Episodes

Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.

Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today we talk with Gold Stock Analyst editors, John Doody and his partner, Garrett Goggin.

Dan Ferris: Today, first we'll talk about economists and recessions, and whether it means anything at all for investors.

Corey McLaughlin: Remember, if you want to get in touch with us, send a note to [email protected] and tell us what's on your mind.

Dan Ferris: That and more right now on the Stansberry Investor Hour.

One of the best quotes I've heard over the years about anything in finance is, "All the world's economists laid end-to-end couldn't reach a conclusion." I like to cite that whenever anybody brings up what economists think. I thought of it this morning because Bloomberg has this article called, "Recessions Calls Keep Getting Pushed Back, Giving Soft Landing Believers Hope." It's all about all these economists who basically have been calling for a recession to begin in three months, you know, for a year or something – I mean for at least since last September.

So here we are. We're however many months, five-plus – we're nine months out and no recession yet, and they're still predicting, "Three more months, three more months, three more months." Consumer spending is growing, housing looks better than it did a month or two ago, and other things. The GDP rising. So I don't know. Are we ever going to get a recession? Are they ever going to stop calling for one? I don't know.

Corey McLaughlin: There's a couple things that come to mind here for me. One, could we already be in a recession, just without that high unemployment number? So maybe they're right, the economists. They just don't know that they're right or they're using different criteria than is practical.

1. What's the point anyway? People have been waiting – I think that's another thing. All these economists and people in general have been saying, "Oh, the recession, the recession, the recession. When's it going to come?" At some point, it's like a self-fulfilling prophecy, if you're expecting it to come, which we've seen already with the Fed hiking rates and just the market responding to that, and the bank crisis we've seen.

Dan Ferris: Yeah.

Corey McLaughlin: When I see economists' predictions, I generally ignore them completely, other than to take them with a heavy, heavy, heavy dose of skepticism.

Dan Ferris: Yeah. The article says, "Of the 27 forecasters surveyed by Bloomberg in early May, only five said they didn't expect the U.S. economy to slip into a recession sometime over the next year." But then there's one Morgan Stanley economist, Ellen Zentner, said, "We all hate that term 'This time is different,' but we have not seen this dynamic before. This is unique." I think she's talking about the combination of a robust labor market, wage growth, excess savings accumulated during the pandemic, and consumer spending rising as a result of that.

So I don't know. Basically, we have an economist. We have like, you know, most economists saying recession, and then we have this one who is saying – putting the cherry on top and saying, "This time is different." So maybe we don't get a recession.

That's sort of where I am. I've been warning people that I thought the market was in danger of an imminent decline. I still think that's true. But whether or not there's a recession or worse inflation, I'm less convinced that I have any clue of that, but I'm starting to throw recession just completely out the window because inflation, like PCE inflation, has been hovering in the general ballpark of 5% for like a year.

I mean it's lower now than it was. It's a slight downward slope, but still, it's in the same general ballpark. Then we saw Canadian inflation tick back up, and they paused rates for months. They haven't raised in months. So who knows? Maybe what we're seeing here is just a persistence of a level of inflation that folks would have thought we might not have all this time.

Corey McLaughlin: Right. That's what I think is more important than whether you call it a recession or not, although that matters to kind of sentiment in the market as well and just the country in general. If people think we're in a recession and we're calling it a recession, that has an influence on things too, which is why I think all the politicians in 2021 were trying to call that a recession, which if we remember was two quarters of negative GDP growth. So you could argue that we already had a recession.

That was more based off of, I think, the high inflation of that time, which led to all kinds of different bottlenecks and supply chains and inventory changes and all of those things for businesses. Basically, that was an inflationary kind of recession to me, the peak, that part. Now we're getting to the part that might be a recession based on the reaction to fighting the inflation, on the part of central banks and the consequence of that.

But my base case personally through all of this is inflation is just going to be higher than people think. I'm with that maybe there isn't a, quote-unquote, official recession, but that doesn't mean that the economy is going to be great either. I think we're seeing thar reflected in this sideways market for the last however long you want to say. It's been almost perfectly sideways for about six weeks, even with a little volatility from the end of the bank story.

If you go back to last summer, we're approaching a year of – you could pick dates. It's a little unfair to pick out dates, but my general feeling is this inflation is just going to be higher than 2%, probably higher than 3%, I'm thinking more and more, and the Fed is just going to kind of not want to break things too much, but might sacrifice just higher prices for the rest of us at the same time. So if that's not a recession, fine, it's not a recession, but it's not growth either.

Dan Ferris: Yeah. You make a good point because it's about the announcement. It's about whether or not they call it one.

Corey McLaughlin: Yeah, the NBER, right?

Dan Ferris: Yeah.

Corey McLaughlin: Who pays attention to that –

Dan Ferris: The National Bureau of Economic Research.

Corey McLaughlin: - until they call something and it ends up in a headline?

Dan Ferris: Right, which is weird. I was saying during that earlier period you described, I said, look, by this other definition of two quarters of negative GDP we're there. This is a recession. But we never got the official call. We never got the official NBER call.

Corey McLaughlin: Because of the employment number at that point.

Dan Ferris: Right.

Corey McLaughlin: However, that doesn't take into account the 40-year high inflation number, which is you put that in there, it would be like, oh, could that be the equivalent of some higher unemployment? I think so.

Dan Ferris: Yeah.

Corey McLaughlin: On balance, if we're just talking about how people behave, the influence of spending decisions and that sort of thing, and growth. A 40-year high inflation, of course it's a recession.

Dan Ferris: Right. Yet here we are with consumer spending rising and all these things in the Bloomberg article that we're talking about that have people pushing it out and pushing it out, and pushing the announcement out and not saying there's a recession.

You're right. Does it matter? I wonder. Does it even matter? I don't know if it does. I mean what matters is people getting up every day and living their lives and figuring out what to do.

I think it matters for people who – most people in the stock market, they don't hold on for a long time. They trade too much. So if they think there's going to be a recession in three months, maybe they're more bearish or they're not holding longer, you know, whatever it is, and maybe that's the only value of it.

Obviously, if we do get a real brutal 1980s sort of recession, that matters. We know that matters. Lots of people go out of work. Things get really difficult, etc., etc. But for now, if we just – if they made this announcement tomorrow, I think the market would go, "Eh."

Corey McLaughlin: Right. I think most people believe that we're – that's why I'm saying the labels, the labeling doesn't – I try to ignore it, even though when I'm writing for our daily Digest,  I use it all the time because we're talking about it and it's what you can attach kind of a conversation to, the labeling, but there's too many nuances to just apply one word.

This is why I always go back to what your goals are as an investor and what you're doing with your money, because that makes things so much easier when you're hearing all of these different things, whether it be are we in a recession or not, what will the impact of it be, whatever it may be. It could be any topic.

I mean you go back to it's easy to get caught up in the day-to-day stuff and we talk about it all the time because it matters to a point, but it doesn't matter as much as what the goals are that a person may have themselves. So it's a lot easier for me just to ignore these economists that if you lay them end-to-end around the world. That would be a scientific feat or something impression, I don't know, but that's about it.

Dan Ferris: Right. Recessions happen. If you're actually a truly long-term disciplined investor, you're going to hold through the recession anyway. You're probably going to keep buying. You're going to keep adding to your 401(k). It's just that in the short-term things get scary.

We've been in a bear market, technically speaking, over a year now, in my opinion. Some people say otherwise, but until we hit a new high, I'm going to say we're still in a bear market.

Corey McLaughlin: Yeah. Listen, we've had our colleague, Mike DiBiase, wrote in the Digest recently, showing that also recessions – the correlation between them and the bottom of a bear market. A bear market bottom is usually like 20 or something weeks, on average, after the official recession starts. But again, that is kind of retroactive based on when the official recession is deemed.

So the market might bottom before anybody says it's a recession, but then looking back on it you'll be like, "Oh, the market bottomed in the middle of the recession." So in the present, you're better off just going with what you see and preparing your own portfolio and managing risk that way, rather than relying on the labeling. That's why I think we're still in a bear market, too, unless we make those new high.

Dan Ferris: I was going to say I can understand the shorter-term orientation because bear markets are scary, recessions are scary, etc., you know, inflation, higher rates, all this stuff. But we've been there. Anybody who has been investing for 20 or 30 or 40 – well, maybe 20 isn't enough actually, like 30 or 40 years. If you're our age or my age, if you're in your 60s, you've seen it all and you know that this too shall pass. If you keep buying into a time of lower valuations, you're actually setting yourself up for higher returns.

So I don't know. For that long-term person adding to the 401(k), I don't see it for traders. Good luck. This has been sideways, awful, ratcheting-nowhere action. I've got this chart of S&P 500 in front of me. It looked sideways for a year actually. It's hardly anywhere in a year.

So I understand the anxiety around this, but obviously the economists so far have once again sort of overstated their case. They've predicted whatever it is, 11 of the last five recessions or something and they're predicting another one, but I don't know. I think the focus there is misplaced. I think if you want to think about macro stuff, you need to be like Brent Johnson was saying when we had him on the podcast, don't be dogmatic. Don't take anything for granted.

I showed him The Ferris Report, one issue recently. I just put a simple chart of recessions and the CPI together and said, "Look, prices can go up during the recession." The CPI was going up during these recessions. It was during the '70s, the '70s and then '80. So into the first part of those, it still looked like inflation, but it was technically a recession. So you never know how things are going to turn out.

The talk of recession, there's an underlying like I would know what to do kind of a thing, "Oh, there's a recession. Well, then I know what to do." Eh, probably not.

Corey McLaughlin: Right. Is it just people wanting to feel better that there's a label on what we're living through rather than the uncertainty? That may be part of it, too.

I was walking the dog, Dan, the other day. I said to myself, wait a second. It's May. It's the middle of May already, and if you were completely on the sidelines of the market this year – we say we want some cash on hand right, but I've also been saying own those high-quality businesses that can spew out dividends, so you can compound over time, too.

So if you've been out for – it's already almost halfway through the year. So if you're listening to these economists saying, "Oh, the recession is coming," since over a year ago and you've been believing that, OK. But what's the action you're taking based off of that?

To me, like you were saying, you can be in this market and if you're in a great company, you know, like a Coca-Cola or a Hershey or something and you just hold onto that, it's just going to benefit, depending on your timeline. If you're talking long-term, it's going to benefit you way past whenever this recession begins, ends, whoever says it is or isn't. Anyway, that was my profound thought while I was walking the dog the other day.

Dan Ferris: I feel like we owe our listeners a takeaway here because we've sort of been going around and around with this idea of a recession and economists and maybe it doesn't matter, but I think you just said it. I think you're right. I think that's the takeaway. I think we're going to have you walk the dog regularly for takeaways.

Corey McLaughlin: Well, I do plenty of that.

Dan Ferris: All right. So now that we know Corey's dog has been exercised, we can move on and talk with not one, but two guests. I love these guys. I've been reading John Doody for decades, since the '90s. He's one of the first people I ever read a newsletter by, and still one of the best. I'm looking forward to talking with him and his partner, Garrett Goggin. Let's do that. Let's talk with them right now.

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Dan Ferris: All right. With that, John, Garrett, welcome back to the show.

John Doody: Nice to be back with you, Dan.

Garrett Goggin: Thanks, Dan. Nice to be here.

Dan Ferris: Yeah. Hey, man, we've got two guys this time. We're not fooling around. I wanted to talk first of all about just your general views on things. I do want to get to this "Top 10" list of yours because I know you're all fired up about it. I read your recent report. The first hundred words are like, "This is a bull market in gold. You must buy our Top 10 stocks right away."

So I know you're fired up, but maybe just for the sake of our listeners, John and Garrett, you could both sort of give me your overview about why – you know, what are you so fired up about? Why are you really bullish on these stocks right now?

John Doody: Well, from my perspective, it's 2008 all over again. The banks are in trouble. In 2008, they had bad mortgages that sank their balance. Now it's bad bonds. It's not that the bonds are going to nothing. It's that bonds are paying a 2% yield when they were bought a year or two ago, and now the market interest rates are 5% and the bonds have all gone down in value, which is fine as long as nobody wants their money back, but if the depositors want their money back, the value is not there in the bonds.

The bonds can be held by banks in a special class called "hold to maturity," which means that the banks don't have to mark the bonds to market. So if a bond is paying – when it was bought, the $1,000 bond was paying at 2% when it was bought a year or two ago and now market interest rates are 5%, that $1,000 bond is now worth about $400. If the bank is holding it in a hold-to-maturity account though, then they don't have to take a hit on that value change from $1,000 to $400, but they do have to take a hit if they have to sell the bond in order to pay back the depositor.

So I think that's got the banks in tough shape. As long as they can hold on, fine, and the big banks probably are always going to be fine. But it's the smaller banks, like the Silicon Valley Bank, that had that exact problem. The bond portfolio was underwater. People wanted their money back, and they couldn't sell the bonds to get all the money back to them. So there goes the bank.

I don't know. What do you think, Garrett?

Dan Ferris: Yeah, let's listen to Garrett.

Garrett Goggin: The banks are having trouble because the fed-funds rate is too high and you can see that. The 10-year yield is declining. The fed-funds rate is high right now. The economy is slowing down.

One of the things that we like to take a look at is the difference between the 10-year yield and the fed-funds rate. Right now, the fed-funds rate is 1.7% higher than the 10-year. This is the deepest discount ever, all the way back even through the '80s.

It's only reached anywhere near these levels maybe three times since the year 2000. So this shows the economy slowing down. It shows the fed-funds rate is too high, and that the Fed is going to have to start cutting rates soon. Every time this happened in the past, it's been a great signal for gold and gold stocks.

Also, the other thing that's going on right now is Treasury cash. They're going to raise the debt ceiling. The Treasury alone is $87 billion. We spend that in a day basically. So as public debt outstanding goes up, the Federal Reserve balance sheet will continue higher also, so that has a pretty correlation for gold as well.

Dan Ferris: OK. I want to go back to John. John, draw me a line from banks are in trouble to gold. Is it simply that folks will be fearful of the banking system, so that they'll withdraw cash and buy gold with it?

John Doody: No. It's interest rates that affect gold prices. Since gold doesn't have a yield, when interest rates are high, gold struggles. When interest rates are low, gold does very well. I think what's going to happen is the Fed is going to have to lower interest rates and soon, this year. Every time that's happened in the past, the price of gold has taken off.

We tracked this in the latest issue five different times that the Fed has lowered interest rates, just in this millennium, just from when Greenspan lowered rates when Bush came into office in 2001... gold took off. So this is just going to be another time of gold taking off, and that means that gold stocks go up. Gold stocks are leveraged to the price of gold, so they'll go up more than gold.

Dan Ferris: All right. Garrett, is it simply the correlation? You just like the correlation between the Treasury, fed-funds spread and gold?

Garrett Goggin: Well, what happens, if you look at the dates that the curve was inverted by this much, there was financial calamity. Back in 2019, back in 2006, and back in 2000, were tough financial periods. The Fed was forced to step in and support the markets. With QE, they were bailing out the banks, and we're seeing the same thing right now. The Fed is going to have to step in, buy more bank assets and build the balance sheet back up.

Dan Ferris: All right. I want to really get to the nitty-gritty because in my mind, just for our listeners, John and Garrett really shine when they talk in their book about gold stocks. I mean these guys rip apart gold companies.

I'm telling you. I started reading John like decades ago. I remember opening up Gold Stock Analyst and seeing those pages. I think this was when things were printed in a different way. It wasn't like we were all working off of laser printers. We were still mailing things out and stuff.

[Crosstalk]

Garrett Goggin: The first issue was 1994.

Dan Ferris: Yeah. So I looked at this issue in the 1990s, and it just was so packed with data. I was like, "Whoa, man." This thing was overwhelming. For each company, too, there was all this data. I was like nobody does gold stocks the way this guy does. Now you've got Garrett with you and you guys are in gold stocks and silver stocks. You're like my go-to place for information about these.

I know your Top 10. That's for your readers of Gold Stock Analyst, though, right? I mean are you comfortable talking about individual names?

John Doody: We cover about 50 stocks that are gold miners, royalty companies, and silver miners. We boil them down to the top 10 gold stocks and our favorite five silver stocks. The reason we cover so many stocks is that's how you know where the value is. That's how you know what's undervalued and overvalued.

When somebody writes – some other analyst, so-called, writes something is undervalued, well, how do they know that? We know it because we have the average valuations for market cap per ounce of reserve, market cap per ounce of production or operating cash flow models. We know where the average of the market is now. When we say somebody is undervalued, we have the data to back it up. We're just not saying it as an adjective.

Garrett Goggin: John, tell Dan about your process back in Nantucket, back in the day.

John Doody: Back in the day. You mean before you came along? [Laughs]. Well, there was a lot of number crunching and Garrett made the crunching a lot easier.

But back then, I was living on an island, Nantucket Island. There was no Kinko's, no Sir Speedy copy company. There was no nothing. There was no Internet either. We had to get information faxed to us by the companies.

But I had two high-speed copy machines, two because if one broke down I was out of business, because the copy repair guy only came to the island one day a week. So I had to have two, a backup.

So we would print the issue on these copies. Then I had a folding/stapling machine that would fold the pages and staple it in the middle. Then I'd get two high school kids to come in on issue day, and we'd stuff and stamp and get them out that night, and take it down to the post office the next morning, and it would leave the island. So it was a two-day process just to print the issues. When I moved to Fort Lauderdale in 2001, there was a Kinko's there and they could do all that for me in six hours. So that gave me back a day and a half of my life every month.

Dan Ferris: Now of course everything is different. I don't even know if we deliver hard copies of anything anymore.

John Doody: We don't, for us anymore.

Dan Ferris: All right. Let's talk about stocks. Like I said, are you comfortable talking about an individual name from your Top 10 or would you rather not?

John Doody: Yeah, we can talk about it.

Dan Ferris: OK. Who do you like?

John Doody: How many kids do you have, Dan?

Dan Ferris: Three.

John Doody: Three. OK. Which is your favorite?

Dan Ferris: [Laughs]. We don't have a favorite.

John Doody: No, we don't really have a favorite, although maybe at certain times we think that some of the Top 10 – you know, the Top 10 are often in different stages. They all have feasibility studies, so we know the ounces are there.

Ninety percent of all gold stocks don't have a Feasibility Study. It's just some guy arm-waving around his company. It's all BS. There may be a Feasibility Study. It's possible, but they haven't done the work yet. You can't go from just drilling... starting drilling to getting a Feasibility Study could be a five- or 10-year process. So we only look at companies that have a Feasibility Study and/or are in production, but there's various stages of that.

A company could just be completing a Feasibility Study. Maybe they're going to be raising money now to build a mine or trying to permit the mine. There's two or three years right there.

So we try to get companies at the stage that something might be happening to them. Sometimes that happening is itself a two- or three-year process. So it's hard to get – there's a Lassonde Curve which shifts. Pierre Lassonde coined it. It's sort of like a laying down S.

The company price has the stock price on the vertical axis and time on the horizontal axis. If the stock price goes up early on, when there's a lot of excitement about to start, but there's really not a lot of information, there's certainly no mine, they may have to do the Feasibility Study and raise the money to build the mine.

When you get into that stage of raising money, building the mine, there's a two- or three-year period of time when not a lot of exciting stuff is happening. So often, when a company has got good results, a good project, they go into doldrums for that two or three years.

Then when they're building the mine, they've raised the money, that's often an ideal time to get involved in the stock, because they've taken a lot of the risk out. The Study is done. The permits are in place. They've raised the money. The stocks just sit in the doldrums because there's nothing really exciting going on. But when they start getting ready to produce, then you've got some excitement. So you want to be an earlier view, before that period.

Garrett Goggin: One of things that we do with folks in the whole industry, too, is we really get to know the management. There's good management and there's bad management. There's management that will have a good asset and they will waste it. They'll waste the money on bad purchases. There's a lot of dilution in this section, a needless dilution where they issue shares every year because community investors will get a tax write-off. So the share count goes up and investors get stuck with a smaller piece of the pie.

However, there are other management that are shareholders in the company that benefit, that are aligned with shareholders that make money when the share price goes up, aligned with shareholders. So these are the companies that we primarily like to focus on, the ones that generate good shareholder value.

Dan Ferris: Yeah. Mining companies generating good shareholder value, even just talking about it kind of makes me chuckle, because the history of the industry is very poor in that regard.

John Doody: Yeah. It's an oxymoron.

Dan Ferris: Yeah.

Garrett Goggin: People think silver and they think Coeur Mining. Coeur Mining is silver/gold. It's about 40% silver, 60% gold. Coeur Mining was $300 a share back in the '90s. It's $3 a share now. It's down 97%. Why? Because they issued so many shares over the past decade or so that the share price goes down like a leveraged EFT.

They have a tremendous amount of debt outstanding. They hedge some of their production. As I like to say, a backer's best friend is a shareholder's worst enemy. So some of these companies are great deals for bankers, but they're not good for shareholders. So we avoid companies like that.

Dan Ferris: So I'm going to assume that it's not in your Top 10.

John Doody: No. And that's a split adjustment. Coeur never sold at $300. It's just that if you back out all the splits that they've done, you get to a $300 price, 20 years ago.

Dan Ferris: Right.

Garrett Goggin: And there's good companies out there, too, no doubt. One of the silver companies that I follow very closely is SilverCrest Metals. Eric Fier built SilverCrest Mining and started with an open pit, went underground, built it for, I don't know, $130 million cap-ex. It ended up getting bought out by First Majestic, and he spun off his Las Chispas and created SilverCrest Metals.

They just finished that project on time, on budget, after all the COVID cost increases, which was a great effort. It's an extremely high-grade mine and they're coming out with production right now, extremely profitable, low costs, and good benefit for shareholders. So there's two sides to that coin.

John Doody: And really, value does out. The companies that give shareholders value rise to the top. We help them because we identify them, but other people find them, too.

Dan Ferris: I feel like Garrett's SilverCrest example is, against all odds, it really is possible and we really can show you which stocks these are.

John Doody: Well, look at our rate. Since gold was set free in 1971, the compound annual rate of growth of the gold price, up to $2,000 now, is over 8% a year. Eight percent. The inflation rate is 4% over that period of time. So that's a 4% real rate of return.

Where do you get that? Show me any non-interest-earning asset that has given that kind of return over a 50-year period of time. It doesn't exist. Maybe diamonds, but there's no way to track the value of diamonds or land. Gold is really the only one that can do that.

Now you can identify some stocks that have done that, but that's back-testing. There's no back-testing here. We're looking at gold at $35 an ounce in 1971 to $2,000 an ounce now. The same thing. So it's proven itself. The Top 10 has outperformed gold price by a factor of double.

In the last 20 years, the Top 10 is up a compound rate of growth of 10% a year. It's higher than gold. We're the only newsletter we know of in the world that is audited by an independent auditor that audits mutual funds and hedge funds and truly independent, not some – we don't make these claims. It's every trade. It's easy to make because we don't make many trades, two or three trades a year basically. So it's a matter of subscribers simply follow what we suggest they do, and they should reap the rewards.

Dan Ferris: Right. And what you're suggesting now is like these 10 are the most attractive bet that you could make. If you wanted to buy gold stocks, in other words, these are the most attractive, like risk-to-reward, value-oriented kind of bet that you could make right now.

John Doody: Yeah. Well, these are real companies, real assets. We've vetted them. In fact, right now there's only nine because we kicked a company out of the Top 10.

Dan Ferris: I noticed.

John Doody: They have a good site. They said they were going to – they've sold a lot of shares over the last couple of years and put it into the ground in terms of building the mine and whatever. They were saying all along, "When it's actually time to finance a mine and get into construction, we're going to do it all with debt."

Well, it turned out the banks wouldn't give them the money now. So they had to sell half the company to a bigger company, Gold Fields. So they gave away half the upside. If they had been able to do it as they promised the last couple of years for debt, the stock price, target price would be double what it is now, but since they gave away half the company, with good reason, hedging their bet, the target price on only half the company, half the mine is half of what it was when it was earlier. So we took it off the Top 10. They misled us. It's still going to be a successful mine I'm sure, but we look for at least a double and the double isn't there anymore.

Dan Ferris: It's Osisko Mining, just so people know what we're talking about. But Osisko Mining, I have experience with Osisko Gold Royalties, and I wound up selling it because I was warned that the business model is kind of fluid. You never quite know what they're going to do next. I didn't heed that warning, and I wound up selling because of that exact problem.

John Doody: Yeah. They've gone in a couple of different directions, different from what the normal royalty company has done. They wanted to be a royalty developing company and that model doesn't work. The investors want royalties. They don't want to be – if you want a developing company, buy a miner.

Dan Ferris: We know royalty investment and royalty creation works, a company like Altius Minerals or something. But yeah, that development thing, that costs money and you wind up focused on large projects and that's super-risky and expensive. That's when you get into selling shares that you didn't plan on selling.

Garrett Goggin: What happens with the larger miners is the management will grow the company from 1 million ounces of production to 2 million ounces of production to 3 million ounces of production, but they're not generating any extra profits on a per share basis. They're reaching their threshold for getting their bonuses, so they keep on getting increasing payments, but the shareholders get a smaller piece of the pie every time.

So you really need to be focused on economics on a per share basis. Whether it's profits with cashflow or not, we need to be looking at companies that can do this and it's hard. It's hard to do in the mining industry, but we find the ones that do.

Dan Ferris: OK. Do you mind if we talk about another specific name that is still in the Top 10?

John Doody: Sure.

Dan Ferris: OK. Let's talk about Franco-Nevada, since that's the big one. Of course that's a high-quality company, but do you think the returns are really going to be there?

John Doody: Well, they've outperformed everything since their IPO in 2007 or whatever it is. I remember for a while they were owned by Newmont. They were a public company, smaller, then bought by Newmont, and then they didn't really fit in the long-term with Newmont and they IPO'd back out of Newmont, I don't know, in 2010 or something like that.

Since then, they call themselves the "Gold investment that works." And it's true. They've outperformed everything.

So yes. Can they keep growing? Maybe not quite at the rate that they have in the past, but they're going to grow faster than the gold price because they've still got to leverage the gold price. I think our target on them is 200 U.S. and it trades around 150 U.S. now. So that's still a pretty good return on your investment, and there's a lot of stability on that.

We like to have some stable companies that are maybe less risky. We don't like to think any of our stocks are risky, but maybe there's a lower risk profile to a big royalty company like Franco than a single-minded developer like Osisko was. So yeah, we think upside is still there.

Garrett Goggin: Yeah. Also, we've been collecting the metrics for the gold stocks John and I have, all the way back to 2002. In 2002, the price of gold was $341 and ounce. The average cash cost was $183 an ounce for it to get outside of the ground. Now, with the gold price at about $2,000 an ounce. Cost to mine is about $900 an ounce, cash cost to get an ounce of gold out of the ground.

So basically, cash costs have gone up almost as much as the gold price. The margin has been a relatively constant range of between 40% and 60%. That's what a lot of these miners trade off.

If you look at royalty companies, royal companies lock in costs, right. They'll sign a contract, they're like, "We're paying you this much money now. You're giving us 1%. We'll give you maybe an ongoing payment as well." But they're basically locking in their contract, so as the price of gold goes up their margins continue expanding.

Then the royalty companies are structured to get lucky. They've got hundreds of royalties. All they need is one to do well and the other 99 cannot do well and the royalty company is going to do well. So there are some inherent benefits to royalties over the mining business, but the miners are extremely leveraged. The royalty business takes time to grow, whereas miners, if they get it going in the right direction, they offer tremendous leverage at full price.

Dan Ferris: I love that you guys publish a long-term target price, two to three years out, for all of these stocks. I notice some of them are trading sort of near their target price, but some of them are like the target is $75 and the stock is $15, and you're talking two to three years out. I mean that's not a long time for a five-bagger.

John Doody: Well, it could be that the mine needs to get built or come online or whatever. So it could be something – you know, these stocks can double overnight, as you know. So it's not necessarily that far away, given how the stocks can react to either what they're doing themselves or what the gold price is doing, although we don't base our target prices based upon gold.

We're using a $2,000 target price now. That's what we assume is going to be the price two or three years out, when we set the target price. But the two or three years gives the company time to get the stuff done that they need to do to get to the target price.

Dan Ferris: I see. So besides the current price of gold, what else goes into that target price calculation?

John Doody: It's really a multiple of operating cash flow. Stock has to be in production, based upon its Feasibility Study or whatever plans that they've shown us. It's pretty simple.

Garrett Goggin: We look at high margin companies, companies with low cash cost within the high margins. The No. 1 factor leading low cash cost is grade. Grade is the denominator in the cash-cost equations. So if you're mining a ton of ore you want the highest grade possible. So your cost remains relatively constant, whereas your production is large down at the bottom. So your cash costs are lower... your margins are higher.

It generates operating cash flow. It generates free cash flow. Companies use that to issue dividends, and use it to buy back shares. They use it for accretive acquisitions. Those are the sorts of companies we look for.

The other companies, the companies with lower grade mines that aren't as profitable, they've got balance sheet gaps. They're forced to issue shares constantly, year after year in order to pay management salaries for these lifestyle mineral companies.

Corey McLaughlin: You guys are good. I'm listening and learning here. I do want to ask one thing, going back to your outlook for the Fed to cut rates the second half of this year and that benefiting the gold price. I want to ask you about the inflation side of it. If inflation is where it is or higher than maybe other people think at that point, what will that do for gold as well?

John Doody: Well, it'll probably send it higher, but we think inflation is on the glide slope down. That's what data shows us anyway. Inflation doesn't change dramatically from one month to another. It changes over a couple of years.

So we're going to be in a high – we're not going to get the 2% inflation, if we ever get there again. It's not going to happen in two months. It's a two-year or longer process. So we're going to be dealing with inflation, inflation in the news and impacting investors' expectations. Maybe we'll even end up with a 3% target price for inflation rate. If you can't get to where your target is, change your target, right?

Corey McLaughlin: Move the goalpost, yeah. That's exactly what I said to Dan last week on the show. Eventually we'll get to a point where they say, oh, it's at three or three and a half and that's good enough. Yeah.

John Doody: That's good enough.

Corey McLaughlin: Yeah.

Garrett Goggin: The CPI we look at is year-over-year change. We had a big spike during COVID, where inflation was moving at a tremendous rate. Now, as we go further out, we're going to be comparing it to a period a year ago where you had that inflation spike.

Food prices have risen a tremendous amount. They're not going lower, so we have an elevated plateau. So the inflation CPI headline number might show low numbers, but it will be a big change from three years ago, but not a big change from one year ago.

Corey McLaughlin: What I love about that is what you were talking about before. You were talking about margins relative to the dollar and inflation. To say it in Dan's words, draw a line from inflation to higher prices for gold and the gold company.

John Doody: Right.

Dan Ferris: I like the point about inflation versus expectations of Fed cutting, but I'm not married to any one ideal. If gold and the dollar rise together, the dollar is priced in other currencies, and what if it just outperforming them while gold is rising? That can happen. We've seen it happen before.

I heard you, Corey, asking that question and I was like, "Yeah. What about inflation, if it stays higher for longer?" But I think gold has become appealing for a number of reasons these days. John pointed to the banks.

John Doody: And look at the track record, 8% compounded a year for 50 years in terms of the price change. That didn't –

Dan Ferris: I'm glad you mentioned that John, because a lot of people probably don't think it means anything. You're looking 20 years or 30 or 50 or however many years it is in the past, because it beat stocks in the 21st century and it's done great since 1971. Why does that matter? Why does that long-term track record matter?

John Doody: Well, that's why you want to be invested. It's proven itself over the years.

Garrett Goggin: The flip side of that is the purchase power of the U.S. dollar, right, which has steadily declined year after year over the past hundred years. So as the dollar goes down, it purchases less and less. Gold has been on the other side of that, going higher and higher.

That trend is accelerating right now with the amount of debt that's outstanding. You know how they're going to increase the public debt outstanding. The [inaudible] is going to spend more money. The government is getting bigger and it's increasing.

John Doody: Yeah. Fortunately, they're not like cojoined twins, that they have to move together all the time. They're going to have some independence from each other, but over time, what we're looking at is how the trend has worked out, 8% a year compounded over 50 years, and at 9% I think for this millennium.

Dan Ferris: Yeah, better than stocks. I want to go back to talking about companies. I said before the idea of gold stocks generating good shareholder value is crazy, and you kind of agreed with me.

But specifically, gold companies generated zero free cash flow over a long, long period. But things have changed, haven't they? They're a lot better at that now as a group. Why is that?

John Doody: They finally heard stockholders complaining. Stockholders want dividends and they want – "If you can't give me growth, Mr. Manager, give me dividends." There are some companies that pay a 3% dividend now, which is pretty good.

Dan Ferris: Gold companies, gold-producing companies you're talking?

Garrett Goggin: Barrick Gold was almost bankrupt – what, a decade ago? – when Tye Burt, the CEO of Kinross, paid $3.1 billion for Red Back and Tasiast. That marked the top of the market back over a decade ago. These companies had a tremendous amount of debt. They weren't generating much cash. Their debt was downgraded. They were on the verge of bankruptcy.

So then they hired good CEOs that managed the balance sheet. They cut back their liabilities. They reduced their debt over the past decade. These companies are lean and mean now, and they have the ability and they are generating good operating cash flow and free cash flow, and they're paying dividends and they're buying back shares. They're doing the right things with shareholder capital and not blowing it like they did last time.

Dan Ferris: Right. What about the prospects for exploration? In all kinds of metals, they just haven't been making big finds in the past several years. They haven't found big deposits in the past seven years. How has it gone for gold that way?

John Doody: Pretty similar. A lot of the ounces that are mined today were known about 10 or 20 years ago, but it didn't make sense to mine them at $300 an ounce. But at $2,000 an ounce, it makes a lot of sense. So the rising prices of all metals is going to make more stuff that's in the ground still economic to mine now. That's going to be true for lithium or any commodity you want to mention.

We know there are millions and millions and millions of gold ounces dissolved in the ocean, but the grade is so low that it doesn't make any sense. But maybe with $10,000-an-ounce gold it'll make sense for some of this gold to be recovered from the ocean. So it's price-determined as much as anything.

Some big mines that were shut around 2000 are now huge mines producing now. There's the Detour Mine and the Malartic Mine, both of them owned by Agnico Eagle. They're both 700,000-ounce-a-year mines. These are big mines with 20 or 30 million ounces of reserves at these prices, but they were both shut in 2000 because they couldn't make any money at $200 an ounce or $300 an ounce gold. So it's really price-dependent.

When a mine is depleted, it's not depleted. It's depleted at the current gold price. Then lots of mines are started back up because the gold price has gone higher.

Corey McLaughlin: That really is the point, isn't it, John? People talk about the scarcity of these things, and you think, well yeah, at current prices maybe, but it's funny how things get a lot less scarce when the price doubles and triples.

Garrett Goggin: That falls hand-in-hand with the average grade of gold mines over the past say 100 years. Back in the day, you used to find it at surface, you know, a gold vein, because you can identify it right there. It's, I don't know, 50 grams a ton. Then you start getting down deeper, and then it falls to maybe 20 grams a ton. All that easy stuff gets mined out during the last gold rush, and now we're left with one or two-gram a ton material. I don't think that's the average grade right now. If the price of gold goes to $4,000, then it'll probably be profitable to mine half-a-gram gold.

Dan Ferris: Yeah. Of course the classic example is like South Africa. They found it by tripping over it on the surface, and now they're mile or two in the ground or something, two miles.

[Crosstalk]

John Doody: And they're mining so deep and it's so dangerous at those levels. Maybe they'll reach some point of depletion or some point at which the miners can't – they can't sacrifice miners anymore to get it out that they'll stop, but they're still mining it.

Dan Ferris: All right. I think it's time for my final question actually. We've been talking for a while and it's gone by so fast. So I've got two folks for the final question. This is great. We normally only have one guest.

So I'll ask each of you, whoever wants to go first. If you could leave our listeners with a single thought today, what would it be?

John Doody: I would say it's 2008 all over again. The banks got in trouble in 2008 because of their bad home loans and defaults on the mortgages, and they extended credit to everybody to buy a house. Now, it's a different problem. It's the banks' balance sheets that are having problems because they bought too much debt, too much Treasury debt even, the safest debt you could own, but they bought it in the last couple of years when they thought they were buying safe investments.

They were safe if interest rates didn't change, but now that interest rates are significantly higher, the Treasurys that they bought have been cut in half in terms of value. I think that unless the Fed has to – just like the Fed rescued the banks with QE after the home prices crashed in 2008, they're going to have to come up with QZ or whatever it is to rescue the banks now.

We can't have small banks – small banks are the life blood of the economy, and if they're all going to go broke, then we're not going to live in a JPMorgan world, where that's the only bank, I'm sure. So that's my advice. Protect yourself. Don't have more than $250,000 in your bank account – who has that much anyway in the bank? – and be in gold or, even better, the Top 10.

Dan Ferris: All right. Garrett?

Garrett Goggin: For me, it's inevitable that gold is going to go higher over the long-run. My major advice to people listening is stay away from low-grade cow pastures.

There's a study by Archie Bell who was the head of exploration in Noranda back in the '30s. It was the back-of-the-envelope calculation to find profitable mines. What you needed to do is to recover twice your operating cost.

Then if you move the grade around – you need to find high-grade deposits that are economic. When people have economic models, it's easy to move the silver price up to 30 and 50, but what people don't do, they don't change their costs. Inflation is pushing silver and gold higher. Inflation is going to push your costs higher.

So a lot of these low-grade, uneconomic, pie-in-the-sky mines appear to be good investments when the silver prices are 30 and 50, but they're not. You need to find the high-grade ones. You need to find the ones that are profitable now. These lower grade ones that are unprofitable now, they're going to have to continue to fill those holes in their balance sheet, so that when the price of silver finally spikes, there's going to be so many shares outstanding the stock is not even going to move that much. So stick to good companies with good management, with good high-grade deposits.

Dan Ferris: All right, sounds good. Listen, thanks, John and Garrett, for being here. I really enjoyed it. I always enjoy talking with you guys.

John Doody: We enjoy being with you, Dan. Thank you.

Garrett Goggin: Nice to see you.

Dan Ferris: You bet.

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That was great. I love talking to those two guys because rather than just making general comments about gold, they can get nitty-gritty on gold companies and it's nice to hear. It's not something everybody knows. It's something very few people know well and they are two of the best in the world at it, frankly. So it was really great to hear that.

I love hearing John Doody talk because I've been reading his stuff since the '90s, man, and it's just good to catch up with him.

What was your takeaway from that, Corey?

Corey McLaughlin: Yeah, similarly I would say. If you haven't heard John or Garrett talk before about this sort of stuff, that is them, what you just heard. I'm glad you asked a lot of different questions about the companies, because that really is what their newsletter is all about. It's what separates the work they do, as you were saying, from pretty much everybody else.

To me, a lot of what they were talking about also just reinforced this idea to me, and that's why I asked about inflation, was real assets and why they can still matter and why they are valuable in this age of fake everything else in finance. They're talking about margins, the dollar, the grade of the material in the ground, and that separates the good companies from the not so good companies, and how they are able to arrive at the ones that are good.

They're talking to actual real people, too, like the management companies and that sort of thing. So yeah, if you're at all interested in gold stocks or silver stocks and you're not reading their stuff, I don't know what to tell you.

Dan Ferris: Yeah. I hear people say they are interested in gold stocks, and I'm like, "Oh, so of course you read Gold Stock Analyst. You know who John Doody and Garrett Goggin are," "No, I've never heard of them." I'm like, "Dude, you're missing out. You need to get on the stick."

They're going to do a presentation. They're going to do an interview with our colleague and fellow podcaster, Daniela Cambone. You can go to GoldRush23.com and sign up for that and get a reminder when it drops on May 23.

I would do it. If you're at all interested in gold stock, you just need to keep John and Garrett on your radar at all times. So go to GoldRush23.com and sign up for the presentation, and get online May 23 and watch it. Watch the interview with Daniela Cambone.

Like I said, if you're into gold and gold stocks, you can't miss it. It's not like, "Oh, it's the greatest thing in the world." It is the greatest thing in the world because you cannot literally afford to miss it.

One more time, that's GoldRush23.com. Check that out.

All right. I really enjoyed that. I think Corey did and I hope you did, too. That's another interview and that's another episode of the Stansberry Investor Hour. I hope you all enjoyed it as much as we did.

We provide a transcript for every episode. Just go to InvestorHour.com. Click on the episode you want. Scroll all the way down, click on the word "transcript," and enjoy.

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