(Ep.114) The Acquirers Podcast: Sean Fieler – Gold Value – Gold, Gold Mining, Activism, And Inflation

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In this episode of The Acquirers Podcast, Tobias chats with Sean Fieler, CIO of Equinox Partners. During the interview Sean provided some great insights into:

  • Value Investing In Gold Miners
  • Is It Better To Buy Gold Or Gold Miners?
  • The Impact Of Crypto On Gold
  • The Inflation Effect On Gold
  • Activism In The Gold Sector
  • Gold ETF’s Or Gold Mining Stocks?
  • Warren Buffett’s $GOLD Investment
  • Buying Gold As A Hedge To The Market
  • How To Uncover Gold Mining Companies
  • When To Sell Precious Metal Miners
  • The Fed’s Impact On The Gold Sector
  • Central Banks On Gold Buying Spree
  • Gold Mining & Geopolitical Risk
  • Choose Public Gold Miners Over Private

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Full Transcript

Tobias: Hi, I’m Tobias Carlisle. This is The Acquirers Podcast. My special guest today is Sean Fieler. He’s the President and CIO of Equinox Partners. We’re going to be talking about gold miners inflation. It’s a fascinating discussion that’s coming up after this.

[The Acquirers Podcast Intro]

To alter this phenomenal run to 2011 and it was a moribund for a long period of time after and then it’s in August last year ran up, maybe got its nose a little bit ahead of where it had been in 2011. Seems to have pulled back again, but it surprised me a little bit given how much money printing we’ve had in this decade that didn’t turn up more in gold. Do you have any thoughts on just the underlying gold price?

Sean: Well, unfortunately, surprise you and me both. So, it’s been a long nine months for investors in the gold and silver mining space, because we’ve had from a monetary policy, fiscal policy perspective, more radical policy, easier policy, more inflation all combined with a rebound in the economy in a way that you would have thought would have been very good for gold and silver mining stocks and you had the index really peak into summer of last year and then many months of sideways to down and then this year through the end of March 30th at its intraday lows, the GDXJ.

The big junior gold mining index was down 20 plus percent for the year. So, we’ve been feeling exactly that same question from our clients is, how is it that this is negative for gold and very negative for gold, silver mining companies? I think it’s reflective of there[?] still being a pretty dominant bear market mentality in the space. It is contrarian, it is still unloved, it’s unpopular and you have a number of the companies, even some of the large intermediate companies trading big discounts to their NAV at anywhere near today’s pedal prices.

Is It Better To Buy Gold Or Gold Miners?

Tobias: I have quite a few gold miners in my screen and I asked myself all the time, why would I go and buy a gold miner when I could buy the underlying directly and take out that operational risk? So, I guess that’s the fundamental question. Why invest in the miners rather than the commodity itself?

Sean: It’s a good question. I think some of the reasons that people want to own gold, they want to own gold for its safety, its store value. A lot of those reasons then come into conflict with some of the jurisdictional, political operating, geological, etc. Many of the idiosyncratic risks, but risks that you have in a particular gold or silver mining company. So, it’s not logical to people to make that step after the metal to the companies.

The argument to do it is that you can buy a gold, silver mining company, or gold company, in this example, for $200 an ounce for highly economic counts in the ground. Whereas, if you go by that, today you’re paying over $1800 an ounce. You can get a lot more leverage and you can buy those ounces at very large discounts to their intrinsic value, even after all the costs and the discounting back of those free cash flows that are associated with actually taking them out of the ground. So, that’s the argument for doing it in the form of a mine.[?]

Tobias: When you’re putting together a portfolio, do you favor established miners that are already extracting gold from the ground, or do you include juniors who are exploring prospect?

Sean: We own both. We don’t own companies sticking holes in the ground looking for gold. That’s generally a difficult low probability business, but the economics of a known high grade discovery, the business risk associated with exploiting that asset as compared to the business risk associated with actually operating a marginal mine are[?] often it’s the less risky asset is the one that’s undeveloped in the case of that example, if it’s actually a much higher grade ore body, a lower cost ore body. So, the risk doesn’t run nearly from exploration to production. It’s more very dependent upon everything from jurisdiction to grade to the nature of the oral body.

How To Uncover Gold Mining Companies

Tobias: Can you talk through perhaps how you find an opportunity, how you go about proving it up in the sense of just looking at the company, looking at the management and validating those ideas?

Sean: Well, it’s a lot of legwork. You need to be competent in terms of your assessment of the technical merits of the underlying assets and so, you need to know, are they are they viable, are they sustainable, is there a technical flaw in the mind and this is something that you face with the undeveloped, not the developed mines, but if you have a company and you have a market cap and you have a strategy of exploiting an asset, but then you find out that there’s a fatal flaw, either it’s the metallurgy or the geometry of the ore body, or whatever it is, it’s not typical that management would come out and just raise their hand and say, “Oops, sorry, our company’s worth nothing.

We’re moving on.” Instead, you tend to they want to buy another asset, they want to do something else, or work around the problem that they fully understand, but the outsiders don’t fully understand and so, I think there’s a real necessity to do a lot of due diligence from a technical perspective.

I think where we really differentiated ourselves has been the due diligence from a governance perspective and so you have in the space, a real agency issue between the insiders and the shareholders. You often have insiders who own very little stock, maybe who are too cynical about the company they’re managing, or governing, or the industry they’re in more generally, I think part of that comes from the cyclical nature of the business. Part of that comes from the long bear market we’re in and often their motivation is to make the company bigger and then pay themselves more rather than to actually build intrinsic value on a per share[?] basis.

Those two things aren’t often in direct conflict with one another, but they’re certainly in tension with one another and so, making sure that the board as much as the [unintelligible [00:07:58] are very aligned with shareholders in terms of their interest is for us is a top priority, because it’s a challenging enough business, when that partnership is well structured and if that partnership is not well structured, I think over time, you’re just very poorly positioned to actually generate good returns on space.

Choose Public Gold Miners Over Private

Tobias: Are you only looking at public miners, or do you enter into some private partnerships?

Sean: No, only public. The non-negotiated price of these miners today and offer in the stock market is in many cases really fantastic. I think it’s much better than what you would find in any negotiated transaction, because it can be irrational, it can idiosyncratic, it can be– It reflects where we are in the market for these securities where you’re still down two thirds over the last decade and this is not any particular stock, this is in the gold and silver junior mining indices. So, there’s been a lot of money lost and not a lot of analytical resources are being dedicated to data the space in a way that will make the pricing of the securities efficient.

Tobias: I wonder if one of the problems is in that 2007, 2008, 2009 crash, because it had been a commodity super cycle before that point, I think gold miners were expensive going into that crash and they were punished through that 2007, 2008, 2009 crash. So, if you look back, it’s been a long time since we’ve had a very– there’s really nothing that compares to that mega bear. We’ve had lots of small drawdowns in the time since, but nothing like that really extended period. If you’re looking at how could I hedge my portfolio and you look at the performance of gold miners through that period, you might think well.

Buying Gold As A Hedge To The Market

Tobias: That didn’t provide a very good hedge if anything it was sort of you just added a little bit more weight to the portfolio and sank it like a Spanish galleon? What do you think the prospects are for gold as a hedge to, or gold miners if we go into some other downturn?

Sean: The March 2020 is a great example. So, where you had the miners not just decline with everything else, but decline quickly, more violently than everything else in the spring of last year. So, why own those as a hedge and I think the answer is in the event of a market crash. Gold, silver miners are going to go down with everything else just as they did in 2008 and just as they did in in the spring of 2020.

Over a longer period of time, the types of policies that we get from either the Fed or Congress and the executive, in response to these crisis has created a very positive backdrop for the metals, gold and silver, the monetary metals in particular and to the extent that doesn’t sync up with global economic growth or stronger global economic growth. You have a real opportunity where the fundamentals underlying the monetary metals diverge with other commodities and certainly diverge with other financial assets. The companies that are geared into that have a real opportunity to compound value at a time where everybody else is struggling. So, that’s the fundamental case and then as to the short-term trading case, I fully agree. I think your correlations are going to be very high in a crash scenario.

The Impact Of Crypto On Gold

Tobias: Do you have any concerns that you have they are these alternative currencies or alternative hedges to the market in the form of the crypto currencies? I just wonder if that had some impact on the price of gold? Or, whether a more recent phenomenon that the price of gold has struggled since 2011? But do you think that has any as an alternative to gold or[?] folks, younger folks, perhaps looking at bitcoin or some of the cryptos. Does that affect the behavior of gold going forward?

Sean: I think so. I think certainly in the last year, it’s obviously been a factor. I don’t so much see gold investors selling gold or gold or silver mining stocks to buy bitcoin or other crypto currencies. But I have to imagine there’s a population of investors that would otherwise have invested or pay more attention that aren’t, because they’re doing so well with crypto. If you’d look back over the last couple years, which has been a bull market both in gold and gold and silver mining stocks and certainly bull market in silver, you’ve seen net investor inflows into the metals, if you look at the ETFs as a proxy for flows.

So, we’ve seen pretty good demand and what is in the case of gold is a pretty large market. So, it’s a $15 trillion market in the aggregate. But over those same two years, you’ve seen net outflows cumulatively from gold and silver mining companies. I think demonstrably growing investor interest and investment in gold and silver the metal, the miners themselves have been– they’ve performed over the last couple years, but nothing in relationship to what they should have done given the move in the metals and so, I think that’s still the big investment opportunities today.

Gold ETF’s Or Gold Mining Stocks

Tobias: Wonder if it’s a function of you talked before about the step from owning physical gold to then owning a miner which is the folks who like the physical gold are concerned about the counterparty risks in an ETF or something like that and certainly counterparty risk in that in the company, but then, with the introduction of something like GLD, or fears[?] or something like that, if you were interested in the tradable version of the financial version of gold, you could express that pretty easily by buying ETF and then you don’t have the counterparty risk of– you don’t have the operational risk. So, what do you think about that?

Sean: Yeah, and it’s easier, right?

Tobias: Yeah.

Sean: So, now, you don’t have to know the required amount of knowledge you need about West African or Latin American politics is zero, because who wants to do all of that and last year, you couldn’t really get on a plane? Do you have the expertise to do the mine site visits to even that know the assets? Do you know the people? I think the industry has a unfortunately, well deserved reputation for having some governance issues and are you well positioned to work through all those in the case and respond to most investors is no. But I think again, that’s also from our perspective, that’s the opportunity, right?

So, here you have a sector where you have these– really the stars are aligning in terms of the underlying fundamentals and the valuations are eye-popping[?]. So, instead of paying multiples to NAV or a premium to NAV, you have well run companies trading at $5, $10 billion companies trading at 25% discounts the NAV at current spot prices and a 5% discount rate. If you go to the billion or to half a billion dollar market cap, you’ve got companies trading at half of NAV, using those same metrics and that’s just an enormous amount of value, of value creation potential that the stock market expressing a lot of indifference to today.

Tobias: Yeah, I tend to agree with you. I prefer higher quality companies and so when they come into my screen, they tend to be, they’re all pretty good earners. They’ve got religion when it comes to capital allocation for the most part which is one of the concerns. So, I think there’s some very interesting prospects around at the moment. Do you want to talk about individual names? Are you comfortable doing that?

Sean: Yeah, one I think that is one of the easiest ones to talk about is endeavor. So, this is a $5 billion market cap. It has a longtime controlling shareholder of Naguib Sawiris that has solved a lot of the agency issues that you typically see in even in the intermediate mining space in gold and silver mining is a high teens owner of the company. They have a demonstrated track record of building an enormous amount of value in West Africa with on time on budget, high performing gold mines and then last year, they did two really impressive deals. One, in the crisis last spring, when[?] everybody else was paralyzed, they bought semaphore[?], picked up some two high quality assets and then another at the end of last year, both great deals and the stock traded sideways and then down towards the end of last year.

So, despite the size, the 10th largest gold miner in the world, the market was just radically indifferent to their technical expertise, their ability to consummate transactions in a timely manner at attractive prices when the peers were paralyzed, the governance boxes they’ve checked, you go through the list and this is a company that is in many ways, playing out the Randgold playbook, which obviously created enough value for Bristow to merge with Barrick and become CEO. It’s just surprising that that exists today. But it does and that’s a company that trades at a 25% discount to NAV.

Warren Buffett’s $GOLD Investment

Tobias: Speaking of Barrick, you must have cheered when Berkshire put on the little position Barrack, even that seem to be very short lived. Do you have any view what happened there?

Sean: I don’t know. Well, Warren Buffett has spent his whole career criticizing gold and so, it’s–

Tobias: Was luckily one of the boys [unintelligible [00:19:21] [crosstalk]

Sean: [laughs] Yeah, it’s not that surprising. The real irony there is his father as a congressman had written some of the very best pieces ever on gold and I think Warren Buffett, his description of gold as anti-social is really interesting.

Tobias: [giggles]

Sean: In that, it is, it in some ways goes to the heart of what gold is and why it’s a monetary metal is that because it’s not controlled by anyone government and it’s not any one geography and because it has this liquidity and scale, the gold price and golds monetary function is the market phenomenon rather than the result of a committee meeting. I could understand why Buffett and people of his kind of political persuasion would just see that as anti-social in some way. Given what’s happening to government, government spending today, I just think the idea that you wouldn’t want a monetary metal, you wouldn’t want something money that’s independent from government just seems to be a nonstarter, if there was ever a time when you needed at, 2021 seems to be that time.

Tobias: He’s talked about it on occasion though, he said, I forget the year, but in the 70s, or the 80s. He said that he pointed out that for all of the work and effort that they had put in over a period of say, 10 or so years, the Berkshire share price, it only just kept up with the gold price through that period. So, he must be cognizant of the fact that, it does have these periods where it runs very strongly. But I shake my head a little bit, because it looks to me, like, all of the conditions are there for gold to have a very good run.

But for some reason, it seems to have not had it and it’s one of the more perplexing things out there. That could just be value investing has not had a very good run. There are alternatives in the form of bitcoin is that there, there are alternatives and ETFs. Do you have any view about what’s going on? Is it, there are some conspiracy theories that there’s some suppression of the gold price by either the exchanges or by government? Did you have any thoughts there?

Central Banks On Gold Buying Spree

Sean: A couple of things. One, would be the– some of the very largest institutional investors in the world, namely central banks have been the principal acquirers of gold over the last decade. And that is I, in sharp contrast to the way they’d behaved prior to 2008. So, publicly, do they want to talk about why they’re acquiring gold?

Generally, not. Sometimes you see, some really, so the central bank of the Netherlands, Hungary, Poland have put out some really interesting statements as to why they’ve been acquiring gold and it has to do with financial stability, systemic risk, it’s all the reasons why individual institutional, any other investor would want to own gold, because of it’s different from other financial assets. In particular, it’s different from central bank money and debt as money. They, each of those central banks expressed concern about the current system to some extent, not just in their buying gold, but in the press release, they set out along with those purchases.

Then you have the really interesting behavior, in the case of Germany of their decision to re-domiciled their gold, so, not just [unintelligible [00:23:34] owning gold, but the idea that the gold we own, we wanted to actually physically located in the country, which we govern or in which were the central banker of which is interesting. Again, I think it reflects a very rational concern about the excesses of financial excesses and excesses of debt that we have in the system today and the idea that the path we’re on is in some way unsustainable.

If you look at most of the other central banks, especially those that haven’t been acquirers of gold over the last decade, they tend to never talk about it and to the extent they do talk about it, they’ll say something similar to what Greenspan said in the late 90s, which is, “If it goes up, we’ll lease more. We’ll make sure there’s not a disruption in the market.” So, it’s pretty clear that they’re not gold friendly or not eager to see their monetary monopolies eroded in any way by gold. So, I don’t think there’s nothing I don’t think particularly surprising there in terms of how central banks and governments have behaved.

I will say that the rewriting the amendments to some of the silver ETF, this last spring was really surprising in the idea that anybody would invest in an ETF that highlighted the risk of the underlying metal that they’re buying as an ETF going up as a potential problem. I think speak to some of the maybe institutional tensions that exist in that market. Silver’s obviously, very different just because it’s a metal that’s consumed and the supplies are much scarcer and it will be much more volatile. But I thought those amendments, especially the amendment to the [unintelligible [00:25:25], ETF perspectives was surprising.

Tobias: What was the amendment?

Sean: Surprisingly, honest. [chuckles]

Tobias: What was the amendment?

Sean: I don’t have it in front of me. So, it’s not verbatim–[crosstalk]

Tobias: Just in rough terms.

Sean: Something to the extent that if, in fact, we continue to get inflows into the fund and we were to continue to use those inflows to purchase physical silver, this may result in a much higher silver price and may create disruptions in the market. Therefore, we may not be able to do that, or at least not buy that silver in physical form. Something along those lines and you’re thinking, “Well, gosh,” part of the reason why people are buying silver ETFs these days is because they realize that, in fact, there seems to be something of a supply constraint and the whole idea that you would actually have dollar, pound or whatever, go into the silver ETF and that would not be properly translated into the actual physical ownership of silver, is a surprising admission.

So, that’s not really the realm of conspiracy theory, because they went ahead and just amended that [unintelligible [00:26:34]. So, it doesn’t leave much to the imagination, but it is why we don’t own either physical gold or silver today, but when we did, we didn’t own it for the ETFs and it’s not clear to me, if you don’t want the jurisdictional risk, you don’t want all the risks associated with financial markets, why you would choose to own monetary metals through the intermediation of the stock market I think is not particularly sound logic.

Tobias: I guess they’re concerned about some sort of squeeze, maybe some big fund could come in and invest into their ETF, forcing them to then go into the market and squeeze it that way, rather than squeezing it directly.

Sean: You can view go on buy lumber. I suppose that makes there’s less lumber available. I presume that might be part of the reason why people are building inventories of lumber. That’s just the reality of the way markets work and these are not securities. Obviously, the underlying metals are not securities. So, yeah, that’s just the state, that’s where we are today.

Tobias: One central bank we didn’t discuss, which I think is an interesting one. It was the Swiss National Bank, I think sold almost all of its gold holdings, or perhaps all of its gold holdings. And then there was an outcry in Switzerland and they held a referendum to see whether they should force the central bank to buy back a great portion of its gold and the referendum didn’t succeed and so they were able to keep on doing what they had been doing. Do you have any thoughts on why they did that? Or, what happened there?

Sean: So I don’t believe that over the last two decades, the Swiss National Bank has been selling its gold. I think they were part of the Washington agreement back in 2019, which I think had 16 signatories. So, maybe mistaken, but I’m pretty sure they were not one of the signatories that was actually selling gold over the last 20 years and they do have pretty substantial gold reserves, which I think they do continue to hold. I think the last central bank to really aggressively sell gold was Great Britain, back under Gordon Brown, this was in the late 90s and they engineered a series of auctions that cost the government and the British people in billions of dollars, because of the very low price that they were able to achieve as part of those sales. And then really, I think, as I mentioned earlier, since 2008, central banks have not exactly uniformly, but to a large extent, have been large acquirers of gold and a very large acquirers have been Russia and China, who’s exactly how they report how much they’ve acquired is not clear, but I think each of those now formally declares almost 2000 tons of gold to their account, which was a huge change from where they were going back 15 or 20 years.

Value Investing In Gold Miners

Tobias: I may be confused about that. What’s your background, Sean? How do you come to be interested in precious metals and hedge funds?

Sean: Well, I see, I started in this business in summer 1994 and been here at Equinox Partners full time since 1985. We’re better business value investors and we’re better business value investors in a 25-year period where there’s been some really significant cycles. But generally, we’ve seen financial assets, pricing ever upwards and we’ve seen stocks and you certainly see that today trading net valuation that are hard to reconcile with the value investing approach.

So, what we’ve found is that there are niches, there are areas where investors aren’t for a variety of practical or ideological reasons. And that by taking our better business value investing discipline and applying it in areas where most other investors are comfortable or familiar don’t know, we’ve been able to generate good returns and take advantage of a lot of the inefficiencies out there and not get caught up in what I think is now at today of very broad base financial mania both in stocks and bonds really across almost the entirety of the developed world and a large fraction of the emerging world.

Tobias: There’s a chart that does the rounds on Twitter every now and again and probably more broadly, but it shows, it could be the [unintelligible [00:31:35] take your pick of whichever index you like and they compare it to the price of gold or to commodities. And so, it shows on occasion that the index gets very cheap in gold terms, in which case, you should buy the index. The index gets very expensive in gold terms, in which case, you should be in gold. Every time somebody posts that, somebody else points out that that’s a chart crime. I’ve never been able to figure out what’s exactly wrong with that chart, but do you have any view on the usefulness of an approach like that?

When To Sell Gold And Silver Miners

Sean: Yeah, I think it’s very useful. When you look at that version of that chart that I most frequently see. When the [unintelligible [00:32:19] and announced the gold trade pretty similar to one another that tends to be where gold is topping out and financial assets are bottoming and right now, we’re at the very opposite extreme. I think one of the questions we get and we don’t get it today, but we get in a bull market in gold and silver and particularly gold and silver mining is when do you sell? When do you know, it’s 1980?

When do you know it’s time to go do something else? I think that chart is probably the best answer to that question is, right the time when you no longer need to own gold and silver is when markets and investors have decided that other financial assets are trash or not worth much, but they all have to own gold. That’s a good indication that it’s time to go back and buy those better businesses at the market no longer life. I think if you’d done that over the last 40 or 50 years, you would have managed to take advantage of both some of the really significant bull market cycles in commodities, as well as, equities and miss some of those very painful bear markets.

I think that’s something in 2021, that investors, especially equity investors are just too cavalier about right there, the idea that you could be underwater for 14 years in a stock portfolio as people were going into the early 80s. It’s just not– It’s something maybe people know on paper, but I don’t think they understand emotionally. I don’t think they understand what it’s like to live through that. I don’t think they’re behaving in a way to try to avoid that given where valuations are today.

Activism In The Gold Sector

Tobias: Well, you could have the indexes from 2003 to 2013. I think you would have been underwater as well. There’s recent examples of that. As a strategy I like following activists into positions and there’s some activism in the gold sector. Do you have any thoughts on how you play it or what you expect to happen?

Sean: We’re participants. One of my colleagues is a board member on the shareholders gold console, which was started a number of years ago by Paulson’s funds and has a membership of between 10 and 20 different money managers and it’s a space that’s not a minimal to activism and private equity in general, just because it’s capital intensive. It’s cyclical.

There’s a lot of reasons why it’s not going to attract mainstream activists. That all said, if you look at the success that they had with [unintelligible [00:35:09], going back two years and their ability to change that board that I think exemplifies some of what’s wrong with the industry, where you have insiders that are very locked in their position or are not well aligned with shareholders and are not willing to really consider meaningful offers for their company. That’s a real problem in terms of value creation.

The idea that there was receptivity amongst institutional investors to make that change going back two years ago, I think is a good sign for the industry. It’s been unfortunately, two years since we’ve had anything like that and this proxy season is looking pretty meager in terms of activist campaigns so far, but I do think that’s something that needs to continue to happen in the space and to the extent that we can, we’re not activists, but where[?] we can play a positive role, we do in that space.

Tobias: Is that where you see the activism, it tends to be governance focused, rather than have some ideas about improving the operations of the mind. It’s more a capital allocation or governance rather than operational?

Sean: 100%. Right now, it’s not an issue of, you could make this engineering decision better. That’s not the problem we’re having. The problem we’re having are insiders that own very little to no stock in some cases, you even in the case of South Africa have companies that are now following the King IV report, which is a governance report in South Africa, that actively discourages board members from owning stock in their companies, which on the idea that they have to reflect the interests of all stakeholders, not just shareholders, which I think just goes to the heart of the problem that we’re having as long-term shareholders in gold and silver mining companies, is we really need a partnership with the insiders and in particularly with the board and if they don’t have any economic interest or ownership of the company and they view themselves to some process oriented near priesthood that sits there and just implements best practices. That is going to be enormously value destructive for the industry and it’s just not the way forward and that kind of sense of what best governance is, is unfortunately gained a lot of traction in the industry.

I think there needs to be a lot more pushback from investors, like, ourselves and others in the space. Activist campaigns are just one part of that you have a lot of other engagement and around the management circulars and around board formation that goes on all the time and that needs to be really focused on this alignment issue and share ownership of the directors in particular.

Gold Mining & Geopolitical Risk

Tobias: You touched on a little bit there, but you do have some unusual geopolitical risk with gold mining, because the gold mines tend to be in areas that may have some political instability, some strife. How do you handle that as an investor in these regions?

Sean: Well, I think it helps a lot to [unintelligible [00:38:36] been active and be familiar with these jurisdictions over time and get a sense in terms of what the range of debate in the countries in which you’re active are. I don’t think mining investors generally are expecting a government to bend over backwards to help them. The governments are really there trying to maximize their own economic interests in many cases. But so long as they’re behaving rationally and so long as they’re adhering to the stability agreements and the rule of law, I think it does really create a framework where as an investor, you can support a 10-to-20-year investment on the idea that the economic parameters that you started with will be true throughout the life of that of that mind.

Governments that are constantly changing the rules or where there is a highly politicized judiciary or legal process that can expropriate or take or shut down assets really makes the mining business unworkable. So, the example that comes to mind most immediately for me is the Escobal[?] mine in Guatemala, which is incredibly high grade, low environmental impact. Well-built silver mined, in production would account for about 10% of the Guatemalan government’s tax receipts, that mine alone and was shut down. It’s been shut down for years and it’s been shut down by activists and the activists have been aided and abetted by a very politicized judiciary in Guatemala. That’s the thing that makes jurisdiction uninvestable. It basically makes that jurisdiction investable for the Russians, Chinese but not for the Canadians and Australians, not for companies that are going to follow best practices and adhere to the laws of the countries in which they’re operating.

It’s a real shame and watching the current President of Guatemala, trying to work through that legal process to get that mine back up and running is again painful, because you just see the extent to which the institutions and the administration of justice itself in that country has been corrupted. That’s something that is, that’s where you can lose a lot of money in this space and it’s really hard to find a way out once you’ve gone down that path, if you’re in one of those countries. Most countries don’t do that, because they understand the logic of maximizing their returns by incenting further investment into the mining industry.

The Fed’s Impact On The Gold Sector

Tobias: It seems that after a very long period where we haven’t seen much inflation that it really has come back to life. If you dump a whole lot of money into the system and you constrict supply on one side, then you’re naturally going to see some prices rise, I guess that the tension is always between folks, who say it’s transitory and folks, who have a view that that continuing money printing, so it’s now going to be with us for an extended period of time. Do you have any thoughts?

Sean: Well, we have, I think, a very weak Fed Chair. I think he was chosen by President Trump in large part, because of his disposition and we didn’t get John Taylor, because he was too ideological and looked like he was going to act independently based on this model. We didn’t get Kevin Warsh, resigned under [unintelligible [00:42:26] under one of the initial bouts of QE, got obviously courageous, independent and even though in favor of broadly speaking, the easy money we’ve had posed a risk in terms of actually maybe raising rates if we did see inflation. So, what we have is we have a Fed chair who seems to be have been captured by the Fed, captured by the administration, captured by the lure of easy money, who is sending all the wrong signals here at a time where we have rising prices.

And then you combine that with a congress that has an administration that has very little restraint in terms of the amount of money they want to spend, are willing to spend. Republicans are rhetorically, for smaller government in practice that just hasn’t been true certainly wasn’t true under Trump. It doesn’t look like there’s much possibility of any real fiscal constraint coming out of Adam [unintelligible [00:43:26] and then you lay on top of that, the economic rebound we’re seeing today, the actual rates of inflation now year over year that we’re seeing and then the likelihood of a new Fed chair, that we’ll hear about later this year, voted on next year, that I think could be much more political and radical than even we have in [unintelligible [00:43:52].

So, the setup seems horrible. I don’t know if we’re quite to the level of the early 70s and formally debasing the dollar and going on Bretton Woods if we quite have that setup, but we have a setup where the governments in charge of the economic cycle and we have a very imprudent Fed chair. So, in that case, in those ways, it is very similar to what we had in the early 70s.

Tobias: And the result of all that money printing, hopefully is some performance out of gold, but perhaps financial assets get beaten up through that process.

The Inflation Effect On Gold

Sean: Yeah, so, gold tends to do well in inflationary periods, but gold tends to do extraordinarily well in inflationary periods that are a result of higher rates of growth. So, if you have inflation that is a product of excessive government action in monetary debasement, that tends to be the environment where gold and silver do extraordinarily well. That’s what you had in the 1970s. That’s that stagflation area environment, we’re[?] owning common equities is not the solution because there’s inflation, but everything’s not growing.

So, we have money managers that had the last four or five inflationary episodes we’ve had, where we’ve gotten through 3% inflation have been driven by higher rates of growth. So, the [unintelligible [00:45:29] five through a week periods, a great example of that. Stocks are up a bunch and so why not just own stocks instead of bonds, if you think there’s higher rates of inflation, but that’s just not the inflation that we’re seeing today. We’re not seeing inflation that’s driven by strong fundamental growth. We’re seeing inflation that’s driven by excessive government action and excessively easy monetary policy. That is not a good recipe for common stocks to recipe for gold and gold and silver mining.

Tobias: Well, we’re coming up on time. If folks want to get in contact with you or follow along with what you’re doing, how do you suggest that they do then?

Sean: Hmm. They can email me at sfielder@equinoxpartners.com. If you go to Equinox Partners and search it you can find our contact details on the internet.

Tobias: Sean Fieler, Equinox Partners, thank you very much for your time.

Sean: Thank you.


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