all these boxes checking, you’re like, All right, well, that’s we’ve gone up too much. You know, the dollar is very devalued, you know, let’s call the dollar is back to, you know, on its back again, and it’s very devalued. And who knows what world we’re going to be in at that moment. But I’m happy to change my view. So I think it’s going to be a list of these things that today are pointing to the direction that we use. So should own hard assets. Oh, and interest rates, right? I mean, I mean interest rates. I mean, if go back to a world where interest rates, let’s say, 10 years from now, are double digits, yeah, I’m happy to own treasuries of double digit interest rates. And why not? So, you know, I don’t, I’m not saying we’ll see that world, but in I think that that’s, you know, you have to be open minded to those, those those scenarios.
Trey Reik 36:30
You don’t sound like the type of guy who throws around price predictions on gold, because I’m not in that category either. However, your firm does have a quant DNA level as well. And I’m just wondering, do you have any methods that you’d like to share on how you get a proper view on the appropriate price for gold, what it should be at today or in the future?
Tavi Costa 36:57
Yeah. And I think the problem with price targets is usually that as you see things moving in your direction, the price target could change. And so that’s the the biggest concern is, is how the whole factors you’re using to come up with that price, you know, may may change over time. I will explain one, one example of that. You know, for instance, a lot of people use monetary base to try to price gold. You know, what? If monetary base, you know, in five years, starts to contract for whatever reason, I must sing, it will. But you know, then it changes the completely of your the picture of your target price as well. And you know, so I’m just giving one example. There’s a lot more other factors you can use. I use, I use monetary base before, and I don’t think it’s very reflective about the gold prices, because it’s a small number of what the dollars available out there. I try to use them to money supply. But money supply, which is a broader way of looking at the amount of money available in the system also does not reflect very well. We’re about 20 plus trillion dollars in the US, of which it’s not really reflective of all the dollars that are floating around. Then I use the government debt. Government debt is a really outstanding way of maybe looking at this, because that’s, you know, that really is a majority of the dollars out there. So you’ve got about just to make a math simple, about 35 trillions more, like 36 but $35 trillion you know, you and then you look at all right, well, $35 trillion we revalue gold at its price today. How much gold, officially, the US government has, you know, we may say that the government securities are backed by military and other things, but ultimately, is really backed by gold. And people will learn that lesson on this as well. I mean, a lot of people are changing their tune, saying, No, it’s about military. It’s really about the gold. I mean, ultimately, whoever got more gold will their currency will be valued, you know, better, accordingly, and so. So I thought that that was the best way to look at and, you know, back in the 40s, you know, running, you know, as we were getting into the Second World War, what we saw was that we were about 40% of the government debt was actually backed by gold. Well, that’s remarkable. And then, you know, as we saw money supply and debt creation in order to enter the war, that ratio declined, you know, to, I don’t know 20% or so or 30% and we enter a downward trend of that, in other words, government that has been rising at the same time as the reserves actually were sold before the break of the gold standard and after the World War Two, and since then. Seen gold, you know, reserves being basically static, at least as far as we know, in in the US. And so how do you value gold? Well, today, the government debt in the US is backed by about less than 2% of gold reserves. Okay, this is valuing gold at today’s price is not, not the ridiculous, you know, $40 an ounce that we hear from, from the Treasury mark, from the treasury secretaries. So what I think it’s likely to happen if you, if you just revalue at more appropriate levels, let’s say 10, 15% which we saw back in the 70s, you get a gold price somewhere close to $20,000 an ounce or so. If you get it closer to the 40% which is a very extreme number, you get it close to 50,000 so things are fluid, of course, you know, but, but that gives you a sense that, you know this metal is, is really cheap at at 3030 $500 an ounce. I mean, it’s it. Of course, things move too fast in a quick direction. We can see a correction here and there. But that gives you sort of that, you know, light at the end of the tunnel of where we could get and and who knows if, if 1015, years from now, we’re going to see debt at 36 trillion, we could see a 40 of which would increase my price target, so that that part is fluid, both sides and so, so, yeah.
Trey Reik 41:23
So I think we would both agree that the monetary regime of the world, the dollar standard system, is evolving. And I think we both agree that the dollar is unlikely to disappear soon, but we’re definitely sort of a getting near a Bretton Woods, type of moment. Do you think gold will play a role in the new monetary regime? I mean, I know central banks are obviously buying sort of twice as much as they did in the prior decade, but can you, you know, a 25% cover clause on the Fed’s balance sheet, that type of thing. Do you think gold will play a role
Tavi Costa 42:01
I do, and it wouldn’t shock me at all if it’s the Treasury in the US that is buying gold recently and driving the metal price higher. The main reason for that is because, if you look at what the measurements that they can do without using the Federal Reserve in order to manipulate interest rates lower. And using the Treasury buyback system, what they need is cash in the TGA account. The TGA account is just a treasury cash balance, and in order to improve that cash balance, what you need to do is to have more collateral. And so gold prices are still value at ridiculous low level, historically speaking. And so if you revalue gold, you know, let’s say in a few months, the change that it does is that increases the collateral value, increases the value of your cash available to do things. And so, of course, the government’s thinking about that as a potential change in things. And I it wouldn’t shock me at all if you see a revaluation of gold later. And in order to do that, they also probably want gold prices to be much higher in order to allow them to have even more capital to be deployed in other things. And so what I find it fascinating, and it’s not against the crypto space, but it really is amazing to me that people have such a high conviction on crypto and all that, and when they hear that the Treasury is likely to be building a position in Bitcoin. Other things look, let I, from my understanding, you know, if, if a large party is really interested in buying something, they don’t announce it to the whole world. They buy it and they they announce it. And so the fact that we have not announced to the world that we’re doing something on gold. Is extremely bullish. You know, leave it alone. Let them do their thing. They know. They know the value. I mean, Scott Basin’s, you know, biggest position in his hedge fund was what was gold. And the same goes for Donald Trump. He knows the value of gold. Everything that he builds has got gold everywhere. You know, it’s pretty obvious that he likes the metal and so and so, I do think. And then he tweeted recently, you know, he who’s got gold has the upper hand on negotiation something along those lines. I’m paraphrasing what he said. It’s necessarily but he’s right. And so I do think that this accumulation of gold from central banks is, is, you know, the US is going to likely to be part of this as well. You know, it’s, it’s, it’s, it has to become part of it. It has opt out of this accumulation of the metal recently. But international central banks are at a 60 year highs in gold reserves today, and the US is at a 90 year low, so they better get cranking here.
Trey Reik 44:46
Terrific. This has all been great. I’m going to wrap up by asking you a question which you can specifically or generally address, and that is, you know, it’s mid May, how do you see the rest? To the year unfolding.
Tavi Costa 45:02
Um, I think there’s going to be a catch up of other commodities to gold. That’s where I’m mostly focused on. It’s great. I think gold will hold up well. But I think the other commodities will, will will do quite well. And I think we’re going to see a real force into the interest rates in the US to fall substantially, especially on the two year yield. I wouldn’t shock me at office a two year yield a lot lower. I think energy commodities could make a comeback. I think they’ve been out of favor. I believe in this, just because commodities work in a rotational, dynamic. Sometimes you have the flavor of the day, and then things change, and the flavor of the day now is gold, and I just know that’s not going to be the case, you know, probably 12, six months from now, and it would change to a new commodity. And so, you know, one of the things that caught my attention the most recently was that metric about how much we’re going to add of electricity consumption in five years. That’s a real, real investment thesis question to anybody who is in the markets. I mean, is it natural gas, coal? You know, all these things are likely to play a role here, particularly steel producers, you know, you’ve got, you’ve got things like car manufacturers that may have a comeback. So I’m, you know, I know I’m saying a lot of things, but there’s all sorts of ideas that could play out by the end of the year, like that, like what I just mentioned, that I’m focused on, on the equity markets. I think if we’re going to be in a, you know, it was easier to call the not easy. Nothing is easy. But I would say that the odds are that we’re going to be lower from where we are now. But I think it’s going to be a choppy environment. I’m not sure we’re going to see a real crash in equity markets either. So, you know, still a lot of liquidity out there. Still a lot of liquidity. And also it’s very policy driven, you know, if, if, if they remove the Federal Reserve, you know, chair, Chairman, Jay Powell, from his role, and put somebody there to play ball with the federal with the government. I think things can change drastically in the equity markets. I don’t want to be put in a position where I have a view that it’s, you know, that is no locked into the end of the year. I’m trying to be very open minded. It is. We’re
Trey Reik 47:33
going to have to save your gold funds specifically for our next conversation. But as a preview, you mentioned other commodities. Can you give us just a couple thoughts on silver? Is it a big part of what you do in the precious metals fund, or not, or because it doesn’t have as much monetary characteristics? Does it make it less interesting to you? Silver
Tavi Costa 47:55
is probably, I’ve said this before, the cheapest metal on Earth, and it’s most likely one of the most interesting things to own in the next five to 10 years. And so in terms of asymmetry, in terms of how it’s been behaving, a lot of people are bearish on the metal, just because it hasn’t moved along with gold. That’s just part of the game. Don’t, don’t overthink this. I mean it. You know, silver is at 30 plus dollars an ounce with this gold to silver ratio at 100 What a dream. You know, that means we could see easily, you know, $100 plus dollars of silver in a pretty, pretty normal market, of which, you know, it wouldn’t shock me at all. So I’m very, very bullish silver. I think it carries much more. No, that. This is another one. You know, people look at the gold to silver ratio at 100 and they say, well, it could get to 105 or 110 I don’t want to waste my time with that. That’s just not where the real meat is. The real meat is that, yes, you can get to 105 but then what if it drops to 70 and 60 from there, and that’s to me, where the accumulation of an investor, in terms of position building is, and I don’t lose my conviction because price has gone against me. I It’s quite the opposite. You you earn, you know, you gain even more conviction. In fact, if, if the thesis is is intact, and that’s the case here. So I’m extremely bullish silver. Excellent
Trey Reik 49:22
along those lines. I’m sure you follow Dave Ivan and copernic, and we spoke to him a few weeks ago, and platinum is not something that I spend a lot of time thinking about for a couple of different reasons, supply and catalytic converters. But he points out that platinum has just gotten way too cheap versus gold. And, you know, these, these are the areas I think that you want to participate in in the next six months. Yeah, I would put,
Tavi Costa 49:51
put another idea that is has been on, on my agenda, at least, of looking for, is zinc, you know, it’s, it’s role. Into onshoring and the building of America. Rebuilding of America could be critical. And so I think that should be. It’s a metal that has been if you look at the long term story of so of zinc over 1900s you see a big, big channel where it hits the peak and then the bottom and we’re right at the very lower end of that lower range of the of this, of this zinc prices. And so I think that’s something that is off the radar of a lot of people that could become on the radar. Got
Trey Reik 50:33
it. Tommy, thank you so much for your time. This has been great and best of luck to you and your new adventures in Brazil. I know that you’re relocating down there for at least part of the year. It looks like you need to fill up your shelves behind you with a few knick knacks, maybe photos, but we wish you the best of luck and look forward to checking in in six months or so. Thank
Tavi Costa 50:59
you. That’s true. I literally moved in two days ago. So So thank you very much. Appreciate for the interview.
