Why to Love the Silver Bear Market – Rick Rule Interview

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Transcript

Dan of FMT: Greetings and thank you for joining futuremoneytrends.com. I’m here with Rick Rule, he’s a legendary investor and he also heads up Sprott USA. Rick, thanks for joining me.

Rick: Dan, pleasure as always.

Dan of FMT: Rick, I have been very picky with the resource stocks I bought for the past three years. Not because that’s my style, hopefully will one day be, but more just an allocation of capital.

Six weeks ago I had a weekend with Rick Rule, and I watched 12 hours of YouTube videos of you in the last six months and you gave me the courage to buy about 10 junior resource stocks many of whom, or probably all of them you own. How does this compare to the other bare markets, from what you’ve seen. I’m leaning on, is this the worst that you’ve seen or is this…

What’s it compared to? How safe am I buying.

Rick: The sector is never safe, first of all. You’ve asked me a bunch of questions there, so I’ll try to answer them sequentially.
[laughter]

Rick: We’ve talked before, Dan, about the fact that if the junior mining sector is composed of 3,000 names on a global basis, you can scrape a zero off that in terms of which ones you can consider buying. The first thing is that 1 in 10 juniors even merits consideration and if you pick the stocks well over time, I think, you will do well if you can find yourself the bare markets.
With regards to ranking this bare market against other bare markets I have seen, the bare market of the early and middle ’80s was like comparing having cancer with the flu. That was a very bad bare market. That was one where more than half of the listed oil companies in the globe, big, small, otherwise went broke.

That was a truly special bare market, one that I also experienced personally, sadly. The bare market that we enjoy, if that’s the right phrase, in the period 1998 to 2002 was, in one sense, the deeper bare market and in one sense not as deep. Deeper in the sense that the companies that came into it were less well fortified financially, but the ones that came into this one.

Deeper in the sense that the duration was longer. What’s interesting to me about this bare market, and maybe a better way to have answer your question, would’ve been to say that I think this bare market probably sets up the best opportunities of any bare market that I’ve ever seen, for two reasons.

The fact that the companies that came into this bare market gorged on capital from 2004 to 2010 means that the assets that are on sale now were bought with cheaper capital and better managements then ever before. The severity of this market in a relatively short period of time with 75 percent sell off in three years suggest that in certain cases, not every case, because most of the money was wasted, as it always is, but in certain cases you’re getting relatively well chosen assets at a 75 percent off sale.

Dan of FMT: What does a recovery look like in a junior resource market? I mean, this is new to me so should I expect the next year to be a snap back or is this just like the bare market spent three years in the bull market, going to take three years to start?

Rick: The bare market that we enjoyed, if that’s the right phase, was one that didn’t occur with a capitulation sell off. We talked about this before on your show, you may not remember, but I do. We didn’t see the precipitous downside.
This bare market has been like a board going through a planer mill with a belt sander coming down taking a little piece off it. Without the precipitous sell off you don’t get a precipitous decline. The recovery that we’re in right now, which I believe began in July of 2013, is and will continue to be a saucer shaped recovery with higher highs and higher lows but with every gain consolidating.

This is an extremely healthy market that we’re in. It is exhausting your patients and exhausting your faith, but what you’re seeing classically is stock in metal. Moving from weak ends to strong, gradually.

What will happen in this market and you’re going to ask me when, which I will duck. What will happen in this market is two things. The author of every bull market is a market where the expectations are exceeded and it’s impossible that this market won’t exceed expectations, because this market has no expectation associated with it at all.

The challenge would be to get under the hurdle, not over the hurdle. Markets happen when, by surprise, the market performance exceeds expectation and that will happen and at some point in time, I unfortunately can’t tell you when, we will experience a mini melt up. You will be expecting because you’ve been conditioned to a 20 percent advance followed by a 15 percent decline for a 5 percent net gain.
One of these days you’re going to find the 40 or 45 percent advance with no con commit decline. I can’t tell you when that’s going to happen, but 40 years of sometimes hard experience in this market tells me that it will happen.

Dan of FMT: When?
[laughter]

Rick: I told you I’d duck it. That’s a young man’s job.

Dan of FMT: Are you open to sharing the last three stocks you bought?

Rick: No. The last 3 stocks I’m still buying and the idea that I’d have 10,000 of your closest friends as my competitors in the market is not a prospect that fills me with joy.

Dan of FMT: Let me put you in a conflict of interest, because your job is probably to promote Sprott as a business and as clients. What about Sprott asset management, because my thought is safety and Sprott…I always think of with buying a bigger stock like IBM or something hoping my grand kids will do business with them. With Sprott, it seems like it’s almost like the shot gun approach, you’re investing in all the resource stock and without any real risk. Its not like Sprott is going to go away in 10 years. It’s got no debt.

Rick: As a matter of public record, I own like 30 million shares of Sprott, none of which were an escrow. I sold my business for some, I bought the rest . We’ve done a really remarkable job in Sprott in a bare market that saw our basic asset class fall by 75 percent.

We had three businesses since Sprott that need fixing. We fixed two and a half of them and we built two new businesses in the course of that, despite a market which caused many of our competitors to go away, which, by the way, is good news for us. We come out of this with $325 million in networking capital, no debt and a business that generates between $45 and $50 million a year in free cash in a bare market.

We have 160 investment professionals who, as you might suspect, are battle scarred and ready to go. We pay a 4.2 percent dividend, which we get from free cash. We don’t borrow to pay. What you say is in fact apropos were, in effect mutual fund, where you don’t pay fees you received dividend.

For a passive investor in junior resources, Sprott may be the best pick of all. It’s certainly the largest exposure I have to the junior resources industry, but I work there.

Dan of FMT: I know it’s irrelevant of what it used to trade for, but did not trade for around 11 bucks and today is about to 2…

Rick: Yeah, it came at 10 bucks, I think the high was 11. I haven’t seen the quote today, but I suspect in Canadian dollars it’s at 2.75 or some number like that .

Dan of FMT: Silver. Because of Eric Sprott a lot of people have been attracted to [inaudible 8:14]because of the silver ETF, which actually I think it’s a trust. Right?

Rick
: Correct.

Dan of FMT: Silver just made another new low in a four-year low. I wanted to know if you had any initial thoughts on it. I mean, gold was holding up, the juniors have obviously been holding up, but here is silver making another four-year low.

Rick: From the point of view of someone like myself admittedly I’m A. rich and B. patient. The fact that silver made a new low is a good thing. The way that one adds wealth is by buying an asset class that one thinks is attractive as cheaply as possible.

People who don’t agree with that are people that are nervous about their existing position, not people who are trying to get wealthy in the future. I have been a consistent buyer of precious metals and I suspect that I will continue to be a consistent buyer of precious metals until I see them disgracing the covers of the major news magazines in the United States. In other words until a trade becomes popular.
Perversely, the declining silver prices are attractive to me because I’d like to own more of it. I realize that many of your listeners have neither my means or my patience and for them I can only say, this is going to sound really ethereal and make me a Californian, but the essence of wealth is to enhance your sense of well being. If your silver position is causing you trauma, sell it.
Get out of it. I can’t tell you when it’s going to turn. I can tell you why I think it’s going to turn, but the truth is, if you’re uncomfortable with an asset class sell it, buy something that you’re comfortable with.

Dan of FMT: A few years ago we talked and you said that without a doubt platinum palladium, in fact, last time in Tucson I asked you if there was only one investment you could make, I believe it was was physical platinum palladium. Is silver, now that it is below the cost of production, do you equally like silver just as much are you still…

Rick: I don’t. I still like platinum and palladium much more. With silver you have to contend with the fact that nobody really knows what the supplies are because so much has been stored as personal wealth in the Indian subcontinent.
Some of your listeners will remember back to 1997, when the silver price ran as an odd set of circumstances surrounding Warren Buffett’s purchase of silver at the same time that the Asian contagion caused the Indian rupee to collapse and drought swept central India. That set of circumstances caused a wave of silver to come out of India and crush the 1997 bull market. The important lesson from that is it’s very difficult to understand the total supply of silver and what price it will come to market at.

The second thing is, in terms of production, there’s very little primary silver production. Most of it is produced as a consequence, as a byproduct of copper lead and zinc production, and so to understand future production trends in silver, the silver prices is irrelevant. The copper price, the zinc price, and the lead price are what you have to look at.

Those facts, the uncertainties associated with supply, make me prefer platinum and palladium where you can see the above ground inventories and you can see the fabrication demand on a manual basis. I understand the silver thesis. I understand the thesis of silver is poor man’s gold.

I like it. I like the narrative. I like the story. I don’t like the uncertainty.

Dan of FMT: That’s great. Last question, really, is a total selfish question on my part because I wanna ask you about the government and it has to do with…I took on a new editorial role at a website and it has [inaudible 11:54]and I’m talking about raising my kids in this corrupt environment. You have some great thoughts on wealth and being independent of the government and you actually despise it from what I understand. My question is, when my son asks me if the police are good or bad guys and I told him everybody has their own choice, but either way, even if you’re a great cop, you have to enforce unjust laws like somebody relieving pain from chronic ailments.

I know this is a big long question, but what is the government to you? And how would you teach it to somebody?

Rick: I think your response to your son was especially profound. I have noticed many government employees I’ve met, including most policeman I’ve met, are very good people. I regard them uniformly as misguided, because I think that the institution that they work for, be it the government itself or the police, is evil. I don’t think of them as evil people which would suggest from my point of view they’re misguided people.

I think it’s very important to stress to your son the difference between good people and an evil vocation. I think that second thing is that you need very early to introduce your children to the concept that involuntary servitude, which is what taxation is, is immoral. That it’s slavery.

I think it’s important to explain to young people that the extortion by force, threat or fraud of the fruits of an ordinary citizens’ labor, irrespective of whether it’s of 12 months duration or 4 months duration, is slavery. From my point of view, in order for young person to be in favor of government they have to believe that their interpretation of someone’s needs gives them a call on somebody else’s means. In other words, before they say that they’re in favor of government they have to say that they’re in favor of slavery.

That puts a young person in a fairly unique position. The young person is going to say, “But its not really slavery because we voted on it.” There was a vote in the 13 colonies back in the old days so they decided that the vote didn’t apply to either women or blacks.

It’s the same kind of vote. There was a vote in Germany, I think it was in 1943, that brought in Hitler. Just because slavery is popular doesn’t mean it’s right.

Dan of FMT: Rick thank you so much for your time and wisdom.

Rick: Thanks for the questions.

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