A Quiet Week for Precious Metals - Weekly Wrap Up

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Craig: Happy Friday from Sprott Money News at sprottmoney.com. It's Friday, June 25th. The year is almost half over, if you can believe that. End of the quarter looms next week. And it's again, time for your "Weekly Wrap-up" however. I'm your host, Craig Hemke. Sitting in for Eric this week is our old friend Rick Rule. Of course, many of you are familiar with Rick from all of his time at Sprott Inc. Rick, is it fair to say you're retired? Is that the right word?

Rick: I prefer to use the phrase "redirected." I'm down to working sort of 45-hour weeks, but I'm working only on those things that amuse me, nothing that doesn't amuse me. I've given up my securities license, so I'm no longer regulated by the Securities and Exchange Commission. I've retained my role on the board of directors of Sprott Inc., but I'm no longer employed by Sprott Inc., so I have no managerial or supervisory responsibility. So I have no regulation, almost no responsibility. The truth is life is absolutely wonderful.

Craig: That's I think something we all aspire to, to get to that point. Focus on just what you want to do, for crying out loud. And anyway, congratulations with all of that. I know it's been a process this last couple of years. Hey, and before we get started, please remember, all of this content is sponsored by Sprott Money. So please do a couple things for us. One, wherever you're listening to this information, or the monthly "Ask The Expert" segments, or the monthly things we do with Chris Vermeulen, please give us a like, a subscribe, help us spread the word.

But then also, again, Sprott Money is a bullion dealer and a bullion storage company. We've actually got three days left in our annual Spring into Summer Sale. That means you've got this weekend to go to sprottmoney.com and check out some great deals on some physical metal and also details on how you can store it safely and securely, too. So again, sprottmoney.com, but if you really want to get your questions answered and look over the whole inventory, give us a call, (888) 861-0775. Rick, it has been kind of a quiet week, actually, after last week.

And last week, it seemed like everything hinged off of that FOMC meeting that concluded. You know, that we're talking about a couple of governors looking for a rate hike now in 18 months instead of 21, but that move to increase the rate on excess reserves seems to be, drove some dollar demand, and really kind of crashed the metals. All of that back together, what did you think of what the Fed had to say? And what do you think about the, I guess in a sense, predicament the Fed finds itself in?

Rick: Well, I guess I'll come across as, you know, old and sort of cynical, but I don't pay an awful lot of attention to what they say, for two reasons. I think that their job is to misdirect, which is a polite way to say lie. And I think they also respond to circumstances, which is to say they do what they believe that they can get away with. Certainly, with the liquidity that's in the economy now, and the ostensible good economic times, I think the Fed believes that they don't have to engage in very aggressive yield management, which is to say that they can let the interest rate on the 10-year rise.

This is critically important for them, because if they need to use reducing interest rates as a tool later, the idea that they can let interest rates rise to a level that they can then reduce from later is a critically important policy tool. So, if you believe in what they do, which I don't, I think they're doing the right thing. Certainly, we have talked, Craig, you and I, before in these interviews about the reasons why I believe that precious metals are in a bull market. And one very important consideration is extraordinarily low nominal and real interest rates.

So, to the extent that the nominal rate at least rises, it will lead to some speculative disintermediation from precious metals into conventional savings products, which I think is precisely what you've seen. You asked me what I think about it. And the truth is that I'm absolutely delighted. As we also said, in earlier interviews, I believe that many of the gold and silver equities, particularly the juniors, were way ahead of themselves in price. And although I wanted to increase my weighting in the junior part of the sector, they were overpriced.

The Fed has done a bit of a job in fashioning a correction for me. And so, I'm looking forward to that. If you are trying to increase your wealth over a decade or so, the bear markets, not bull markets, are in your interest. You increase your wealth by buying wealth-generation assets when they're on sales, and bear markets are in fact sales. So, from my personal point of view, I welcome the Fed's actions, knowing that the probability is that they won't be able to continue them in the intermediate term. What they're doing is in effect subsidizing discipline speculators like myself. And I know that's not their intention, but I appreciate it nonetheless.

Craig: Well, that kind of leads to, we had a, when we announced you were going to be the guest this week, we had a number of questions come in. And a couple of them dealt with the equity markets in general, Rick. It's just kind of assumed at this point, there's so much wealth and interest tied up into the stock market. You know, whether it's public and private pensions, wealth, you know, 401(k) plans, all this kind of... And can the Fed, or will the Fed, always take actions to prevent a crash? But I guess what these questions were, well, what happens if they can't and there is a steep correction in the stock market? How would that play out for the metals and the miners?

Rick: My experience has been that precious metals stocks are stocks. And if you have a liquidity-driven sell-off, if you have a crisis in confidence, all asset classes fall. The most speculative asset classes, read junior mining stocks, among others, fall the fastest and the furthest, because the sell decision often isn't made by the investor, it's made by the margin clerk. And what he or she cares about is the debit balance. What you found in 2008, and before that, in 2000, and before that, in 1987, is that assets that are desirable assets, which is to say companies that are good companies, or, frankly, precious metals, which end up to be very good assets in periods of time when there's low social trust, although they sell off hard, they come back hard, too.

The tertiary assets, like the junior mining stocks, which are exploring for things, as opposed to having things, often stay depressed for a very long time, because their cost of capital goes up when the share price goes down, and they consume rather than generate capital. So it's important that speculators in the junior gold and silver stocks, which is to say speculators and companies that are looking for precious metals rather than owning precious metals, perform particularly poorly in liquidity crises.

As to the general equities markets, I'm of really sort of two minds. If you look at the S&P 500, it's populated by some absolutely spectacular companies. And these are companies that have benefited from extraordinarily, and in fact, artificially, low costs of capital. When your return on capital employed is high, which they uniformly are, and your cost of capital is low, the delta, which is called earnings, do very well. And when that situation goes on for an extended period of time, people anticipate that the future will be as benign as the past.

I believe 10 years from now or 15 years from now that the S&P 500 will be substantially higher than it is today. But I fear that in the interim, that we have a possibility, a strong possibility, of revisiting a liquidity-driven event not unlike 2008. So I think it depends on who you are, what your timeframes are, and how intelligently you have constructed both your psychology around your investing, but also around your portfolio relative to your personal needs for liquidity. I know that's wordy, but what I'm asking people to do is be prudent even while the big thinkers at the Fed are imprudent.

Craig: Do you think they can forestall that through monetary policy changes? You know, is there a Fed put?

Rick: I don't think so, but I've been wrong so far. You know, I joked that between Doug Casey and I, we've actually accurately predicted 17 of the last 3 declines. Liquidity covers a lot of sins. I think ultimately, arithmetic prevails, to be honest with you. The other side of me, though, looks at what I laughingly call the ascent of humankind. The fact that five young geniuses can commandeer a garage in Sunnyvale, California, and out pops Google or Facebook or something like that.

The fact is that we can generate more economic activity now with less capital than we could 30 years ago, because there's so much knowledge online. There's so much access to knowledge online. The structural costs of building and scaling businesses, particularly technology businesses, is lower. And it might be that our individual creativity and tenacity can amortize our collective stupidity. That is, it might be that when we work, we generate so much utility that we can afford the idiocy with which we vote. I don't know, but I hope so.

Craig: That's a good way to put it. Rick, I had a number of questions this week about uranium. I know the last couple times we've spoken, you've expressed your optimism after what has been a, gee, 9 or 10-year bear market, even, especially after Fukushima. But you've been excited about uranium. Just, your current thoughts? People wondering if you still are.

Rick: Of two minds. I'm very excited about the physical material. I think we are approaching the circumstance now where the utilities have to begin to contract, and they tighten up the term market, which by itself tightens up the spot market. I'm distressed by the market capitalizations of the junior uranium stocks. They've uniformly doubled or tripled. I suspect some of that's my fault. The uranium narrative is very powerful, and I'm a reasonably good communicator. And the constituency around the junior uranium stocks has been too strong. The market capitalizations are too strong.

So, ironically, this is another category that I want to really increase my exposure to, but I'm constrained in terms of doing it because of price. Your listeners will doubtless be aware that Sprott Inc., of which I'm no longer an employee but I'm still a major shareholder, is acquiring the management contract for Uranium Participation Corp, which is the largest of the physical storage mechanisms. And the proposal in front of everybody, including the regulators, will be to convert that from a corporation to a trust, improving its tax advantages for U.S. holders, and listing it on the New York stock exchange, which takes it out of the Canadian capital markets', you know, ecosystem, and puts it in the largest financial ecosystem in the world.

If that happens, and I suspect it will happen, the introduction of a uranium product to the 250,000 investors who currently hold Sprott precious metals trusts, I think has the potential to, by itself, effect change in the uranium market. It's a much [inaudible 00:12:56] market than the silver market. And I think a tax-efficient and liquid product managed by Sprott, structured as a trust and listed on the New York Stock Exchange, could be a catalyst for the uranium price to recover to at least the cost of production.

Craig: Be fun to watch. So, you're still excited, and think the fundamentals are strong.

Rick: For the material. I think the junior stocks are ahead of themselves. Maybe they're anticipating everything I've talked about. I don't know.

Craig: Maybe. Hey, there's been some news recently about potential mine nationalization, particularly down in South America. So we had a couple questions this week wondering of, you know, you got that socialist, I guess he's now the president, got, won the election in Peru. There was some news this morning concerning Bolivia. What do you think of that resource nationalization possibilities around the world?

Rick: You know, Craig, I think it's going on everywhere. It's interesting that people like you and I seem to equate political risk with political systems that we don't know. We tend to view money stolen from us in English by the legislature or parliament, according to the rule of law is somehow less gone. Resource nationalism is alive and well in the United States and Canada too. The resource nationalism that you see in South America is simply more formal resource nationalism.

Craig: Good point.

Rick: But the permitting regimes, the changing of the tax code, the increase in the corporate tax, the increased social take in North America, you know, suggests that what we're seeing in Latin America is live and well. I understand the nature of the question, and I expect the circumstance around resource investing in Latin America to deteriorate. The bastion of good governance in natural resources has never been the United States and Canada. It's always been Chile. And the consequence of that is that both good governance and a wonderful abundance of natural resources has made Chile easily the richest society in South America.

The Chileans have decided now, after 40 years of success, to snatch defeat from the jaws of victory, by changing the tax code with regards to mining, which will have, you know, a predictable outcome. Congo tried it, Angola tried it, Zimbabwe tried it, Zambia tried it. It's certain to fail. Argentina has made an absolute national sport of stealing wealth from foreigners for 100 years. The idea that they were able to sell a 100-year bond when, in the last century, they've defaulted 7 times, it's just an amusement to me.

Peru fashioned an amazing economic recovery since the end of Sendero Luminoso 20 years ago. And it appears that the Peruvian voters have decided to snatch defeat from the jaws of victory, too. What Bolivia is attempting to do is make the natural products of Bolivia, natural gas, tin, silver, copper, lithium, finished in Bolivia. That is to say, have products fabricated from them. The problem is that Bolivia is basically a pre-industrial society, and the infrastructure that's required to smelt stuff or to produce various lithium chemicals don't exist in Bolivia. Neither does the capital, the infrastructure, the educated labor force.

So, while on the face of it, this is a fairly good idea, it runs face-first into reality. I suspect it would take 20 years in Bolivia to develop the necessary processing infrastructure to beneficiate those products. In the meanwhile, over 20 years, the social rent, which is to say the taxes, the payroll, the infrastructure that they would otherwise gain from extractive industries, will be lost to Bolivians. The net present value of this decision is absolutely catastrophic. But politicians don't exist in the world of mathematics. They exist in the world of narrative. So, unfortunately, we can expect bad countries, including the United States and Canada, to get worse.

Craig: Yeah. It's kind of the way of the world. You're right. They're going the wrong way, unfortunately, at this time. But yeah, that's what the voters want sometimes, Rick. We find that out all around the world. The final question I have for you, Rick, and it kind of comes from that same category. A couple of people wrote this week wondering about the PSLV, and it's not the same, you know, questions about, you know, where do you source the metal and, you know, is there gonna be another shelf offering, that kind of stuff. These two questions were both about how safe is the PSLV silver when it's at the Royal Canadian Mint in Canada? Can you discuss that?

Rick: Yeah. I'm delighted, frankly, that your audience is becoming cynical enough that they don't trust their government. I think that's a very, very, very healthy circumstance. And I would suggest that the Royal Canadian Mint is a risk that's worth considering. In the panoply of risks that we face, I'm not belittling it. I think it's a lower risk. The PSLV product has almost no premium associated with it. The first risk that silver stackers face is the extraordinary premium associated with physical.

The second risk that some silver holders face, if they take physical possession themselves, is a personal security risk. The risk with midnight gardening is that somebody who you wouldn't normally invite over to lunch shows up with a gun. The third risk that stackers face is unallocated storage, which is to say they believe they own their silver but they don't. They have a secured or unsecured obligation with the person who is offering up the storage facility. So, in the whole range of risks that we run, my belief is that Canadian government confiscation of silver stored at the Royal Canadian Mint is fairly low. And here's the reason for that.

Overt theft on behalf of government carries risks to politicians. The idea that they would steal private property, including private property belonging to voters, runs real risks to them. They can steal from you in a way that's very popular. They can inflate. You know, they can mismanage your pension. They can do quantitative easing. And all those forms of theft, which are theft, are extremely popular with the voters. As an intelligent politician, why would you engage in a form of theft that involves real risk to you when you could engage in theft wholesale, with the click of a mouse, in a way that is popular, as opposed to unpopular with the voters?

So, while I acknowledge the questioner's concern about the honor and efficacy of the government of Canada, I would suggest that the arithmetic of theft through quantitative easing, through debt and deficits, through artificially low interest rates, through the debasement of the currency, the threat of that form of theft is much higher.

Craig: Yeah. Yeah. Wise.

Rick: I would note, by the way, on PSLV, the simple, extraordinary popularity of the product, Sprott has now stacked, that's the current parlance, in excess of 150 million ounces. And the idea that the Canadian government could easily get away with stealing the treasure owned by 250,000 people worldwide is low. As the product gets bigger, the ability that they would have to steal from the free to subsidize the many goes down, because the few becomes larger.

Craig: Yeah. No, that's a good point. Yeah. That's a very good point. And you've made a lot of good points, and that's why it's always so much fun to have you sit in on these calls, Rick. Hey, before we go, again, just a reminder of what I mentioned at the beginning of this call. Please look at the channel that you listen to this stuff on, whether it's YouTube or an audio podcast channel, and give us a like or a subscribe. It really does help us to widen the distribution of this information.

And again, of course, keep in mind, this information comes from Sprott Money, which is a bullion dealer and a bullion storage company. So the next time you're in the market for some physical metal, be sure to keep Sprott Money and sprottmoney.com in mind. Rick Rule, thank you so much for your time. It's always fascinating to talk to you, and very much appreciate you sitting in this week.

Rick: Two final words, if I might. I've been a fairly consistent buyer of Sprott stamped physical silver rounds. They make wonderful gifts, particularly to employees of firms that have Sprott on the door. The second is that I look forward to visiting with your subscribers and listeners, Craig, and I incent them to do that. Any of them that care about my thoughts about the specific stocks in their natural resource portfolio are invited to go to a website, sprottusa.com/rankings. That's plural, rankings, and list their natural resource stocks. I will personally rank them 1 to 10, 1 being best, 10 being worst, and I will comment individually on those stocks where I think my comments might have value.

In addition, if your listeners mention the word charts, I will include in my ranking the Barron's Gold Mining Index, which is the longest-running and most inclusive precious metals equity index on the planet, and a hundred-year commodity chart, which shows just how cheap physical commodities are relative to other asset classes, going back 100 years. Thanks for the opportunity, Craig. I look forward to visiting again.

Craig: Well, and, Rick, how extraordinarily generous of you. Again, I hope our listeners take you up on that. Again, hit us at sprottusa.com/rankings.

Rick: Forward slash rankings.

Craig: All right. Yeah. By all means, geez, to have a legend in the precious metal sector give his personal opinion on your top 10 holdings. Boy, you got nothing to lose, everything to gain there. So, again, Rick, thank you so much for all you do. And from everyone at Sprott Money News and sprottmoney.com, thank you for listening, and have a great weekend.