Why Inflation Will Return To 9%; 85% Chance Of Fed Cut By September | Brett Heath

Why Inflation Will Return To 9%; 85% Chance Of Fed Cut By September | Brett Heath

inflation data was released today on Thursday June 11th monthly data fell 0.1% in June and annually the CPI is now at 3% down from 3.3% in the previous Month Gold reacted by going up 1.6% on the day stocks are down with the S&P 500 down about 0.8% Tech is leading the charge downward with major sell-offs in Nvidia for example and the markets are now pricing in a significantly higher chance of a Fed cut by September the CME fed watch tools reading an 85% chance of one cut by September what’s the Market Outlook overall factoring in today’s data we’re going to be talking about this with Brett Heath CEO of matala royalty if you haven’t already please subscribe to my upcoming newsletter it’s completely free it’s just another way to consume content if you don’t have time to watch 30 minutes or an hour of interviews every single day I post once or twice a day uh then you can just read the summary recap which will come out on a weekly basis plus it’ll be uh Recaps of the week’s top news plus news to watch for the following week um it’ll be very informative link Down Below on the substack Subscribe now put your email in and be one of the first to receive the first issue coming out later this month BR welcome back to the show good to see you thanks David glad to be here the major news of the day is of course inflation it’s up only 0.1% on the month down from 3.3% on the year to 3% now the markets are reacting uh by the stocks going down uh we can talk about that and gold has gone up so let’s start with gold first gold is up 1.7% as we speak about uh 2 pm eastern time on Thursday that’s a huge jump Brett what happened to Gold well what we saw was we saw CPI uh you know slightly come down I mean pce still holding in there kind of basing uh but what happened I think that made gold jump was there was a significant jump in the probability of a fake cut of a red a Fed rate cut so inflation coming down closer to their targets you know that gives the fed the opportunity to uh potentially have a cut I think it’ll still probably maybe only be one uh or probably maximum two this year and I I think they’ll be fairly shortlived because I think that inflation is going to uh continue in the latter part of this year kind of in in in the face of these cuts and that’s what gold is signaling now I’ve heard the view Brett that if the FED doesn’t cut by September it’s already going to be too late for the economy by then if they don’t cut it’s going to Signal just tightness for too long and businesses especially the small businesses are going to go bankrupt what’s your view there well the economy is weakening uh there there’s there’s no doubt about that I mean you’re seeing that in in uh you know various uh different economic indicators and you know when when you look at M2 uh and you look at kind of M2 coming back you know everyone was predicting a recession recession but there was just so much liquidity in the system it never even made it back to kind of the mean of that trend line and so you know we’re seeing M2 start to increase it’s starting to Bas starting to go higher again um and I think that is in response of kind of the FED in preparation of a potential rate cut again in in this fall um to starve off some of these these things that you noted of the economy weakening I feel like I’m living through um an episode of The Shepherd that cried wolf right because earlier in the year the markets were pricing in six rate Cuts we didn’t get any and now it’s like okay now there’s an 85% chance of a cut in two months yeah right that’s what I’m thinking what do you think I I think I think that the the fed’s gonna have to do something this year so we probably get one cut but it’s probably shortlived I think on the back of any cut you’re going to see a significant bump back in inflation in in in pce I think you’re going to see all of the inflationary metrics start to rise again I mean inflation comes in waves it’s not it’s not a linear type of of uh activity and so you we had a big move of inflation things have kind of cooled down the FED raised rates the economy is weakening so things are coming back down uh there’s a lot less of that liquidity that was in the system like if you look at a way that the FED has been pulling liquidity out using the revers uh repo Market that’s been basing they really haven’t been pulling out a lot of liquidity the last few months and so so that kind of tells you I think that they’re they’re getting ready to do a cut I mean it seems like they’re in more of a reactionary type of of phase but uh but it looks like they they potentially are analysts at City Group though have predicted that once the FED starts cutting uh they’re going to cut by up to 200 basis points in their next eight meetings through the summer of 2025 um I’m sensing you don’t agree that because you said that it’s going to be a shortlived cut what do you think I think that there’s still a lot of liquidity out there you know I think we will see inflation move into its next wave and I think we’re going to see inflation exceed the previous High which was you know running around kind of eight8 to n% range um a little ways back and so if we get that type of inflationary data and those inflationary pressures on the back of any type of rate cut you know the FED will have to reverse and I think that the market is not anticipating this I think that the Market’s anticipating that that the the rates go back down to zero and I just don’t think that that’s going to happen Okay well let’s talk about that so inflation is going to return to their uh upper range what why why is that why is inflation going to return well there’s still there David there’s still a ton of liquidity out there and when you look again when you look at at at M2 it’s turning back up when you look at if there’s rate Cuts if we get into another phase of increasing the liquidity in the system it’s going to respond and look gold is the best measure of this and you look at on a day like today it’s almost back up to all-time highs I mean if it breaks out to alltime highs we could probably see it rise another 100 um dollars pretty easily uh so when you look at gold I think that that is going to Signal what’s what’s likely going to happen in the future in the next three to six months okay let’s go back to Gold then uh gold went up today again why because I thought and me and other people as well I thought that gold was an inflation hedge well at least that’s one of the ways it’s being marketed in the past with inflation having come down are you surprised that gold is hitting new highs no not at all because again I think Gold’s very forward-looking so what Gold’s doing is it’s it’s it’s predicting of probably what we’re going to see in the next three or six months in advance and so that’s that’s when I when I look at gold if gold was coming back down to 2000 or if it was breaking 2000 then we’d have a different approach on it we’d probably be saying okay well maybe there’s a much much larger recession or uh you know some type of liquidity event in front of us I mean that that still may happen but uh when you look at the the price of gold and and really how reactionary uh the FED has been to any type of event meaning very very significant amounts of liquidity pushed into the system in a short period of time uh I think that you know gold is is basically signaling what’s what’s going to happen in the future gold has done very well the miners for the most part in the last 12 months have not caught up with gold why why is that let’s start there and we can talk about specifics yeah it’s it’s it’s a very interesting phenomenon to see the Divergence not only in the equities but also uh the kind of physical metal proxies within the market but what we’ve seen you know what I believe we we are we are seeing is a lot of the capital is getting sucked up into big Tech and we’re seeing outflows when I look at the the GDX and the gdxj which are the two largest ETFs uh for the the gold equities we’ve seen respectively 50 million and 110 million of outflows in the last 30 days and respectively 145 and 1.34 billion dollars of respective outflows in the last three months these are the two biggest gold ETFs so it just shows you Capital even in the midst of gold moving higher uh capital is still coming out of uh out of this industry and this industry is pretty small so these types of numbers can make a material difference where a few billion is going to make not much of a difference when you’re looking at kind of the big Tech or any of the the market leaders that are out there today um and similarly when you look at GLD um and when when you look at GLD back to its Inception the Holdings of GLD is always correlated somewhat with the gold price as the gold price goes up the Holdings will go up more people will buy gold and what we’ve seen in the last six months is a very very significant Divergence where we’ve seen2 billion dollar of outflows out of the G GLD which is the largest gold ETF uh in the public markets and we’ve seen gold move up over 20% so what it’s telling me is that the the you know the the investing public whether it’s institution or retail are just not in these equities or interested in these equities at that time and a lot of them have just in incredibly compelling valuations right now I like talking to you because you’re the head of a royalty company and being a royalty company you’ve worked with a lot of different projects from all over the world because that’s what a royalty company does we can talk more about that business model in just a bit but let’s just take your stock for example as an as an example right MTA currently flat year-to date right it’s gone up it’s gone down but year to date it’s about 0% gold is up 177% what would you do to convince shareholders that this is still a good value and that eventually is going to turn around what’s your message well our our business has always been built for the long term and so our f Focus since since the very beginning since Inception 8 years ago was to build a very highquality royalty portfolio that was based around the most proven geological Trends and the largest operators and the safest jurisdictions and so we went out and we picked up over 100 of these royalties uh the majority of these royalties are being Advanced by the the largest mining companies in the world and a lot of these assets were in development we’re a very heavy development type of company uh over the last eight years just by that was our angle to be able to get exposure to these really great assets and so right now the company is at um I bit I believe at an inflection point because a lot of these assets that we B that we bought that were in development uh are now coming online we just saw uh one of our newest royalties come online uh within the last couple days that was a royalty on token tanino this is going to be the third largest primary gold mine in Brazil uh and we also have another three that we expect to come online in the next 12 months and and in another probably 5 to 10 in the next 3 to five years so as the profile of our company changes and the cash flow starts to really ramp up um over the next one two three four five years uh I believe that it’s going to be a an a Very uh attractive risk reward opportunity for investors looking at getting that free carry non-dilutive interest exposure which is what a royalty provides you know we don’t have those cost pressures that the mining companies do so if gold goes from 1,800 to 2400 we get that entire margin basically uh to our Top Line where um when you see the gold price typically move from 1,800 to 2400 the mining companies their margins expand but the costs always always come up it might be three months later six months later a year later um but typically when you when you see these big advances with gold the cost follow it and with royalty companies you get that 100% margin so uh you you know our shareholders are are you know positioned I think very well with with all of this growth that’s been bought and paid for and it was bought and paid for it when gold was between $1,200 and and $1800 for the most part what are the miners doing with gold above 2400 let’s start with the producers first presumably they have more cash right um from the people you’ve talked to and worked with what are they doing with this cash right now right now they’re paying dividends they’re buying back stock they’re not investing that much of it back into uh new projects new exploration that’s what really they should be doing right now uh but you know investors have really pressured the particularly the majors and the big MERS into returning capital and and you know I don’t blame them for that because historically the sector is is has not been the best Steward of capital uh but at the same time mines are depleting assets and if you don’t invest in the future of those mines or continuing to drill and explore at some point these mines just will shut down down and that’s really what we’ve seen over the last 3 four years we’ve seen a big push in m&a and a lot of that m&a was driven on the fact that these big mining companies have not been able to replace the reserves and so how are they maintaining that growth how are they maintaining these production profiles and it’s through mergers and Acquisitions and so the sector has kind of become a bit smaller and smaller or or at least more highly concentrated we’re also seeing that in the royalty sector there’s been a big m&a wave we obviously did an m&a transaction last year and I think that trend is going to continue right uh that was my next question m&a activity this year uh seems a bit quiet compared to previous years despite the fact that gold at $2,400 why is that well I think it’ll pick up I mean normally most of the m&a activity that we’ve seen happens in the the second half of the year for for whatever reason uh and we have seen some m&a activity particularly around Copper I think that the big not only the big Diversified companies but the big uh gold mining companies completely understand the setup with the uh very well documented Supply deficit with copper over the next almost decade or two and also the every single year that goes by we seem to have a new source of demand for copper um it’s it’s a very very strategic asset that’s why we merged with Nova royalty and and and gave our uh shareholders exposure to five of the largest 10 uh development Assets in Copper uh in the Americas last year so that’s been a lot of and we’ve seen that with BHP trying to buy uh englo American last year Glen core and Tech there’s been a lot of this m&a and a lot of it again has been driven around these big companies trying to figure out how they’re going to give and basically ring fence their copper exposure for this next decade wait so is happening more the base metal sectors than gold right recently that’s what we’ve seen we’ve seen a lot of a lot of either m&a or attempted m&a around Copper as a specific uh commodity and these big companies because these big companies realize that these big copper assets they take 20 30 years to go from Discovery to production the lead time is is is very very significant and as we go into this Supply deficit uh it takes that much time to bring a new copper mine on so there’s there’s very very few projects that are ready to be built today and so and and and even fewer that are in production so it’s it’s uh it’s really a race for these companies to be able to kind of get that exposure and once they get it then then they’re they’re good for quite some time these these mines go for oftentimes 50 60 70 years I’m just trying to think from a valuations perspective is it correct me from wrong but is it generally speaking lower cost to produce or mine copper than it is to extract high-grade gold it’s really assets specific did there you know copper only seems to work with very very large assets there there’s been a lot of smaller copper mines that have been tried to be built they all seem to run into a lot of trouble uh the big successful money-making copper mines are these Mega deposits um and these are the ones that that typically have the scale to lower those costs to make them very profitable let’s Circle back and end on the markets now the the uh General sentiment of investors what do you think they want right now I know that’s very open-ended question a couple years ago we were talking about the business cycle and sentiment we’re talking about cryptos a lot that was The Craze Bitcoin has broken new highs this here yes but it seems to be getting less attention from the media than three years ago right and so Tech AI we talked about is is that is that it is that the only theme what happened to cryptos what happened to uh you know smaller names in the in in the tech sector yeah I mean right now it seems that the market is just consumed with AI uh when you look at the representation within the S&P you’ve got 30% of it is basically tied up in seven massive tech companies and when you look back historically that’s only happened two times in in I believe the last 100 years which one was the tech bubble in 2000 and the other one was back in I believe like 1929 you have to go all the way back then to see kind of that heavily weighted obviously the companies were a lot different back then um so you know it remains to be seen if that’s even relevant but that’s where all the capital is Flowing right now when you look at uh the Invesco QQQ one of the largest uh Tech kind of centered ETFs you know that’s seen 10 billion of inflows in the last three months uh but even Bitcoin I mean Bitcoin had a big move I think it had a big move off of uh the new ETFs I when you look at the Black Rock ETF which is now the largest ETF holding Bitcoin that’s had 500 million of inflows in the last 30 days and over three billion of inflows just on its own in the last three months so these are still significant inflows that are coming in as opposed to you know what’s happening in gold or at least the GLD but gold look Gold’s being driven by the central banks when you look at the first quarter uh Central Bank purchases was 289 tons of gold that’s $23 billion or so of gold we’ll get the data for Q2 here shortly um but I wouldn’t be surprised if it’s probably going to be a little bit less than that but I wouldn’t be surprised if it’s pretty close um and when you look at gold as a percentage of reserves for emerging market countries when you look at India China Japan Saudi Arabia Brazil Mexico and so forth all of these countries their percentage of gold as their total reserves is less than 10% a lot of them are less than 5% and when you look at gold as a percentage of reserves from us France Germany um Italy uh there over 60% so I think this trend is going to continue uh the world still understands that uh you know the US is I mean the US has to refinance 17 trillion dollars in the next two and a half years very very significant amount of capital and most of that is coming off at 50 basis points and it’s getting refinanced at 450 basis points that will drive the interest expense I believe well well over a trillion doll and we’re going to continue to see central banks Drive gold higher um I think we can I think we could potentially see uh 26 to to even up to $3,000 of gold um within the next 12 months based on Central Bank buying continued Central Bank buying Brett I think continue Central Bank buying and at some point in time we’re going to see these inflows reverse now the the entire investing public today is selling gold equities is selling gold so what happens when the central banks are buying and then all of a sudden the investor um you know investors whether institution or retail start buying as well so that’s going to that’s going to put a lot a lot of upward pressure on gold I think that that’s going to allow it to rise probably much faster and much farther than than most people are anticipating um and it just goes to show that there’s very very few people in this trade today and it’s almost hitting alltime highs again okay I have to finish off on Silver uh silver is something that moved a lot so it was at about $22 an ounce uh earlier this year in January it’s at 31 now so about a 50% move in the last five months or so what’s the silver narrative well silver with silver I always just look at the silver or the gold silver ratio um you know we saw that break uh we saw that break when silver kind of moved up through $30 it since then corrected it kind of went back and tested that trend line and now it’s looking to advance again so I think silver is poised for a very very significant run uh in in the very near future particularly if we see gold see new highs I think we’re going to see a very significant run um in silver the the setup is there and when institutions come in um when you look at gold as a percentage of total Global wealth that’s this all the gold above ground this physical gold physical silver as a percentage of total Global wealth it’s still only two maybe 3% so what’s going to happen is as as those funds start to as those flows start to reverse and we’re going to see more flows into into gold gold equities as the price continues to go higher as we start to see maybe some of of this Capital start to outflow out of these big Tech names I mean there’s trillions of trillions of dollars um in these in these basically wrapped up into seven companies so when that starts to reverse like where is that going to go well it looks like it’s going to go into Commodities there’s only so much gold above ground Gold’s going to move first silver is going to move first and I think these equities are going to move on the back of it um and I think companies like matala um that have a non-dilutive free carried interest into uh all of this gold then you know they’re going to do very well metala currently has approximately ly our royalties cover about 1.7 million gold equivalent ounces and our market cap today is about 250 260 million us so there’s a significant opportunity there I think not only for the royalty companies but also for the mining companies on the back of that move all right good stuff thank you very much Brett thank you for your time and uh where can we follow your work mattal royalty yeah our website matal royalty.com and uh you’ll you know find all of our our assets there and in our company and our and our recent news okay we’ll put the link down in the description below thank you very much for your time Brett see you next time all right thanks David thank you for watching don’t forget to like And subscribe

Brett Heath, CEO of Metalla Royalty, discusses his outlook for inflation, Fed monetary policy, market reaction, and the mining sector.

*This video was recorded on July 11, 2024

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0:00 – Intro
1:35 – Market reaction to CPI report
2:33 – Fed rate cut
5:37 – Inflation to return
6:22 – Gold and inflation
9:50 – Metalla Royalty
12:15 – Mining stocks
16:35 – Investor sentiment
18:14 – Gold price outlook
20:40 – Silver

#stocks #economy #inflation