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Gold price to triple with miners poised to gain 85% - Tavi Costa

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(Kitco News) - Gold could easily triple in price in the current economic environment, and gold miners should see a big move upward as well, according to Tavi Costa, Portfolio Manager and Partner at Crescat Capital.

“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 said. “At least a triple in gold prices would be likely what's going to happen.”

Costa sat down with Kitco News reporter Ernest Hoffman at PDAC 2023 in Toronto last week, where he shared Crescat’s latest analysis of the gold market.

Costa said cash-rich miners should follow the example of the most successful energy companies by putting money back in the ground. “Energy companies are printing money,” he said. “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.”

“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 also sees the broader economy beginning to adapt to the new realities of high inflation and low growth, and he believes this will drive new investment in the mining sector. “This shift towards focus in profitability is a real shift,” he said. “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.”

Costa said this new reality is causing a domino effect which is now playing out across the market. “But if everything is a domino effect, what are the next dominoes to fall?”

Costa believes that one of the important changes will be to multiples in equity markets, which will need to be adjusted downward. “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 said. “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.”

On the industrial demand side, he expects that the twin trends of deglobalization and onshoring will drive gold and other commodities higher for years to come. “Think about what happened in China in the early 2000s,” he said. “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.”

Costa also sees gold playing a more important role on the investment side, as an inflation hedge but also as a means for central banks to shore up their reserves.

“If you go back to the seventies, gold was about 70% of [central banks’] overall international reserves,” he said. “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 believes that based on price history, the miners are very undervalued right now, even before the further gains he expects from gold. “I do think that the opportunity when it comes to the value proposition of investing in the mining space today is becoming more and more compelling, at a time when sentiment is very, very negative,” he said. “And look, gold is oversold at $1,800! What a time to be in the mining industry!”

To learn more about Crescat Capital’s predictions for gold and mining stocks, watch the video above.

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