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Gold Reserves Depleting In Supply Cliff - David Garofalo, former CEO of Goldcorp - YouTube
Channel: Wall Street Silver
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hi everyone thanks for joining in welcome back聽
to wall street silver joining us today is david聽聽
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garofalo the chairman and ceo of gold royalty聽
david great to see you great to see you too thanks聽聽
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for having me on well it's an absolute pleasure聽
having you on david you're about 90 gold so we can聽聽
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tell you're very bullish on gold what factors聽
will impact gold's performance in the future聽聽
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well i think it's uh interest rates lower for聽
longer quantitative easing i you know tapering聽聽
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is a relative term i've heard that they're聽
tapering but they're still buying they're聽聽
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still buying government bonds they're still buying聽
corporate bonds they're going to continue to do聽聽
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that for the foreseeable future they're going聽
to continue to debase their currency because聽聽
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ultimately all of the debt they've聽
strapped on both pre and post pandemic聽聽
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as is really not fiscally uh sustainable it can't聽
be repaid from tax revenues i think the only way聽聽
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to deal with debt is to basically debase the debt聽
the base the underlying currency to do that so聽聽
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fiat currency will continue to expand and supply聽
and gold is the one currency you can't print聽聽
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yeah that's a it's it's you know this tapering聽
that they're doing a lot of people are wondering聽聽
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whether or not it's for real whether it's聽
sustainable whether the market's gonna flip聽聽
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out and just have a crisis a a taper tantrum聽
as they call it um i know you're in canada聽聽
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but you obviously watch what's going on in in the聽
united states and what the fed does very closely聽聽
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you know how do you think the market's likely to聽
respond as we taper well look i think we're in the聽聽
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beginning of an inflationary cycle no matter what聽
they do on the taper inside again i said tapering聽聽
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is a relative term i i think it's still going to聽
be expanding money supply it's going to expand at聽聽
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a slower rate but they're going to continue聽
to print fiat currencies to deal with their聽聽
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debt situation they're going to print their way聽
out of debt that's the only way to deal with the聽聽
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amount of debt that they've strapped on but what's聽
really alarming and you bring up canada but i聽聽
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would say in the western world generally it's聽
a coordinated effort from all the central banks聽聽
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in the western world to debase their currencies on聽
competitive basis to maintain their export markets聽聽
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so if the us continues to print money canada聽
well europe will uh and the asian economies聽聽
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will continue to to base their currencies聽
as well so it's a competitive debasement聽聽
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paper is infinite and gold and commodities are聽
finite and so the prices of those will continue聽聽
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to go up we're going to experience continue聽
to experience double-digit inflation for the聽聽
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foreseeable future that's what we have now don't聽
believe the headline cpi numbers they vastly聽聽
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understate the inflation we're all experiencing聽
yeah inflation's six or seven percent unless聽聽
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you're eating or putting uh fuel in your car or聽
buying a house otherwise it's like thirty percent聽聽
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do they do they think the cpi in canada聽
also is it massage like it is here to聽聽
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oh it is everywhere yeah it is everywhere it's聽
it's ridiculous and it it really understates聽聽
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what we all have to pay just to live to聽
breathe um and and you know that that's聽聽
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that's unfortunate but i think the reality is that聽
we're seeing that in inflation in equity prices聽聽
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you know if you look at the multiples we're seeing聽
the general equity markets they've been distorted聽聽
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beyond recognition and that's because there's so聽
much paper chasing a finite number of businesses聽聽
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and hard assets so everything's inflating聽
commodities inflating copper's at all-time highs聽聽
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bitcoin is is a bubble and and in my view in聽
cryptocurrencies you know that's just reflecting聽聽
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uh the reality that a new class of investors聽
are looking for ways to preserve their capital聽聽
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safeguard their capital they're mistakenly聽
looking at cryptocurrencies as uh a scarce聽聽
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commodity that will protect their capital that聽
the reality is it's just zeros and ones any any聽聽
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[ __ ] can create a digital currency in my view聽
and and under my many morons have created them聽聽
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so so i i i'm just saying that this they're all聽
all sorts of signs and and and flags about the聽聽
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inflation that we're experiencing every aspect聽
of our economy but gold is so finite in quantity聽聽
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ultimately it'll explode in value well you聽
know you told me also beforehand that uh聽聽
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you have a thesis on silver also as it relates聽
to gold could you share that with our audience聽聽
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well look the way i look at silver is it's聽
a proxy for gold and tends to provide a much聽聽
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higher leverage to look to increasing precious聽
metal prices and the way i look at it is聽聽
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in uh in a bull market when gold's really flying聽
typically the golden silver price ratio goes聽聽
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down to as low as 40 to one or less and right聽
now it's more like 70 or 80 to one um because聽聽
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you know gold has been range bound it's kind of聽
lost its luster it's waiting for the next leg up聽聽
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but when it does achieve that momentum if you聽
believe gold is going to 3 000 which is my聽聽
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thesis that would be the all-time high in real聽
dollars silver is going to go to north of 100聽聽
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bucks an ounce yeah in that environment because聽
it's going to over over perform or outperform聽聽
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gold because of that leverage opportunity that i聽
talked about that ratio and starting the narrow聽聽
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as the gold price gained some momentum david do聽
you think the current inflation rate is warning聽聽
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us of a crisis ahead and how will that affect聽
the precious metal space yeah look i i think聽聽
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um inflation is rearing its ugly head um you know聽
people are concerned that interest rates are going聽聽
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to start to go up but i look back at the last聽
massive inflationary cycle we had as an economy聽聽
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which was in the 1970s and gold didn't achieve聽
its peak until 1981 which was 850 an ounce聽聽
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which was two years or so into the tightening聽
cycle remember paul volcker came in to run聽聽
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the federal reserve and he was the inflation聽
hawk that started the rain and money supply聽聽
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bring up interest rates and it was two years after聽
he started doing that that we actually started to聽聽
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see peak gold and that was again the real all-time聽
high for gold 850 announced in 1981 is 3 000 an聽聽
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ounce today i didn't just pull that 3 000 target聽
out of my hat i just looked at the all-time real聽聽
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high we haven't come close to achieving that so聽
even if the federal reserve starts to taper um the聽聽
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damage is done and it takes a number of years for聽
that damage to undo itself and we won't see peak聽聽
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gold until a couple years into that tightening聽
cycle in my view peak gold pricing i should say聽聽
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do you really think they can tighten uh with the聽
amount of debt they have i mean it just seems聽聽
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implausible to a lot of people that with 30聽
trillion in debt and 3 trillion deficits and聽聽
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the housing bubble where it's at and just the聽
everything bubble where it's at is it i mean i聽聽
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i question whether they can even taper and聽
fully stop their buying of bonds let alone聽聽
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raise interest rates i mean where do you think聽
that that line is that we'll get to all the way聽聽
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up to you think we'll actually get to the point聽
of tapering being complete and then raising rates聽聽
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i i think it's unlikely and i i certainly don't聽
think rates are going to go up on a real basis it聽聽
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and they may go up marginally on a nominal basis聽
but that point inflation will be very very high聽聽
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and real rates will continue to decline that's聽
what you need to look at not the nominal number聽聽
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what's the real number net of inflation and聽
that will continue to go down and continue to聽聽
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stay in negative territory we're decidedly in聽
negative territory now we're going to be further聽聽
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negatory even as nominal rates start to go up聽
and that's really what happened in 1981 is yes聽聽
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paul volcker was raising the benchmark rate聽
but inflation was still galloping away and聽聽
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real rates were coming down that's why the gold聽
price was going up that's what's going to happen聽聽
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in this cycle in my view gotcha um do you do聽
you think we even have a paul volcker in in the聽聽
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central bank system now though it seems like that聽
that personality has been purged entirely from聽聽
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uh from the system don't you think all the phd's聽
running around no i haven't seen anybody uh rear聽聽
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his head and talk about inflation they seem to be聽
united in singing from the same choir book on the聽聽
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federal uh federal reserve board um so we'll see聽
we'll see um but no i haven't seen any evidence of聽聽
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that kind of personality yet well the other thing聽
that i've noticed is they they're they seem to be聽聽
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acknowledging there's inflation but they all want聽
to blame it on supply chain disruptions or covid聽聽
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no one seems to want to say oh maybe we shouldn't聽
be printing you know three trillion dollars a year聽聽
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or what you know whatever the number is now聽
uh they don't seem to want to think monetary聽聽
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policy has anything to do with it right no聽
and this is unlike the inflation cycle back聽聽
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in the 70s this is very much a money supply driven聽
inflation cycle you know back in the 70s was oil聽聽
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you know oil was really the reserve currency of聽
the world our economies ran on oil and uh opec聽聽
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you know launched the embargo and that聽
infected the entire supply chain because the聽聽
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economy ran on oil to a much larger degree than聽
it does today this is being driven by money聽聽
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supply and i i feel like the central banks pay聽
more attention to the to the level of the equity聽聽
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markets than they do to actually taming inflation聽
they want to keep that party going for as long as聽聽
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possible i think ultimately that's going to end聽
in tears david do you think powell just wants to聽聽
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get it over with and retire and just throw it on聽
the next guy um well i think to a degree every one聽聽
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of them want to do that they want to get while聽
the point's good hit the speaking circuit right
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when we start seeing stagflation in聽
2022 what's your thoughts on that聽聽
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yeah i mean that's a real risk um you know聽
and we certainly saw that in the 70s um you聽聽
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know inflation eats away at capital it eats away聽
productivity it really infects the economy and聽聽
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causes ultimately causes significant unemployment聽
causes slower growth i mean it it's a real concern聽聽
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um you know ultimately we're going to end up into聽
that type of cycle for sure and and again in that聽聽
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type of environment you want to protect your聽
capital and i'd say gold is where you want to be聽聽
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precious metals and there's a very finite quantity聽
of it and when you want to preserve your capital聽聽
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you want to do that with a hard asset that can't聽
be replicated or produced at a whim and there's聽聽
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so much uh inelasticity of supply to price in聽
our industry because of the capital intensity聽聽
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the social barriers to building new mines it's聽
a very very difficult industry to ramp up and聽聽
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respond to the gold price we can't just make more聽
gold overnight it takes sometimes decades to bring聽聽
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new my capacity on um it certainly takes a lot聽
of exploration effort a lot of capital intensity聽聽
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a lot of engineering and a lot of social聽
engagement with surrounding communities and聽聽
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governments and regulators and whatnot it's it's聽
a very very difficult industry to ramp up supply聽聽
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well you know that that raises the point you you聽
follow the gold mining industry closely as part of聽聽
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gold royalty corp um are you seeing that trend聽
that it's tougher and tougher to like the big聽聽
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mines as they are depleted it's tougher and聽
tougher to replace them with those tier one you聽聽
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know 500 000 ounce a year in the lowest quartile聽
or you know you know that that thing that like聽聽
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barrack mark bristow likes to define as a tier one聽
and barrick himself mark bristow he seems to be聽聽
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shifting more towards copper than gold he wants聽
to make you know one of the largest gold mining聽聽
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companies more of a copper play going forward is聽
that because they're having a tougher time finding聽聽
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those big tier one assets now yeah absolutely聽
and i'm not just a royalty guy i mean up until i聽聽
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launched gold royalty back in march in an ipo i聽
spent over 30 years building operating mines i聽聽
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ran gold corp i ran hud bay i ran i was the聽
cfo of nico eagle for 12 years eight years聽聽
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in inmates so i've been a mine builder my entire聽
career it's never been more difficult to replace聽聽
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depleting reserves and resources in fact gold聽
reserves in the industry are down 40 percent聽聽
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since their peak seven years ago because聽
of under investment and expiration聽聽
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and mine development you know the industry has聽
been so focused on deleveraging their balance聽聽
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sheets returning capital shareholders the reality聽
is they've not cycled back any capital back into聽聽
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the ground or replaced depleting reserves and so聽
yes it's becoming extremely challenging i'm not聽聽
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surprised that mark's looking to diversify because聽
he recognizes how precious precious metals are how聽聽
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scarce they are how difficult they are to find and聽
so the only way to grow if you're not finding it聽聽
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is to buy it and he's looking to diversify聽
obviously because he recognizes how scarce聽聽
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these resources are and how difficult they are to聽
find and ultimately develop into productive minds聽聽
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david how big is the upside for the miners like聽
i know we're talking about lots about miners but聽聽
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how big is the upside yeah people yeah that's聽
a good question you know the uh we think the聽聽
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upside for the underlying commodity is x you聽
know how much more leverage do you think the聽聽
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gold miners will have this cycle uh honestly聽
honestly there's a reason after 30 years i've聽聽
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gone into the royalty business and it's because i聽
think that the leverage proposition in gold miners聽聽
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is going to be undermined by significant聽
input cost inflation and you know we're at聽聽
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an interesting point in the cycle where there's聽
been a significant amount of under investment in聽聽
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the industry and new mine capacity reserves are聽
depleting production is depleting that undermines聽聽
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that leverage proposition but also because there's聽
going to be a catch-up in investment in new mine聽聽
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capacity companies are going to have to spend聽
more on expiration more in mind development to聽聽
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replace the depleting reserve and production聽
base is going to drive up input cost inflation聽聽
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and also we're seeing inflation in the聽
general economy that will further amplify聽聽
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that and so we've been there before if i look聽
10 years ago we came out of the credit crisis聽聽
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and i was running high bay minerals at the聽
time i was building a big copper mine in聽聽
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in peru called constancion i was building a couple聽
of other gold mines in northern manitoba called聽聽
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uh lawler and um and reid and i have to聽
tell you at that time there was massive聽聽
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cost inflation because everybody was building聽
new mines both in the base and precious side聽聽
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but at that time we didn't have inflation in聽
the general economy we had one to two percent聽聽
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inflation now we have that rush to build new mine聽
capacity and we have inflation in general economy聽聽
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that will erode margins in the gold industry even聽
as if and as the gold price goes up so if we look聽聽
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at what happened to gold equities back then well聽
during that cycle when gold went from you know聽聽
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a thousand to nineteen hundred dollars an ounce聽
posted credit crisis so gold went up 140 percent聽聽
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i saw the mining equities actually going go up聽
only about 65 or 70 percent they underperformed聽聽
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the commodity you know what happened to聽
the royalties and streamers they went up聽聽
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almost four-fold they went up almost 400聽
percent as the gold price went up 140聽聽
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the simple reason is they provide you top line聽
exposure they provide you leverage of the gold聽聽
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price and leverage the expiration success because聽
the the royalties are typically not only on the聽聽
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existing deposit but any growth geologically in聽
them and so they provided that optimum leverage聽聽
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with zero exposure to input cost inflation because聽
it's all on the top line we're in that type of聽聽
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cycle again i think that's what's going to happen聽
so i think gold is going to fly again my thesis聽聽
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is gold goes up at least 50 from here but i don't聽
think the uh the mining equities are going to keep聽聽
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pace i think they're going to underperform and聽
we've seen that under performance in the last year聽聽
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we've seen a steady degradation in valuations聽
in the money industry over the last year聽聽
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because of the fear of inflation and narrowing聽
margins and i think the royalty companies are聽聽
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going to vastly outperform in that market that's a聽
good point in fact i've heard keith neumeyer sort聽聽
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of we in a previous interview i had with him uh he聽
said something along the same lines that there's聽聽
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two things that could cause silver to skyrocket聽
there's the monetary inflation you know monetary聽聽
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debasement portion that could cause it to go up聽
and then there's the shortage side uh you know聽聽
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physical supply shortage that could cause it to聽
go up well if it was only a physical shortage聽聽
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proposition then the margins get really good聽
but if it's a monetary debasement issue yeah as聽聽
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you just described the the margins you know don't聽
the margins shrink because your cost inputs go up聽聽
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uh he thinks it's actually we're in a situation聽
where both are going to happen at the same time聽聽
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but but uh and so we've never had that before uh聽
and so it's it's going to be really interesting聽聽
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as to how this plays out over the next 10 years聽
but i i know keith keith was mentioning something聽聽
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very much along the same lines as you well聽
keith's a friend and i actually have a royalty聽聽
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on his mind jared canyon so nice so you're聽
why it's jarrett canyon so high cost right聽聽
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that's good how long does it take on average to聽
set up like a silver or gold mine like i know聽聽
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a lot of people think oh next week you can just聽
set one up but on average is it two years five聽聽
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years how long would it take uh i would say聽
it could be multiple decades you know from聽聽
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discovery to first production and that's true聽
for both silver gold mines fact it's true for any聽聽
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major mine um because you know typically you're聽
spending a long time geologically delineating聽聽
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and drilling out the deposit to know what you聽
have and making the economic case engineering聽聽
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it raising the necessary capital quite often聽
you're spending hundreds of millions to billions聽聽
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of dollars to build a new mine and also uh what's聽
a big impediment now is getting local communities聽聽
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to support it getting permits uh from regulators聽
within the country to operate you know we often聽聽
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don't find deposits in the most politically uh聽
amenable countries you know they tend to be in聽聽
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in more difficult parts of the world that are聽
underdeveloped and don't have a regulatory regime聽聽
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that's rational and systematic and and timely聽
and predictable and so it like i said there's a聽聽
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remarkable elasticity of supply to price in聽
the mining industry generally we just can't聽聽
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flick on new capacity tomorrow in response to a聽
higher price is a big lag between higher prices聽聽
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and higher supply well david i really want to聽
thank you for for giving us some of your time and聽聽
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sharing your expertise with our audience we'd聽
love to talk to you again in the coming months as聽聽
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this market develops this year and next year well聽
thank you for having me on it was a real pleasure
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you
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