A rising gold price can make the metal appear increasingly expensive, but its market price alone reveals little about its underlying value. For instance, gold’s monetary role adds a dimension to its valuation that traditional supply-and-demand analysis may not capture fully.
For investors, the challenge is determining whether a rising price reflects genuine value, growing speculation, or an opportunity the market has yet to recognize. As Taylor McKenna of Kopernik Global Investors explains, answering that question requires:
- A disciplined approach to valuation.
- A willingness to challenge market consensus.
- The patience to act when price and value diverge.
Read the transcript below.
Transcript
Taylor McKenna
The fact that we’re above a $40 trillion deficit already and growing. There’s been, you know, comments made, I’m sure you’re well aware, that inflation is a way to grow out of this. I see a lot of inflationary forces moving forward. Post-World War II, we were on Bretton Woods, which was essentially a 25% backed currency. Of course, it’s also important to mention that in the US’s history, we were on a gold standard longer than we’ve been off one, if people can believe that.
One aspect that we look at is what we call our shadow gold price, which would be currency in circulation and then bank reserves. We divide that by the country’s gold holdings, and we come up with the clearing price that gold would have to trade at for it to go back to 100% backed currency. When the difference between the market price and what we call the shadow gold price is really, really extreme, historically we’ve seen these move together over time. So right now, gold at $4,000, that’s roughly 15% of the shadow gold price. That is well below the historical average. We don’t think volatility is actually risk. We think it’s opportunity. So as things go against us, we’re buying more. Our fundamental view remains the same. And then we’re obviously selling as it gets closer to what we think they’re worth.
Monetary Metals
Welcome back to The Gold Exchange Podcast. I’m your host, Ben Nadelstein of Monetary Metals. I am lucky to be joined today by Taylor McKenna of Kopernick Global Investors. They are a value-oriented investment firm known for their contrarian approach to global markets, natural resources, and of course, precious metals. Today, Taylor’s going to join me to discuss how they value commodities. We’re going to talk about how patient capital works in this type of environment, and of course, some of the opportunities that Taylor as an analyst sees going forward. Taylor, welcome to the show.
Taylor McKenna
Thanks, Ben, for having me. It’s great to be here.
Incentive prices and the shadow gold price
Monetary Metals
Taylor, I want to start a bit on just the idea of a value investing firm valuing gold, which so many people think, oh, value investing, that’s Warren Buffett and he hates gold. So Where is this contrarian approach where you have this value investing side alongside investing in precious metals like gold?
Taylor McKenna
Ben, thanks for having me again. And as you mentioned in your intro, a value investing firm, right? And our opportunity set, we think, is really, really big. And we have a, what we call an organizational advantage. And we’re destined, we’re determined to stay small and nimble to give us this wide opportunity set around the globe. So while we manage $11 billion today, we can get bigger to $15 or maybe $17 billion, but we’re not going to go much higher than that.
And this gives us the great opportunity set. So while we think Warren Buffett’s obviously a great investor with a lot of success over the long term, we do think that there’s a price for everything, right? And it’s using that as the backdrop. And of course, we’re talking about gold here. You know, when we start investing in natural resources, including gold, we start with the incentive price, right? So if we’re investing in oil, we’re investing in natural gas or uranium, We really like buying when the metal or the natural resource is below that price. And historically, we’ve seen the greatest returns in those examples. So buying uranium 10 years ago when it was below $30 a pound, right?
When we thought the incentive price was $75, that’s a huge difference. Gold, if you can even believe it, you know, 10 years ago before 2020 was below its incentive price. So what we thought the incentive price for gold was $2,000. It was $1,500, $1,200 at the lowest. You know, but there’s a lot of opportunity just from that piece of the evidence. And then of course, when you incorporate the monetary side of it, which we can get into, the upside was even more.
Monetary Metals
And explain to our audience who maybe doesn’t know about this incentive price, how do you as an investor use this incentive price? Where can you come up with it? How do you calculate it? And then of course, how is it different for different commodities? Some like gold have this incredible above-ground supply of gold, where other things like wheat, you know, we’re going to eat all the wheat next year. So How does that incentive price work for different commodities and how do you calculate it?
Taylor McKenna
Sure. The incentive price is actually determined the same way for all. And the way we do it is we look at supply and demand factors, right? If there’s going to be more demand in the future, with most cases they’ve grown over time, then we know there’ll need to be new mines or new oil wells brought to market. And in all those examples, we determine what price is necessary to incentivize these companies to build these new mines. Or these new wells. So in the case of oil, $75 is what we have as the incentive price now.
That means that when oil’s above that, you’ll see a lot of new drilling, right? And when oil’s below that, you won’t see as much. And you know, there’s a few ways that we go about this. We look at hurdle rates and IRRs needed by the industry, and then we also talk to the business owners themselves and saying, at what price will you build a new mine? And when it comes to gold. So we start there, right?
Like I said, we really liked gold when it was below this level, and then we incorporate the monetary side of it. We understand that gold historically for a long time, as you’ve talked about on your podcast with many guests, has been a store of value over many centuries, and we firmly believe that to be the case. And one aspect that we look at is what we call our shadow gold price. And by shadow gold price, I mean using M0, right?
Starting there, which would be currency in circulation and then bank reserves. We divide that by the country’s gold holdings, right? And we come up with the clearing price that gold would have to trade at for it to go back to 100% backed currency. And in this case, right now we’re at $25,000 for that metric. We’re not saying gold is going to go that high, but when the difference between the market price and what we call the shadow gold price is really, really extreme.
Historically, we’ve seen these move together over time. So right now, gold at $4,000, that’s roughly 15% of the shadow gold price. That is well below the historical average. And the last point I’ll make on gold is, yes, we still like it for these reasons that we’re talking about, but we like it a lot less now that it’s above the incentive price and that it’s moved up so much in recent years.
Risk, volatility and buying gold miners again
Monetary Metals
And how do you think about, as a value investor, someone looks at this and says, oh wow, the price is super cheap. But it has to be cheap, you know, maybe for a reason, right? Because there’s some other risk involved. So as a value investing firm, how do you think about risk when it comes to investing in an asset? Because simply people say, well, the price is cheap, but there’s a reason that it’s cheap. What’s the risk that a value investor should be focusing on when it comes to commodities or precious metals?
Taylor McKenna
Sure. I mean, the way we express most of these views is by buying mining companies or natural resource companies that own this Under the ground, right? And have to pull it out. And of course, there’s a lot of risk associated with all of that, which we can get into. But even if we’re going to buy an ounce of platinum or an ounce of gold, to your point, we could be wrong.
And there have been a couple examples in our portfolio where we’ve held physical uranium, physical platinum historically. And even in those scenarios, we would demand a margin of safety, right? So there’s many reasons you could be wrong. The counterparties are part of that. You could be wrong with your analysis on what the incentive price is.
To your point, maybe gold stays historically well below the shadow gold price, which it has, but maybe it stays below the average. So all of these are risk. But when you diversify across many different metals, many different natural resources, and of course we’re not a natural resource firm, when you incorporate across many businesses and investments around the globe, some will be working at times when others aren’t.
And another important part of our strategy, you mentioned volatility and risk, is we don’t think volatility is actually risk. We think it’s opportunity. So as things go against us, we’re buying more. Our fundamental view remains the same. And then we’re obviously selling as it gets closer to what we think they’re worth.
Monetary Metals
And I want you to talk about this idea of volatility. Of course, for investing in commodities, oftentimes people say, oh, gold is much more volatile than stocks or much more volatile than these other types of assets. How do you use that volatility as an advantage when you’re saying, well, actually, we don’t see volatility in the same way as a risk framework as other investors do?
Taylor McKenna
That’s a great question. So we’ll just talk about, since I cover mining, we’ll talk about that piece of the portfolio, but this can apply across the portfolio. So, you know, if we were sitting here now, it would be about 2.5 years ago, we were 20 to 25% gold miners in the entire portfolio, which sounds like a lot, especially when mining as a piece of the index is about 1%. And of course, that’s another important point for me to point out.
We’re industry and benchmark agnostic. We’re investing this like it’s our own money. We’re going to where we see the most upside to our risk-adjusted value. And in this case, we saw the most upside to risk-adjusted value in gold miners. And then of course, you flash forward to this time last year, for instance, or later on last year, we’ve brought that weight in gold miners down from 23% down to 3%, right, into last March. And then earlier this summer, as you’re probably aware, as the miners had cheapened up again, we were reallocating to them. So we can take advantage of this volatility. And as we’re moving out of the gold miners, We’re buying platinum, which we can get into, and in some places copper. So as, of course, as long-term investors, we can take advantage of this volatility, and we certainly do.
Monetary Metals
How important is it to be a long-term or a patient type of investor where you can say, well, I can ride out the volatility where maybe someone else can’t, where they’re day trading or they need the money or they need the liquidity? How important is it to be patient as an investor?
Taylor McKenna
I think it’s very, very important, and that’s what we specialize in, right? We’ll use Uranium as an example. So we started investing in uranium, if you can believe it, back in 2013, 2014, and certainly 2015, well before it became in vogue in investors’ eyes. And again, we used the premise that uranium was selling for, you know, $30 a pound. We thought the incentive price was $75, and China was building all these nuclear reactors. So at some point there had to be a point of reckoning, right? And when you’re investing in those scenarios, the upsides can be massive.
Right? So in some of the uranium companies, some of the larger companies, but certainly some of the smaller ones, we saw, you know, 5 to 7 to 10 times upside in some cases. And while that thesis or that in those investments took, you know, 7, 8, 9 years in some cases to work themselves out, we saw 5, 6, 7, 8 times upside, and that actually happened in the marketplace. So we were compensated for being patient in those periods. So that’s what we look for as investors. We look for these asymmetrical opportunities and we diversify this across the portfolio knowing that we can’t time exactly when they’re going to work, but if the upside is enough, some will work at different times and the returns will be good.
Physical metals versus mining stocks
Monetary Metals
We’ve discussed at length a little bit here between owning the actual physical metal, whether it’s platinum or uranium, and then owning the actual miner, the guy who mines the gold or mines the silver. How do you think about those 2 different businesses? On one hand, you’re investing in the management of a mining company as well as the jurisdiction and the mining risk of actual, you know, grade of the metal versus when you own the physical precious metal, you own the physical commodity, you own the commodity. So what is the different play between those 2 types of investments?
Taylor McKenna
They’re vastly different, and we could take a whole podcast to discuss this. But let’s start with, of course, there’s a much greater risk when you own a miner or an undeveloped asset of gold, platinum, oil, natural gas, etc. There’s risk associated with geopolitics, expropriation, governments always wanting more as prices increase, so taxes increase, right? There’s social, there’s environmental risk. We think one of the biggest risks and one of the biggest disappointments in mining, and perhaps one of the reasons why we see so much opportunity, is because managements have destroyed value on the capital allocation over time. So all of those reasons present enormous risk when you’re investing in a mining company.
So before we invest in a mining company, we need to be compensated for those risks. And let’s use the example of gold. Historically, we could buy 2 years ago, 2 and a half years ago, we could buy gold below $200 an ounce at a company like Newmont or a company like Barrick. And at the time, you know, gold was between $2,000 and $3,000. And even when you were to include lifting costs and a pretty large margin of safety, there was a lot of upside embedded in that. Right? We like that opportunity. And then if you look at now, Newmont’s now trading at about $1,000 per reserve, so they’re up quite a bit. So there’s a lot less opportunity now than there was.
And if we look at platinum, you can buy platinum in the ground, I’m using Valterra Platinum, the largest platinum producer, for about $150 per ounce right now, right? Even when you include lifting costs, platinum’s around $1,600, you’re still actually making money. And we think platinum’s fundamentally undervalued. So the optionality in that is pretty incredible. So we like to be compensated for the risk and we like the optionality and the leverage that gets associated with these miners. And then like I, like we’ve already spoken about, being active managers of this and taking advantage of the volatility is an important part of it.
Monetary Metals
And talk to me a little bit about the difference between a mine that’s already in production. They had a history of producing metal. They’ve you know, had years and years of production. Maybe they want to scale up production or they’re scaling down production, but they’re a producing mine versus someone says, hey, we think we have this metal in the ground or we’re sure we have this metal in the ground.
We just haven’t actually brought it out. How do you value those differently in terms of the life of the mine, the production of the mine? In some ways, maybe it’s easier to say, well, we know that this mine produces X, Y, and Z, so the net present value is X. Therefore, it just comes up to how much buffer of safety do you want or how interested are you in the metal? Versus, hey, we don’t really know how much metal’s in the ground here. We don’t know truly how long this mine is going to produce. How do you value those differently?
Taylor McKenna
I can explain it like this. If we’re going to invest in just the metal itself, maybe we need a 10 or 15% discount, right? Something along those lines. And then if we’re going to invest in a large producer like a Newmont or a Barrick, or certainly a royalty company like Wheaton Precious Metals or Royal Gold, maybe we need a 20 to 30% discount from our risk-adjusted intrinsic value, right? From a margin of safety.
Now, as we get more towards an undeveloped miner, or, and there’s also a group in the middle, maybe a mid-tier miner that’s in risky jurisdictions, maybe we need a 40 to 60% haircut, right? Or discount to our value before investing. And then as we get to an undeveloped miner, maybe we need an 80 or a 90% discount in some cases before we’re investing. What’s really interesting to us is that even when you assume that we’re more than being compensated for that from an undeveloped miner, and I think one other important point I think we should raise, we also think that we have an analytical advantage.
You mentioned the word NPV, and yes, most investors around the world value mining companies using an NPV analysis, which is basically a discounted cash flow. We think that that’s not the right way to value mining companies. And, you know, let me give you an example. If a company has a 10-year mine life, right, that company, if you look at an NPV, will be valued the same or very similar to a company that has a 20-year mine life, right? And we think that’s wrong. And you actually, in many cases, should be rewarded and will work out better in the long run if you invest in that 20-year mine life company.
That company should have a much higher value, not the same value. So we like to take advantage of that. And that’s how we think about undeveloped assets. We like long mine lives. As you know, historically, the grade of gold per ounce mined has dropped tremendously over time. So once you actually find this These large mines, these large assets get built over time. And having this long mine life that takes advantages of the cycle is really, really important. Because what if, in the example of the 10-year and the 20-year mine life, what if the first 10 years is a down cycle, right? You don’t get rewarded for the upcycle.
So have that 20 years. So we really think that that’s an institutional advantage for us as well.
Monetary Metals
And what do you think about miners who hedge their own production? They say, hey, listen, I’m a little bit worried about the price of gold changing on me. Gold, as we’ve mentioned, is a volatile asset at times. So I want to hedge out the price of gold. I’m basically going to hedge out my gold position. I’m neutral to the price of gold. But now you’re basically betting on the management. It’s less of a leveraged gold play. What do you think of that idea? Does that hold water with you?
Taylor McKenna
We wouldn’t argue against doing that. I think if you look at it historically, management teams have mostly mistimed these types of things, right? So they end up destroying value over the long run. On top of that, it almost takes the power, to your point, out of the investor’s hands. Right. So yes, we would advise management teams not to do that. There could be instances where they have some debt due that, but there’s small instances of doing it that might make sense. But no, over the long term, we would prefer management teams don’t do that.
Mining jurisdictions and margins of safety
Monetary Metals
And what do you think about, obviously with this idea of nearshoring, people are saying, well, a mine in Mexico is now maybe going to be more favorable for a US investor than a mine in China, even if they’re the same type of grade or the same type of metal that’s coming out of the mine. What do you think about this idea of jurisdictional risk becoming more important because of the less globalized world that maybe we’re heading towards?
Taylor McKenna
I think it’s certainly important, but you know, the old adage in the industry is you can’t move a mine. So you don’t want—you have to, in the end, go where the resources are, right? And so I do think that mining will remain a globalized business. You know, mining companies will have to look both onshore and offshore for assets, and there’ll have to be a way for it to move around the world. There could certainly be changes if you’re talking about the US to the, to the mining code, right? It’s still incredibly hard to permit a mine in the US. So we would like to see some changes there. But I still think that over time you have to go where the resources are. So that’s very important.
Monetary Metals
Over time, obviously different jurisdictions become better or worse for mining. For example, maybe the US was good at one time and now maybe not as much. South Africa was maybe great at one time, maybe now not as much. How do you guys think in terms of as a value investor, hey, this region actually has a lot more value than it seems on its face?
Taylor McKenna
Let’s use the example of South Africa, right? If we’re going to invest in a platinum mine in South Africa, about 70 to 90% of the world’s platinum actually come from South Africa and Zimbabwe. So it’s very important in platinum world. And so if we’re going to invest in a platinum miner, you almost have to go there. And of course there is jurisdictional risk, right?
And coupled with that, there’s, you know, ESG, there’s social risk, there’s electricity and power risk Eskom in the country. And so there’s a lot of risk there, and we would need a larger margin of safety before we invest in South Africa. Talking about Velterra Platinum, maybe a 50 to 60% margin of safety before we invest there versus for investing in Australia or Canada, maybe 20 to 30%. So yes, we need a bigger margin of safety.
But the other thing I’ll point out, just using South Africa as an example, every country is different. But again, on this example, mining is really the largest industry in South Africa, right? So as there’s volatility with social regulations and taxes and electricity, as we spoke about, it’s incredibly important. So it wouldn’t be in the interest of South Africa to completely disrupt the industry.
So that’s also an advantage or a benefit when you’re investing in that business in a country where it really matters. Whereas in the US, As a percentage of GDP, mining doesn’t matter at all, right? So it’s, you know, it’s good once you permit a mine and build a mine and have a mine, but it’s not like the government is relying on tax receipts from the mining industry in the US. So it’s two sides of the same coin, if that makes sense.
Monetary Metals
To me, it always feels like there is some level of art when it comes to the value investor. The value investor says, hey, listen, I’m trying to look at this more objectively than maybe the momentum people, these other types of investing frameworks. So where does that kind of art or personal subjective taste come in when a value investor is looking either at a jurisdictional risk or a region or an investment where they say, well, listen, I want a 20% buffer, but obviously that’s subjective. Maybe someone wants a 30% buffer. So where does the art kind of slide into this more objective value framework?
Taylor McKenna
I think in a few different ways. One, what we were talking about, the analytical advantage, right? And I really think that when we’re valuing a mining company, it’s different than most in the industry, right? We’re not discounting long mine lives into the future. We’re actually rewarding them in a way. And then we’re also paying very close attention to what is the incentive price and how dislocated are we from that incentive price.
So buying when we’re cyclically depressed, miners are shutting down mines or not building, and we’re below the incentive price, that’s a very good time to invest. So I think that, you know, we have a behavioral advantage too, And that we’re willing to take on this risk of buying at low points of the cycle. As we’ve discussed, we’ve done this in uranium, certainly gold, platinum, copper, oil. And I think that that’s a really big advantage for us. And then we’re not afraid, of course, to sell. I mean, I use this example.
I’ve been on the road with some of our marketing team as everyone is now talking about uranium, or this was a couple years ago now, we’re no longer in it. And it’s like, it’s tough from a marketing perspective because now everyone wants to hear about it, but we don’t own it anymore. Right? So that’s a behavioral advantage that we think we have.
And then I think the margin of safety approach is also very unique in its way where we have these different risk buckets and we score them on a score of 1 to 10, 10 being very good, which is almost impossible, 1 being very low, but there’s a lot in the middle and it’s subjective to your point. But we sit around a table with a lot of smart people and we determine these scores and then we risk adjust our investments this way. I think that, that, that also is a very important part of our process.
Long-term gold ownership and buying through downturns
Monetary Metals
I want to ask you now, for our clients who of course have a yield on their gold, paid in more gold, they’re generally patient investors. They say, I was going to own gold no matter what for the next 50, 100 years. I might as well earn some yield on it, get some compound interest on my gold. I’ll outperform whatever the gold price does. If it goes up, I get a little bit. If it goes down, I still get a little bit.
So these are a patient type of investor. They like gold, for the long haul. How do you think about having gold in a portfolio kind of allocation sense where someone says, I’m not day trading gold, I might day trade Nvidia, or I might move in and out of some stocks, but when I own gold, I own it for the long term? What do you think about that in terms of a portfolio allocation strategy?
Taylor McKenna
In our white paper, our precious metal white paper, we actually comment on that. We think that that’s a worthwhile investment for everyone to make, owning some physical gold in their portfolio. And if you look at over time, it’s been a great diversification asset. It has a negative correlation to equities last 200 years or so. So we think that it’s a very important asset for everyone to own. And we have owned some physical metal, not necessarily gold, but platinum and uranium historically.
We also think owning mining companies or being a value investor, there’s times to own it and there’s times not to own it, right? So while we’re in a period of time where we think owning mining assets makes a lot of sense, We certainly wouldn’t recommend an investor own mining assets to the same degree we do for all the time, whereas physical gold certainly makes sense.
Monetary Metals
And I want to talk to you now about this behavioral aspect where it’s really difficult to buy something at the cyclical low because you don’t know if it’s the cyclical low. Maybe it goes even lower, right? So how can an investor, not only for their own behavioral aspects, say, hey, this is the cyclical low, it’s going to be tough, but I’m going to buy, but I’m a patient investor, so hopefully this pays off. How do you get that behavioral aspect locked in?
Taylor McKenna
Sure. And sorry to keep coming back to it, but I think it’s really important. And let’s—we haven’t talked about lithium yet. We can use that as an example. We determined the incentive price is $15,000 per ton, right? And the price in the last 10 years has been anywhere from $5,000 to above $50,000 a ton. So very, very volatile. But when it got below $15,000 about a year and a half ago, a year ago, 2 years ago, and even below $12,000, we actually saw mines shutting down, right?
We actually, and then we saw people pushing out their plans to build mines, right? And then we saw write-downs at some of the biggest lithium companies in the world. So when all of that happens all at the same time, and then you go back to your fundamental incentive price analysis and you still determine that the industry needs $15,000 and it’s destined to grow over time for batteries, et cetera. We don’t have to get into that. But the point was, is we get comfort in knowing that no one’s building.
People are shutting down supply. Demand is still likely to grow over the long term. And at some point, the rubber band will have to spring back towards that incentive level, as happened historically in all of these metals to incentivize new growth. So we get comfort in knowing that we’re closer to the bottom, if not at the bottom. To your point, value investors are often early, but we get comfort in knowing we’re closer to the bottom than were certainly when prices were well above $15,000.
And then on top of that, you know, the equities, you know, the leverage in the equities, the lithium equities in this example were down 50 to 75%, right? So we get comfort in knowing again that all of this has already happened. And again, we might not time the bottom perfectly, and historically we certainly haven’t. It’s a much better entry point than certainly when prices are above the insider price.
When to sell and gold’s monetary value
Monetary Metals
Now I want to ask you on the flip side. So, okay, I’ve made this investment in gold or gold miners, and I think, wow, this is great. I bought at the and now we’re shooting through these highs. I’m up some percentage. When is it the right time? Obviously, it’s unique to each individual investor’s needs, but what’s a good framework for thinking, hey, maybe it’s the right time to take some gains off the table, to pull back, or just exit the position fully?
Taylor McKenna
Sure. We come up with our risk-adjusted intrinsic value. So when we incorporate all the risks, the geopolitical risks, the management risks, the balance sheet risks, we come up with our risk-adjusted price. And when prices are well below this, obviously we like it. And as prices approach this or exceed it, we’re out of the stock. We stay anchored to that risk-adjusted value. And, you know, that’s certainly easier with, you know, base metals, with energy-type assets. It’s a little tougher with gold, right?
Because, you know, with gold it has a monetary value. And of course, you know, we talked about going back to a gold standard. And again, I’m not saying we’re going back there. The price is multiples higher than it is today to go back But of course we’re well above incentive at the same time. So while in most commodities we wouldn’t own much exposure if the price was above incentive, in most cases we still own a little bit of gold because in our analysis of gold we incorporate this monetary element as well. So in most cases, in all cases I should say, when we hit our risk-adjusted intrinsic value, we’re out of the stock and we stay anchored to that. But with the gold piece, We incorporate into that a monetary scenario.
Monetary Metals
Talk to me a little bit more about that monetary scenario for gold, because a lot of people who are gold bugs, we like gold, we think, hey, it’s a monetary asset. It’s not just like copper or nickel or lithium. It has some kind of monetary flavor to it. So how do you decide, for example, like an asset with silver? Well, does it have a monetary flavor to it, or is it really just an industrial commodity that people used to like as a monetary asset? How do you decide how much monetary asset framework to apply to different assets?
Taylor McKenna
That’s a great question. So we would incorporate a scenario like this into silver too. You know, the way we think about it is the market can do this itself too, right? So post-World War II, we were on Bretton Woods, which is essentially a 25% backed currency. So within our framework, we incorporate that. So if we were to go back to a 25% backed, and of course it’s also important to mention that in the US’s history, we were on a gold standard longer than we’ve been off one, if people can believe that, right? But if we were to go back to a 25% back scenario, that’d be just above $6,000 an ounce.
That doesn’t seem too far away right now, right? And of course the market, like it did in, you know, the 1970s, it can actually take the price to these levels itself, right? There doesn’t have to be any intervention by the government like there was during, you know, during FDR’s period. So we incorporate that as a scenario into our analysis. And we also incorporate what if the market price is correct right now? So for around $4,000 an ounce, of course we incorporate the incentive price, which is in gold $3,000 an ounce now. And then we incorporate a bear case. So we incorporate all of these scenarios into our valuation. And then the monetary piece of it is much higher than gold than it would be for any base metals or anything else.
Monetary Metals
I want to ask you now, what’s the strongest argument you’ve heard against owning gold? Obviously Warren Buffett is a very famous value investor. He says, well, the reason I don’t like gold is because it doesn’t have any yield. It doesn’t spit off a dividend. Obviously, at Monetary Metals, we do pay a yield on gold, and we’d be happy to have Mr. Buffett as a client. But in terms of the strongest arguments you’ve heard against owning gold as a value investor, what is your opinion on that?
Taylor McKenna
I mean, I’m trying to pick something outside of what Buffett is saying, because that is certainly the key reason I’d suggest. What if you get the timing wrong? You’re not going to be paid to wait. I guess in your example, you can. And certainly with a good miner and a good management team, you can be paid to wait too. They can increase value over time. But if you’re talking about just physical in that sense, I guess the fact that to your point earlier on the stock-to-flow ratio, right?
There’s just so much that’s out there and we don’t consume it all like we do with wheat or with like copper in most cases. And what if the selling pressures, central banks for whatever reason decided to unload their positions? There would be a lot of liquidity and a lot of gold out there. Of course, I don’t think that’s going to happen and it’s not happening. Central banks are purchasing, but I would probably look at the stock-to-flow ratio as one of the big risks within gold versus some of the other metals, but would be curious your thoughts as well.
Platinum, silver and precious metals ratios
Monetary Metals
Yeah, well, especially on that volatility front, one of the negatives people say about gold, obviously outside of the yield, which we got covered at Monetary Metals, is the volatility, which is, hey, gold is more volatile than all these other things and I want to be paid to own something that’s volatile. On the flip side, of course, most people own gold as a long-term asset where most people don’t really own platinum or copper as a long-term asset where they say, even if I pass away, my kids will always want some platinum, right?
So there is some benefit for the patient investor versus someone who says, listen, should I buy stocks, bonds, or gold? It’s unclear how long your investment horizon is. So for someone like Kopernik, where they have that longer-term ability to hold through these up and down cycles, that volatility of gold maybe isn’t as big of a risk.
Taylor McKenna
That’s true. We think that that’s opportunity, right? That we’re being compensated for. On your point on platinum, I’ll just point out that the long-term ratio of gold to platinum is 1 to 1. And currently platinum’s trading, you know, 40% of the price of gold. And what’s really interesting, what we really like the setup in platinum is even if, you know, prices don’t appreciate that much, as you can see in some of the results, some of the large companies like Volterra and Paul are putting out, they’re making a lot of money even at current prices.
And if we were to go back to a scenario where it gets closer to 1-to-1 gold, the optionality is incredible in these companies right now. You can buy the same amount of platinum for roughly 5 or 10% of the price of gold in some of these large platinum companies. So yes, we think that it’s, gold is superior in many ways, but we think that the rubber band is stretched far too much right now. And the case can be made that platinum goes back to the same price as gold.
Monetary Metals
And I want to ask you now about those ratios between different commodities. We have some analysts who say, oh, I watch the oil-to-gold ratio, and other analysts say, oh, I watch the gold-to-silver ratio because if that gets out of whack, then I invest in the other metal. Are there certain ratios that are important outside of these incentive prices or other supply and demand factors? Just saying, hey, wow, the ratio between these 2 assets is way out of whack.
Taylor McKenna
Sure. I mean, I think they’re an important tool to use and look at, and we certainly look at them, right? So the long-term average gold-to-silver, if we’re looking at that, is 40 to 60 to 1. Right? And 50 to 1 is often cited as the long-term average. The geological average is much lower than that, right? So that would imply a, you know, 8 to 1 ratio, which would—it’s hard to believe. Of course, the end demand is certainly different. Silver’s 70% industrial and also mined 70% as a byproduct.
So it’s really, the supply is really factored into copper mines. But yes, we certainly look at them. And when silver was, you know, above $100 and close to $115 a few years ago, and even more recently for a small stretch, for sure it looked very undervalued compared to gold. And of course, we saw that snapback as we’re alluding to. You know, what’s interesting about platinum and PGMs in general is there’s about roughly, I think, 90 to 100 million ounces of gold mined per year. There’s a 10th of that, you know, there’s 10 million ounces of platinum mined per year, right?
So it’s much more rare from a production perspective, and we actually think that that could be a benefit for it. And so yes, the long-term ratio of gold to platinum is 1 to 1, and we’re 60% below that right now. So we do view that as an opportunity. But again, we, we still anchor upon that incentive price for all of these.
Rapid fire: debt, inflation and investment risks
Monetary Metals
I want to ask you now a list of rapid-fire questions. They’re going to be all over the map, and you can answer as short or as long as you want. But I want to start, what factor do you think is going to have the greatest influence on gold prices over the next decade? Your options are the mining supply, just, hey, how much gold is coming out of the mines? Central bank demand, so how much central banks are interested in purchasing? Fiscal deficits. So something in terms of that kind of monetary layer outside of supply and demand of gold, or the actual just allocation that institutional investors say, hey, this is how much gold I want in my portfolio. Which do you think is going to be the most important for gold over the next decade?
Taylor McKenna
Well, all of those matter, but I guess I’ll go with the monetary side of it. I mean, I would probably fade the supply component due to the stock-to-flow, as we spoke about, and I would focus on the monetary phenomenon and the fact that You know, we’re above a $40 trillion deficit already and growing.
Monetary Metals
I want to ask you now in this rapid-fire section about investors who are concerned about their jurisdictional risk. Hey, I like this asset. Hey, I like this mine. Hey, I like X, Y, and Z, but I’m a little bit worried about the jurisdiction, whether it’s expropriation, whether it’s property rights, whether it’s just, hey, I’m not sure about capital controls, or maybe this is not going to be a favored nation sometime soon. What should investors know about jurisdictional risk that they can learn from your experience?
Taylor McKenna
They should be very willing to demand a large margin of safety the greater the risk is. I would also advise to look at the long term, not necessarily what’s happened recently, but over the long term. And I can give examples for that. So again, if we’re going to invest in Argentina, while everything looks a lot more promising today than it did perhaps 2, 3, 4 years ago on the mining front, Our margin of safety analysis wouldn’t be that much different, right?
We would still demand a 60 to 70% discount to invest in Argentina going forward, right? So we don’t think these changes are overnight, but investors at the same time, if they’re being compensated for the risk, should be willing to invest there, right? Because there’s risk everywhere in the world. There’s risk here in the US, there’s risk in Canada. So demand an appropriate amount of margin of safety. And then be willing to act when you’re being compensated for that.
Monetary Metals
Now I want to ask you, what is the most underrated and overrated mining jurisdiction in your opinion?
Taylor McKenna
I would say the most underrated, but probably less so going forward, is Brazil. Underrated. And then overrated, it’s funny, I want to say the US, but it’s not really, you know, rated that high in general right now on mining because no one’s permitting. So But I would still say the US. I mean, it’s incredibly hard to permit and build a mine in the US, so I’ll go with those 2.
Monetary Metals
All right. What commodity are you most bearish on? I’ll give you a second to think while I tell you mine, which is diamonds, because I think over time with the lab-grown diamond phenomenon, people saying, well, do I really need a diamond? I think as a structural bear, I would be saying diamonds are the asset where I think, wow, I just don’t see a future for the diamond as asset class to invest in. So Taylor McKenna, we give it to you. What’s the commodity, the asset class where you’re most bearish going forward?
Taylor McKenna
Wow. It’s funny because as value investors, we haven’t made any investments and I don’t know enough yet, but we’re looking at diamonds a little bit because a lot of people are bearish on it right now. So as value investors, we’re certainly taking a look. So it’s funny you bring that up. As far as what I would be the most Bearish on? That’s an incredibly hard thing to say. I’d say that, you know, when everyone likes something, we tend to look and think about it.
You know, is there a lot of market behavior, a lot of emotions that are behind that? And, you know, I’m certainly not overly bearish, but everybody is really focused on the critical minerals and some of these rare earths right now. We don’t own any in the portfolio. But I think that while there’s a lot of concern about it, I think they likely work themselves out over the long run. So perhaps rare earths or something similar to that right now.
Monetary Metals
Okay. Next question for you. How important are tariffs to an investing regime for someone who says, I invest globally? How important or destructive are tariffs? And should investors worry about tariffs or should they say, hey, listen, focus on your incentive price, the tariffs and all these other Excellent
Taylor McKenna
question. I mean, we think in general, government interventions in general around the world are pretty cyclical and they tend to move up and down over time, right? And so we would encourage investors to, yes, think about the long term and demand a margin of safety everywhere we go. So again, that brings into the question the US and the tariffs that are in place now. We would deem the US imperfect before and going forward, so we would always need a margin of safety before investing in the US. And I think that’s a really good point. So I think the way we think about it is we’re not great forecasters of how these government interventions play out. So we demand a margin of safety and we understand these to be cyclical for the most part over time in every country.
Monetary Metals
Now I want to ask you about inflation or deflation. What do you think is more likely a risk to an investor’s portfolio in the next decade?
Taylor McKenna
I think inflation. I think that again, we can get back to the fact that we’re over $40 trillion in debt. There’s been, you know, comments made, I’m sure you’re well aware, that inflation is a way to grow out of this, right? So I would imagine just based on where we are now, that inflation, we can call the reindustrialization, bringing things onshore in the developed world as another inflationary. So I think there were a lot of forces that set up more of a low inflation environment. Up until 2020, but I see a lot of inflationary forces moving forward.
Monetary Metals
I want to ask you about interest rates. Obviously, in some ways interest rates are pretty cyclical. Who knows what they’re going to be 5 minutes from now, let alone 5 years from now? How important are interest rates to your investment thesis or your investment framework?
Taylor McKenna
The amount of debt that a company has is very, very important to our framework, especially when we’re investing in cyclical businesses, right? So a company with a lot of debt in a mining business, to us, would need a large margin of safety before looking at it. So we prefer miners, we prefer businesses in every industry, but certainly in cyclical industries like mining to be relatively low debt levels. And in a worst case where interest rates rise, that is not going to impact us that much, right?
So it plays an important part when we’re doing the evaluation on the company and a miner or a natural resource company with a lot of debt, a lot of interest rate risk, Well, it would be hard for us to invest in that. There’s always a price for something, but it would need a very large margin of safety. And then on interest rates in general, we’re a bottom-up fundamental firm, so we don’t forecast out interest rates, but of course we pay attention to the risk associated with each business.
Monetary Metals
All right, next question for you. What’s an investment book you advise everybody to read?
Taylor McKenna
One of our favorite books, and one of my favorite books around here is certainly the, you know, The Most Important Thing by Howard Marks. It gets into a lot of the topics we’ve discussed and our view of volatility as opportunity. And I would encourage people to, if they’re really thinking about investing with a long-term mindset, to read that book. It’s very helpful.
Monetary Metals
Okay, now I’m going to put you in a tough spot. Who is your favorite value investor?
Taylor McKenna
Ooh, my favorite value investor. Well, can I say Dave Ivan?
Monetary Metals
Absolutely.
Taylor McKenna
Yeah, I’d say I’m very happy to be where I am right now and working under Dave Iben, who’s been a value investor for 40-plus years. Just his level of engagement even now is through the roof. He’s willing to go everywhere, and I think he really has a knack for investing on a global basis and finding opportunities. So what I really like about us versus many other value investors is that we’re globally focused. I think that’s a big differentiator for us, and I think a lot value investors are more regional focused. And I think that the opportunity set for us is much larger. So I’m going with us and Dave Ivins.
Monetary Metals
All right. I won’t put you in a hard spot and tell you what do you disagree with Dave on, but what is something you disagree with value investors on where you think, okay, I like the whole value investing framework, but here’s where I disagree?
Taylor McKenna
I would say that one of the areas that we disagree with most value investors would still be on, you know, time value of money within the mining sector. Right? So I think most focus on that, even on the value investing side of things, whereas we’ve talked about, we don’t think NPVs and DCFs should factor into the mining business. I also would disagree with some value investors and their approach to—I, maybe it’s not only value investors, but quantitative value investors where they’re focused on buying the cheapest price to book or the lowest PE. Let’s use mining companies.
Mining companies tend to have low PEs when they’re fully valued, right? So, you know, you always have to look at the E. And you also, one thing that we pride ourselves in here, you have to look at what’s making up book value, right? So don’t just invest in the lowest price-to-book securities. Understand what is in book value. Understand where you are in the earnings cycle. So I think I would disagree with some value investors that, that take that approach.
Why Taylor would choose silver for 20 years
Monetary Metals
All right. Next rapid-fire question for you. If you could only own one commodity for the next 20 years, What would it be?
Taylor McKenna
If I could only own one for the next 20 years, I’d go with silver. I think that, you know, we’re certainly not at an extreme point where the gold to silver ratio’s really low historically. We’re still above average and from what I can see, and I think that the silver demand will continue to grow, both investment demand, but importantly the industrial demand. I think solar energy likely continues to grab share. There’s a lot of silver used in that. So I do think that silver, if I had to close my eyes for 20 years, I would go with silver. If we were sitting here 2 years ago, 3 years ago, I probably would’ve chosen gold. But with gold’s rally, I’ll go with silver for now.
Monetary Metals
All right. Next question on gold and silver. Obviously we have lots of gold and silver investors listening in our audience. What’s the biggest risk that you think is going to face the gold and silver markets in the next decade?
Taylor McKenna
The biggest risk on the silver side, as we talked about it, There are primary silver mines, right? But there’s not that many and there’s not going to be that many going forward, you know, based on what’s undeveloped today. So there’s a lot of 70, 75% of silver supply is a byproduct, right? So I’m not forecasting this, but if suddenly there was a huge pickup in CapEx budgets by large copper miners and huge copper mines were built, there could be a drastic increase in the supply of silver.
Again, I’m not necessarily forecasting, but I would say that’s one risk is not only silver mine development, it’s base metal mine development you have to watch out for in silver. So I think that that’s an important risk there. And then if we were to go back to a period of positive real interest rates, again, I don’t see this happening. It’s certainly not in the US, but if we were to go back, I think it would cause a day of reckoning. And I think the more likely approach is kind of the reflation trade as we were talking about. But if we were to go back to really positive real interest rates, that were sustainable, that might be a negative for gold and silver.
The supply problem investors overlook
Monetary Metals
All right, here’s another tough one in the rapid-fire section for you. What’s an investment thesis that you’ve changed your mind about over the years?
Taylor McKenna
I think that Dave has certainly been helpful in this, and Alisa, our co-CIO, is I think investors, and myself included, often focus on the demand side of the equation, right, when we’re talking about natural resources. And then underappreciate the supply side of it, right? So let’s take platinum as an example. Investors are concerned about demand because 25% to 30% of demand are internal combustion engines, right? For platinum, 70% are other sources that we think are growing.
So yes, that is a concern on the demand side, but that leads many to not even invest in platinum. Whereas if you look at the supply side, these companies are not reinvesting So even in that scenario, if that demand falls off over the next 10 or 15 years, which it might, it might not, the supply side looks very bleak. So supply will come out of the market. So 15 to 20% of the supply will leave the market in platinum. And we think that that’s underappreciated. So I think one thing that I’ve really, really learned and started to focus on is you really have to look at supply.
Uranium’s another good example. When you have an incentive price of $75 and then a price of $30, no one’s building new supply. Everyone’s focused on the fact on demand, but no one’s building new supply. And we think, and I think that that was underappreciated, certainly by myself.
Monetary Metals
Yes. All right. Last rapid-fire question for you. What’s the best gift you’ve ever received?
Taylor McKenna
The best gift I ever received was from my wife is guitar lessons. I’ve always wanted to learn how to play the guitar and I’ve never got over the hump to actually taking lessons myself. And she bought me lesson package, and that’s been great.
When should investors sell gold?
Monetary Metals
All right, next time you’re on the podcast, we’ll, we’ll open it with a little guitar from Mr. McKenna. All right, last question, which is, what’s a question I should be asking all the future guests who join me on the Gold Exchange Podcast?
Taylor McKenna
What I’d be interested is at how are you thinking about selling gold, and then asking them about how, of course, you can make the case that a piece of investor’s portfolio should be in gold at all times, But when do you flex that? How do you think about flexing that up and down? And that’s something always I’m interested in hearing.
Monetary Metals
All right, Mr. McKenna, I’m sure people are going to want to hear more of your views and of course learn more about Kopernik Global Investors. So where can people get more Taylor McKenna and more Kopernik?
Taylor McKenna
Certainly on our website, there’s a lot of great news and views. There’s industry pieces of which I’m speaking about. It goes through our framework for investing in natural resources. But also, you know, a big piece of our portfolio is in emerging markets. So we talk a lot about emerging markets and the valuation disconnect between there and certainly the US market. So that’s all available on our website.
Monetary Metals
For those interested in earning a yield on gold paid in gold, they can check out Monetary-Metals.com. Mr. McKenna, good luck with the guitar lessons, and we’ll have to have you back on again soon.
Taylor McKenna
Thanks, Ben. Thanks for having me.
