With gold breaking all-time highs this week in U.S. denominated terms, we were thrilled and honored to have a conversation with the brilliant Frank Giustra to get his take on the current gold market and the state of the U.S. dollar.
Mr. Giustra is a Canadian businessman, mining financier, and global philanthropist who founded Lionsgate Entertainment. He is CEO of Fiore Group of Companies and Co-Chair of International Crisis Group. From 2001 to 2007, he was the chairman of the merchant banking firm, Endeavour Financial, which financed mining companies.
We encourage all of our followers and subscribers to give Frank a follow on his twitter, here.
Alex Deluce: Thanks so much for taking the time to answer a few questions during these incredibly exciting yet uncertain times. First off, you have had an incredible career in the mining industry, what made you interested in the space when you were a young man?
Frank Giustra: Serendipity. I was in the right place at the right moment in history. I started my career at Merrill Lynch in Vancouver in 1978.
Coincidentally, that was the beginning of the great bull market in gold, silver, and oil that culminated in 1980 with gold hitting an all-time high. In those days, the Vancouver stock exchange was the world capital for junior exploration stocks, so culturally, I was exposed to that world at a very young age. I moved to a small firm called Yorkton Securities in 1980 and spent the next 16 years of my life, transforming the firm into a boutique powerhouse in resource financing.
Alex Deluce: On a global basis, we are witnessing extreme monetary and fiscal policy, but let’s focus on the United States.
We have seen the Fed balance sheet go from 4 trillion in March to roughly 7 trillion today while we saw the budget deficit hit an all-time high of $864 billion in June.
What does this mean for the U.S. dollar?
Frank Giustra: In terms of the U.S. dollar continuing as a reserve currency, it’s days are numbered. The timing can be debated, but I believe it’s a mathematical certainty. The Fed balance sheet will reach $10 trillion this year and possibly a lot higher in the next few years. The chances of ever unwinding that is a near impossibility.
Additionally, the days of sub $1 trillion deficits are over. We will likely see a $5 trillion deficit this year and elevated deficits for years to come. All the unfunded liabilities from Medicare, Medicaid, and Social Security are about to hit a wall, while the effects of the pandemic will hit tax revenues and add to the costs of bailing out the economy. All of those deficits will be monetized, which will add to the Fed’s money printing needs. The printing presses will remain in ludicrous mode for a long time to come.
Alex Deluce: With gold now through all-time highs, price predictions are always tough, but do you have an estimate of where the gold price could go?
Frank Giustra: I never predict gold prices. It’s a mugs game. Anyone telling you they know how high gold will go is a fool or a liar. There are way too many dynamics at play, each of which will impact the price of gold.
What I do know is that it’s going a lot higher. As I said last summer, gold will blow through $1900, and where it goes from there is anyone’s guess. The recent move suggests that although the coffee has been on for a few years now, investors are just now starting to wake up and smell it. We are nowhere near the panic phase yet. I see this as the third and final wave of the gold bull market that started in 2001. And this one will be a tsunami.
Alex Deluce: With regards to deleveraging all this outstanding debt circulating the global economy, what types of things do you think market participants will see? Could it be a means of extreme inflation or taxation? Or do you think we are on the verge of a paradigm shift that Ray Dalio alludes too?
Frank Giustra: Deleveraging at this stage will be impossible. With global debt at $260 trillion, there is no hope to ever see it repaid. Politicians will never increase taxes to the levels needed to eliminate the deficits. It’s just too easy to add to the debt. We live in a new world where it seems the only thing that is non-partisan is big spending. A restructuring would trigger a global depression of biblical proportions.
The only way out is to inflate it away, which is exactly what we are in the midst of with all the global money printing currently taking place. Make the dollars needed to pay back debt, worthless. It’s the oldest policy game in history. I highly recommend that your readers look up Ray Dalio and see what he says about the paradigm shift and the “big squeeze”.
He articulates the current situation perfectly.
Alex Deluce: With regards to gold exposure, the standard investing philosophy for portfolio construction has been allocating 10% of your net worth to gold to preserve wealth.
Given the negative real interest rate environment we are in, in your opinion, do you think this percentage should be increased?
Frank Giustra: You are correct. For years the standard investing philosophy for portfolios was 10%. Even that has fallen to the wayside over the past 30 years as Wall Street convinced investors that holding gold was unnecessary. For all the reasons I have mentioned, I think it reckless to NOT have a substantial percentage of your portfolio in gold.
Mine is a lot higher than 10%. It’s up to the individual risk tolerance of each investor, but as you folks have said,” This is the Era of Gold.”
The investment strategies that have held for the past 30 years are about to be severely shaken. The paradigm shift is real.
Alex Deluce: With your seasoned career of investing in world-class mining companies at an early stage, what do you look for when investing in the industry?
Frank Giustra: Investing in Mining companies is a great way to capture more upside in this current gold bull market.
Mining costs are well under control and energy prices ( a big cost component) will stay subdued for the next few years. If you assume that a mining company has all in costs of say, $1000 all-in oz, the current margin is $1000. If gold goes to $3000, that company’s cash flow would double.
Apply a multiple to that number and you can see how much more torque you would get from owning the shares versus bullion. But, mining is a risky business.
Make sure you have solid professional advice. These markets attract all sorts of junk deals and promotions that end up losing investors a lot of money. I recommend holding both the physical and a solid collection of mining shares.
Alex Deluce: Thank you, Mr. Giustra, for giving the Gold Telegraph readers a glimpse into your thinking during these historic times. Hopefully, we can do it again soon.