Rick Rule, Precious Metals Update April 2014

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Transcript:

Future Money Trends: Thank you for joining us at FutureMoneyTrends.com. I’m here with Rick Rule of Sprott Asset Management. He’s a legendary investor, a mentor to a lot of successful investors, including Marin Katusa. He’s also close friends with Doug Casey, who’s one of the favorite people we like to put on our show and talk with. Rick thanks for joining us.

Rick Rule: Pleasure, thanks for coming down.

Future Money Trends: Rick, I want to talk to you about platinum and palladium. We talked about it last year at the Cambridge Show. You guys had a new presentation. Well, I love quoting you about how inevitably doesn’t mean imminent. And thank god I think I hopefully have learned that, because I’ve been caught up in it too many times. But now we have the miners on strike in South Africa and a standoff in Russia, which has a history of stopping supply for platinum and palladium. Could 2014 be the year that inevitability does mean imminent?

Rick Rule: As long as you allow me the use of the word ‘could’, absolutely. We’ve seen, with regards to the Russian situation, more sort of sound than fury. It isn’t in the West’s interest to embargo Russian palladium because they need it. It’s not in the Russian’s interest to embargo palladium because they need the money. What took place 13 years ago in a Russian context, when the Russians withheld palladium from the palladium market, would seem to be a circumstance where the kleptocrats, where they oligarchs, got in control of the process, bought palladium from the Russian state, withheld palladium from the Russian state to the market, and then cashed in themselves in the resultant price escalation. It was a manipulation of the type that were rife in the political environment that existed in Russia 13 years ago. We don’t think that that sort of thing is in the offing any more. We think the Russian state, while far from transparent, is substantially more transparent than it was 13 years ago. So we don’t see the Russian situation with regards to Crimea and Ukraine, as being particularly germane with regards to the palladium business world-wide. Except that this will lower the price of Russian equities and increase the cost of debt to Russian companies, including the risk when they go to develop new sources of palladium. But that’s a problem far down the road. South Africa is a very different set of circumstances. The strike in and of itself shouldn’t have a near-term impact on platinum prices because everybody saw the strike coming for 18 months. And the fabricators and the financial interests had ample supplies of platinum. But the truth is that the strike has taken 600,000 ounces of platinum supplies, and deferred them for a very long time. Which means that there’s a 600,000 ounce greater problem than existed before, and there was probably a 10,000,000 ounce problem. Now, what’s instrumental about the price is not what’s going to happen in the near term as a consequence of the strike, but the fact that the strike is a manifestation of what investors need to know about platinum and palladium. It’s a labor-intensive business and the workers need, emphasize need, to be paid more money. The problem is they can’t be paid more money. The industry does not earn its cost of capital at this platinum price. So they can’t afford to give the workers wages, but the workers have to have a raise. This is the state of the industry. They are literally, in mining terms, stuck between a rock and a hard spot. So don’t think about what the strike does to the platinum and palladium business over the next one month, three months, six months. You can’t know, it doesn’t matter. Understand that the strike is a manifestation of the problems that are obvious with regards to the business, and one of the reasons why the palladium and platinum prices must, and will, go up.

Future Money Trends: We’ve talked about this with other commodities, like uranium or even silver, or I think you were talking about zinc last time we spoke. So this happens, it seems to be a common thing with commodities, but is this a unique situation where these miners actually aren’t being paid enough? Because the coffee farmer who’s losing money right now – he would say the same thing, that he’s not making any money. But he’s not doing anything about it.

Rick Rule: The big difference, I guess, with regards to crops, agricultural crops, is that you can affect supply fairly rapidly. If the coffee price goes up from planting coffee to fourth leaf, which is when it starts to produce well, it’s obviously four years. With regards to effecting supply in uranium, or platinum and palladium, it takes 15 years or 20 years. So the imbalances between supply and demand are much, much, much, more exaggerated. With regards to the mineral commodities, of course what we say is true. We said before with regards to uranium, in your own interviews, that if it costs the industry $70 a pound to make the stuff, and they sell it for $35 a pound, they lose $35 per produced pound as an industry. One of two things happens – the price has to go up or the lights have to go off. It doesn’t work like that in crops, because you can address supply or demand imbalances much more quickly and with much less capital. So minerals are unique with regards to other types of commodities.

Future Money Trends: Just look at the recent gold price, a lot of people got very optimistic in 2014. And you actually pretty much called the bottom for the juniors, and I want to say that I recall you saying that we would see those kind of pull backs. So does this mean that a bottom wasn’t put in for gold and silver? With this, seemed to go from 1390 to 1310, was pretty dramatic for gold and silver bugs who thought we were headed to 1500.

Rick Rule: Well the gold and silver bugs are silly. I believe we’ve put in a bottom. My believing it of course doesn’t make it so. But the truth is…

Future Money Trends: It makes me feel better when I buy.

Rick Rule: The truth is that gains need to be consolidated, and that’s precisely what we’re doing, we’re consolidating the gain. I had an interview this morning where somebody talked about the fact that the gold price had pulled back by 4% or something like that. And I said, “really? Is that what it did? That depends on your time frame.” If you look at the fact that gold has advanced from $1410 or $1420 to $1300 and something over the six-month time frame, maybe what it means is that gold is up 6% or 7%, you need to decide in terms of your time frame, in terms of your metric. It’s my belief that we have seen the bottom in gold and silver prices. Or if we haven’t seen the bottom, that we were within spitting distance of the bottom. I also believe that we are up off the bottom. But I believe that the recovery in precious metals, and in precious metals oriented equities, I believe that the bottom is going to be saucer shaped. I don’t believe that the recovery is going to be V-shaped. And I gave you the reason on an earlier interview. That is that we never saw issue or capitulation or market capitulation in this market. The  requirement for a V-shaped recovery is a viscous capitulation, which we didn’t have. We certainly had a bottom put in, or the condition precedent needed for a bottom put in, by simple price. We certainly had that. But if that’s the type of bottom we had, my suspicion is that the graph of the bottom that we’ll see over time is saucer shaped. Which is a way of saying that we’ll see a gradually rising channel, with higher highs, and higher lows, but certainly 15% perturbations between highs and lows along the way. Not serious, but uncomfortable for people who don’t have the cash or the courage of their convictions to stay their trades.

Future Money Trends: Moving to the dollar standard, the global reserve currency. Do you think by the end of this decade we’ll have another currency that will be the reserve currency? Because you always get these things on Drudge where Russia recently came out, and Putin was like, one of their reactions could be that they’ll stop doing transactions in U.S. Dollars. And we have seen so many of these stories, and I guess it’s a slow process, but is it something realistic that could happen, even within the next six years?

Rick Rule: Sprott has cultivated, and recently succeeded, in lending some very large Asian investors. And I have asked those asian investors this question, about the primacy of the U.S. dollar as a reserve currency. And off the record what they say is, “we don’t particularly trust the U.S., but we trust you more than we trust each other.” The consequence of that is that he U.S. dollar would seem to be the certificate of denomination for global trade for a long time. What I would liken this to is that the U.S. dollar compared to all the others is the prettiest mare in the slaughter house. I can, and have told you many disparaging things about my country’s currency, and about my country’s debt. And the fact that it performs so well compared to the others, speaks volumes about the quality of the others. Probably the oddest financial event that I have witnessed in almost 40 years of investing, was in the middle of last year when the U.S. Congress was flirting with a situation that would have caused a new term default on U.S. debt obligations. And the market’s response on a global basis was to bid up the price of the U.S. dollar and U.S. treasuries. Now that’s an odd marketing technique. How would it be if I issued you a bond, and right after I issued you a bond I said, “oh by the way, I’m not going to pay you interest rates, or pay you interest.” Would that make you want to buy more of the bond? I mean this was truly an odd response, and it speaks to the fact that with regards to other sovereign issuances, and with regards to fiat currency, as ugly as the U.S. dollar is there is no alternative. And that’s important to this interview; because if there is a change in attitude on behalf of a very, very, very small group of sovereign investors about the efficacy of precious metals relative to U.S. Sovereign instruments, the impact on precious metal’s prices could, and I dare say should, be explosive to the upside.

Future Money Trends: We may have rock bottom interest rates since around ’03 and for my generation this is just sort of what we pay. This is just the interest rate for mortgages and the kind of returns you get on savings accounts. What is your analysis of that? I’m talking about the future, because if it goes up, if interest rates go up, it seems like the whole thing is blown up. So is it just going to be low for the next 20 years?

Rick Rule: Well you brought up an interesting point at the beginning of the discussion, your generation. For your generation, I guess turnabout is fair play. Interest rates manipulation lower is the way that you subsidize spenders at the expense of savers. Mostly what my generation is going to leave your generation is debts, but the fact that you are stealing some of our savings, because there’s very low interest rates, is probably very, very appropriate. A set of circumstances that penalizes the productive elements of society, I’m being serious now, the savers to benefit the spenders, is of course popular in a democracy because there are more spenders than savers. So that is of course going to be popular to a democracy, but it is not functional. An economy built on consumption, rather than an economy built on savings, investment, production, is an economy that’s built on a very, very, very weak base. And the strength of the U.S. economy for 200 years was the fact that this was an economy that rewarded production, not consumption. What we’re doing right now, politically, is that we are subsidizing spending and we are penalizing savings. The point that you make is a point that’s well taken. In the first instance, the government probably can’t afford higher interest rates because there’s the interest on their debt. Not just the federal debt, but the state debt and the local debt. And the second thing is that this program is extremely popular, because there’s an awful lot more spenders in the world than there are savers. That’s very unfortunate on every set of circumstances.

Future Money Trends: A lot of people are internationalizing their assets. I would assume that you’ve done this long ago. Have you noticed it being more difficult for your clients to set up off-shore accounts, or do anything that’s off-shore as a U.S. citizen?

Rick Rule: That’s certainly become more difficult. The activities of the U.S. government, and the overreach of the U.S. government attempting to regulate the activity of non-U.S. financial services institutions has been very good for Sprott frankly, because it has halted the transfer of assets out of the U.S. to places where people would like to put their money. I think it’s bad for the world, I think it’s good for Sprott. And yes, financial services institutions on a global basis would rather not do business with Americans. That’s not a consequence of the fact that they don’t like Americans, it’s a consequence of the overreach of the U.S. Government.

Future Money Trends: So is there any protection? Let’s say someone becomes a Sprott client in Carlsbad, California. How do you get their money offshore, or are you just saying you’re buying foreign stocks?

Rick Rule: We don’t.

Future Money Trends: So it’s all here in the U.S.?

Rick Rule: Absolutely.

Future Money Trends: You just mean to own foreign assets.

Rick Rule: Correct.

Future Money Trends: What about a Canadian bank account, or those Canadian vaults and stuff? Is that something you recommend for people?

Rick Rule: Recommend them? No in a blanket fashion. For individuals they may be appropriate, but having a discussion like that on camera, that’s distributed to 100,000 people I don’t know, would be irresponsible of me. Recommendation involves understanding the needs of that individual client. And it’s impossible for you and I to know who’s going to watch this video. And as a consequence of that, it’s impossible for me to make a recommendation on the video. Certainly as a broad topic of discussion, I have internationalized my assets. I have done that to avail myself of a broader range of opportunities outside of the United States, and I have also done it out of prudence. Doug Casey famously says that your person, your passport, and your assets ought to be diverse, so that you protect yourself from the depredations of all governments, including your own. Which is something I believe in.

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