Transcription
And so of course I would expect those companies to decline. But the gold mining equities should be in a very different situation because their revenues should be improving because gold prices should be appreciating and at the same time their labor costs and their fuel costs and their steel costs and their equipment costs should be under pressure potentially declining because of the uh reduction in economic growth due to the recession. So that's an important reason why I think gold mining equities are likely to appreciate during the next bare market even as the S&P 500 is getting crushed.
Welcome back to Metals and Miners. I'm your host, Gary Bone. Today we have an exciting and timely discussion to work through with Brian Hirschman with the focus being on gold and gold miners. Brian's a gold stock hedge fund founder of Hirschman Capital. He is a CFA and former Wall Street investment banker. Brian, it's an honor to have you on Metals and Miners for the first time. Welcome to the show.
>> Thanks, Gary. It's great to be here.
>> All right, Brian, your career in capital markets spans several decades. You launched your fund in 2014, and since its inception, from what I found, it's outperformed the S&P 500 despite being considered the world's most bearish hedge fund. Previously, you were an associate at Goldman Sachs Principal Strategies, a multi-billion dollar hedge fund in and of itself, whose alum alumni list is pretty prestigious. You graduated with distinction from Yale where your investment philosophy was strongly influenced by Professor Robert Schiller. You have an incredible background really. Um there's a lot to discuss today, but before we do, what's the big takeaway for those tuning in that you hope that they walk away with after listening to our conversation?
>> Sure. I'd mention three quick things. The first is I continue to think this is the most dangerous time in US financial history because it's the first time any major economy has had three bubbles all at the same time in US equities, US real estate, and in US bonds. And all three of those bubbles should probably burst at the same time and that could be very soon. And the consensus view on Wall Street is that that's not a a problem because the government will bail out the economy and markets. But I think that couldn't be more wrong. If the government could always bail out the market, then it would have been discovered 2,000 years ago, not just in recent years. Instead, I think this era of bailouts that we've had for the last 40 years is over because 40 years of government deficit spending has pushed the US government's finances to the breaking point. So in the next recession, instead of a bailout, we're likely to have a government debt crisis with extremely high interest rates and very high inflation because the US has this deadly combination of high government debt to GDP and very high borrowing from foreigners.
The second point I'd make is that even though uh is that glo uh investors portfolio allocations to gold are still far less than they were at in 1980 at the pe at the tail end of the last inflation crisis. And when investors increase their portfolio allocations to gold, the gold price increases because the supply of gold is mostly fixed in the short term. And as stagflation from the inevitable government debt crisis d uh crushes bonds and equities and real estate, investors should rush to gold and that should in turn cause gold allocations to increase which in turn should cause gold prices to increase. In fact, if investors were were to take their portfolio allocation back to what it was around 1980, then the gold price would roughly double from where it is now. And the third quick point I'll make is that the Toronto Stock Exchange, TSX, Goldmine Developers, which my fund is currently concentrated in, uh, remain far more attractive in my opinion than Gold Bullion or larger gold mining companies. In fact, at the start of the year, our portfolio is trading for only 20% of its present value of its intrinsic value at current gold prices. Which means if gold prices are flat over the next few years, then the portfolio still has the potential to more than triple. And that's an important reason I think why as of yesterday, the fund was up or as of today, the fund is up around 20% net of fees for class A. And the GDX index is actually down for the year. And since I we mentioned performance, I should mention really quickly that uh that's net returns, past performance is no guarantee of future results. And investors should review the funds offering documents for important disclosures including risk factors.
>> Yeah, it's good information. All right, so um Brian, everyone is wondering why the price of gold has plunged about 20% from its record high since the start of the war. Gold as a safe haven should have gone up on the worsening inflation outlook and the mounting geopolitical risks. These are usually bullish developments for gold and should remain. So what is your read on why gold has fallen like it has?
>> Yeah, maybe I'll I'll answer that in in two parts. First, I'll I'll talk a little bit about why I'm I'm bullish on gold long term and then I'll I'll talk a little bit about why I think returns have been weaker this year. And I think as we're just talking about historically investors have increased their portfolio allocations to gold when they've be uh become worried about sovereign default whether that default was going to potentially happen through an outright default as in the European debt crisis around 15 years ago or whether that default was through inflation as uh as was the case in the US in the 1970s. And I have a great chart on my most recent investor letter which is available to everyone on my website which shows how investors gold portfolio allocations have varied over the last 55 years and have been affected by various macro events. But the basic summary is during the 1970s when the US government was effectively defaulting through inflation investors gold portfolio allocations were were very high. And then again, we saw an increase in portfolio allocations during the European sovereign debt crisis when investors were worried that the Euro zone might break apart. And then we saw a big increase in portfolio allocations after COVID when governments around the world were being very very aggressive with stimulus and deficit spending. And then of course last year we also saw an increase in gold portfolio allocations as the US continued to run huge deficits and we got very erratic policy coming out of Washington. But the key point here I think is that this concern about the sovereign debt risk should continue because since 1825 all 55 net debtor countries with gross government debt to GDP of more than 120% ultimately defaulted and when I say net debtor I mean countries to simplify I mean countries that borrow a lot from foreigners. So that would include the US which is the the largest net debtor in history but it wouldn't include a country like Japan that doesn't borrow very much from foreigners. But the key point is that the US has already crossed that critical 120% threshold and after the next recession we should be way beyond that 120% danger zone. And so investors gold portfolio allocation at the start of the year was around 6 and a.5% and that's well below the the 12% allocation they had around 1980. And I think that given that private debt is is much higher than it was in in 1980 and that the uh the US has a much bigger bubble in equities and real estate than it had in ever had in the 1970s. the next crisis, next recession should be far worse than 1980. So gold allocations could easily surpass their 1980 peak. And I think another way to think about it is as you said, gold does well when concern about inflation and defaults pick up. And since it's the one asset that's nobody's liability and it doesn't depend on fixed coupon payments in the future which is why investors tend to shift from bonds which do depend on fixed coupon payments when inflation picks up. Uh and since the start of the this year as you said inflation risk has increased and default risk has increased as recession risk has increased since those two usually go hand in hand. So as you said that's bullish for gold. But I think the problem is if we look back at 1972 to 84 the average gold portfolio allocation at that time was around 7% which is around where it is right now. As I mentioned at the start of this year the allocation was around 6 and a.5%. But during the 1970s, the US government was was already defaulting through inflation. And today, uh, we don't yet have that 7 12% inflation. So investors seem to be anticipating a future sovereign debt crisis, anticipating future inflation that hasn't yet appeared. So you can make the argument that given where gold prices currently are, investors are getting a little bit ahead of themselves because if you look at other asset classes like US equities, US equities are near their or they were near their highest valuation ever at the start of this year and that type of US equity valuation only makes sense if you expect very low and very stable inflation in the future. So gold investors are pricing in a more pessimistic scenario than investors and other asset classes. And so gold is now less attractive than it was at the start of 2025. But that said, and so for that reason, I'm not surprised to see that in Q1 returns have been weaker than they were in 2025. But I'm still very bullish on gold over the long term because inevitably we're going to have this sovereign debt crisis or almost certainly we're going to have this so sovereign debt crisis and that has the potential to send gold above 8,000.
>> So it sounds it almost sounds like um what has taken place in terms of gold price deleveraging has been more of a mechanical thing. Gold got ahead of itself. It got stretched too far. Maybe it needed a catalyst. Maybe it didn't, you know, maybe it was going to it was going to uh mechanically delever anyway back to its 200 day moving average into a more realistic position versus any alarm that we should have because of the fall since the start of the war. Would you say that's accurate?
>> Yeah. Yeah, I think I think that makes sense. It's always very difficult to tell what exactly is going on because gold is traded around the world in in many different markets. And as with any asset class, you have momentum buyers that are buying and selling in in relation based on price movements rather than actual fundamentals. And my fund really tries to take a a more long-term perspective. We have very patient clients which gives us allows us to do that. And for a long-term investor, I think gold is still reasonably priced. Uh we're almost certainly going to have a sovereign debt crisis at some point and the gold valuation and portfolio allocations should go much higher when that happens. But more importantly, and as maybe we'll we'll talk about today, the gold mining developers that I mentioned earlier that my fund is invested in look extremely attractive and uh so we want to stay invested in in those as long as the gold price is still reasonable.
>> Yeah. Okay. So Brian, um, Deutsche Bank recently stated that gold's rising sensitivity to the US dollar is the central driver in the recent weakness as the dollar has gotten stronger since the beginning of the war. They further stated that gold's beta to the dollar has reached extreme levels while its correlation with equities remain elevated relevant uh relative to recent history. So they finished by saying this combination has repositioned gold within the macro framework aligning it more closely with liquidity conditions rather than traditional safe haven behavior. What is your takeaway on what Deutsche Bank is saying here that gold's role has fundamentally and permanently changed from safe haven to being affect affected by liquidity as if it were a risk asset.
>> Yeah, first before I get to that uh first regarding the dollar, I would I would agree with what a lot of other people on this show have said is that uh in 2008 for example, the dollar was uh undervalued and so the dollar was generally appreciating during the global financial crisis and that limited US dollar um returns for for in gold investors. But now we're in a situation where the US dollar is overvalued and so you'd generally expect the US dollar to be to be depreciating over the the next few years. And so that's going to be a tailwind, something that's going to help the gold price. And then as far as the correlations, look, these correlations change all the time. Uh they're very unstable. And so I never get and because we're making investments that we're holding these gold mine investments for five years or more sometimes I I don't worry too much about how the correlation is changing monthtomonth. I think fundamentally as we were talking about earlier gold is the one asset that's nobody's liability. And so when uh companies start defaulting, when governments start seizing private assets, when governments start defaulting through inflation, through outright, uh gold is still going to do very well as long as its valuation is reasonable. And as I was mentioning earlier, I think gold's valuation is a bit high. It's higher than its 55 year historical average, but it still looks very reasonable given how likely it is that we're going to have the the mother of all financial crisis. And that the same goes for gold's inflation protection probabilities. Regardless of what the the correlation was, regardless of what any investment bank says, gold doesn't depend on fixed coupon payments the way Treasury bonds do. So when those assets are getting annihilated by inflation, gold will look more attractive to investors and you'll see capital shifting from from bonds to gold. Provided that uh gold's valuation is reasonable provided that if the gold allocation was 75% then of course then I then I would be concerned. But if it's still within a reasonable level and I know that investors are going to be more concerned about inflation and default in the future than they are now, then gold looks very attractive. If the valuation was unreasonable, then it would be a different story. So I don't worry too much about the correlation. And I don't think the the US dollar movement this year explains the the fluctuations in gold. So I think that's another issue with that argument.
>> Okay. Um one of the concerns that folks have right now and this is just since the war started and um you know because war brings unknowns. There's a fog of war where there's a lot of unknowns. You don't know how long it's going to last. You don't know what the impacts and the second order of impacts are going to be. Has demand for gold materially changed since the war began? I think demand for gold and essentially we're talking about investors here, right? Unlike other industrial commodities, uh demand for gold comes almost entirely from investors. Very little is used for for industrial purposes. It's hard to tell exactly what's going on with investor demand. I guess the best indication what's going on with investor demand is the price. So we've seen some decline in investor demand, but I think investor demand is very fickle. So maybe they're they're selling gold now to uh reduce leverage or something like that. But all the fundamental properties of gold that I mentioned earlier remain true. uh the one asset that is nobody's liability, a very good an asset that is uniquely protected against inflation. And uh for all those reasons, I expect investor demand to increase dramatically over the next several years as we have this inevitable um or as we almost certainly have this inevitable financial crisis that will push in that will make gold look more attractive to investors uh relative to equities, bonds, and real estate and push uh gold portfolio allocations much higher. Do you have a um a target range for gold at the end of 26?
>> Yeah. Uh I'm you me uh you mentioned one of my my Yale professors earlier and one of my other Yale professors was was David Swenson who used to manage the the Yale endowment and some consider him uh the best endowment manager ever if not and one of the best institutional investors ever. And the first lesson he he taught us in his class was that it's very very difficult if not impossible to make uh predictions about what's going to happen over the next year. All the investment banks always try to do that of course but I think their their track record is pretty mixed. So, I'm I think I would just say that if we have that financial crisis and gold goes back to the allocation that it was uh to 1980, that 12% allocation, then the gold price should go well above 8,000 and it could go potentially higher than that since the next crisis should be much worse than 1980. But it's I would say it's impossible to predict exactly where it's going to be at the end of 2026. So I think in people in investing in this sector, especially in gold mining equities, it's not a great idea to invest money that you need next month or next quarter. It's better to make long-term investments here because as with any asset class, there can be a lot of fluctuations in the in the short term.
>> Yeah, that is absolutely true. Um, all right. So sentiment typically drives buying behavior in the markets in the January February time frame. Sentiment for gold and gold miners was incredibly high. The war has completely washed out sentiment and now it sits at a historically low range. In fact, the last time that I saw it was in this range was around October of 2022. What's your read on sentiment for gold and gold miners right now? And how instructive is it for you?
>> Yeah, I would say one way to look at sentiment is just ask what are valuations? how do they compare to history? And that's kind of a a simple way of of gauging what sentiment is. And I think if we look at gold, you can make the argument that actually sentiment is still pretty positive. Yes, March has been rough, but 2025 was fantastic. And even though gold is well below the portfolio allocation it was at in 1980, it's actually well above its its 55 year average portfolio allocation. And so that means you can make make the argument that sentiment is actually above average right now. But I think sentiment should be above average because the risk of a sovereign debt crisis has never been higher. And so I'm not surprised that investors are trying to protect themselves by raising their gold portfolio allocations. And then I think sentiment for gold producers such as the main companies in the GDX, it seems reasonable. They seem undervalued but not extremely undervalued. And then I'd say as I alluded to earlier, the sentiment for the TSX developers that were that my fund is invested in still seems excessively pessimistic. And so that's why my fund is invested there. That seems where seems to be where investors are most pessimistic. But ultimately, I think that sentiment should improve, which should mean higher valuations for our mining companies. and we should hopefully benefit from both higher gold prices and improving valuations.
>> Do you view where it is now as more of like a consolidation zone where it would then take off for a new leg at some point? It might be weeks, months from now, quarters, who knows? But it's a it's more of a zone that it's building a a new base to just like it did back um we'll call it sub sub 2000 in that range there from 1650 to 2000. Do you view this, we'll call it 4,100 to maybe 4,800 zone um in that light?
>> Yeah, I think it's it's it's always hard to predict the the short term, and I I'm not much of a a technical analyst. We're I'm really taking more of a a five-year long-term valueoriented view. Uh so, I would say the the crisis could happen at any time. That should almost certainly drive gold much higher. And it's and that should cause the gold price to double, potentially double or maybe even increase even more. What it does in in the short term, I I don't know. And for to be honest, I I don't really care. I don't care that much. You know, I care more about how it does over the next five years. And if we have a a rough month or rough month or two, it's okay. I do think that the the downside is limited because sovereign debt is so high. Investors, I think in their their heart of hearts, investors realize that US equities are a bubble. Uh maybe they're they feel a lot of pressure to stay invested because they don't want to get fired and they want to keep up with their their benchmarks. That's the the problem with Wall Street. But I think it's it's the highest US equity valuation ever. It's the worst fiscal outlook ever for the US government. Uh that's a problem for many governments across the world. Real estate across the world is very overvalued. The the Fed the since the US government has so much debt. The the Fed is going to have a very difficult time raising interest rates to try to contain any increase in inflation. And that's going to be a problem for central banks across the world because government debt is a problem in a lot of places and private debt is at record levels. So the I'm making a this is a long-winded answer, but my point is the risk in the system is clearly so high. So I think investors aren't going to take their portfolio allocation back to where it was in 2000 when it reached an all-time low back when the US government was actually running budget surpluses. that's not going to happen again. So, I think this clear sovereign debt risk, this clear, it it should be clear that this is the most dangerous time in financial history and so that should provide a floor on the gold price and I don't think we'll get too much consolidation for for that reason.
>> Yeah. So, you know, and and to your point, the debt is only going to increase from here. Baby boomers are retiring in droves. They're going to need a lot more medical care. They're going to get social security. They're living longer than ever before. Um, interest expense on the debt is growing. The debt itself is going to probably grow a lot faster because we need more war spending and other types of spending. So, to your point, you know, that is an issue that is only increasing uh pressure on the budget. Uh, but I was asking you the question just for everybody's sake here. You know, there are some who have a uh much more measured long-term view like yourself. Um, but there are others who tune in who, you know, struggle with the day-to-day minations of the movements here. And, um, I really just was looking for you your your response to to help them bring a more of a calm perspective to the outlook and I think you did that and I appreciate that. Um, oil.
>> Yeah, sorry to interrupt. I was just going to add, you know, what what would make me concerned about gold? it would be if the US government were to start uh running budget surpluses and and paying down its debt, then I would really start to question my my thesis. But I think we all agree that that we're pretty far away from that. And so I think that's why long-term investors in undervalued gold mining equities can sleep peacefully.
>> Yeah. And this is not a comedy show, so you know, just FYI. Yeah. Um All right. So oil prices are a great proxy for expenses for the miners. Oil prices were sitting under 7075 for the better part of the last 18 to 24 months. They're now sitting 90 to 100 since the war started with a brief move to 120. Um obviously there's pain at the pump for people and there's panic um maybe maybe overdoing it a little bit, but how do you see these higher oil prices affecting gold mining equities?
>> Yeah, I think higher fuel prices definitely have a negative impact on gold mining companies, especially open pit gold mining companies since they use more diesel fuel. On the other hand, as I as I've said, the I think we're headed for the mother of all financial crisis and that should ultimately crush oil demand and crush oil prices and then that should be the perfect storm for gold miners because we should have higher gold prices. At the same time, we have lower fuel, labor, and equipment costs because of the the downward pressure on those things from the crisis or recession. But if oil prices stay high, uh I think for the open pit gold mining companies that we're invested in, fuel costs are probably only around 12% of mining costs. And that you also have things like uh tires and engine oils, which are petroleum based products. So, the prices of those things will increase, but I think a a 30% long-term increase in oil prices might only cause a a 5% increase in open pit mining costs, which is small compared to the appreciation we saw in gold in 2025. And it's small compared to how much I expect gold to appreciate in the future. And yes, oil could go much higher in the short term, but that should be a temporary increase, I think, because either Trump is likely to back off or a financial crisis is likely to occur due to a a huge oil spike. And that financial crisis would then lead to an oil crash and solve the oil problem for the gold miners. And plus, uh, nearly all the companies were invested in, they're building mines. They're not yet producing gold. And so what happens to oil next month or in May doesn't really matter. What matters more is the average price over the next few years. And that should be much lower than the price in April 2026. So I think for a long-term investor in gold mining equities, the the oil price rise isn't a huge concern.
>> All right. So Brian, everyone is always fearful of the next bare market to come. The Iran war has only heightened those fears. The 2000 and 2008 markets, they were very different, but both left very lasting impacts on the minds of investors. During the next bare market, do you see more of a 2000 type market reaction where you know tech falls sharply? There's a rotation in the underbelly of the markets towards hard assets including gold and gold miners as they perform fantastic from 2000 to 2002 or do you see more of a 2008 deflationary type vortex that just pulls everything down with it including gold and gold miners?
>> Yeah, we touched a little bit earlier about how the US dollar is uh overvalued now whereas it was undervalued leading up to the 2008 global financial crisis. So that's one thing that is going to be positive for the dollar over the next few years and was something that was a bit of a headwind in 2008. But I think the bigger difference versus 2008 is I don't think investors are going to rush into treasuries the way they did in 2008. So, I think instead of the next crisis looking like 2000 or 2008, I think it's actually going to look more like 1980. We're all uh where gold allocations soared and treasury bonds were were crushed. Indeed, this year we're already seeing Treasury bonds declining as recession risk rises. And so, I think that's going to be the the key difference for gold. And then for what's going to happen with gold mining equities, I think when you're thinking about what's going to happen to any uh equity investment uh during a recession, there's essentially three things that matter. One is how are the company's cash flows going to be changing? The second is how is its perceived riskiness going to be changing during the bare market or recession. And third is how is it going to look compared to other investments? And I think for the typical S&P 500 company during the next recession, the next bare market, it should have plummeting cash flows and profits. And so of course I would expect those companies to decline. But the gold mining equities should be in a very different situation because their revenues should be improving because gold prices should be appreciating. At the same time, their labor costs and their fuel costs and their steel costs and their equipment costs should be under pressure potentially declining because of the uh reduction in economic growth due to the recession. So that's an important reason why I think gold mining equities are likely to appreciate during the next bare market even as the S&P 500 is getting crushed. And then the second point would be the typical company during the next recession, the typical S&P 500 company will look riskier as its profits get crushed and as its margins compress. But the gold miners profit margins should be improving dramatically. And especially for the the gold mine developers that my fund is focused on, their perceived riskiness should decline as due to their improving margins during the next bare market. And that should lead to higher valuations and higher stock prices. Now the last the problem will be that comparisons to other investments will get more difficult during the uh next bare market if interest rates are are soaring due to a sovereign debt crisis and and so bonds and cash will look more attractive relative to gold mining equities and equity valuate S&P 500 valuations should be improving. So the S&P 500 will look more attractive, but the valuations of these sorts of gold mining companies that were invested in are already so low. I think they'll still look very attractive relative to those other assets. to so to kind of sum up, I think the gold miners that we're invested in should do very well if there's a severe bare market because the valuations their valuations are low, because their profits should be improving during the recession, and because they'll look safer uh due to their improving margins. And in fact, we've seen gold miners do very well in past bare markets such as 1929, the 1970s, and 2000. But as we talked about before, anything can happen in the short term. So I think investors should take a long-term perspective with with gold mining equities.
So clearly the common theme is is you're taking a longer term view. You're expecting there to be a strong recession kicked off by a sovereign debt crisis at some point. Um that's the the central key theme to the thesis that um that's driving capital towards the gold miners. What's the catalyst that kicks off the sovereign debt crisis? How how soon could it possibly kick off? Are you seeing warning signs that it's getting close to kicking off? you know, where are you with the actual the actual bare market, the actual sovereign debt crisis that's going to lead to capital flows shifting?
>> Yeah. I think the one key point that I don't I don't think I've mentioned or I haven't emphasized is that anything that causes a recession has the potential to trigger the sovereign debt crisis. Because as I mentioned, right now we're more than 120% US government debt to GDP. The next recession should push us closer to 150%. And if you look at my year-end 2023 letter, which is up on my my funds website, I explain why 150% is a reasonable estimate of where government debt might go in a recession. And if we're at 150%, we are so far beyond the the red line. We are so far into the danger zone that I think a a sovereign debt crisis is almost certain. And it's of course impossible to say exactly when a recession is going to happen, but it's certain that at some point there will be another recession. And we're very much overdue since we haven't had a significant recession since 2008. And so yeah, any any number of things could hap could trigger the recession and actually trigger the sovereign debt crisis. What's going to trigger a recession? Yeah, I guess or the other point I would make is that you don't need a a big event for the US stock market bubble to start to collapse, for the US real estate bubble to start to collapse. There was a a famous professor that said, "An overvalued market is like a a ruler that's vertically balanced on someone's hand and any little gust of wind can trigger the crash." And if you look at the 1929 crash or the 1989 Japanese stock market bubble and cor and crash or if you look at the 2000.com bubble, there wasn't any big pandemic events. There wasn't any Lehman Brothers moment. Yes, you had tighter monetary policy in all those cases, but it was really just slightly tighter monetary policy combined with minor events that caused those bubbles to collapse and then caused the the recession. And today we do have a tighter monetary policy compared to 2022 and interest rates have stayed relatively high and may increase this year. So, uh, it may just be a question of what minor event is going to combine with this increase in interest rates to trigger the collapse of these bubbles, which would in turn trigger the sovereign debt crisis. And I should also say it's impossible to say whether the sovereign debt crisis is going to happen first or the equity bubble crash is going to happen first. The problem is they're all connected and regardless of which one starts first, it should trigger the collapse. If the stock market crashes, that should wreck the US government's budget deficit, which uh should then make the stock market even worse and either and gold should go much higher. But it could also the bond market could sell off first and then that'll cause the stock market bubble to crash. It doesn't really matter where it started. when you have this where it starts when you you have this much leverage in the system and this many asset bubbles. So there's a lot of ways that gold investors can win.
>> Yeah. So we've got 120% as you said uh debt to GDP tighter policy. It's like the Fed is in this box. You know they can't they can't print because of the the uh the debt levels are going to kick off much higher inflation. If if the economy starts spiraling, if the stock market starts spiraling, do you see them stepping aside because of that 120% debt to GDP number and say we'll just let it find its own natural equilibrium or do you still think they'll print?
>> Yeah, I think that's a very good question. I think uh ultimately the Fed is going to be
>> because because if it if it needs to find its own equilibrium with the housing bubble, the stock market bubble, the credit bubble, we could be looking at a great depression part two. Are they just going to stand aside?
>> Yeah. Yeah. Uh yes, exactly. And of course we we know that every uh every time there's been a minor crisis or every time there's been a recession over the last 40 years, the government has stepped in to try to bail out the the economy. So I would expect them to try try to do that the same because you can make the argument that oh if they step aside it's going to be so painful but it's actually better for the economy in in the long run because we need to have that correction to get the debt in the system and the valuation of asset classes back to more reasonable levels and to get rid of the inefficient companies. But no no regulator is going to take that view. They they always go for the bailouts. Of course, we we know that because they always want to kick the can down the road and and make the sovereign debt problem. Uh
>> and the pressure from the pressure from the populace to do something. The people are going to be screaming out, you've got to do something. You know, we have elections every two years. I mean, there's going to be an enormous amount of pressure on them to do something to to bring help to the people who are suffering.
>> Yeah. Yes. That's exactly right. That's exactly right. That's arguably how we got into this mess is that there's a relatively short election cycle. So, nobody has the the backbone to uh implement the austerity or make the the painful changes that would actually improve our our budget outlook. And so, as a result, these problems have been building and building for 40 years. The key difference I
>> if Elon Musk can't get it done, if he gets kicked out of town that quickly and he was, you know, on the road to finding things, who can get it done? Right. Right. You know, I think I heard Seth Clarman, the famous value investor, make that that same point. But the key difference now is that the the bailouts will no longer be an option because it was always the government every time we had a recession or crisis for the last 40 years. It was the government ste stepping in to bail out the private sector through deficit spending through direct bailouts through interest rate cuts. But now, because the sovereign debt crisis, uh, the sovereign debt levels have gotten so bad, the Fed is going to essentially lose control of interest rates, the Fed is going to be trapped and we're going to end up with this stagflation on steroids situation where whatever, and you may have heard the term fiscal dominance. We're going to end up with fiscal dominance where the the nation's terrible fiscal situation dominates monetary policy. And whatever the Fed tries to do, we're going to get higher inflation. For example, if the sovereign debt crisis starts and the Fed tries to cut interest rates, that'll just lead to more inflation because it'll increase the money supply. If the Fed tries to hike interest rates, that will raise the government's borrowing cost and make the the deficit even worse and thereby further increase inflation expectations. If the Fed tries to implement QE, uh that's going to cause all kind uh it depends how they implement the QE. If they just print the money to buy the bonds, then that's going to cause inflation and that'll make the debt crisis worse. If they try to fund it as they have been by issuing short-term floating rate bonds, then that's not going to work well because the uh short-term debt will be incredibly expensive during a debt crisis. And when investors see that the government is issuing lots of short-term debt, they're going to see that the government is just increasing its debt rollover risk and that's going to me make them dump treasuries even faster. So whatever the Fed does, it won't be able to solve the debt crisis. And that's why the central banks in countries like Argentina and Turkey and Brazil were never able to get those countries out of their sovereign debt crisis because ultimately the the Fed loses its power in a a sovereign debt crisis. So I think investors are like junkies addicted to government bailouts that we've been getting through these Fed rate cuts. But during the next crisis, instead of a bailout, investors are probably going to be decimated by stag inflation and the government instead of be and the Fed instead of being the savior, it's going to be part of the source of the crisis. The government they do they just stand aside and let the and let the uh the bond market collapse the biggest the biggest market on the on earth or do they sacrifice the dollar? you know, what do you think um ultimately is tried by the Fed? What are you expecting the Fed to actually do?
>> I think ultimately, if we look at other sovereign debt crises, we'll get much higher interest rates, much higher inflation. The currency should get weaker because the dollar is overvalued. We'll get much lower equity prices, much lower real estate prices. Those are uh much higher uh much higher inflation if I didn't already mention that. So those are
>> gold mining equities is not in with the other equities in in your view here.
>> Yes. I I don't think so. I think because their profits should be improving dramatically, their margins should be improving dramatically which which will make them seem much safer and because their valuations are so low, I think they should do extremely well.
>> Okay. All right. So Brian, I understand that your fund does not own any silver miners. Would you please share why you don't?
>> Yeah, I think as I I've mentioned, I like to value the gold price by tracking investors portfolio allocations and that works well for gold because gold is primarily used for investment. Very little of gold is used for industrial purposes. Silver, it's much more industrial. So I couldn't use that only that same portfolio allocation methodology to value silver because that would be only capturing half the the demand. It wouldn't be telling me anything about industrial demand. So I have much less confidence about what silver's intrinsic value is. The second issue I think is it's tougher to find silver mines in countries that I consider safe and that also have overvalued currencies. I want countries with overvalued currencies because as the currency depreciates then that means it'll get less expensive to operate a mine there. For example, Australia, it's a a relatively safe jurisdiction. They don't have many silver mines. You find a lot more silver mines in places like Peru and Mexico, which I consider higher risk. And then the third issue is it's tough to find pure silver deposits. they it usually occurs with lead and zinc and those are more proyical commodities and I would prefer just precious metals exposure. I don't want to get hurt because the China bubble bursts and lead and zinc get crushed for that reason and therefore hurt the the profits of the the silver mine.
>> Yeah, that's great insight. I appreciate you sharing that. This has been an incredible discussion with Brian Hirshman. Before we wrap up, I want to direct everyone who's interested in the metals and mining sector to visit our Substack at metalsanders.substack.com. When you join our quickly growing community, you're going to receive a free report. It's titled, "If you don't own gold, you know neither history nor economics." That's a famous quote by investing legend Ray Dallio. And that's the name of the report you'll receive. I'm positive that you've been enjoying the conversation that Brian and I have been having. Would you please let him know? Hit that like and subscribe button and leave a comment below the video. Brian, as we wrap up the discussion, would you share a key takeaway that you want to leave with the viewers for them to keep in mind and walk away with from this video and then let everyone know where they can learn about your work and how they can connect can connect with you?
>> Sure. I would just add although my fund is is concentrated in in gold mine developers and I have the vast majority the vast vast majority of my net worth invested in the fund. I think investors that want more diversification could also consider holding cash as Warren Buffett is doing and they might also consider non US value equities as guys like Jeremy Grant have suggested and my funds website is hcap.lc and on Twitter I'm at hcapl. Thanks very much for having me.
>> Yeah, absolutely. It's been a lot of fun. Um I will have all the information up on the screen. So guys, who's tuning in right now, you can either just type it in or you can go to the description area uh of the video and I'll have links over there. You can get over to Brian really easily there. Brian, thanks again for coming on to Metals and Miners. You've been really generous with your time, analysis, and ideas. I've really enjoyed the time that we've had together. This is the first time, but hopefully you'll come back sometime soon. Everybody else who's tuning in, thanks for watching. I want to direct everyone who's interested in the metals and mining sector to visit our Substack at metalsanders.substack.com. When you join our quickly growing community, you're going to receive a free report. It's titled, "If you don't own gold, you know neither history nor economics." That's a famous quote by investing legend Ray Dallio. And that's the name of the report you'll receive. Heat. Hey, Heat.