26 April 2022

Clay Finck chats with Tavi Costa about why he believes that now is the time to have exposure to hard assets like gold, silver, & commodities, what the potential catalysts are for gold and silver, how investors can think about the value of gold, the one leading metric that’s most helpful to see where we’re at in gold and commodity cycles, and much more!

Tavi is a partner and portfolio manager at Crescat Capital and is Clay’s favorite resource when it comes to precious metal research.



  • Why Tavi believes that now is the time to own gold, silver, and commodities.
  • What the potential catalysts are for a move to the upside for gold and silver.
  • How investors can think about valuing gold.
  • The leading metric Tavi looks at in determining where we are in the gold and commodity cycles.
  • Why exploration assets offer asymmetric upside potential for investors looking for exposure to hard assets.
  • Why Tavi is bullish on commodities.
  • And much, much more!




Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Tavi Costa (00:03):

If you look back in history, silver tends to do very well during those periods. I believe in that. So I think silver will be one of the metals that will outperform the overall commodity cycle here and its competitive vehicles that are out there to play this move. I think gold and silver, when you look at the ratio of the two, historically we’re seeing very elevated levels.

Clay Finck (00:26):

On today’s episode, I’m joined by Tavi Costa. Tavi is a Partner and Portfolio Manager at Crescat Capital. He is extremely knowledgeable when it comes to precious metals like gold and silver, as well as commodities. During the episode, we uncovered why Tavi believes that now is the time to have exposure to hard assets like gold, silver and commodities, what the potential catalysts are for gold and silver going forward, how investors can think about the value of gold, the one leading metric that’s most helpful to see where we are at in gold and commodity cycles, and much more. I’ve been thinking a lot lately about the overall macro environment we find ourselves in today. And I see a lot of benefits in adding exposure to hard assets to help me diversify and protect myself against a number of different potential scenarios. With that, I hope you enjoy this episode with the one and only, Tavi Costa.

Intro (01:20):

You are listening to Millennial Investing by The Investor’s Podcast Network, where your hosts, Robert Leonard and Clay Finck interview successful entrepreneurs, business leaders, and investors to help educate and inspire the millennial generation.

Clay Finck (01:40):

Welcome to The Millennial Investing Podcast. I’m your host, Clay Finck. And today I have a very exciting guest for you all, Tavi Costa. Tavi, welcome to the show.

Tavi Costa (01:50):

Hi, Clay. Thanks for having me.

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Clay Finck (01:52):

I’m super excited to have you on the podcast because with the crazy macro environment we find ourselves in, I’m constantly evaluating ways to potentially protect myself from what lies ahead. During today’s conversation, we’re going to be covering gold, silver and other ways to hedge against inflation. So let’s start with gold. Many of our listeners fall under the Warren Buffett school of thought and will operate under the assumption that a portfolio of high quality businesses will outperform gold over the long run. However, there are periods historically where gold has performed exceptionally well. Why do you believe that now specifically is a good time to own gold?

Tavi Costa (02:33):

I think there are a lot of reasons why I believe in that. And by the way, I do think that Warren Buffett is correct on his statements about gold in general and tangible assets. I think there are times when you want to own tangible assets. Those times they begin with the difficulty of finding a yield in general, nominal yield in alternatives of investments as the whole. And I think we are in one of those times. We saw that in the 1970s and 1940s and the 1910s, all those times were inflationary periods. Some of them were more sporadically inflationary times like the ’40s, and some others are more sticky like the ’10s and the ’70s. But all the three had one thing in common, which was negative real rates during those times. And the other thing in common was that commodities or tangible assets did better than things like financial assets at those times. And so I think we’re entering something similar to that in terms of the inflation problem. I think we have the wages and salaries growth. That’s number one, which we saw back in the ’70s.

Tavi Costa (03:31):

I think we have the supply constraints, this chronic under investments in not natural resources that will drive prices higher, continue to drive prices higher. Something you cannot fix in a short term. We’ve got this reckless fiscal spending. Now we can get into that, but it’s certainly something I’ve been watching very closely and matches with other inflationary times. And the third one is in my view, this end of a globalized world where we’re seeing geopolitical tensions. And that is indeed a very and also inflationary pillar to the global economy. So I am extremely focused on owning tangible assets today at a time when you have debt, valuation and inflation playing out in the US, which we haven’t seen those three imbalances really unfolding all at once. We’ve seen them independently happen throughout history, but not all at once. And so I think this is very unique from a political constraint standpoint, and it’s a time to be allocating capital towards gold and other tangible assets too.

Clay Finck (04:29):

During this inflationary time, we’ve seen commodities run really hot and gold has run not as much. Is a bet on gold essentially betting on continued high inflation for the next five to 10 years?

Tavi Costa (04:44):

I think it’s more of an investment on misguided fiscal and monetary policies going forward than inflation itself. Inflation is one of the consequences of that. And so we begin to mix things, but I also think that gold will play a major role when it comes to what’s happening with the treasury market. I think today’s portfolios mostly look like long technology companies and long treasuries and long fixed income as a way of hedging that position. The risk parity popularity has been at its highs right now. And so I am not sure we’re going to see that going forward, or meaning the outperformance of strategies as such in the next 10 years. And so the change in capital allocation that will come into my view of that, meaning coming out of treasuries and into gold, and gold playing into more of that part of the risk parity thesis.

Tavi Costa (05:34):

But now instead of owning treasuries, owning gold, I think will be an important part. So large capital allocators are not putting enough capital into gold. And 1970s was a great example of how nominal rates were rising and gold was following the same pattern. It was extremely positive correlated to nominal rates. How incredible is that? I mean, nobody talks about this. Nominal rates in the ’70s was basically one of the most predictive forms of looking at gold prices. They both went up at the same time and almost the same chart. And so I think that’s a bigger case for precious metals in general. And for folks that say that gold does not perform very well, gold is what? Six percentage points, five percentage points from all-time highs. It’s really hasn’t been that bad for gold investors. It has been bad compared to other assets in the last 10 years, but is that the right way to be looking at?

Tavi Costa (06:24):

Should we be looking at the last 10 years and saying, “Well, that’s going to play out in the following 10 years”? I don’t think so. I think that’s even adds to the thesis of owning precious metals here is the fact that it hasn’t worked in the last 10, 20 years or so relative to other things. And so I think we’re entering a very important regime here for gold, and I think it will outperform a lot of other assets in the next 10 years. So you have to think about how do I get… You’re not going to get rich buying gold. So how do I get the leverage on that? That’s why I like silver. That’s why I like the miners. And you can get into those businesses that should perform even better than a 10, 20, 15% increase in gold prices.

Clay Finck (07:04):

Do you think that with what is happening internationally at the Russia-Ukraine situation could be a catalyst for gold making a move to the upside? Say if Russia were to start requiring payments for certain types of commodities in gold, or potentially backing their currency with gold. I’ve seen talks of that as well.

Tavi Costa (07:23):

I think absolutely. I think we’re seeing the genie is out of the bottle when it comes to protectionist policies and the geopolitical tensions. And I think in my view that started to turn with Trump in 2016, even a little bit before that. Some folks may disagree, some folks think it started even earlier than that. Well, just think about how this idea about sanctions and the acceptance by the public on sanctions have changed from Trump’s era to now. It’s insane to me. I mean, that’s certainly, I would say a lot more of the Democratic Party for instance, is a lot more open. And not only that, they’re imposing that in other economies today. And so the shift on those policies is important. And the way commodities are become strategic now. Macro assets is another thing to point out because economies are shutting down or showing how the reliance on some commodities like oil, like wheat, like basically any metal essentially is starting to become relevant, and when it comes to relationships worldwide.

Tavi Costa (08:26):

And we need to think about what are the economies in this global stage that will perform better in this environment of commodity prices becoming more relevant. And I think this notion that places like China and India will perform very well is very incorrect. And so in my point, I think we’re going to see other economies like perhaps Brazil emerging as an economy that may actually really benefit from this. I’m from Brazil and I never been so bullish on Brazil, even though there are possibilities of negative outcomes on political side of changes in political leadership in the next 12 months, even less now. And I still think that the setup is extremely bullish for those economies that do have enough commodities and are more neutral when it comes to the relationships in the global stage again. So I’m looking for those economies because I think those are going to do well in the next five to 10 years and I think there are great opportunities in those markets.

Clay Finck (09:23):

Transitioning to how investors can hedge themselves against inflation, I think many people struggle with the idea of gold because you can’t value it, there are no cash flows, and it doesn’t produce anything. So how can investors think about the valuation of gold?

Tavi Costa (09:40):

Ultimately, I think is the value of gold is linked to where the monetary bases money supply is, and the recklessly of fiscal spending that we see in economy, the amount of leveraging the system, or there are many ways of looking at those measurement as a way of figuring out what the gold price should be. The other thing that is important to know is gold tends to struggle when it hits new highs in which was the case in August of 2020. It was the case in January or so of 2008. And it got caught up in the global financial crisis in 1978, also did the same. And what is important there is struggles. And then the second lag of that move is the most violent one. I think we’re in that one. I think we’re entering that regime right now. We saw the kind of the risk-off rally in gold recently because of the war, but it’s much more than that.

Tavi Costa (10:29):

It has nothing to do with the tensions between Russia and Ukraine. It has to do with the shift from much more de-globalized world along with inflationary pillars that are continuing to infiltrate the economy more and more, and the psychological shift of consumers, as we see inflation building up. I think you could see a case for gold reaching $3,000 announced in the next two to three years. I think it’s very plausible. And if you think that way, then you start now exploring other alternatives. What would miners do in that setup? And what would the free cashflow of businesses that are in those underlying commodities look like? And it’s astonishing. I mean, it’s like those companies are being have multiples of businesses that will go out of business in the next three to five years. And I don’t believe in that. I don’t think they will go out of business at all. And so, in fact, I think this is one of the best growth and value opportunities we’ll see in the next five to 10 years. And we’ll take some time to play out.

Tavi Costa (11:26):

There’s a lot of shifts towards, especially the popularity of those assets and the understanding of the opportunity. And I’ve known those trends take a little long to again, to really unfold. And I think we’re in the process of that. You look at the miners relative to gold starting to outperform. And it’s difficult to make decisions when you look in the precious metals because they haven’t really performed well, but that psychological shift can happen very quickly when you see prices moving higher. The same happened with commodities three years ago, no one wanted to invest in commodities. We talked to a lot of investors in that space when it comes to institutional investors, trying to invest in funds like ours. And the lack of understanding of this industry is astonishing again. So it’s not just a capital trend. It’s also the lack of knowledge and labor to really feed the story going forward. So a lot of imbalances that will create this, a very interesting setup for things like gold and silver, but also other commodities. So it’s a very exciting time to be invested in those.

Clay Finck (12:27):

Since gold has gone through these massive bull and bear cycles over time, it seems wise to look to buy and sell at opportune times. Now being a potentially good time to go long gold. If you could only pick one or two metrics or ratios to try and judge where we’re at in those cycles, what would you suggest?

Tavi Costa (12:54):

It’s certainly CapEx strengths. It has to do with the capital spending in the industry. And it’s very simplistic to see how the aggregate CapEx of the industry leads to either bull markets or bear markets is extremely cyclical. And so you see gold prices moving higher, companies become extremely bullish. And so they start losing some of their conservatism to start spending more money. And so you see capital spending rising to absurd levels relative to other things. And so we are not seeing that yet. M&A cycles tend to also be a link to the beginning of a bull market, certainly is established by not having too many M&A cycles or M&A activity. And I think this is starting to happen now. So we’re going to see probably the biggest M&A. I think we’re going to be the biggest M&A trend in this space that we’ve seen in history. And that is mostly because of the supply cliff that most of the miners are facing right now. So they’re producing commodities. They’re not looking for new exploration assets. And so their budget spent on exploration has shrink significantly now.

Tavi Costa (13:55):

And in fact, we’re not seeing enough new discoveries of not only gold, silver, but also base metals. And so how do we electrify the world and how do we make all this green revolution shifts if we don’t have enough metals? And those are going to be the ones that drive prices higher. So to your question, I think the capital spending trends are the most important part of it and were certainly seen a major divergence of gold prices where they are relative to this conservatism, which I think is driven by ESG policies and the green revolution that is in a strange way, also impacting companies to not spend enough money. And so it is an interesting time again. And I think we’re going to see those imbalances in the industry itself will probably make one of the biggest bull markets for precious metals and base metals that we’ve seen in history, particularly to the companies that are involved with those.

Clay Finck (14:45):

I sometimes hear talks of the gold and silver price being manipulated with things like rehypothecation in the paper markets. I’m curious what your thoughts are on, if there’s any truth, to that idea and why that might even be happening.

Tavi Costa (15:01):

Look, I’m open minded to any thesis, right? And I don’t think you should be as an investor. The issue is for me, I back everything up with data. And I can’t back that up. And so do I think it’s just strange that gold is up on a Sunday afternoon when the market opens at 4:00 PM Mountain Time, 6:00 PM Eastern, and then it falls right before the market opens? Sure, I think that’s strange and it happens more than once. It happens quite a lot, but I just cannot really justify what’s really happening. And I think what we’re seeing when it comes to the thesis behind owning gold is much larger than any sort of manipulation we’re seeing in the markets, I think if you believe in that, you should probably not be invested in gold in the first place. And funny thing is that most of the people that talk about that are the ones that are investing in gold.

Tavi Costa (15:48):

So it’s kind of strange in my view. And so I think sure that may be happening, but it’s also a prisoner’s dilemma where I think every central bank in the world also wants to own a lot of gold. So manipulating the price of gold seems kind of, doesn’t make a lot of sense to me and when it comes to the long term trends of why you want to own the asset. And you want to own the asset to the point that you made earlier, which is creating an anchor and improving the credibility of international reserves across the globe in order to also improve the credibility of fiat currencies. And so I think ultimately that will not matter as much as the big case for owning gold and silver.

Clay Finck (16:27):

Are we able to see gold purchases by central banks and other countries, or is that something that just totally flies under the radar?

Tavi Costa (16:35):

The data when it comes to that is just not updated at all. I mean, it’s not enough data for us to know exactly what’s going on. As in gold prices with political issues in different countries, I would say when Turkey was having issues. But more recently we saw Turkey really having issues and being forced to sell some of their gold positions to defend their currency. That’s really when you, I think that’s linked to the declining gold prices indeed. And central banks will be the biggest drivers of gold prices and make those inflection points in this market. But at the same time, so I do watch for that very closely, I think we may see a world where what’s happening right now with interest rates in particular and also with commodities will set off I think a place where we haven’t seen many detags of currencies relative to the dollar. I think we’re going to see some of those happen. And I have my biggest candidates that I think will probably go through that, but I think this is all kind of linked to the gold market too.

Tavi Costa (17:39):

And those economies are going to have to be buying gold at some point too. They’ll force to buy gold in order to restore the credibility of their currencies. And so it’s a movement that really if we think about it, the most credible central banks in the world own US treasuries. And what are US treasuries? That’s just debt. It’s insane that we went from owning gold to owning debt from another indebted economy. And I would say historically indebted economy. And so how do you square that circle when it comes to really justifying the credibility of the any central bank that owns debt from another historically indebted economy? It’s very difficult. And I think that’s about to change. That has to change. And maybe Bitcoin, maybe other assets will play into this role. But I do think historically central banks like Russia, China, India, Brazil, Canada, Europe or European economies, Japan, all resort back to gold ultimately. So I’m expecting that the flows are going to be much larger to that asset relative to anything else.

Clay Finck (18:41):

For those wanting to get exposure to gold, there are a number of ways to do so. A few include buying the physical gold and storing it somewhere yourself or with an institutional type custodian, or you could buy a gold ETF, or you could buy even gold miners on just the stock exchange. What are some of the things investors should consider in determining which path might be right for them?

Tavi Costa (19:05):

I think it all depends on the expected returns type analysis on each of those investors that are looking to invest in this space. For me, I’m looking for the most asymmetric bet I can find in this industry. And if you look across the industry, it’s basically very simple. I mean, you have exploration assets, you have development assets, you have production assets, and you have the royalty ones. And they are basically ranked by levels of risk. And so less risk would be royalties. More risk would be exploration. When you look across the industry and you do real analysis on what’s happening with the industry is certainly what I said before is the supply cliff of the major companies that have consistently generated free cashflow and referring to the producers mostly. And so what’s been happening is that the producers has been building up a cash balance position that is becoming bigger and bigger.

Tavi Costa (19:57):

They’ve been paying down their balance sheets, so meaning they’ve been paying out their debt to levels we haven’t seen in history. They have not been issuing a lot of equity. And so they’re cleaning up their balance sheets pretty good in the last three years or so. And with gold prices where they are. Yes, can they get some squeeze from energy prices and labor costs? Sure. That’s another risk. But in my opinion, the best way to make money empirically speaking on gold cycles is to own gold and silver in the ground. By that, I mean is finding major discoveries of gold and silver or exploration assets that will carry that leverage of those mineral value to a degree that certainly the biggest billionaires or the billionaires of the industry all made their money. The majority of them made their money in the exploration side of the industry. And so that has been our focus. About 93% of our portfolio is in exploration assets because the industry has not invested enough money there. So there’s a lot of inefficiencies. There’s a lack of understanding on geology.

Tavi Costa (20:57):

It’s extremely difficult to navigate the space, not only finding labor to work on those companies, but also finding folks that can actually understand the industry to make investment decisions. And so we can get into some of that process, but of how to find those exploration assets too, but there are a lot of misunderstandings of how to properly invest in this space, in my opinion. And I think that’s setting up an incredible opportunity for a fund that has this kind of smart capital mentality, long term mentality that is able to come in and take more of an activist role in owning a lot of businesses that are extremely cheap micro-cap companies that we think be worth north of billions of dollars in market cap in the following years, again, through the value of the mineral relative to the price of those underlying commodities moving higher because of being in a super cycle for those assets.

Clay Finck (21:51):

That’s very interesting. What types of companies have these minerals in the ground? And is it certain types of commodities that aren’t gold and silver? Or could you expand a little bit more on that?

Tavi Costa (22:03):

Well, there are a lot of things. You can buy copper exploration assets. You can buy gold, silver, nickle. I mean, there’s plenty different ways you can play that opportunity I think. But it’s I think you have to have a view about the metal first and foremost, and seeing how economically viable those deposits are. It’s certainly don’t want to sound like there’s no risk involved. There’s a lot of risk involved, more than almost any investment you will make in your life. But I think this is the time to be doing that because a lot of those companies are not being priced to the risk or the probability, the high probability that they have found major discoveries. And so that’s the interesting part. I mean, some of… So basically a company will issue shares or look for ways to fund an exploration project. They were going to go poke some holes in a property and look for those minerals.

Tavi Costa (22:52):

If they find, meaning if they have very high grade intercepts or so forth or good geological surveys that present that the thesis is interesting when it comes to an investment standpoint, then it should drive the value of that company higher. So the concept of not actually producing for cashflow is interesting because they’re just literally diluting themselves to look for minerals in the ground. What’s interesting about this is that the biggest intercepts that we find today are not being rewarded by the market. And if you look back in other times in history where we had gold cycles and we had similar intercepts of high grade minerals in the ground, certainly we saw appreciation of market caps to levels that we’re not seeing today. So the inefficiency in this market is tremendous. And so it creates an opportunity. And so for a fund like ours to make many bets, 90 companies that we own in our portfolio, which maybe one-third of them are not going to turn out to be discoveries, and maybe 10 or 15 or 20 of those can. If we do that, that would be incredibly successful.

Tavi Costa (23:52):

Some of those portfolios may just be successful with one discovery where you take a company from five, 10 million market cap all the way up to four to $5 billion worth. And so that’s really what you’re looking for here. And there are a lot of retail investors that drive that market. It’s a very illiquid market in general. And what an opportunity for a fund that has that long term mentality is looking to own up to 20% stake of those companies and help them to succeed and searching for geological expertise to help them to design those drill programs and really find the best leadership of those companies in order to succeed, helping them with the money, finance those projects in general, look for good investors that will support the story as well, market those stories too because there’s some marketing involved. And so there’s so many angles you can go here. There’s really a lot of activism that can be done, but not enough people are doing that.

Tavi Costa (24:46):

And just one thing I would mention is the common sense of investing in exploration assets is that you should try to find large deposits because it’s more levered to the price of those minerals. But the problem is that usually those large deposits are also involved with having very low grade and not being as high of a quality of a mineral than other opportunities. And so I think what you’re looking for here is certainly opportunities that can work in a bull market or bear market. And there are many examples, Kirkland Lake was a great example of that. A company that found an extension of the deposit by continuing to explore in an existing producing asset and was able to do in [inaudible 00:25:26] market. So that’s the risk management that I think should be done is to look for high quality assets that work in any market, even though, as I said before, I have a very strong view of where we are in this cycle. So hopefully I answer some of your questions, but I think that’s basically the kind of the case for this part of the industry.

Clay Finck (25:45):

I’ve considered buying the physical metal myself. And I noticed that investors are faced with either buying the minted metal or something that is government issued as well as a number of other options. I’m curious if you have any preference between the two and how investors might want to think about that.

Tavi Costa (26:04):

So I’m not an expert of the physical market, believe it or not, because I think it’s the least asymmetrical way of betting on this cycle. Doesn’t mean it’s the bad way. No, it doesn’t mean that at all. A lot of folks do that. And I know there smart guys do that. I just don’t think again, that’s the best opportunity relative to how much capital you’re deploying, the potential for capital appreciation here. So I’m not an expert of that part of the industry at all, but I do think that owning again, minerals in the ground and safe jurisdictions or places that are uniquely well positioned to develop those mines are certainly the best opportunities out there.

Tavi Costa (26:42):

If you get gold prices going up 15, 20%, the mineral in the ground, given the fact of the risk involved with putting those assets into production and the cost involved with that too, will certainly pay off when it comes to the risk relative to return. And so the returns can be north of multiples of those companies. You can see a tenbagger easily, if you see any sort of success in this, not only on the exploration side, but also on the gold cycle being right. And so I think there are plenty ways of playing this, but the physical market is just not the way I’m focused right now. I think other people would be better candidates to answer that question.

Clay Finck (27:20):

Yeah, that’s helpful. You’re talking a lot about looking at asymmetry in the market and where there are good risk-return opportunities and you’ve been very vocal about silver. Why is silver potentially an even more attractive opportunity than gold today?

Tavi Costa (27:37):

Well, simplistically speaking, silver is a high beta version of gold. And if you believe you are in an inflationary era, if you look back in history, silver tends to do very well during those periods. I believe in that. So I think silver will be one of the metals that will outperform the overall commodity cycle here and its competitive vehicles that are out there to play this move. I think gold and silver, when you look at the ratio of the two, historically we’re seeing very elevated levels, meaning gold prices are high relative to where the silver is. I think technically speaking, it’s one of the most attractive charts I’ve seen in my career. I think you could see an explosive move up to new highs very quickly. I know very well I should say I track very closely the supply side of silver, which I know it’s incredibly difficult to find silver assets out there, particularly again in exploration side of it.

Tavi Costa (28:28):

And so that’s going to drive the market. I know the geopolitical side of it, meaning Mexico, Peru, some of those more challenging areas of the world are also one of the biggest places when it comes to finding silver deposits. And so that will make it more and more difficult to supply and feed the world with silver. I think silver fits into not only as a monetary asset, the benefits from this reckless amount of fiscal spending and debt and monetary disorder that we’re seeing, it’s an asset that fits the green revolution. It might as well be used in many ways to feed that purpose. And it’s probably one of the most undervalue assets relative to the monetary base to equity markets to any other commodity that’s seen. And so I am extremely focused for the next five to 10 years of finding very important silver assets that I think will be worth multiples of where they are today.

Tavi Costa (29:21):

And I think there are quite a lot of opportunities out there. I shouldn’t say quite a lot. We found some of them, but it’s somewhat restrictive of unfortunately just the difficulty of finding silver in general. And so, but it’s an important market for us. And I think we’re yet to see that big move in silver prices. And for folks that complain about the performance, I mean, silver has really gone sideways in the last year or so. And it’s so [inaudible 00:29:45]. It hasn’t been the end of the world. I mean, we’ve been adding to our position every time silver is down three, four, 5%, we certainly add to our position. We look for more assets in the space. And that’s what I think, it’s the value principle is adding to undervalue assets over time and accumulating those more and more throughout the course of what we believe it’s going to happen in the macro setup. So I find this a great opportunity and I still think it’s one of the most asymmetric opportunities again, in sort of the metal space in general.

Clay Finck (30:15):

What are some of the miners that you would consider to be more blue chip type miners that have free cash flows today and great balance sheets and well managed, whether it be gold or silver miners?

Tavi Costa (30:28):

Well, I’m happy to say some of them, but again, it’s not where I spend most of my time looking at. But I think there are great opportunities there. I think buying any of the royalty companies, you’re going to be fine. I mean, majority of them do a great job selecting their assets. And I think all those are going to be okay. Newmont, Barrick, more on the producing side are all interesting opportunities. But then you have companies like B2Gold that mostly operate in areas like Africa and other unsafe jurisdictions, but they’re very well known for being capable of managing those operations in those unsafe areas. And so incredible. I mean, they produce very large amounts of free cashflow relative to their market cap or enterprise value, which has attract us quite a lot. I think some of the major companies are just not investing enough as they’ve been very, had a lot of challenging times when it comes to the shareholder pressure of spending any dollars in finding new exploration assets here.

Tavi Costa (31:27):

And that’s mostly because those assets don’t generate free cashflow. It won’t generate free cashflow any time soon. And so they’ve been pressured on spending that capital into those opportunities. I like the developed phase as well. I think the developed phase of the mining industry is fulfilled with financially savvy folks that are able to really calculate when it comes to the, how much free cashflow generation can be driven by those assets and the cost of building those mines and so forth, and how we come online and will start producing. But there are opportunities of miners today trading three times free cashflow literally, less than that sometimes. So we look at some of those too, but I think even bigger than that is again, exploration is where we are just because of where the value relative to the, that is being priced in the markets relative to the probability of finding something and having something that is truly world class type of asset is just certainly not priced in accordingly.

Tavi Costa (32:26):

And when you look at the some of the majors, I mean, look at the price of Newmont, it’s incredible. Newmont is continuing to do very well. And it’s certainly driven by an institutional capital. Institutions are certainly starting to allocate capital into the space and they start in the easiest parts of the industry, which is Newmont and the large companies. Newmont is close to new highs, approaching new highs here. And not a lot of people are paying attention to that. So you’re starting to see the senior miners doing very well, but not seeing the juniors yet catching up to it. It’s a matter of time until the juniors start to lead their way to the upside and silver starts leading their way to the upside relative to gold too. Again, we haven’t seen the riskier parts of the market really play out, but the other parts have already started. So pay attention to those trends because it’s a matter of time until that money spill over the other parts of the industry.

Clay Finck (33:15):

Yeah. I know you aren’t super immersed in the physical market, but one piece that caught my eye when looking at the prices of the physical silver is that the price of the physical silver is much higher than the paper silver. So I just found that pretty fascinating that there seems to be much more demand for the actual physical metal. Transitioning to other potential inflation hedges, we’ve seen the prices rise for a number of commodities recently with the increase in global tensions and supply chain issues. So I’m curious how you think about commodities playing into an investment portfolio.

Tavi Costa (33:50):

Yeah. Let’s get into that because I think it’s important. Now look, the global equity market is somewhere close to $120 trillion worth. That’s the whole global equity market today. This is about that amount. Natural resources industries are probably worth about $10 trillion. So that’s 11 times the size of the natural resource industry. If we take out energy for this, it’s only about $3 trillion. Another imbalance that is interesting is looking at Apple’s market cap is about 40% higher than the entire energy sector in the US. The issue is that Apple produces about, or I should say the energy companies produce about 50% more in free cashflow than Apple. And so I’m starting to see that those inconsistencies in the market are going to close those gaps very soon. Companies in the energy space are making a ton of money. I’m a big believer that we’re going to see. I was saying this way before this war, nothing related to the war regarding the agricultural commodity crisis.

Tavi Costa (34:47):

I thought we’re going to see some sort of food crisis along with energy crisis, meaning that those two parts of the commodity market would rise to significant levels that would start hurting the global economy unsustainably, and also in a way where capital cannot really fix this issue because it’s not just a capital problem. It’s again, it’s a labor problem too, where we have a lack of folks that understand this market in order to allocate capital efficiently. And so, and I’m referring to agricultural commodities, especially I’ve thought that the charts, when it comes technically speaking look incredibly attractive. I’d seen the CapEx in the space has been decimal. Same happens with energy companies. Just think about this. I mean, oil prices, just call it around a hundred dollars a barrel or higher or lower. When was the last time we’ve seen that at the same time energy companies have CapEx estimates at multi-decade lows when adjusted to GDP levels?

Tavi Costa (35:44):

I don’t think we’ve ever seen this. So that gives me a lot of conviction that the bull market in this phase is just getting started. You asked me the question about what’s one metric I look at? Well, CapEx is one of the most important ones. When you start seeing CapEx reaching new highs, watch out, I think that’s time to get out of that trade. But it’s an investment, it’s not a trade. I think it’s going to play out in many years. The political environment may shift and help some of those companies to put more money to work in terms of capital spending. It may not shift. And that will shift my view when it comes to investing in this or not. I think there are many ways of being protected against inflation. Commodities is one way to do it. And when you look at the equity markets today at the valuations that we are relative to housing market, for instance, I think there is a setup today as well, where the housing market may perform incredibly well relative to the stock market.

Tavi Costa (36:37):

So for folks thinking about retirement for the next 10 years or so at least, this is the type of strategy that you should be investing in. For the next 10 to 15 years, I think the housing market looks much more attractive than the stock market. And the other thing in commodities that is important is we haven’t even seen the boom in infrastructure developments. We haven’t seen the no residential building happen. And those trends are very low relative to history still. We’re seeing to pick up a residential building, but it’s not to absurd levels just yet. So how is that going to drive commodity markets is going to be an important driver in my view of the demand side. And so I still think you’re in the market right now that you want to be buying the dip on commodities. And we’ll have plenty dips out in the course of five to 10 years. And I think you want to be buying those dips. And I think you want to be selling the rallies in equity markets as a whole.

Clay Finck (37:26):

It seems like we can’t talk about inflation hedges nowadays without asking about Bitcoin. Do you consider Bitcoin any sort of an inflation hedge or more of a risk-on type trade?

Tavi Costa (37:38):

Well, it’s a more of risk-on type trade. I mean, copper could be a risk-on type of trade too. It has its similar attributes when it comes to the correlation with other risk-on assets. I think Bitcoin serves its purpose when it comes to being an alternative to the monetary system. I think we are seeing the biggest libertarian political movement we’ve seen in history in the crypto space. By that, I mean, folks with similar ideologies questioning the credibility of any fiat currency that has no anchor. And also I think that will force central banks again to be improving the quality of their international reserve. It’s something we haven’t seen in many years and decades I should say. And maybe Bitcoin will play out as one of those alternatives, but I think central banks are much more open to buying gold than Bitcoin, but it doesn’t mean Bitcoin doesn’t have its value.

Tavi Costa (38:31):

I mean, it’s certainly a place that is developing in a digital world in general and will continue to serve that purpose. But I just don’t think that you have the same level and efficiency in the crypto market versus some parts of the commodity market just yet. So everyone is sort of an extension of the technology sector. And technology sector is a very crowded sector. There’s a lot of smart guys. There’s no lack of smart labor in general. I mean, you can find software engineers that are just geniuses. And I mean, this whole industry is fulfilled with young and smart people in general. And so at what point do we see that shifting towards the geology side? I think we will see that. Now I’ve been thinking about how do I make money on that shift because it’s a matter of time until… Again, it’s all about capital.

Tavi Costa (39:19):

You get a copper mine start paying the same amounts that some of the technology companies pay those employees, you’re going to see that shift very quickly. The labor is going to follow the money here very quickly. And so the needs for investing in basic necessities of the economy will drive the interest from folks to learn about geology. And if I could be long geology, I would. And I think one of the ways of doing that is being long natural resources industries in general. But yeah, it’s kind of a long answer, but I believe that Bitcoin, we own Bitcoin in the past, I’ve owned Bitcoin in the past too, and I think it’s a true movement and it will continue to be here for many decades and you shouldn’t ignore it. But at the same time, I’m looking for interesting opportunities that I don’t need to put a lot of capital and the risk is not being priced accordingly to the opportunity of those assets to performing well in the future.

Tavi Costa (40:10):

And I don’t know if crypto is in that camp. Again, when you have enough smart guys all thinking on the same place, I mean, obviously you remove most of the inefficiencies in the market. So I think we’re kind of there in the crypto space. And doesn’t mean you won’t make money, but are you going to make multiples of your money? I also don’t think you’re going to do that. So I think we’ve seen that. We’ve seen the last few years of that and I don’t think we’re going to see again those crazy big opportunities relative to what you may see in other industries.

Clay Finck (40:43):

Tavi, thank you so much for joining me. Such a informative conversation, just so much knowledge packed into many of your answers. So I really appreciate you coming onto the podcast. Before we close out the episode, where can the audience go to connect with you and learn more about your work?

Tavi Costa (41:00):

Well, thanks for the opportunity, Clay. It was a pleasure to speak with you. And I think you can find my work on Twitter @TaviCosta. And I also write letters. I don’t say monthly, but little bit, depends on my time. But I would say every month and a half for two months, I’ve helped to write some large, big letters with a lot of in-depth research on the macro environment. And you can find that at crescat.net, either website, and that those are the ways you can find my work.

Clay Finck (41:27):

Awesome. Thank you so much, Tavi.

Tavi Costa (41:29):

My pleasure. Thank you.

Clay Finck (41:31):

All right. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app, so you can get these episodes delivered automatically. If you’ve been enjoying the podcast, we would really appreciate it if you left us a rating or review on the podcast app you’re on. This will really help us in the search algorithm so others can discover the show as well. And if you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There you’ll find all of our episodes, some educational resources, as well as our TIP Finance tool that Robert and I used to manage our own stock portfolios. And with that, we’ll see you again next time.

Outro (42:07):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin, and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.


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