Gold & Silver to Benefit from Global Investment in Hard Assets

Welcome to another episode of the Market Pulse Podcast. Tavi Costa from Azuria Capital joins Brett Elliott with APMEX to discuss the macroeconomic drivers underpinning the forecasts for an increase in investment in hard assets like gold & silver. Tavi’s deep expertise in the mining industry gives rare insight into the supply of critical minerals, challenges and obstacles to responding to demand increases, and why an increase in precious metal prices isn’t enough to fix an imbalance.  

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This podcast is for informational and educational purposes only. It is not financial advice, investment advice, or a recommendation to buy or sell any asset. The views expressed are opinions only and should not be relied upon for financial decisions. Always do your own research and consult with a licensed financial professional before making investment choices. 

The precious metals market is dynamic, and spot prices update by the minute based on trading activity in exchanges across the world. Spot prices at the time of recording may not match spot prices at the time of listening and/or viewing.  

Transcript

SPEAKER_00 0:01

This is the Atmex Market Pulse Podcast, your front row seat to expert discussions on precious metals. Hello, I'm Brett Elliott, host of the Market Pulse podcast by Atmex, and our guest today is Tavi Costa, founder of Azuria Capital. Tavi, thanks for joining us today. Happy to be here, guys. Looking forward to this. Great. And uh, you know, for our audience who may not be familiar with you, could you tell us a little bit about yourself?

SPEAKER_01 0:30

Yes, I um been covering macro environment microenvironment for some time now. I think uh um for the people that know my work, it's usually linked to my views and uh analysis and and research letters that I write about uh the macroenvironment. I also been um very involved with uh uh with my own investments in the mining industry in a big way, uh acquiring uh different types of assets in the in the space. I am very, very um constructive on commodities and uh particularly metals and mining. And I was also made a transition recently to be a large investor in Brazilian and Latin American uh economies overall. So that's that's usually my uh a little bit about my background.

SPEAKER_00 1:20

Great, thank you. And I'm really excited to talk to you about you know your sort of the macro view that you have over uh over this entire industry, this sector. It's really interesting. And then um really excited to talk to you about some of your your mining expertise and how that plays into things. So uh, you know, just to kick things off, you've spoken about what you call the great rotation. Now, for those who might be less familiar, what does that mean in practical terms and what's driving it?

SPEAKER_01 1:48

Yeah, this is a term, by the way, that's been used for a very long time by different people. And to me, it means that we're seeing a big shift from hard assets or from very expensive financial assets into hard assets. And that will trigger a lot of other trends that we haven't seen for a very long time, like the shift back into value investing, away from growth, the shift back to emerging markets, away from US based assets, the shift away from US dollar also uh types of uh of investments, um, and the seeking of neutral assets like gold itself, uh, not only for 60-40 portfolios, but also by for central banks uh to sort of uh enhance the quality of their international reserves over time. I think those are the the re don't what we call the growth gray rotation would be involving those types of shifts. Um there's likely to be the case that we will see also a big change away from technology companies into uh what I see as more a necessity type of industries like metals and mining, but also energy and others that are involved with infrastructure uh and what we need in order to um to sustain the global economy. And so I think there's going to be lots of investments in those parts. They happen to be a lot in critical metals and critical minerals overall uh um sort of realm. But uh uh yeah, I think you know, lots of my thoughts from a macro standpoint will kind of derive from that view of that rotation.

SPEAKER_00 3:36

You know, one of the things that we've kind of heard uh quite a bit in the gold and silver industry is the term commodity supercycle. And the theory goes that if we do see the great rotation occurring, capital rotates out of tech and into real assets. It could be a trigger for a commodity super cycle. Um what makes you confident that we are in the early innings today of the great rotation rather than somewhere mid-cycle or closer to peak, given that we have seen, you know, several real hard assets, commodities hitting things all time highs like tungsten. We've seen copper moving up recently, we've seen silvers hit a new all-time high, gold hit new all-time highs. What what what makes you think this is closer to the early innings rather than somewhere further down the line?

SPEAKER_01 4:28

Well, if if this was closer to the end of it, we would have seen a lot of different signs, and we're seeing the signs on the opposite way of being at the very early stages, meaning what is causing the main issue here is on the supply front. Yes, we're seeing an increase of demand coming from AI, which wasn't the case years ago. We're seeing an increase of demand coming from onshoring, which is being triggered by deglobalization trends and other things. But I think the biggest thing that is happening is in the supply side that has not changed despite the change in prices. As you mentioned, the price of a few metals of other resources have reached new highs. And usually when you see those high levels, it tends to sort of create a uh justification for companies to chase new deposits, to develop new projects, to increase supply substantially. And rather than that, we're not seeing this at all. In fact, we're seeing the exploration budget of companies falling. We're seeing the number of discoveries in response to that lack of spending and exploration being very marginal. And on top of it all, we're also seeing cap acts for the overall industry of metals and mining, for instance, uh being at one of its lowest levels in history when adjusted by gold prices, which is the way to do it as a sort of an inflation-adjusted metric. And so, yeah, I, you know, if we are in a different world where discoveries are being made, exploration budget is at all-time highs, and also at the same time, we're seeing cap acts at a at an ultra, ultra high levels. Yeah, that would change my opinion about where we are in the cycle. We're far from that. So I think it's time to be uh a large investment in the space. And on top of it all, we've heard recently that the U.S. economy is looking to deploy about$200 billion at least into the mining industry for uh the securing of critical metals. Um, and if that's gonna be the case, we haven't seen anything yet because that's higher than the overall industry. That's that type of capital coming coming back into the industry. That's one party coming in. What about if any institutional capital decides to do the same in others? And so those are gonna be big shifts in the overall industry. And so I I do think we're in the early innings of a sort of uh long-term bull market for for commodities, but metals mining specifically.

SPEAKER_00 7:01

That answers a lot of the questions that I was going to ask you, actually. Uh, so we're gonna have to shift a little bit. Um, and and I I do want to dive deeper into some of these things. Uh particularly, you know, you mentioned at the start of that demand from AI, data centers, onshoring infrastructure. How significant is the long-term demand for those things when we're thinking about, say, the future of silver?

SPEAKER_01 7:30

Uh, future of silver specifically. Well, I think it's large. There's going to be a few metals that are probably going to be big focuses for investments. I think there's been a lot of um emphasis on minerals that are not as relevant, meaning from a multiple player of producers uh in those industries, like rare earth, you know, where I think we're overinvesting there. Like we don't need that many players looking to find the next rare earth deposit. Like we've got enough of that now. Um, you know, tungsten is another one, and others, these are very small markets. Our focus needs to be now at this point. Uh I think we've raised enough attention of the smaller markets like those. Needs to be in the bigger markets. The copper is going to be one big one. Um, obviously, zinc is going to be another one. Um, and I would say gold and silver are going to be very large ones, too. So, you know, we do need to focus on those four markets, in my view, in a big way uh to fix some of the issues in the future. Um, AI is going to create the equivalent of electricity demand of the US currently in terms of the global demand for electricity. So it is a very significant uh increase of uh overall um electricity demand. And so we need to be thinking about on top of it all that the deglobalization trends are causing onshoring to take place. In other words, countries looking inwards, not outwards. And in that sense, geopolitical conflicts are only gonna add to the need of economies to really uh ensure that they have uh all the minerals that they need to survive in in the world for the next five to ten years. As we see that occurring, we're gonna see a lot of infrastructure changes in the G7 economies, um, in my view at least, and which would be a transition away from Chinese reliance. And if you look at the Chinese demand for electricity uh today is is substantially higher than other any other place in the world, uh, which also explains that they have and they are the manufacturing hub of the global economy. So as we see that transitioning away from that and back into particularly uh G7 economies creating their own uh capacity industrially and manufacturing, I think that that's going to be, in a way, a zero-sum game of where electricity demand will go away from China and move into those countries. But we need to think about that the infrastructure of those countries is not ready to support those changes. And so the demand for metals to then accommodate those shifts is going to be to be very large. And that's going to be, in my view, one of the biggest trends uh when it comes to the structural demand to metals uh from an onshoring standpoint that is yet to be taking place here in, you know, not only in the US, but as I said, in the G7 economies, Japan, in European country, Australia, Canada, and others. All those need to substantially change uh their focus on to revamping their electrical infrastructure uh in order to allow industrial and manufacturing capacity to grow as well. That is not to mention all that is happening with data centers and AI, which will also be a big shift in terms of the demand for construction and other things that we'll are likely to see in the long term, not just a near term.

SPEAKER_00 11:18

You know that that that that leads me to you know a question that we've been kind of looking at for some time now. Um and our last podcast guest with the World Gold Council kind of fed into this a little bit. So we've seen that there's a growing divide between the way the West tends to value precious metals and the way the East tends to accumulate precious metals and the way that that prices those things. So in the West, typically paper markets are how we've priced gold and silver. Um, but in the east, you know, that's where the big industrial centers are, that's where they're actually using things like silver to produce things like photo photovoltaics and electronics, and and the demand there is immense. Um we noticed last year that the market for silver was getting priced in Asia during the Asian market open, and it was being kind of confirmed and consolidated when, say, London opened. And uh the the numbers that we heard in our last episode was that I believe it was like 30 32 out of 52 trading days gold uh price movements were led in Asia as well. Does the traditional do you think that with this change um in terms of onshoring producing a greater need for industrial demand and the physical commodity itself, does that change the way the paper market could be setting the true price, or are we going to see that change in the future?

SPEAKER_01 12:59

Um I think it's a very technical question. Um personally, I think there has been a lot of focus on the paper markets when when you do the research and you're very confident that there's always manipulation that happens in those markets and you shouldn't pay too much attention to that, especially when you see weakness uh caused by those types of manipulative policies. Um it doesn't really change the the overall thesis of investing in this industry. Um so I I don't spend a ton of time thinking about paper markets because I think ultimately we'll always find intrinsic value of what a commodity really is worth. I think it's worth also noticing that it you know we're seeing a lot of different resources reaching new highs in the last five years or so. And it's also important to mention that this is not a one-off thing of one specific commodity versus another, but rather a broad movement that is causing structurally higher resource prices that are unlikely to go back to ultra low levels like we've had in the past. We're gonna see ups and downs, but like silver down 50%, but you know, the matto is is higher than any other time in history today, despite being down 50%. And so some macro people are thinking this uh matto is down 50%. I myself involved in the fourth largest silver mine in the world and celebrating this price because we're producing at a$15 ounce cost structure. So these prices are highly, highly economic for us. And I don't think that's going to change anytime soon. So there's lots of ways of you know thinking about what's happening in the world from those lenses. I believe also the other big difference that we're we'll see in the markets, regardless of how the paper market will behave or not, is that as I said before, G7 economies are joining the party. And back in the days used to be all about China building um resource um reserves of critical metals, you know, copper being a large one, for instance, gold, silver, and others. And I think that we'll be in the world very quickly here, that all these other economies are also going to be following the same idea. And what does that mean to the market uh over history? A lot of people thought that central banks and other sovereign uh wealth uh institutions would never follow the league of gold itself and start also storing oil or storing agricultural commodities or storing silver just because gold is money and they would only do that with gold. And I always disagree with that view because we're in a world where resources are absolutely critical for these countries to survive, and the relationships among economies is being very damaged over the last uh few years, and I don't think that would change because it's mostly related to the indebtedness that we have in the world. Debt creates wars. When you are at these levels of debt, you can only focus on how to how to afford that debt. And so I do think that what we're seeing, and also the over overwhelming levels of debt decelerates growth because once you're very indebted, you eventually start impacting low growth. And when you reach low growth, you then start seeing very populist ideas to change those dynamics. And they're not related to necessarily policy making, but rather because of the level of imbalances that we have worldwide through the debt issue that can only be solved by letting inflation run hotter than expected, unless you want to everybody to default in their debt and cause a major depression. So yeah, I I think I think the lead the cat the the path of least resistance is to keep inflation inflating and letting growth nominally be hotter than other periods, and letting resource um markets to also do much better. And so paper markets are only going to be able to suppress so much of those of that of that pressure. And that's why I I don't put a lot of emphasis on my analysis into that, because I think eventually we'll see the intrinsic value playing into markets at some point.

SPEAKER_00 18:30

Yeah, that's a that's a really good point. There's kind of this uh I guess I'll call it maybe maybe a theory that's going out there that there's almost a a shadow mandate or like a third mandate on the Federal Reserve. Uh, you know, they're they're dual mandate officially, low inflation, low unemployment. Um, but debt servicing levels is coming up in conversation more and more. We've seen you know some of our uh some of our politicians pressuring the Federal Reserve openly uh to keep rates low so that we can save money on servicing our debt. Um but if they do that, as you said, you know, inflation will run hotter. Um and if that happens, then yes, all these all you would expect all of these commodities to rise in in price. So it's a very it's a very interesting period of time we find ourselves in. Um given all this though, you know, that it sounds like typically speaking, we have a a a macroeconomic outlook that looks very favorable for the mining sector. And we have strong prices, record prices. And I I think you you said, correct me if I'm wrong, you're you're producing silver at$15 per ounce? By the way, this is not just us.

SPEAKER_01 19:50

I mean, I think most producers are are having that um experience. I mean, it's it it it's industry-wide, it's not specific to each company. I mean, most companies are not seeing the same level of growth in cost relative to the rise of metal prices. So it is a wonderful, wonderful environment to be in. We're having better margins than Google today, so which is crazy to think about.

SPEAKER_00 20:21

Yeah. Uh love it. But it does raise an interesting question, right? So I think I think you mentioned at the start of this, there hasn't been that big influx of new investment yet. CapEx spending, exploration spending budgets, they're not at their peak. We've got historically strong prices. Um I think we're in the sixth year of silver's supply deficit now in terms of demand versus um output. What is causing this imbalance? I mean, mining investment, major new discoveries of new mines, that remains limited. What's what's driving that lack of new supply if the if the margins are so good and the money is there?

SPEAKER_01 21:07

Yeah, I look, I that's a good question. I don't know the answer for it because I think it's a little bizarre what we're seeing. I think it has a lot to do with just the conservatism we've had over the last decade that it's been still very difficult to shift away from giving that companies have suffered so much from overly overspending back in the you know prior cycle that then caused a major bust that lasted over a decade and has still a lot of ramifications in the in this industry when it comes to interest of capital, when a lot of institutional you know, knowledge about this industry is mostly with the view of that these are companies that only spend capital like drunkard sailors. So, you know, to change that dynamic, they have to be overly conservative. And so we're seeing that right now. And the CEOs are not mostly thought leaders, but rather thought followers, which is the case, which every major company pretty much in the mining space. What we're seeing is exactly that. They're not yet being pressured by growth, they're being pressured by profitability. So eventually that shift is happening here, I guess, you know, slowly, but I should say gradually happening, where people are starting to realize that these companies, most of the major companies, are stuck with their reserves and they're depleting things, and they will not have any prospects of how to expand their current uh demand for uh or their current uh pipeline of growth in the future. So eventually, what I think it's going to trigger is a very significant MA cycle of companies looking to acquire um large um mineral deposits from other junior companies that have already made major discoveries. I think that's going to be the next um step of these of this cycle that we haven't seen yet. But you know, that's the best answer I have for why they have not spent money yet. 1970s was very similar to this, uh, where we didn't see much of uh changing in in uh behavior by the mining companies until prices were a lot higher. And once prices peaked back in the 80s, we actually had a a decade and a half period of very significant discoveries being made, uh, just given the fact that the economics of those uh deposits were so attractive, although gold prices are falling in a long-term base during that period. So are we going to something similar? I do think we will. Eventually we'll get into kind of a discovery phase of this industry where prices are so high that it starts to really justify companies and individuals to seek new deposits. And that's what creates the you know excitement across exploration and other uh names. I think we're gonna go there as well.

SPEAKER_00 24:43

Given that silver, you know, you if if I if I recall correctly, you um you were one of the founding shareholders of the San Cristobal buyout, is that correct? Yeah. And that that mine, that's a primary silver mine, isn't it? Yeah. What is you know, silver is uh silver's got kind of a reliance on being uh a byproduct supply from zinc and copper mines, and I think there's one other in there, um, where it tends to come out as a as a byproduct. Um there's not a lot of there's not many silver mines in the global supply that are just primary silver silver mines themselves. Do you feel like that's going to be a continuous structural supply constraint on silver itself? Or do you think that a new wave of investment will eventually lead to more green field exploration, more primary silver mines opening up, maybe deregulation to open those things up as it becomes a more critical component of onshoring, AI demand, uh, and and and just energy demand in general?

SPEAKER_01 26:02

Well, in terms of brown fields and things that can come back online or or be brought online, um, there's nothing major that will substantially change the supply side of things, which is why I feel so comfortable investing in silver companies and silver itself for the next five to ten years, because the visibility for supply changes um is very clear, and I don't see that changing anytime soon, unless there's major technological changes that I think we would be well aware of that can potentially shift um the supply curve as well. But you know, I think that's gonna be very well telegraphed as well. Um the problem with silver is that uh it is very challenging to find just geographically find new discoveries. Um and as you pointed out well, um a lot of these discoveries end up having silver as a secondary metal. Um, and zinc, lead tend to be, or even gold tend to be um, you know, usually uh associated with silver deposits in a big way. Um, but uh it's just rare to find pure silver place that can substantially change uh the supply uh aspect. And so um St. Cristobal is in a good position because we have very significant amount of silver exposure uh that is just you know likely to stay with us for decades. And so we're excited about that. And especially at a time when I do think silver has got long ways to go here, and um, you know, we're by far outperforming our cost increases in a in a very significantly. And uh again, I don't think that's just in crystal ball, but the scale of the mine is key here, um, which is the fourth largest in the world. And I I do think we'll continue to see uh that scale uh be incredibly important for us over time as well. But there are markets today, given their size, and the markets for commodities are so small relative to other markets that allows you to have significant control of supply over different markets that could be very significant. Like when we did this with St. Cristobal, in a way we control the supply of silver in a very significant way, right? I mean, if you're the fourth largest silver mine in the world, you have some level of uh of controlling of the supply uh curve globally. Um and it's remarkable that we are still able to attain similar strategies in different markets uh in today's world where it is very clear to me that resources uh demand will only grow from here, and people are not paying attention to uh certain metals uh or minerals like zinc, for instance, or even copper, uh because the political agenda and the media it keeps emphasizing rare earth and other things. And so it's kind of bizarre. Um, so I you know my focus stays on things that I truly believe have major supply and demand imbalances, and I I think those are the biggest opportunities we may have in the markets here in the next five to ten years.

SPEAKER_00 29:58

You know, you're you've kind of emphasized this point throughout this conversation, and I completely agree with this that demand is only going to grow. We've got more people, we've got more nations that are uh past either at the point or past the point of industrialization than at any point in history. And resource, uh resource nationalization has been uh kind of spreading across parts of the globe, and that just puts further uh constraints on the supply. Uh, but you said something else earlier that I kind of want to go back to because in the face of all this macro demand, um, you mentioned that you know, senior producers are depleting reserves. In your view, are they depleting those reserves faster than they're replacing them? Are they maintaining some sort of equilibrium? Or, you know, is it is there a point at which they could in they could increase their reserves either through brownfield exploration or greenfield or whatever? Um and does that put us close to a point where it there could be a real constraint on global supply just from the fact that there hasn't been as much exploration?

SPEAKER_01 31:18

Well, I think there's a lot of misunderstandings of the industry that need to be put in place when trying to understand the supply dynamics in the future. One, people think that miners can just increase their production like that just because prices are higher, and then reduce their production like that when prices are lower. That's not how it works. Uh, mining industry has to have a plan, five, ten-year plan, and they have to follow that plan regardless of prices or price changes. And so very rarely they're able to respond to the volatility in prices as the market tends to believe they have this ability. Okay, that's just not true. So that I'm not saying you're saying this, but that's one thing to be very much aware of because it they there is not much of elasticity when it comes to their views about where markets are going and how they shift their production moving forward. When you make a plan for mining for the next five to seven years, you've got to stick with that plan. You know, you've got a lot of employment uh deals, you've got supplier deals and so forth that have already been put in place, and very unlikely you're able to change those uh future commitments uh just because prices have fluctuated. That's one. Number two, that I think it's also a misunderstanding of the mining industry is that when you take prices um of metals much higher, you're actually increasing the supply of metals in the world because you're basically making a lot of non-economic parts of a deposit now economic because low-grade material is now becoming economic to mine. And so that changes this the scope of your problem as well, that needs to be accounted into you know this issue that we have uh of metals uh availability for the changes we may see in the future. I would also point out that that creates also another aspect, which is the problem that we're seeing with supply of metals, especially copper, for instance, which is a big one, is not that we don't have enough copper in the world. We do. What we don't have is metals above ground. And if we're not seeing any changes in major projects coming online, then the supply of the those commodities are unlikely to change anytime soon. And we know that that's the case. And so the visibility for the thesis is much better than any other visibility of any thesis. And so, yeah, I do think that we're playing with fire here, and we might see an explosive moving copper and other metals that are like to be linked with the fact that supply is just so damaged and is unlikely to change anytime soon. So those are all important uh things that are um, in my view, taking place in in the world of of mining uh that has been sort of, you know, misunderstandings of this industry uh that um also have a critical impact on things here in the future.

SPEAKER_00 35:01

When you say you have to have a five to ten year plan in mining, is that is that due to government regulation, or is that just due to sort of the the capitalistic forces like you have to invest in in the labor, in the machinery, um, and it just doesn't make sense unless you have that sort of five to ten year plan?

SPEAKER_01 35:24

It's the mind plan. You when you create a mine plan and you know exactly where things will be depleted and for how long, and you have everything sorted out, these plans are like years that takes to create those phases of mining. And so if you are you can't just change that just because prices have gone this way or that way, and that's just a major shift that takes years to plan ahead. And so there's not much of a room in changes of of supply because of the fluctuation in price. And yeah, mines don't shut off and shut on uh or open up production just because prices are higher or lower. That is a complete misunderstanding of the mining industry. Um and maybe one day we'll see that, but today there's there's no ability for mining companies to do that, mostly because, as I said, these are things that take a very long time to plan for, and there simply cannot be changed in a near future like that.

SPEAKER_00 36:37

Tavia, I know we're uh coming close to out of time here, and um I just want to take a moment to thank you for joining us. You're leaving us with some really rare insight to the industry, and I know our audience appreciates it just as much as we do here. Uh, if anyone wants to work with Azuria Capital, how should they reach you?

SPEAKER_01 36:55

Yeah, Azuria Capital is now being funded all internally for now, but uh I have been building a research arm of the business through Substack, so you can just uh subscribe there if you like my research. I've been sharing a lot of actionable ideas on the macro side for people that like to invest in the space. Um, a few mining companies that I like, a few agricultural commodities I like, different ways to express your views in the market, other hedges and other ideas of where I think the market will be uh heading towards uh as we see policymaking uh also um you know taking place here in this very complicated world. So the research arm is likely to evolve into a money management business when the timing is right. But for now, that's where the focus is, and eventually we'll we'll get there. That's the goal.

SPEAKER_00 37:52

Perfect. Tavi, thanks again and to our listeners. That's all we have for you today. Thanks for joining us, and we'll see you next time. Thank you for joining us on the Market Pulse podcast. If you want more content like this, please subscribe or share with a friend. Your support helps us produce new content just like this. Thanks for listening, and we'll see you next time.