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Ask The Expert - Rick Rule - September 2015

Ask The Expert - Rick Rule - September 2015
By Geoffrey Rutherford 3 years ago 3321 Views No comments

Rick Rule is the Founder and CEO of Sprott Global Companies and is no stranger to readers and listeners of Sprott Money News. Mr. Rule is a frequent speaker at industry conferences, and is interviewed for numerous radio, television, print and online media outlets concerning natural resource investment and industry topics. He is frequently quoted and referred by prominent natural resource oriented newsletters and advisories. As a self-proclaimed “gold bug” Rick also possesses decades of knowledge and experience in precious metal investment.


Geoff: Hello, and welcome to this month's "Ask the Expert" here on Sprott Money News. I'm your host, Geoff Rutherford. And online today, we have the founder of Sprott Global Companies, Mr. Rick Rule. Rick, thank you for joining us today, sir.

Rick: Geoff, it's always a pleasure. Thank you for having me.

Geoff: Excellent, Rick. Well, as usual, Rick, it's always a pleasure speaking to you. And as usual, when you're on, all the mining questions seem to come out of the woodwork so I'm sure we'll have a few of those today. And with that, how apropos, our first question is about mining. So the first question, Rick, is mining sector stocks have really tanked during the past four years. Are we at the bottom? What are your thoughts on that, Rick?

Rick: I don't know that we're at the bottom, and I think it really depends on what commodity you're speaking towards. I'm very constructive, personally, with regards to precious metals pricing, and so my suspicion is that the bottom is past with regards to precious metal stocks. That doesn't mean the individual issues can't go much lower, including, of course, to zero. But it means two things. It means that, from my point of view at least, gold and silver have much more upside than they have downside, both in an aggregate sense and in terms of timing. And also, that many of the better gold mining companies, including some of the larger ones, have gone a long way to curing their own ills.

It must be said that many of the worst wounds inflicted in mining were self-inflected by companies that were managing for size as opposed to profitability. And it's heartening to see that correcting itself. With regards to the base metals and industrial materials companies, I don't believe they're out of the woods yet. There's a global lack of demand for anything that would seem to apply to things like iron, ore, and coal, and agricultural minerals. So I'm much more positive towards the precious metals mining sector than I am towards the industrial materials sector.

Geoff: So Rick, sticking with metals, the next question is about silver. And the question is, when you have inflows in the PSLV, is it difficult to get the silver on the market? How do you manage to cover the inflows with physical silver, as there are rumors about shortages of silver in the market?

Rick: Our experience has been that while there are shortages of finished, retail products in silver, 1-ounce products, 3-ounce products, and sometimes even 10-ounce products, there is not a shortage of wholesale product. And to the extent that we have inflows at the Sprott physical silver trusts, we are able to accommodate that demand. What seems to be sold out in the silver market are the retail products that are available through the national mints and other places like that. We have not experienced tightness in the physical silver market. What your reader may be referring to is the very small amount of silver available for good delivery relative to the outstanding contracts on the Chicago, the New York, and the London markets. And while we think that's a concern, our transactions are taking place at spot in the physicals market and not in the futures market, so we haven't experienced any tightness at that level.

Geoff: So Rick, the next question we have here is in relation to silver prices, and likewise, mining. So the question is, the downturn in China would suggest an obvious downturn in mining for base metals. As the majority of new silver production comes as a by-product of base metal mining as opposed to primary silver miners, does this mean we will see less silver supplies and higher prices?

Rick: The gentleman or lady has a very pressing question. And I think the answer to the first part of the question, will there be less by-product silver supply, I think the answer to that is clearly yes. And I think it'll happen sooner rather than later. The whether or not that has an impact on price will really depend on industrial demand for silver. Remember, the prices are set on the balance between supply and demand. And remember that while silver is an industrial commodity, it is also an investment commodity, which means that new mine supply is a less important component of supply than it would be for other industrial materials.

One of the things that's always been troubling with regards to gauging the silver market has been the fact that primary silver supply is so low, but that there are many sources of silver supply, including investor inventory and retail hording. While the demand side for silver is similarly non-transparent, it turns out that things like the harvest in India, which impacts the Indian peasantry's ability to save in silver or gold, has disproportionate impact on silver prices. And the very opaqueness of the silver market is one of the things that makes it so volatile and makes it so difficult to forecast pricing levels.

Geoff: So Rick, still tying in to the same question in regards to silver as a by-product. The question from our listener is, why is most of the world's silver that is mined today produced as a by-product of other mining, when for thousands of years the vast majority of silver came from primary mining, as is the case with nearly all other metals? Why is this the case, Rick?

Rick: That's pretty simple. New mining technologies for base metals and new extractive technologies have meant that by-product silver is the cheapest source of silver in the world. The current silver price, the price that we enjoy, if that's the right word, today is a price that is well below the cost of production for most primary silver production in the world, which means simply that the only...I shouldn't say the only, but most of the silver that's economic to produce today is produced as a by-product or lead zinc mines, copper mines, or precious metals mines. Where, in effect, the mining cost, the extraction cost, and most of the processing cost, is paid for by the primary mineral in the product stream. And the cost of silver production is limited to the cost of extracting the silver from the overall metal product stream.

Geoff: I see, Rick. So here's another question that Eric and I have been talking about over the last few weeks, and it's the idea of some sort of default on the market. So the question is, do you think some sort of default event is imminent in the precious metals sector? If so, do you see it occurring with gold, silver, or both?

Rick: Eric is a much better student of the juxtaposition between the physical market and the futures market than I am. In some substantial measure, because of his relationship with you all: it's brought money and his sense of physical silver demand. I don't think that the silver market is anywhere near as tight as it was in 2011, because it would appear to me that at least the visible short position, relative to the overall size of the market is much less tight today than it was then. But if I had my choice to assign a range of probabilities to outcomes predicted by Eric Sprott and Rick Rule, I would probably select the range of probabilities proposed by Eric Sprott, because I think he knows more about the market than I do.

Geoff: I'll make sure he hears that, Rick. I'll make sure he hears that.

Rick: He's got pretty good ears.

Geoff: He does, he does. So moving along then, Rick. Australian and other global mining companies have invested heavily based on demand projections related to the Chinese economy. Do you believe they're correct in doing so?

Rick: I think that depends on your time frame. I think that the Chinese economy is having a difficult time adjusting to two separate phenomenon that will take time to work out. Those phenomenon are respectively, a synchronized global slowdown. It's difficult for the Chinese to generate large surpluses when demand for finished products from China is soft. And certainly, the developed world economies are soft and concurrently, frontier and emerging markets are also soft. So the Chinese aren't generating the same surpluses that they once generated.

The second problem for China, of course, has been their own response to their internal economic condition. Mis-investments and mal-investment is an example. And the lousy balance sheets of the shadow banks in China. China is having their very own economic slowdown that isn't entirely a phenomenon of the countries that they export to. My own personal opinion is that as you allow the Chinese people to become gradually more free, you make them rapidly more rich. And I think that the Chinese people, as a consequence of their predilection for education, their predilection of savings, and their predilection for hard work will continue the trends that we have seen in the 35 years since Deng Xiaoping kicked the boom off by saying, "To become rich is glorious."

My difficulty is with the next two to three years. So really, from your questioner's viewpoint, it depends on your questioner's time frame. If your questioner's time frame is 2015-2016, your questioner needs to be extraordinarily cautious. If your questioner's time frame is as it should be in natural resource investing, a three to five year time frame, we are probably in the third inning of a nine inning game.

Geoff: So Rick, moving over to energy. We know, obviously, we're in a point in which there's been a significant decline in energy prices. Oil, obviously, in particular. So the question right now is, how has the decline in energy prices affected production costs at the major mines?

Rick: It's been very useful. Two things have helped miners. One is the strength of U.S. Dollars, which has helped people who produce in non-U.S. Dollar denominated countries like Canada and Australia. And the other has been the precipitous decline in energy prices. In some mines, on a global basis, 25% of their total costs are energy. And you can imagine if you have a 50% price decline in an item that's 25% of your total budget. But that's an absolutely wonderful outcome. And we're beginning to see, not just productions efficiencies at the mine level, but increases at the total operating levels of these companies get significant benefit from lower energy prices.

Geoff: Now, Rick. Here's a question that I know a lot of our listeners are wondering and it's posed to many of our experts, and to Eric as well, too. And it's just in terms of their thoughts of metals over a certain period of time. So the question here is very simple. What is your outlook for gold and other precious metals over the medium-term?

Rick: I'm extremely constructive as to precious metals prices in the medium- term. My belief is that the precious metals, in aggregate, are depressed as a consequence of the world's attraction to the U.S. Dollar and U.S. Treasury as a savings and investment instruments. I've said in your interviews before that I don't believe that precious metals will win the war against the U.S. Dollar. But I definitely believe that they will lose the war less badly. I think that the situation that we're in right now is analogous to the situation that we experienced in 2002.

For those of your listeners who have a long memory, in 2002 precious metals had been in a global bull market for 13 or 14 months. In currencies outside the U.S. Dollar, as a consequence of U.S. Dollar strength, when the U.S. Dollar rolled over in 2002, precious metal prices began to rise in synchrony in all currencies and we kicked off the bull market that many of your people will remember with such fondness: the market rising from, if my memory serves me correctly, $262 an ounce, ultimately, to a high of $1900 per ounce. My own personal view is that the, if you will, hegemonistic savings instrument on the global basis, is the U.S. 10-year Treasury. And I have said before in interviews with you that to quote Jim Grant, "The U.S. 10-year, the Treasury Bond, is in effect, return free risk." The interest rate offered up by it, from my point of view, doesn't shield people from the depreciation in the real purchasing power of the U.S. Dollar.

The idea that you would give the U.S. Treasury money over 10 years where they absolutely, positively guarantee to give you back less purchasing power than you gave them, doesn't seem to me to be an attractive proposition. As the math associated with that transaction begins to overcome the narrative associated with U.S. strength, which I think is inevitable, I think that gold and silver will do well in U.S. Dollar terms, Canadian dollar terms, or really, against any fiat currency denominator that you want to benchmark them in.

Geoff: So Rick, also, the next question here is more along the lines of in terms of, I guess, a perception of silver, particularly, by the mainstream media. The question is, many mainstream commentators denigrate silver as being an industrial metal because of its ever-widening number of commercial applications. In other words, because silver is more useful now, this somehow makes it less precious. I'm using air quotes here, Rick. Do you agree with this characterization?

Rick: I think it's a brilliant characterization. The idea that something becomes less valuable because you increase its utility is pretty silly. The truth is, one of the things I like about silver, and by proxy platinum and palladium, relative to gold is that silver, in industrial applications, go to supply heaven. It goes away. It isn't available on the market.

If you take silver and you use it for water purification, if you take silver and you use it for imagery, if you take silver and make it into religious iconography, you consume that silver. You take it away from supply. And the idea that something that diminishes supply somehow diminishes value is just an absolutely incongruous thought. Now, one of the things I think that you and I both need to acknowledge is with regards to the mainstream media. What they're really doing is exhibiting their ignorance with regards to silver. And that's understandable.

If you think about silver's position in the global economy, it's a non-event. It doesn't really matter and it makes perfect sense that if you were part of the mainstream media and you were talking about large, economic subjects, that you would assign less of your intellectual bandwidth to silver because of the small, relative role it plays in the global economy. It's precisely that small, relative role that makes it so extraordinarily volatile and makes it so attractive to speculators. Speculators just need to pay attention to where they gather their information from, because gathering their information from a group like the major media that has no particular incentive to have any expertise with regards to silver, is pretty silly.

Geoff: Well said, Rick. Rick, as usual, it's always a pleasure chatting with you and we'd really like to thank you, joining us here on "Ask the Expert" this month.

Rick: Well it's always a pleasure being interviewed by a "cousin" from the Sprott universe who has the education to ask such pleasant and intelligent questions. Thank you.

Geoff: That's right, Rick. We've got to keep it in the family. But you know what? We have to thank our very intelligent listeners for sending in the questions that they send in.

Rick: Pleasure, thank you.

Geoff: And to our listeners, thank you for listening. This is Geoff Rutherford for "Ask the Expert" on Sprott Money News. Have a great day.


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