Ask The Expert - Rick Rule - September 2021

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Craig: Welcome back to the Sprott Money News "Ask The Expert" segment" for September 2021. I'm your host, Craig Hemke, and joining us this month is Rick Rule. Many of you are familiar with Rick. He's a legendary natural resource investor, formerly with Sprott, Inc. And one of the most experienced and wisest people we could talk to about the goings-on in precious metals, industrial metals, and the global economy. So, Rick, thank you so much for spending some time with me.

Rick: Always a pleasure, Craig. Thank you for having me back.

Craig: It's always great to have you on with us, Rick, and we've got a lot of great questions for you this week. We wanna thank everybody for sending them in. Be sure, if you can, to help us spread the word on these podcasts. Remember, they're sponsored by Sprott Money. So give us a like, maybe subscribe or share it on whichever channel you're listening to. And then, again, keep Sprott Money in mind anytime you're in the market for physical precious metal or a place to store it. If you've been watching the falling prices and you're looking for an opportunity to get in, we can certainly help with that. If you wanna talk precious metals, you can give us a call at 888-861-0775. You can purchase through any one of our helpful sales associates. You can also just purchase directly online. Sprottmoney.com, you'll always find a great selection, very competitive prices.

Rick, we're gonna talk about prices a little bit as we get rolling here. But, you know, I thought the first question was probably right in your wheelhouse, in that there's a lot of talk these days, particularly from the Fed, about the supply chain crunches and shortages, and how that is making this inflation that's, in fact, actually only transitory, they say. But you've been around for a while and you're a historian. You remember the 1970s and the stagflationary environment that we were in back then. And so, here's your question. Do you believe the Fed with this transitory stuff, or do you think we are entering a '70s-style stagflation?

Rick: I don't know that we're entering stagflation. We may be. I don't believe the Fed. I don't believe the Fed believes the Fed. So, I mean, the easy answer to the question is no, I don't believe the Fed, and I don't believe stagflation, or inflation, pardon me, is transitory. There are upward pressure on wages, at least for skilled and semi-skilled workers. There are definitely upward pressures on energy prices around the world. Anybody who has been to a grocery store in the last seven months, or a restaurant, or purchased services, anybody who has built a home or been involved in commercial construction can see that there is structural inflation in the market. Stagflation is that awful circumstance where inflation combines with a stalled economy, and we are seeing no evidence of a stalled economy right now. It may be that the economic boomlet, that at least those who qualify for the jobs on offer can obtain, is driven more by artificial liquidity and artificially low interest rates than it is global demand. I can't speak to that. But if we see a situation where the economy falters in the face of inflation, if we go back to classical stagflation, that's a very ugly circumstance, for those who didn't live through it in the '70s.

Craig: And that was a period, again, whether we get there or not, that was a period of pretty strong precious metals prices. Was that stagflation-related, do you think, or was that more a function of real interest rates, or what was the big driver back then?

Rick: Part of it was real interest rates. The most important near-term determinant, from my point of view, of precious metals prices is nominal and real interest rates. But more broadly, precious metals have done well whenever societies have been concerned about the purchasing power of their savings. And so the combination of negative interest rates in the face of galloping price escalations certainly drove the gold price in the '70s. We need to remember, too, when we compare what we're involved in now with the '70s, that in 1970, the price of gold was still price-controlled. So in that bull market, we started with an artificially low gold price.

Craig: Rick, question number two is something that's on a lot of people's mind. A lot of folks are concerned about the stock market and the elevated levels there. We had, as we record this, one week ago today, all these concerns about Evergrande in China. And at one point, the Dow was down 1,000 points. So a lot of folks worried about whether there's some sort of inevitable general stock market correction. What are your current thoughts about whether the gold and silver mining shares, and the precious metals themselves, would participate in that type of correction should it develop?

Rick: If we have a liquidity-driven correction, which means a 2008-style correction, where, you know, some black swan comes and causes the banks to be nervous about lending to each other and lending to people, in that circumstance, all prices fall. The decision isn't made by the individual asset holder, it's made by the margin clerk. And he or she is just interested in getting the margin loan repaid. What's interesting about prior crashes is that although gold and silver, and gold and silver shares, participate, they normally rebound fairly quickly, often because the fiscal measures that are put in place to deal with the illiquidity debase the currency. So my own suspicion is that if we saw a precipitous decline in equity markets, that gold and silver stocks, in particular, being stocks, would participate to the downside, but would come back much more quickly.

Craig: A little bit like what we saw back in February, March of last year.

Rick: Correct.

Craig: All right. Let's move on to question number three. This is an interesting one, and it doesn't come up a lot, so, interested to get your point of view. This person asks, "How do you wrap your brain around the foreign currency implications of Canadian mining companies who report their results in U.S. dollars? Is a strong U.S. dollar bullish or bearish for these Canadian shares?"

Rick: Strong U.S. dollar is very bullish for the shares, because they sell their products in U.S. dollars, but their costs are denominated in Canadian dollars. So, if the measuring stick by which you measure your income increases, while the measuring stick by which you measure your costs decrease, you get a wonderful delta in place. The circumstance that we saw three or four years ago, with the falling fuel prices and the falling Canadian dollar, which meant that the inputs that the Canadian mining community enjoyed, energy and labor, were falling at the same time that the gold price was increasing, was effectively nirvana for Canadian miners.

Craig: Is that specific to... I mean, maybe Australian miners could be looked at the same way, I suppose?

Rick: The same circumstance has benefited the Australians. The situation hasn't been as extreme in Australia, because of very strong prices for iron and coal, so the Australian dollar hasn't been as negatively impacted as the Canadian dollar has been.

Craig: All right. Rick, we're already halfway done. Let's move on to question four. This is, I guess, in a sense we've kind of addressed with the falling mining shares, but man, they've been falling, as you know, for over 12 months. So this person would like to know if you think we are close to a bottom in the mining shares perhaps, or what your thoughts are, if there's any more downside to come.

Rick: That's a nuanced question, Craig. If you'll remember the interviews that we did a year ago, I said that it was my opinion that the junior Canadian miners, in particular, were overpriced. So, one thing that we have seen is simply letting the air out of a bubble, and I think that needed to happen. If you go back a year ago, any amalgamation of butchers, bakers, and candlestick makers could float something in Canada and raise $10 million at absurd pre-money. So one of the things that happened is that a bunch of the fiction came out of the share prices, so let's get that one. Let's get that one straight. The second thing to get straight is that if you look back over prior bull markets, I've been through two in my life, 1970 to 1981, and 2000 to 2011, the duration of these bull markets has been 10 or 11 years, not 3 or 4 years. And the dimension has been spectacular, too. This gold bull market, you could say the price went from $1,000 to $1,800. Well, 1970 to 1981, gold moved from an admittedly price-controlled $35 to $850. In the 2000 to 2011 bull market, perhaps more comparable to this one, the gold price move was more moderate, only from $256 to $1,900.

So, when people say to me, "Is this bull market over? We're into it for three and a half years?" I have to say, historically, they've been of much longer dimension than that, 10 or 11 years...pardon me, duration. And in terms of dimension, $250, pardon me, to $1,900, gives you some sense of the dimension that we could be facing. The other thing, Craig, is we've talked in these interviews before about the Barron's Gold Mining Index, which I think is the best visual aid tool to the anatomy of a bull market. And what you will see is that precious metals stocks are nothing if not volatile. They almost define volatility. Which means that you could have cyclical downturns in a secular bull market that take your breath away as a speculator, but they give you no indication about the market whatsoever. I remember personally in 1975, in the midst of that grand bull market, the gold price had run from $35 to $200. And of course, everybody was really enthusiastic about a six-bagger, you know, in four and a half, five years. Then the gold price fell, from $200 to $100, shook out a lot of the new faithful, before it turned around and ran from $100 to $850.

What you are seeing now is normal and natural. It's unnerving, but it isn't the job of the market to calm your nerves. I would say, finally, Craig, one more thing. In terms of, not so much the penny dreadfuls, but in terms of the mid-cap companies, the 500,000, 600,000-ounce producers, particularly the single-asset producers, on a valuation basis, which is to say the net present value of their cash flow from proved reserves, at strip prices, not at some fanciful prices, when you compare net present value to enterprise value, these stocks are the cheapest that I've seen them in my career. So, I think it's probable that if the market hasn't bottomed, at least the fundamentals are in place for a truly stunning recovery.

Craig: Yeah, yeah, no. And, you know, do you think it's a function of...does the market need to shift its mentality, too, Rick, from, I don't wanna say growth to value, that's a little bit too, you know, broad a category, but it seems as if it's not just the mining sector, there are other sectors that are just, seem to be ignored and unloved because everyone is interested in growth these days.

Rick: I think part of what you say is true, Craig. The money, the momentum, seems to be following technology and the meme stocks. And I'm interested in technology, but I'm not particularly interested in so-called unicorns, which is to say billion-dollar companies that don't earn anything and have no prospects of earning anything. And, you know, these problems take care of themselves. They bother us individually when our portfolio isn't performing as well as portfolios that we think are less well-constructed. You know, Warren Buffet famously said that in the near term, the market is a voting machine, while in the long term, the voting is a weighing machine. Meaning that in the near term, what's popular is what's important, but in the long term, appropriate values are important. And he said if you yourself are very comfortable with the way people vote, perhaps you believe in the efficient market theory, but nobody else should.

Craig: And it's like... I'm reminded of Eric's famous line about sometimes you gotta be comfortable being in the room by yourself at the party.

Rick: That is sort of the definition of a contrarian investor, isn't it?

Craig: Yeah, yeah. No doubt. All right. We, a little bit touched on this one as well. Question number five, you're gonna have to put on your Carnac the Magnificent hat a little bit here, Rick. Will the Fed actually be able to end their current QE program in 2022, as Chairman Powell suggested last week? And if they do, how would this impact the gold price?

Rick: Well, with the caveat that I'm actually not an economist, I'm a credit analyst, the answer for me would have to be no. I think if they ended quantitative easing, that the artificial stimulus provided by artificially low interest rates would end. And I don't think that the economy could stand market interest rates. Let's do a little bit of arithmetic just for fun, Craig. Traditionally, the premier savings instrument in the world has been the U.S. 10-Year Treasury. And traditionally, over three or four decades, the U.S. 10-Year Treasury has enjoyed a positive real interest rate, which is to say that it has yielded savers money in excess of the rate of depreciation of the dollar. Were that true today, and for reference, the U.S. 10-Year Treasury yields about 125 basis points today, 1.25%, while the stated rate of inflation is at 5.5%, if you provided what has been traditional, 100 basis point real yield, that means that the yield on the U.S. 10-Year Treasury would be 6.5% today. Traditionally, too, the 30-year mortgage has been priced at a premium to the U.S. 10-Year Treasury.

So imagine the impact on, as an example, the housing market and the broad economy if the 30-year interest rate in the U.S. was at 7.5%. Imagine the impact on federal, state, and local budgets if the interest chargeable on that mountain of debt tripled or quadrupled. Imagine Joe and Jane, you know, homeowner, or worker, if the interest on their credit card and consumer durable debt doubled. I don't think there is room in the economy, as it's currently constituted, to go to positive real interest rates. And the consequence of that is that while I think they may be able to let interest rates rise some, as an example, see, and I'm just guessing, the U.S. 10-Year Treasury at 2%, or 220 basis points, I don't see them having the ability to halt yield management, or quantitative easing. I need to say, however, Craig, I've been watching forecasters for 45 years, and I'm very reminded again of a Buffet quote, which says that forecasts tell you a lot about the forecaster and not very much at all about the future. So take what I said with a grain of salt.

Craig: And I'm reminded of, back at one time, a long time ago, my stockbroker days, "The Wall Street Journal" conducted a survey of people in New York, economists and the like, where they thought the 10-year note would be a year from now, and the person who got it correct was a doorman. So that's a difficult...historically, a tough thing to forecast. All right, Rick, one last question. I'm glad we got a chance to ask you this one. It's not necessarily precious metals related, but you alluded to you and I speaking a few times earlier this year on this channel, and we talked about uranium, and what Sprott, Inc. was doing with uranium, and the positive situation that looked like was developing for uranium. And so, this question, the final one is, "Can you please explain the long-term bullish or bearish factors for uranium?"

Rick: Both bullish and bearish are easy to do. The bullish scenario is this. Uranium, just in the United States market, produces 14% of all power generated, and 20% of baseload power. Which means that at least for 10 years, uranium nuclear power is part of the energy mix, worldwide. Utilization of nuclear power is growing fairly rapidly worldwide, because it doesn't generate carbon, and it generates reliable baseload power. So, demand for uranium, in the intermediate term, 10 to 20 years, is pretty much assured, but supply is much less secure. When we talked a year ago, the case I made was that the International Energy Agency had said that the fully-loaded cost to produce a pound of uranium, not just the mine site cost, but the exploration costs, the cost of capital, G&A, was about 60 U.S. dollars a pound. So the industry made the stuff for $60, and they sold it for $30, losing 30 bucks a pound. And, of course, being miners, trying to make it up on volume.

Doing that 100 million times a year meant that the industry was losing $3 billion a year, which was fairly boring. So I postulated on your show that the choice was fairly simple. Either the price of uranium would go up or the lights would go out. And I suggested that it was much more likely that the price of uranium would go up. What happened in the interim is that Sprott, as you suggest, got control of the management contract of Uranium Participation Corp., rebranded it to Sprott Physical Uranium Trust, experienced massive inflows, and was able to use those inflows to tighten up the spot market, taking the price of uranium from below $32 to above $50, really, truly shaking up the market. My suspicion is that in the next two or three years, the price of uranium goes up to a price that at least allows the industry to earn their cost of capital, which is to say $60. And much more probably goes up to $70. In that scenario, the price of the companies, uniformly, rises from here.

I need to tell you that the junior uranium stocks, which provided me so much by way of, if you will, fireworks in the last bull market, is almost uniformly overpriced now. They've declined in price just in the last week fairly precipitously, but we had seen the prices of the junior uranium companies begin to discount $50 and $55 uranium, all the way back to the point in time when uranium was selling for $40. So it wouldn't surprise me to see the same sort of malaise in uranium stocks that we've witnessed in gold and silver stocks, but that malaise will be, if it occurs, a 12 to 18-month phenomenon, not a 5-year phenomenon. The bear case for uranium is equally simple to talk about. A Three Mile Island, a Chernobyl, a Fukushima, one more plant failure, particularly if it were a plant failure in China, which is relying increasingly on nuclear power, would set back the nuclear renaissance very dramatically.

Craig: Headline risk.

Rick: Headline. I'm not good at clickbait. Well, you know, I am. I am, now that I think about it. I've got a headline for you. A boring headline. But the real silver squeeze, the real gold squeeze, is in front of us. For reasons of arithmetic, for reasons of reversion to mean, right now, the market share of precious metals and precious metals-related securities in the U.S. market is about one-half of 1%. Meaning that precious metals comprise about one-half of 1% of all savings and investment products in the United States. The three-decade mean is between 1.5% and 2%. If the quantitative easing debt and deficits and negative real interest rates can conspire between them to increase the market share of precious metals only to the three-decade mean, that means that demand for precious metals and precious metals securities will triple. And that's precisely what I think happens over the next five years.

Does it happen over the next five days? Does it happen between now and a three-day weekend, which seems to be the time span of most speculators? I can't say. But reversion to mean is a statistical expectation. Particularly, it's a statistical expectation when the economic winds are in the sails of precious metals and precious metals securities. So I would say to those listeners of yours who have some investments in precious metals and precious metals securities to review the reasons why they became long, and ask themselves whether those reasons are still valid, or more valid, or invalid, and understand that just because something has to happen, just because something is inevitable, it doesn't mean it's imminent. But I would suggest that people who believe that the reasons for the ascent in prices in precious metals and precious metals equities, if they are in place, that your position should be in place too.

Craig: Yeah. No. It's funny you say that. A couple times last week, I had to remind everybody at "TF Metals Report" that the rationale you used for acquiring precious metal last year at this time, or share, I mean, [inaudible 00:23:31] has anything fundamentally changed there, or have your metals gotten more valuable, even though the price might be down?

Rick: Correct.

Craig: And Rick, as we wrap up, you've always been very generous in the past in your offer to assess everyone's mining portfolio. I would assume you're still willing to do that. Can you share that with us?

Rick: I definitely enjoy that, for people who aren't familiar with the offer, and for those who are. You can reach me at a new email address, ruleinvestmentmedia.com. You'll find a drop-down form there. Enter your natural resource portfolio. Please no crypto, please no pot stocks, please no meme stocks or tech stocks, natural resource stocks. I'll rank them 1 to 10, 1 being best, 10 being worst. I'll comment on individual issues, where I think my comments might have value. And for those who mention charts in the question section, I will add a copy of the Barron's Gold Mining chart going back 60 years, the best visual aid to understanding gold bull and bear markets. And I'll also include a hundred-year commodities chart, which will talk about just how cheap other industrial commodities are relative to other financial asset classes, this time going back 100 years. Ruleinvestmentmedia.com.

Craig: Rule investment...I'm gonna take you up on that myself. My only fear is that you're gonna send back and go, "All 10 of these are dogs, Craig. What are you... You need some help." Again, Rick, thank you so much. And again, everybody listening, please support Sprott Money, they're the sponsor of these podcasts. So we wanna thank them for putting this information out there for you to enjoy. Again, sprottmoney.com is the website, but if you're looking for physical precious metal or a place to store it, the number you can call is 888-861-0775. Rick Rule, thank you so much for your time. This has been fascinating.

Rick: Always a pleasure, Craig. I look forward to doing it again.

Craig: And from all of us here at Sprott Money News and sprottmoney.com, thank you for listening. We'll have another "Ask The Expert" segment next month.