Backing the Reset Why Your Gold May Be the Next Target of the State David Garofalo 1

Hi, this is Daniela Cambonio. Welcome back to the Daniela Cambonio Show and excited to welcome back David Garofalo, CEO of Gold Royalty and a true expert of the mining world. At the VRIC earlier this year, he joined me for a powerhouse panel where he laid out a stark view. With US debt to GDP exploding to 350% and fiat currencies under relentless debasement, David noted that we're heading toward a global monetary reset. Gold isn't just a commodity, it's the ultimate monetary instrument that can't be printed, drawing capital from crumbling sovereign debt into physical assets. David, so good to have you on the show today to talk about this and so much more. I'm delighted to be here, Daniela. Thanks for inviting me. I have to say, when I was moderating that panel, which by the way was fantastic, I was surprised because I didn't know that you also shared this reset theory and monetary shift. And I said, I want to bring David on so he can expand on it. I mean, we only have 30 minutes for that panel and we're like six people on it. So can you just explain why you hold this view? Well, it's not a novel thought because if you think about it, every fiat currency that's ever been invented since the beginning of time ultimately has failed. And I don't see the US dollar for that matter, any of the Western currencies currently in circulation, avoiding that fate because the temptation is too great when you can debase by printing to eventually destroy the currency. And that's effectively what's happening. And you correctly pointed out, the driver is the amount of credit that we've strapped on societally, both at the government level, corporate level, even at the individual level. And there really is no responsible way for any of us to repay the amount of debt we've created in our system, in our financial system. So the only way to deal with that debt is debase the underlying fiat currency, like has happened since time immortal. Ever since the advent of fiat currencies back millennia, every one of them, as I said, has failed. And gold is the one currency that isn't an obligation of any government. It isn't owned by any government or controlled, I should say, by any governments owned by any governments. It's the one true currency and has been for millennia for that very reason, because it can't be debased, it can't be printed. And in fact, supply is being introduced at the rate of only about 2% per year. And there's a remarkable inelasticity of supply to price. Actually, production is coming down even as the gold price is going up for a variety of geological and capital intensity reasons. It's really driving down a significant investment in the industry. And I'm going to ask you more about that, because you're really the best person to talk about what we're really seeing on the supply side. But happily you're bringing up debt, because again, even during the State of the Union Address, we heard nothing about it. It just seems like no one wants to address the elephant in the room. And often when I bring it up to people who discount the U.S. debt, they'll say, well, we're servicing the debt and that's all that matters. David, I know you're a professional accountant by trade. So explain to us the numbers. Is that enough? No, absolutely not. I mean, increasing amounts of government budgets, not just in the U.S., but in Canada and the Western world are increasingly being consumed by service of the debt. And we've been able to sustain that in a very low interest rate environment. But there's only so much the governments can do to control interest rates. They can do it at the short end of the curve, as we're seeing the Federal Reserve try to do. And it doesn't matter who they put in charge of the Federal Reserve. They're going to continue to drive the lower end of the yield curve down as far as they can. But the reality is the market price is the long end of the curve. And increasingly we're seeing risk premium built into that. That means debt service will inevitably go up and consume more and more of our government revenues. So they could raise taxes to 100%, which I mean, is fallacy. It's never going to happen. But even if they did that and every dime that we earned was paid back in taxes, it still wouldn't repay the debt that we've strapped on. And we're going to continue this cycle of deficit spending for the foreseeable future. Every government at both the federal level, provincial and state level in Canada and the U.S. is driving record deficits right now. They're carrying record amounts of debt as a GDP. That's clearly unsustainable. We're in a vicious cycle that I don't see reversing unless we have that grand currency reset that both Frank and I have been calling for for quite a while. Right. Okay. So unless that happens and the likelihood of that happening seems more and more real, David? Yeah. And it's really going to be driven by the markets. I mean, we're just a free market economy and the premium that are going to be demanded by debt holders is going to become sore, exorbitant, but the governments will have no choice to basically reset their currency. I think the market's going to drive it. It's not going to be a discretionary decision. It's one that's going to be driven by market fundamentals. Okay. Let me ask you this because we see the ushering in of Kevin Walsh. Anyone who knows his background knows, you know, I've been at dinners with him and he was always friendly towards gold. Him coupled with Scott Besant being there as treasury secretary, you know, both with ties to Drunken Miller, a huge advocate of gold. Do you think that's pointing to gold playing a part in some sort of monetary reset or is that a stretch? Yeah, no, I don't think that's a stretch at all. I think actually we're seeing individuals start to demand some sort of gold standard. You've interviewed Tether on your show or at least met them and they're creating basically an alternative reserve currency backed by physical gold. I think that's inevitably what's happening and we've seen increasing central bank purchases recognizing that we're going to have a currency reset and it's going to be backed by gold ultimately as it has been for many millennia until 1971. We had a gold standard that controlled and tethered, no pun intended or maybe pun is intended, tethered our currency, ensured that it had some substantive and intrinsic value. That was abandoned in 1971 and the results were inevitable. You know, gold's gone from $35 an ounce to $54 or $5,500 an ounce today and a dollar in 1971, a US dollar in 1971 buys you a penny worth of value today. So we've seen a 99% debasement. What else could happen if you continue to print money and not have any sort of anchor for that money, any sort of substantive and intrinsic value instrument backing it and what Tether is doing is captured the zeitgeist, if you will, and the mood in the market which is concerned about the debasement of fiat currencies and is looking for an alternative that isn't controlled by banks or in central banks and governments. We'll jump right back but this is important. Many of you are asking the question right now, what does all of this mean for my savings and return? Because during periods like this, your retirement can rise while the currency underneath it quietly loses purchasing power. Most people track market risk, but almost no one tracks dollar risk. That's exactly why Taylor Kenney here at RTM Trading will be breaking it down in a live webinar called Devalued Overnight, Protecting Your Wealth Through the Reset. It's happening Tuesday, March 17th at 9.30am Pacific Standard Time, that's 12.30pm here on the East Coast. It's free, it's live and there will be a Q&A. Reserve your seat using the link in the description below. On the point of central banks, we know they've been net buyers, but now there's talk of countries like Poland that have been hoarding gold but now perhaps contemplating selling some of their gold for defense spending. Any thoughts here? Are we going to see a trend reversal, you think, David? No, I don't think so. I think the next step for governments will be to confiscate gold because they're going to need it for backing of their currency for the reset that we're expecting. I think that'll be the next logical step. We've seen it happen before. This is not pie in the sky thinking. It's basically the repeating of history. When there's a run on the currency, then you start to look at things that have that intrinsic value and gold does to back the inevitable reset that we're going to have in our fiat currencies. Wow, so you think governments would come after individuals or you think just nationalize gold? Yeah, this is not coming from outer space. It's happened before where individual ownership of gold was outlawed in the United States. It's happened. It's going to happen again because there is going to be a run on our fiat currencies. There's going to be a lack of confidence. It's like that saying about bankruptcy. It happens gradually then suddenly. That will be what happens with the confidence in our underlying fiat currencies. There will be a light switch that goes off and then there will be a run on gold and the governments will then try to control the physical commodity. David, you're obviously the CEO of a gold royalty and involved in various mining products. So how do you like to hold your gold? I mean, obviously you own stock, what percentage do you like having in physical gold then? Yeah, look, I would say in terms of gold exposure overall, whether it's a combination of physical or certain equities, I'd say 15 to 20 percent of your portfolio makes a lot of sense in terms of providing that insurance. It's like having house insurance. You're not going to be celebrating the fact that you have house insurance when your house is burning down, but it still provides you some comfort. That's the way we should be looking at gold. Physical gold is one thing, but also leverage the gold prices is important. That's why we own gold equities typically. I believe that the best place to be positioned for leverage the gold is actually in the royalty companies because they provide cost inflation protection, which unfortunately, the producers simply cannot provide. In fact, they're not immune from inflation. We're going to inevitably experience in the general economy, and that generally tends to undermine or erode their margins in an inflationary environment. So it's not an accident that after 30 plus years of building and running producing mines, I decided to relaunch my career in the royalty space because I think that's where you're going to get optimum leverage to the gold price in a highly inflationary environment, which I think inevitably we're going to experience. Were you surprised by the way gold reacted upon the news of Iran or how gold reacts in crises, David? Were you expecting more of a run in gold? No, not at all. To me, that's a bit of a fool's errand when you see a run on political issues like that or political understates of the severity of what's happening in Iran and the human misery. I feel terrible about that. But gold really runs on fundamentals. It's a currency and it goes up and down on a variety of factors and variables, but ultimately it goes up and down based on the comparative currency it's measured against. What's happening there is a much longer term phenomenon. It's not based on any political events. You might see some volatility around political events, but I think that's really not sustainable ultimately. What sustains gold is the fact that paper currencies are being debased, and that's a long, long-term phenomenon going back over 50 years. You've talked about declining gold reserves. I just want to pick your mind on the mining supply side of things here. You've spoken about the shrinking pie for new discoveries. Talk to me about the real story here when it comes to scarcity in gold. How real is it? It is real, and it's quantifiable, in fact, empirically proven, because reserves of the ground owned by mining companies have declined 40 percent since 2012. We exited the great financial crisis with a big run in commodities generally, in gold in particular, and we saw a big influx of capital into the juniors from 2010 to 2012. It stimulated a lot of exploration activity, which led to peak reserves in 2012. Then we had a bit of a hangover from that. There was a lot of consolidation, a lot of project construction that drove up costs, and the general equity markets abandoned the natural resources sector in gold, gold companies in particular. We went through a nuclear winter until recently, and the juniors who do all the heavy lifting on that ground grassroots exploration simply did not have consistent access to capital to conduct the necessary exploration to replace the depleting reserves. That's nobody's fault. It's just what happened. It's a phenomenon that happens. The equity markets are cyclical. They go from one sector to another from time to time, and so we did have a period where we simply didn't have access to conduct exploration. The producers don't do grassroots exploration. They simply don't. They don't have the skill set for it. They don't have the risk tolerance for it. Producers engineer all the risk out of their business. They just want to hit their quarterly numbers. They're not interested in swinging for the fences and making major discoveries. They've always left that to the junior sector to conduct that kind of necessary exploration, but that hadn't happened, so the result was inevitable. The result was cannibalization among the producers. I was party to one of those cannibalizing deals in the Goldcorp-Newmont merger back in 2019, which came on the heels of Barrick and Rangold merging. Then we saw a steady succession of M&A activity in the gold mining space because the realization among the producers, well, if we're not discovering it through exploration because the juniors aren't conducting the exploration, then we're going to have to buy it. We're going to have to buy the production to replace what we're depleting, but that's a zero-sum game for the industry if you think about it because all that does is pile together existing production under different vehicles, but doesn't create any value in the ground, doesn't create any growth in reserves and ultimately production, so the sector has been steadily shrinking over the last dozen years or so, and that phenomenon and trajectory won't be reversed anytime soon because typically from discovery to first production, you're looking at 15 to 20 years, so we're in a period of cyclical decline, long-term cyclical decline of reserves and production that's not likely to be reversed anytime soon. What that means is all the big producers can do is eat each other up like Pac-Man, and that doesn't create value. All that increases is share count. It doesn't increase reserves. It doesn't increase production. It doesn't create for sure value, and that's ultimately the cycle that we find ourselves in in the producer universe right now. That is such a dire forecast, David. What's it going to take for a wake-up call? Do you need more people with your thinking in the industry? What's it going to take for people to be like, for the industry to realize, okay, we got to turn this around now. We can't operate like this anymore. Don't get me wrong. It's not an indictment on the management in the producer universe. It's just a reflection of the fact that the general equity markets just were otherwise occupied in technology stocks among other sectors where they were getting outsized returns, and now they're starting to start to deploy capital back into, at least tentatively back into the gold sector. We're seeing some cycling of capital out of other sectors into gold and base metals for the first time in a long time, and that will stimulate the necessary expiration. It's just part of the cycle, normal cycle. It's, again, not an indictment. I wouldn't say it's a wake-up call. Now, it's just the natural recycling of capital back into mining, and that is happening for a lot of reasons and positive for the sector and ultimately will lead to major discoveries, but we're not going to see the evidence of those discoveries in production profiles for quite a few years just because of the difficulty in getting new mines up and running. If I had to tie this into Canada's gold reserves, because the pushback I often get when I bring up the fact that Canada owns zero gold, is that people will say, well, we have so much gold under the ground, but you can't just get the gold out of the ground to your point. No. Unfortunately, the Bank of Canada has really been wrong-headed on this for a long period of time, and like Gordon Brown in the UK, they sold the gold around the same time. We had the Gordon Brown bottom in the UK. I'm not sure what we've named it in Canada, but it happened at exactly the same time. We sold all of our gold reserves when gold was in the 200s and never been replaced. I don't understand under what's the reserve theory that the Central Bank of Canada is operating under and not having any reserves in gold when virtually every other Western bank does have significant gold reserves and increasing their central bank reserves to back their currency. Let's talk about gold royalty. As I mentioned, you're the CEO. You've built a massive portfolio. Why do we tend to see royalty-streaming companies outperforming traditional miners in this environment, David? Well, it goes to where margins are in the producer universe, and it's an interesting statistic. We actually mapped this out recently. We looked at EBITDA margin in the producer universe over the last 30 years, and by and large, it's been around 30%. You have periods, like we've experienced recently, where the gold price spikes and that margin expands for a brief period of time, and then inevitably what happens is you have cost inflation. The general economy has inflation and mining companies are not immune from it, so the fuel goes up, labour goes up, other input costs go up. But the other phenomenon that you experience when gold prices spike is lower-grade material gets mined and displaces the higher-grade mineralization. Nothing wrong with that. I'm not indicting producers for doing that. As a producer, I would have done it. When you're at the mining phase, you're not using some long-term theoretical gold price to decide how much you're going to put through the mail. You're using the gold price today, and you're seeing that low-grade material, which was not economic when gold was $2,000 an ounce. Well, at $5,000 an ounce, it makes money. So I'm going to put that through the mail, and it's a responsible thing to do because it makes money, number one, but also extends your mine life because you're keeping that higher-grade material to later in the mine life. That depresses production, increases all-in sustaining cost per ounce, and then what happens is it reverts to the mean in terms of EBITDA margin to about 30%. So we're going to see inevitably, and I've seen signs of it in the cost guidance and the production guidance that producers have provided for 2026, that, yeah, that lower-grade material is going through the mail. Reserves are up in terms of absolute volume of ounces, but the grades have come down because they're bringing that lower-grade material into their mine. So that's, again, not an indictment of producers. It's just a phenomenon that you experience when you have spikes in the gold price. So what that means is there really isn't the leverage of the gold price that investors are expecting from producers. You're not getting the outsized increases in margins because that lower-grade material comes into the mine plans. That's not the case with the royalty companies. They have unmitigated leverage of the gold price. Their cost structures are flat. We have 14 full-time equivalent employees. I've had the same number of employees since the day we IPO'd five years ago. It's a similar framework within the big, big royalty companies as well. Franco, Wheaton, they have marginally more people than we do, and what they produce per person is remarkable, and it's scalable, and it's, again, outsized leverage to the gold price. The other leverage proposition that royalty companies provide is to expiration success of the producers who conduct brownfield exploration around the existing mines. We get the full benefit of that leverage to expiration success, but we contribute nothing to their expiration budgets because our royalties are perpetual. Once we own them, we don't have to fund them anymore. We just sit on them and wait for the producers to realize the expansion optionality of their mines and the expiration optionality of their mines, but on their dime, not ours. David, I also want to get your thoughts on silver. While that panel was taking place at the end of January, we saw silver ripping. Are you as bullish, and then the smack You can certainly make a very strong case on demand-to-demand supply fundamentals, which I'd never tried to make for gold. Gold's a currency. All the gold that's ever been mined is sitting above ground, and there's an infinite, you know, infinite. There's 225,000 tons of supply just sitting around, so I'm never going to make that argument for gold. Silver, it does get consumed in industrial applications in significant quantities, so there's good fundamentals for it, but the other thing is people play it as a proxy for gold, and typically in a bull run, the ratio of gold price to silver price is typically 40 to 1. I think you've heard me say on your show before, and I've said it on multiple things over the last several years, is when it was at 120 to 1, I said, well, silver's got to outperform. It has to because typically in a bull run, it should be closer to 40 to 1, and that has come to pass, so it was really a catch-up trade that we saw recently to bring it more to that traditional ratio of 40 to 1, and so as gold goes, silver will go, and I don't think there's going to be the outperformance that we've enjoyed in the last 12 months, but it will perform in concert with gold, in my view, and it will stay within that narrow 40 to 1 range in this kind of bull market that we're experiencing and likely to experience for a number of years still. Actually, one more question in regards to investors, David. On the gold front, do you feel the institutional investor has fully showed up yet? No, no, not even close. We're still discounting gold prices within equity valuations well below where spot is, and a great testament to that or evidence of that is where long-term consensus gold prices are among the dealers. We survey this every month, and it's still around $3,500 long-term. Well, spot is $2,000 an ounce above that. I've never seen that big a disparity between spot price and long-term consensus pricing because gold has been on a hot, hot run over recent times, and there hasn't been that kind of response among equity analysts in terms of their price assumptions because they just can't keep up. They've never seen this kind of dynamic, and I have to say that we're probably the only industry where long-term pricing is typically below where spot is. It's traditionally that way, so there's this reticence among the sell-side universe to accept the reality of where gold is and likely to be for the foreseeable future. I think $5,000 an ounce is the new floor for gold, so using $3,500 an ounce long-term seems ridiculous in that environment, but I can understand the mentality is kind of wait to make sure that actually this gold price is going to take, and you're going to start to see that margin between long-term pricing assumptions and spot start to narrow, not because spot's going to come down, but because long-term assumptions are going to come up, and we're going to see a catch-up trade in equity valuation. So yes, equity prices had a nice run in the last year, but not nearly reflective of the current realities of the gold price. Interesting. David, just to wrap, I'm wondering, is there anything that keeps you up at night? The geopolitical risks that we're seeing, permitting delays, or anything? I mean, the reset, do you think about all this? Are you worried? Am I allowed to see all of the above? Absolutely. All of the above, yeah. You're an intelligent woman. You worry about the same things that I do. I'm not unique in that regard, and you have at least the brainpower that I do, and so yeah, I worry about all those things. When I look at my business, though, in terms of what I can control, what I'm worried about is deal flow and making sure that we're competitive and can continue to grow and allocate capital and add value on a pressure basis. That's what keeps me up at night more than anything, because that's controllable. The rest of it, well, we can all read the tea leaves the same way, and we can see the reset happening, and it's not going to be pretty. It's going to be painful for the general economy, but you want to make sure that you're positioned in gold equities and physical gold to weather the storm, to have that house insurance, and yes, the house is going to burn down, but having that house insurance is going to make you sleep better at night. David, you have kids, and I know how close you are with them, and they're all superstars, by the way, but do they get what you do, and when you talk to them, do you talk about a reset, and do you say you need to prepare, you need to own gold, or are they like, Dad, what the heck are you talking about? Do they get it? It's interesting. We have eight kids, and two of them are in private equity, and one of them and two of them are in business school, and yeah, they do understand, and the ones in business school are saying, Dad, actually, all the kids want to go into metals and mining now, and I said, I'm not surprised. I'm not surprised because capital is flowing there. Kids follow capital, whether they do that intuitively or deliberately, they follow the capital. They go where the capital is because that's where the opportunity is, so I'm not surprised to hear that business schools are increasingly focusing on metals and mining, and also I'm hearing that mining schools are increasingly getting new entrants in first, second, third year of engineering, like those classes are filling out again, which is great because, again, I think talent follows capital. Isn't that incredible? Never thought I would hear that. Actually, just one final thought keeps coming to me. All in sustaining costs, David. Will we see a run-up in that? Is there a correlation? Yeah, so I go back to that 30% EBITDA margin, which is the difference between basically the gold price and all in sustaining costs, and so if we go back to a 30% margin, which I think inevitably happens, that means all in sustaining costs are going to have to go into the mid-$3,000s. Wow, that's what I wanted you to repeat because I was like, did he say $3,500? Yeah, you did the math too. I could see your real story. That's why I was like, wait. Yeah, I was like, wait a second. Let me go back to that point. Well, that's a game-changer. Yeah, I know. Look, who would have thought? I go back to when I started at Nico Eagle in 1998. All in sustaining costs, well, we didn't measure that. We did cash costs, but there was a big difference between the two. We're below $200 an ounce back then, and when gold was $215 an ounce. Believe it or not, the average was about $190 something. I remember that. I remember all the cash costs, and so yeah, we've seen a more than a tenfold increase in all in sustaining costs in the last 25, 27 years. So yeah, is it beyond the realm of possibility? We could be at $3,500 in short term. Yeah, it's not impossible, particularly when you consider that low-grade material, which is really not being factored into mine plans just yet, but inevitably will, because nobody wants to double-handle material when you're running a mine. If you can just run the low-grade material through the mill without having to stockpile it, re-handle it, and add costs, you're going to put it through the mill. I think that temptation is basically irresistible, and it will happen. But how does that change the mining landscape, David? Well, I think it means that royalty companies are going to outperform. So as a general equity investor comes in, they're not going to want to think about that kind of variable and understanding where the risks are in terms of mine plans and taking on political risk. They'll buy a royalty company because it's brainless. The margins are typically 90%, no matter what, because there's no costs in the business whatsoever. So I think that's kind of the path of least resistance for the generalist equity investors who want a low-risk way to get leveraged to the gold price. Fascinating. Excellent conversation, David. I thoroughly enjoyed it. Thank you for answering all my probing questions. Thanks for having them. Yeah, no, no, no. Best of luck, continued success, and we'll see you soon, okay? Thanks, Danielle. And thank you all for watching. We'll have more great content coming your way, so be sure to stay tuned.