Tavi Costa, a portfolio manager and partner at Crescat Capital believes gold prices could easily triple, given the current economic environment. In an interview with Ernest Hoffman from Kitco News during PDAC 2023 in Toronto, he explained how he predicts gold mining corporations should expect to see enormous gains in the near future, as high as 85%. His predictions came a few days before March 10, when SVB Financial collapsed and the U.S. Labor Department released the job data report for February displaying an uptick in unemployment—a day that inspired many investors to move their funds into gold, increasing its price by $169 per ounce in just one week.
“I like to be conservative, even though I’m very optimistic, but it’s clear to me that if you look at other times, we’ve had very strong performances in an environment like this,” Costa explains.
“At least a triple in gold prices would be likely what’s going to happen.”
Just days after these words slipped from his mouth, gold prices started spiking faster than they have in months. Gold hasn’t breached the $2,000-per-ounce line since early 2022 when Russia invaded Ukraine, but it did on March 17.
Costa believes the only way gold mining companies can continue moving up is by investing their money down, in the ground; the way successful energy companies do. “Energy companies are printing money,” he explains. “And what is interesting is that if you backtest, the ones that are performing better are the ones that are actually doing more CapEx, the ones that are actually increasing production, not the ones that are giving back money to shareholders through dividends and buybacks.”
Companies passionate about increasing production or finding new ways to streamline old processes will find success in 2023. “What is paying off is to be aggressive, invest in the future, and to put money to work into what their businesses are supposed to be doing,” he adds.
Another one of his predictions centered around the concept of the economy adapting to its failure, rather than recovering from it. He believes people will begin developing more aggressive survival strategies to hedge against the rising inflation rates since we cannot rely on the Federal Reserve to combat it. This movement toward adaptability will increase investments in the mining sector, as precious metals provide security when other asset classes fail.
“This shift towards focus in profitability is a real shift,” Costa explains. “What we tend to see during inflationary decades is that investors tend to focus more on tangible assets. I think that’s a major opportunity to be allocating capital towards the miners.”
While a market shift this monumental may increase gold prices, it will also cause cascading effects across many other sectors. Costa believes one primary negative effect of this new mindset would be on equity markets.
“The way we were approaching markets with this mentality where investors have been conditioned, like we’re in a world where we’re going to see high growth and low cost of capital, I think that needs to change,” he explains. “CAPE ratio today, the cyclically-adjusted P-E ratio for the S&P 500, is somewhere close to 29x. If you looked at any other inflationary decade, it wasn’t anywhere close to that. In fact, at the end of those decades, we’re at single digits. So you need to start thinking about what’s the impact of that.”
Costa believes onshoring and globalization in the industrial sector will also push gold prices. “Think about what happened in China in the early 2000s. What drove the commodities market was one major thing, China was entering the WTO to become the manufacturing plant of the global economy. Think about the G7 economies doing the same right now. It would be a big difference,” he explains.
According to Costa, another major demand sector boosting gold prices in the near future will be investments, though not just by individuals, but by major central banks. “If you go back to the seventies, gold was about 70% of [central banks’] overall international reserves. Today it’s below 20%. Now this turmoil in credit markets in general is starting to create a need for most of the central banks to improve the quality. And even owning a neutral asset, the only neutral asset that we know of that has a credible history to be that type of asset to improve the quality of those reserves is gold,” Costa explains.
With all of these factors combined, Costa expects impressive performance levels from gold in the near future, which have already begun panning out in the weeks following his predictions.
