Transcription
Trump wants to change the global trading system. He wants to rebalance trade so that the US doesn't have these massive trade deficits. Well, that's going to mean a lower dollar. And in fact, when you have Scott Bessett saying that one of the reasons that foreign countries are benefiting and they're cheating is they're undervaluing their currencies. So, he wants the currencies of our trading partners to go up to level the playing field. Well, if those currencies go up, then the dollar has to go down.
And so if you're a central bank and you're sitting on a lot of dollars and you know that even the US government wants those dollars to go down, well, why are you going to go down with that ship, right? You're going to want to get rid of your dollars to own something that's not going to go down. And of course, if the US is going to run smaller trade deficits, that means the world is not going to have to reinvest as large a trade surplus in US dollars in US treasury. And of course, if the US is going to have smaller trade deficits, the main reason for that is because the US economy is in recession. We're not buying as much. That's the only way to really address it right now is if Americans reduce their consumption. Well, if Americans reduce their consumption and GDP is 70% consumer spending, we're in a recession. And what's the Fed going to do in a recession? Cut rates, making holding dollars even less attractive. And what are we probably going to do? QE. So now we're going to print even more dollars that are losing value.
And so all this stuff is good for gold because it creates more pressure on everybody who owns dollars to get rid of them. And what do you want to buy? Gold is the obvious alternative because it's not like Europe doesn't have any problems. It's not like Japan doesn't have any problems. And so all these other currencies, they're flawed, too. Now, they may not be as flawed as the dollar, but why just substitute one flawed fiat currency for another? Why not just have gold, right? It doesn't have any of those flaws. Nobody can sanction you. When you own gold and you have it in a vault in your own country, no other government can do anything because you own that gold. So, they can't do to you what the US did to Putin because they were foolish enough to have a lot of US dollars and a lot of US treasuries. And that was the message we sent. If you hold a lot of US treasuries, you're a fool because you've put yourself in a vulnerable situation that we could take advantage of.
I think the biggest driver for gold really has been central banks understanding that the dollar's days as the reserve currency are numbered. I mean, nobody knows exactly how large that number is, but they know that it's getting smaller every day. And central banks need to replace dollars with another monetary reserve. And the best choice is gold. And that's what's happening. You're seeing central banks accumulating more gold. They still own a very small percentage of total reserves in gold and so they have a lot of currency reserves to divest predominantly US dollars. I think it's mostly US dollars that central banks want to get off their books and replace with gold. But I think eventually investors both in retail and institutional are going to figure out what's going on and they're going to do the same thing. they're going to want to replace some of the bonds or fixed income that they have in their portfolio and put gold there instead. And so I think the investment demand is going to grow dramatically over time for gold. And I think central bank demand is going to continue to grow. And so the price I think has really no place to go but up. Doesn't mean it can't, you know, go down along an upward trajectory. Like you know, we pulled back. We almost got to 3500 a week and a half ago and now we're down to 3,200. But I mean, if you look at where we were a year ago, today we were, you know, maybe 2,200. So we've moved up, you know, $1,000. So gold is clearly moving up. And it's not just because of the trade war. I mean, it was moving up before the trade war.
We could back the dollar by gold, but we'd have to raise the official price of gold quite a bit in order to do that. But then in order to maintain that backing, we'd have to stop all the deficit spending, which Trump doesn't want to do. I mean, Trump is one of the main reasons that Congress is going to pass this big, beautiful bill, which is actually quite ugly, and it's going to contain massive increases in deficit spending and a $5 trillion increase in the debt ceiling. We couldn't do that if the dollar was backed by gold, which is why it's not backed by gold, because politicians don't want to be disciplined. They were disciplined when we had gold backing, which is why our economy was much better under a gold standard than it is now. But now the government just can get away with murder. And so Trump could talk about it, but actions speak louder than words. He's not acting like somebody that wants to be on a gold standard. He's acting like a big spending liberal, you know, or Democrat, you know, Keynesian that's, you know, wants to prime the pump with inflation and government spending. And, you know, gold prevents that from happening.
I would prefer private companies to go into the Ukraine and negotiate deals. I don't like the idea that the US government gets in there and tries to, you know, become a middleman or something. It's obviously going to make it less efficient and more prone to, you know, graft and corruption. But yeah, I mean, I haven't looked at all the terms, but yeah, I mean, generally what happens, you know, governments don't develop their own resources. When they do, they do a lousy job. Generally what a country does is they will license through some kind of uh you know mining rights or a particular area to a private company and that company will pay some override a royalty to the government for that concession and so the government doesn't do anything. It allows a private profit-seeking company to efficiently mine the resources. So that's what I'm sure Ukraine I mean when the government tries to go in and operate the business it does a lousy job. It's very inefficient and so they don't end up with, you know, a lot of output from the government-owned mines. You need private sector efficiencies and profit motives.
If you look at the GDXJ, there's a lot of pretty big companies in there for the gold space. I mean, the gold companies are small in comparison to, you know, your typical, let's say, US Fortune 500 company. Even the seniors are pretty small market cap, but the juniors that we're overweighting in our portfolio are much smaller than the average GDXJ company. and they've gotten even less love. But you know the thing is with these stocks you really need to accumulate your positions over time because there's less liquidity there and you know if you go in in a big way you could be moving the price. So we have devoted you know resources to accumulating these positions and yeah you know they haven't moved up nearly as much as the big stocks that we own and we still participate in the gains from the bigger companies but because we have this overrating in these very small companies it's caused our performance to lag but we're willing to do that make that sacrifice for the long-term gain because I think once we really start to see money coming into this sector which hasn't even happened in fact retail investors are still pulling money out of the sector. I mean, they've been liquidating GDX and GDXJ every day this year basically, even as the stocks were going up, when the investment flows reverse, when Wall Street wakes up to what the central bankers obviously already know, and we start to see a real rerating of the gold sector and a lot of money that has no allocation right into gold starts coming into gold, a percentage of that is going to want to go to these smaller stocks and then they're really going to move. those stocks are going to way outperform the bigger stocks, which is why we own them now. And so, we're sacrificing short-term performance because we know if we're right on what's going to happen in the long run, we're going to have huge outperformance. And if we just waited for these stocks to really move to then try to buy them, well, we couldn't get anywhere near what we own. We have good positions that we would never be able to accumulate if we had to compete with everybody else trying to buy the same stocks. So, we're just waiting. And then we expect to have big outperformance and at some point, you know, we'll probably lighten up on these stocks and that's where some of the liquidity is going to come from when everybody else wants to buy these stocks. Well, we'll be able to sell some. And so I think that for investors to get into our fund now, I think they're getting a great opportunity because they're really buying in a portfolio that they really couldn't build because, you know, it took us so long to buy all these stocks and a lot of the stocks we got in private placements. You know, we couldn't even get it in the market. we had to wait for the companies to need money and then we provided it and they got stocked and we also get warrants and those warrants don't even get really valued you know in the whole NAV so we've got a lot of warrants like in our back pocket that are really not being valued at all that could all of a sudden be worth a lot of money I think that we're going to have a rerating and then you know the market isn't going to just crush these stocks like look at Alamos Gold's earnings came out today they were on the low end of estimates but they mentioned that you know with the recent big drop in production costs with oil prices crashing and they're expecting to increase their production and gold prices are much higher now than they were last quarter that even though they're at the low end of this quarter, they're still likely to meet their fullear guidance and probably going to beat it. But at one point today, the stock was down 18%. It wasn't like a horrible earnings report. It was still earnings growth, but the stock is now trading at where it was when gold was 2,800 a couple months ago. So, why should the stock lose all the gains from 2,800 to 3,200 and change, $400 extra? Because it's ridiculous that the market reacts so badly to a miss. I mean, they actually finally, you know, shares at New Gold were up almost 20% yesterday. They had a beat. It wasn't even that big. So, that was like the first time in a while I've seen a gold stock actually go way up when it beat earnings because there's been plenty of them that have been beating earnings and the stocks have barely benefited. I mean, look how little Numont went up. It had a very substantial beat. People still don't believe in the sector. The skepticism is off the charts. My guess is that most people think that gold's going to go back down, you know, to 1500. They never expected it to get to 3,000. They thought 2,000 was the top. So, they have no idea why gold is going up. They just assume it's a fluke. I've heard now people call the gold is like a memecoin. People are gambling someplace else. They're not gambling in gold. The central banks when they buy gold, they're not rolling the dice. They're buying it for a legitimate purpose and they're not going to stop.
I couldn't say exactly where the price should be, but I mean it's trading at about 11 times earnings and the earnings are growing pretty rapidly and I expect the earnings to continue to grow. It's trading at a market multiple of about half the S&P. Right? Pneumont is the only gold mining stock in the S&P 500, but it's trading at about a 50% discount to the S&P 500, even though its earnings are growing much faster than just about any stock in the S&P 500. So, you have to have a very pessimistic outlook on the future of gold mining to think that this stock is only worth 11 times earnings when you're paying 20 times earnings for the rest of the S&P. What I think is going to happen once this sector really catches on fire and companies are getting a lot of investment flows. These companies, they haven't really developed a lot of projects to replenish the reserves that they're now mining. Now, obviously, as the price of gold goes up, that unlocks some more expensive reserves and enables them to get more from the mines they have. But they're going to start looking forward 10 years, 15 years from now and think, okay, well, what are we going to do for earnings then? we need to go out and develop some new minds. Well, the best way to do that is just to buy up some of these smaller companies that already have those projects in early stages of development because they already know they're viable. They've been proven. They just need to be developed and all that requires is money. Well, they have tons of money because they're making money like crazy selling gold for whatever they're selling it. And so, I think you're going to see a lot of consolidation in the industry. And I think like a lot of the small companies that we're buying and that we own in my gold fund, I think those companies will end up getting bought by these bigger companies that I also have in my fund, but they're going to buy these companies. So instead of selling them to other investors, we'll just sell them to gold mining companies because that's the lowhanging fruit, right? Rather than trying to start from scratch exploring for gold deposits, why not buy up the ones that you already know exist?