Volatile Stock Market Makes for a ‘Great Time to Consider Precious Metals - Monthly Wrap Up

Craig: Well, greetings again to everybody out there from Sprott Money News at sprottmoney.com. It's now 2022, January 25th 2022 as I record this. This is your first "Monthly Wrap Up" segment of the year. I'm your usual host, Craig Hemke, and joining us to kick off 2022 is our old friend Rick Rule. Many of you are familiar with Rick. I know a lot of you have sent in questions for Rick, so I look forward to speaking with him. Rick, welcome back. Always good to talk to you.

Rick: Craig, thank you for having me back. I hope that for you and your listeners, this is both a happy and a prosperous new year.

Craig: Yeah, so far at least. And hey, look, everybody out there, just keep in mind, this information is provided free of charge by your friends at Sprott Money. All they ask in return is that maybe you shoot them a like, you share this link, you subscribe to Sprott Money on whatever channel you're listening to. That will help them cast an even wider net as we go through the year. I think that's a pretty low cost thing for you to do. Just send them a like, send them a subscribe, and help them out, and help us get the word out about physical sound money and precious metals.

Rick, it has been quite the start to the year. The stock market in the U.S. gyrating like crazy flirting with one of the worst Januaries it's ever had. It seems like much of this volatility is predicated on the first FOMC meeting of the year, which is in progress as you and I record here on Tuesday, the 25th. All this stuff out there, Rick, that we've seen before, whether it's 2010 or 2018, you know about, "Oh, yeah, the Feds are gonna be hiking interest rates, and rates are gonna normalize. They're gonna draw down the balance sheet," and it never seems to happen, but everybody's falling for it again. How do you look at this, this kind of macro picture, monetary picture as the year begins?

Rick: Craig, I'm frankly surprised that the volatility has sustained as it is. I would have expected it to come earlier. Expected it because of contradictory forces. There's a lot to like in the economy frankly, there's so much cash around, so much cash on the sidelines. That's the good news. The bad news is that a lot of it's counterfeit, you know? It didn't come out of the economy, but rather it came out of the printing press or more properly out of keystrokes. It's always amusing to me that people, when the market is in uptrend, people don't refer to it as volatility, they refer to it as increases. When the market flirts with the red side, it's all of a sudden volatility, it's all of a sudden a very bad thing. That tells you something about the commitment that people have to their stocks. If people thought that the companies were attracted to buy, they would be welcoming them going lower in price so that they could acquire assets cheaper and cheaper and cheaper. If investors by and large had the courage of their convictions, they would look at share market declines as a good thing. The same way that I look at declines in the gold and silver price as a good thing. If you'd like to buy them, you want to see them lower as opposed to higher. So partly, I see this volatility as a function of the fact that people are uncertain as to the value of the things that they have been taught to buy on dips.

Certainly the monetary circumstance is confusing, and I can understand why people would be nervous about it. On the one hand, the economy is nominally in good shape, with jobs growth fairly high, and as I say, all kinds of cash on the sidelines. And I think the Fed would very much like to raise the interest rates, like to merely because I think they think it's highly likely that in an economic slowdown, the only tool they have left in their arsenal is lowering the interest rates. And you can't lower the interest rates from zero, you know, from a low base. The problem with that is, and we've seen it with regards to the lack of faith in the equities markets, if you raise interest rates, you hurt the bond market and you wound the equity market, and you run the risk of hurting the broad economy. One of the things that has occurred to me, Craig, and I think it would be useful stats for your listeners, is if interest rates were to return to their 40 year means, the interest rate would have to go much, much, much higher.

The U.S. 10-year treasury traditionally has traded at a premium to the underlying rate of inflation, which is to say it has had a real rate of return. If you believe the government statistics that suggests that the rate of deterioration of the U.S. dollar at the consumer level is 6.5%, the arithmetic around the U.S. 10-year treasury is it yields 1.6% or 1.7%. If it reverted to mean it would have to yield 7%. So, Craig, your listeners have to think about the impact on the U.S. economy, if the interest carry for the federal government, state and local governments, or for the $14 trillion in household debts was to quadruple. Just as interestingly, the 30-year fixed mortgage rate traditionally has sold at a yield that was at a premium to the 10-year treasury. So if the treasury had to go to 7%, the 30-year fixed would have to go to 7% or 8%. Imagine the impact on first time homebuyers if the interest rate on the 30-year treasury doubled or tripled. So, the point of all this is simply that, well, I think they'd like to raise interest rates, they are gonna have to be extremely careful about it. And my suspicion is, like they have for the last 30 years at the first signs of distress, I think they'll have to back off and lower them again.

Craig: Yeah. You know, it's funny as you mentioned it, Rick, I've been laughing to myself thinking I don't think I can ever recall a CNBC special about markets in turmoil because they went up 5% in five days. That does not seem to...

Rick: That's a good point. That's a good point. Let's not blame CNBC, in fact, let's blame the people who watch CNBC, and investors who don't have either the knowledge and the courage of their convictions. If CNBC thought there was a lot of money or a lot of legitimacy for their advertisers in telling the truth, for sure they would. It's the market that's dictating that behavior.

Craig: Yeah. All right. Well, let me ask you this, Rick, you talked about inflation and real rates of return, one of the things confounded me and pretty much everybody in this space over the last 15 months is that that long term relationship between gold prices and real interest rates has been, I don't want to say broken, but maybe discorrelated, put on hold temporarily. Is it because the market has believed and continues to believe in this transitory narrative, that sharply negative real rates like high inflation are transitory, or is there something else going on here?

Rick: I think if you look at history, you can understand this fairly well. As you know, Craig, I frequently refer to the Barron's Gold Mining Index, which is an equity index that goes back 60 years. And what you'll see is that, as an example, in the period 1968-1969, to about 1974, there was a real lag between perceptions of inflation and inflation statistics and investor action. 1975 when the interest rate rose, that that was in fact transitory, but the gold price fell from $200 to $100 an ounce. The fact that the real interest rates were sharply negative didn't make much of a difference on investor perceptions. The same thing happened in the 1999-2002 period, despite the fact that we saw a really ugly deterioration in real yields. It took two or three years for the gold price to react. I think investor perceptions, Craig, have been shaped by their experiences in the last 40 years, where overall, the interest yield on the U.S. 10-year treasury fell from 15.6% to a low of 1%, and now sort of 1.6%. These have been very, very, very benign times that we've enjoyed. This is certainly the longest and most dramatic bull market in bonds in my lifetime. But I believe that that 40-year benign period is over. I believe that we're in for a change. And I believe that people's actions will respond to the perceptions after we have undone the expectation of a continuation of a benign climate.

People who were concerned about inflation in the period of the '80s and the '90s in particular were in fact wrong. We enjoyed the aftermath of ultra high interest rates and the cleansing that that caused in terms of inflationary expectation. But we also enjoyed benefits from technology and productivity, and tremendous benefits from global trade and expansion. We enjoyed benefits too from the relatively smaller growth of government relative to the economy. All of those trends have turned around. So for better or for worse, we're gonna have to unlearn the behavior that we've learned over the last 40 years, and adjust ourselves to a new reality. But that takes time. People's expectation of the future is set by their experience in the immediate past. And their experience for the last 40 years, granted there have been some punctuations like 2008, but people's experience in the immediate past is fairly benign, even in those punctuations where the equity indexes fell by 50%. Those declines were undone over time. And so I really believe that a whole bunch of people around the world are gonna have to relearn some old lessons.

Craig: Well, yeah, I would imagine that's right. And the Fed themselves have always admitted that any policy moves they make like raising the Fed funds rate takes at least six, nine months to have any impact. Now, maybe perceptions change quicker here in the 21st century than they used to, but nonetheless, I would think that those inflation expectations are gonna have some more time to get rooted in the months ahead. And I guess that'd be my, if we talk this kind of macro stuff, Rick, that would be my last question for it. I mentioned the FOMC meeting as we speak, and the latest headlines, and the press conference coming on Wednesday. To me this feels a lot like the same plate spinning charade that they pulled in 2009 coming out of the first QE, where they said that was just a one off, that was...you know, that was never...you know, that wasn't debt monetization and all that kind of stuff. And then by 2010 here, there came QE2, or, you know, you got too this time in 2018 when they'd run off $700 billion or so from the balance sheet over the last 5 years and got the 10-year over to 3%, and so the stock market fell 20% in 20 days, and you got the what's now called the Powell Pivot. Are we in that sort of, I guess, landscape again as 2022 begins?

Rick: This would be a wonderful time to find out. There is a lot of debt, but there's an awful lot of cash on the sidelines. And I think that the economy could take higher interest rates, although it would be painful to many. It would probably be useful for our society if investors came to understand that they weren't entitled to unending bull markets. Unfortunately, for the very large institutional investors, the circumstance that they find themselves in is almost untenable. Imagine yourself running a very large endowment or a very large pension fund, you're responsible for the wellbeing of retirement retirees 30 years from now. Imagine yourself running the traditional institutional portfolio for the last 40 years, which is 60% equity, 40% debt. The debt allegedly doing well in tougher times, the equity in better times. The debt being the guaranteed yield, the safe return. Imagine yourself coming to understand that 40% of your portfolio is yielding a negative real rate of return, which is to say that 40% of your portfolio, that part of the portfolio which you are hoping is the bedrock of your beneficiaries' retirements, is costing them 4% or 5% of their purchasing power compounded over time. And now imagine that you have to rebalance a portfolio away from its bedrock to overcome the deterioration in value of 40% of your portfolio. How do you do it?

Craig: Precisely.

Rick: I'm delighted, frankly, that I'm not a Fed governor. And I'm delighted too that I'm not running Norges Bank or the Stanford University endowment or, you know, teachers investment and annuity. These people find themselves, I think, or are going to find themselves in a very, very, very difficult position.

Craig: It's good to be an old guy, Rick, we don't have to worry about that stuff. Let somebody else worry about it.

Rick: How true. How true. How true.

Craig: All right. Now, ever since Sprott Money put out that you were gonna be the guest this month, we did take some questions on...as we kind of move into the latter stages of this podcast, do you mind if I hit you with a few?

Rick: I'd be delighted, thank you.

Craig: Some folks wanna know about, you know, you've been a proponent of uranium, and deservedly so and rightfully so, and even I have benefited from you turning me on to, you know, how that market has turned in the last, whatever, 12 months. You know, there's this movement now to consider nuclear as sustainable and green energy and that sort of thing, and obviously silver factors into that equation too. Can you address the two of those, and just your current thoughts on both uranium and silver, but also mainly kind of from that green energy, you know, electric car, environmental perspective?

Rick: Yeah, happily. I have to say that's three different questions, but I'll try to address them...

Craig: I suppose that's true, yeah.

Rick: I'll try to address them sequentially. I think irrespective of people's prejudices, that nuclear is an important part of our future. When I say ours, I don't just mean the United States and Canada, I'm talking about the entire world. It is the most efficient form of baseload energy relative to the amount of nuclear fuel that is required to generate a given amount of electricity. So countries that are net fuel importers, countries like Korea, Japan, China, Taiwan, but also including countries like India and increasingly in Continental Europe, will have to use more nuclear power if they have any hope of meeting their carbon protocol pledges. They have no second choice. As an investment theme, what is attractive about uranium to me and has been, the reason I've been harping on it in your show for three years, is the fact that on a global basis, the incentive price to bring new uranium supplies online is about $60 a pound. And by the way, that number is increasing rapidly with supply chain inflation, and social rents, taxes, and royalties. So the industry is making this stuff for $60 and they're selling that for $45, which is to say that the industry is in liquidation.

The only way that the world is going to enjoy sufficient baseload energy, particularly sufficient baseload energy that isn't carbon generating, is to increase, not decrease the supplies of uranium. Now, about eight months ago or nine months ago, that narrative came to be more broadly accepted by the investors. And unfortunately for those same investors, they embraced that narrative with too much enthusiasm. And the equity indexes around uranium rose much more rapidly than the uranium price, to the point where probably eight months ago I turned bearish on the uranium equities, not because I didn't think that the uranium price would go up, but rather because the equity indexes had discounted higher uranium prices. Then three things happened, Craig. The first was that our namesake organization, Sprott, a different part of Sprott, but one still of Eric's making, took over Uranium Participation Corp., renamed it to Sprott Physical Uranium Trust, raised well over a billion dollars, and bought a substantial amount of the overhang, the surplus inventory in the spot market. There's a joke now that the spot market in terms of liquidity is actually the Sprott market. And that was a useful thing.

The second thing that happened is that the winds of political change around green energy began to blow in Japan. I've been saying for years that the price of uranium would begin to recover as the pace of Japanese restarts picked up. And the Japanese government now has between 18 and 20 of their existing plants in for permits for restart, finally, after five or six years, beginning to be with the assent of the Japanese voter. What that means is that a substantial amount of inventory which has been sort of nebulous, sort of held for sale post-Fukushima, comes off the market and begins to be consumed again. The third thing that happened, Craig, is that the uranium stocks as measured by the ETFs have fallen by 42% from their highs. So at the same time that the outlook has become more attractive for uranium, and the timeline to a turn in the uranium price is shortened, the stocks have fallen in price. That's a wonderful set of circumstances.

I made my first new allocation to the sector last week. I was rewarded for my genius by the sector immediately following. And I intend to make a second installment on my...increasing my position in the uranium equities in the coming week. Whether or not the uranium market continues...the uranium equities continue to fall, I think it's a matter of perception. I think in the 3-year time frame, that the price of uranium will likely break through $70, and I think that a well composed uranium portfolio, uranium equities portfolio, in the 2 to 3-year timeframe will double or triple, with some stocks doing better than that. I need to say, Craig, since you've given me the opportunity, that I'm excited enough about this, that Rule Investment Media is doing a 6-hour online symposium called uranium bootcamp on March 19th, and at the end of this interview, I'll give people a web address where they can get information about that. We'll be having the spokespeople from Kazatomprom, the largest uranium producer in the world, Cameco, the largest producer in North America, and China General Nuclear, the China General Nuclear people talking about the Chinese outlook on the uranium price, which I think will be very, very, very useful. I'm very excited about uranium. So thank you for the inadvertent ability for me to do a commercial for my uranium summit. Moving on... Just go ahead, sorry.

Craig: Rick, the more information the better. So I'm glad you're able to work that in.

Rick: Great. On the silver side, that's an interesting question too, and I'm delighted that you asked it from the sort of environmental and green perspective. A lot of people don't understand the utility of silver in microcircuitry and microelectronic applications. The durability of silver, the conductivity of silver, the malleability of silver, that means that it has literally thousands of microelectronic applications. And as both electric vehicles and conventional vehicles begin to rely more on electric locomotion, but also electric intelligence, the demand for silver in all kinds of vehicles, not merely electric, continues. The other theme or themes, I think, that people need to understand about silver with regards to the green economy is that the reflectivity of silver makes it, if you will, the critical component in solar panels, and to the extent that the world has decided to become more reliant on solar energy, there will be, I think, a continued increase in demand for silver for that.

The other thing that many people don't understand, Craig, is silver's incredible properties as a germicide. There are increasing uses of silver not only in micro-germicidal applications, like wound treatment, eye treatment, body treatment, but more importantly, in terms of the tonnage of silver consumed in water and pollution control treatment, where one of the primary germicides in tertiary treatment plants is in fact silver. So the silver applications, the industrial applications of silver in the green economy, I think are very, very misunderstood and misstated. I think too, Craig, and again, I'll refer to the Barron's Gold Mining Index, if you look back at the uptake of silver as an investment medium, which is to say as a medium of exchange, or as money, in my experience over 45 years, silver is a second half mover in a precious metals bull market. The first half, maybe even the first two thirds of a precious metals bull market are generally dominated by gold. When the momentum has been established by gold, silver, because of its heightened volatility, but also frankly its lower unit cost, means that in my experience, silver leads gold in the second half, or at least in the third third of a precious metals bull market.

If past is prologue, depending on when you believe that the precious metals bull market that we're in now started, what that means is that, you know, we may be a year away, we may be two years away from the period of time when not as an industrial material but rather as a monetary material, silver begins to really shine. And as we've talked about before, the most volatile asset class in the precious metals business that I'm aware of are the high quality silver equities. When silver moves, if the generalist investor comes into the space, the amount of money that the generalist investor traditionally has brought to bear on the silver market when the narrative is strong, is greater than the ability of the market capitalization of the silver companies to accept it. I'm not saying that that's gonna happen this time, but it is something that I'm personally, as a speculator, betting on.

Craig: And it moves so quickly. Again, well, I mean, silver went sideways for 7 years, and then we've got $10 in 3 weeks.

Rick: Correct. Precious metals generally do that. They punish you for extended periods of time, and then they reward you extravagantly over fairly small periods of time. And if you're not in place, if you're not enduring the agony of the time when they're not rewarding you, you generally miss the reward when it comes.

Craig: Right. Right. Rick, let's just hit maybe a couple of other questions in our time remaining. And I want to thank everybody for sending them in. You can always submit questions through just the email address submissions@sprottmoney.com whenever we have a guest for these programs. Here's kind of a good general question about the shares, Rick, is, is it in your experience that when an explorer has multiple projects, and there's certainly no shortage of those kinds of companies out there, and one is really advanced and ready for a takeover, but the other projects are still getting drilled and permitted, does the major come in and buy the entire company, or will, you know, the major maybe just by a specific project out from under that company?

Rick: It's difficult to come with a one-size-fits-all answer to that. What we should know from human behavior is that the management team of the company that is being taken over would like continued employment. So to the extent that a company has four or five projects, and to the extent that the major's interest is focused around one, very often as part of a takeover, there will be a spin out of one or more assets or cash so that the departing management team can continue to be employed. I know that sounds fairly cynical, but it's true, and there probably isn't an economic reason for this other than the economic well being of the departing management team, and to facilitate a transaction. But human behavior suggests that the return on capital employed that interest management most is the return on their own employment, and the fact that there is a corpse, if you will, for them to manage and continue to draw salary and emolument from is often an important part of facilitating a transaction.

Craig: Yeah. Yeah. No, that's right. All right, well, let me ask you one about a specific company. There are obviously a lot of companies that you invest in and keep your eyes on, but one we got a couple of questions on asking you to comment is a company I don't know much about, but it's called Filo Mining. Can you maybe address what's been going on there and your interest in that?

Rick: Yeah, I love it. Filo Mining is a company that's in the Lundin stable of companies, the Lundin's being one of the most successful mine financiers of the last 40 years. It was spun out of an exploration vehicle called Josemaria Resources. It is exploring in the very high Andes. By high, I mean 4,000 meters plus in Argentina. And I would suggest that ultimately both Josemaria and Filo will be mines. That's a fairly aggressive statement because there's a lot of things wrong with the deposits. First of all, mining at 4,000 meters, almost 16,000 feet, is a bit of a challenge. The second is that the history of Argentina is not a history of good government or fiscal stability, and it's a place where you would invest $5 billion or $6 billion to build a very large mine only haltingly. The attraction of Josemaria and Filo is that they have discovered truly gigantic mineral deposits, mineral deposits that, well, they might not make it even to a production decision in the next two or three years, will become important copper, gold, silver producers, and I think will be taken over in time. It's interesting to note that the Lundins took back total control of Josemaria very recently or at least have announced their intention to do that in their namesake operating mining company, which is Lundin Mines.

And my personal gut feeling is that ultimately they will reabsorb Filo back into Lundin too. The proximity of Josemaria to Filo suggests that there could be synergies building these very large mines simultaneously. When I say very large, we're talking about upfront capital expenditures in the billions, and to the extent that you could combine infrastructure or other technologies, saving a billion here and a billion there, that would be a very good thing. Now this is speculation on my part, but what isn't speculation is that both Josemaria and Filo now have made what are potentially tier one discoveries, which is to say discoveries of global significance that will be producing for decades. The downside is that the negotiations with the Argentine government will be torturous. These mines are located in llama pasture, way, way, way back and beyond and very very, very high, but the good news is that they're gigantic and rich.

Craig: Well, if the metal's there, sometimes you just got to go get it.

Rick: Yep, Correct.

Craig: Well now, Rick, in the past, you've been very generous to the listeners and offering just your own personal opinion of some of their holdings. We did get some other questions, but we're kind of out of time. So is that something you can offer again if somebody emails you their top 10 holdings or something like that?

Rick: I can. With your indulgence, I have a variety of offers to make for them here.

Craig: Please, go right ahead.

Rick: The first is, as always, if you care about my thoughts around natural resources specific to your portfolio, I'm happy to share them. Any of your listeners who go to our website, ruleinvestmentmedia.com, and enter their natural resource stocks. Please by the way, no technology stocks, please no pot stocks, please no cryptocurrencies, keep me to what I understand. I'll rank those stocks 1 to 10, and I'll make comments on individual issues where I think my comments might have value. If you care about sort of an illustrative depiction of natural resource and precious metals markets, in the Questions and Comments section at Rule Investment Media, say charts and I'll send you the Barron's Gold Mining Index, and I'll also send the Goldman Sachs Century Commodity Index, which shows just how cheap commodities are relative to other asset classes going back 100 years.

If you care about the uranium market, mention uranium bootcamp, or just bootcamp, and I'll send you information on how to attend our six hour webinar on uranium investment. Finally, in fact, two more offers. The first is that my old friend Frank Trotter and I, Frank being the founder of EverBank, something that many of your listeners will remember with fondness, are starting a new bank focused to some measure on precious metals. Anybody who cares about this bank, borrowing against their physical precious metals as an example, but also lending to natural resource based businesses, and deposit products denominated in precious metals and foreign currencies and equity indexes, should in the Question and Comment section mark bank. Finally, as a consequence of my being retired, I learned that I have a fair amount of commercial freedom of speech. Any of your listeners who care about what I'm doing with my own money in the private placement space, this is only for accredited investors, if you write placements, I will distribute to you free, at least for the time being, notification of any private placement I'm doing with my own money. It used to be that I couldn't do this because it was regarded as solicitation. But since I'm no longer a stockbroker, and I don't make any money at it, and I'm doing it for free, this is simply commercial freedom of speech. So if you are an accredited investor and you want notifications, not of every private placement that comes out of the universe that I'm familiar with, but rather every private placement where I'm writing a check myself, note placement in either the Question or the Comments section at Rule Investment Media. So rankings, chart, bootcamp, bank, and placements, any and all.

Craig: Rick, yeah, I gotta tell you, you are so incredibly generous, not only with the sharing of your experience and the wisdom you've gained, but just sharing of your time coming on these programs with us at Sprott Money, and helping people kind of see the way. That's just tremendous that you would offer that. Thank you so much.

Rick: Well, it's a huge pleasure for me. This is my idea of retirement, meaning I work hard, but I don't do anything at all that's unpleasant for me.

Craig: Right, exactly. Exactly. Well, and again, thank you so much for sharing that. And again, please everybody, please thank Sprott Money for sharing this information with you. You can like, subscribe, share this information on whichever channel you're on, but of course Sprott Money's bullion dealer too. So keep them in mind for your physical precious metal purchases and for storing that metal too. And, I mean, I mentioned the stock market going all over the board these first couple of weeks of 2022, I mean, it's always a good time to consider precious metals, but maybe in particular now. You can get the best price if you make sure you do your homework, but you'll find Sprott Money prices are hard to beat, so you can buy them directly online through sprottmoney.com. If you have any questions, or you wanna talk to a human being, always give Sprott Money a call too, 888-861-0775, and someone will be on the line and happy to help you out with any questions that you have. So again, thanks to Sprott Money for putting this information out there, and thanks, a massive thanks really to Rick Rule for all you do for the precious metals community, and for offering all your expertise and being willing to share it. Thank you, Rick.

Rick: Craig, thanks for the opportunity. I enjoy participating in anything in Sprott.

Craig: And we love having you on too, I know that. And from all of us here at Sprott Money News, sprottmoney.com, thank you for listening. We'll have another "Monthly Wrap Up" segment in February.