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Monthly Wrap Up

Drawing the Curtain on a Crazy Month - Monthly Wrap Up

MWU September

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After Powell pulled a 180 from his July FOMC in order to stop “transitory” inflation, markets have fallen sharply. Now there are hints of trouble for the central bankers ahead. Where the heck do we go in October? Host Craig Hemke sits down with legendary natural resource investor Rick Rule to break down all the gold and silver news you need.

In this edition of The Monthly Wrap-Up, you’ll hear:

  • Why it’s in your interest for gold to go lower right now
  • How this moment is “tailor made” to make money
  • Plus: will we ever stop believing in the Fed?

“At least in the U.S. economy, we probably have room to tighten a little more. I don’t know how much more. It’s worthy to note that the 30-year fixed mortgage rate is now over 7. Which means that the 30-year fixed rate has doubled in a year, and we are beginning to see the impact, both in property prices and inventory for sale. Albeit the sellers’ expectations are fairly sticky. But at present, it seems like more of the same in the sense that nominal interest rates are higher in the U.S. than the rest of the world. The action by the Bank of England will take down nominal rates in England, which means that more money will flow out of Britain and into the United States. Hence, at least for a little while, a stronger U.S. dollar.”

To hear Rick’s full thoughts on the month’s gold and silver news, listen here:  

Craig: Welcome back to your Sprott Money news, sprottmoney.com monthly wrap-up for the month of September 2022. I'm your host, Craig Hemke. And joining us to draw the curtain on what has been a crazy month is everyone's favorite natural resource, retired investor, Rick Rule. Thank you, Rick, it's always good to visit with you.

Rick: Craig, a pleasure to be with you. Thank you for having me back.

Craig: Hey, you are retired now, but I know people can find you in a number of places. If people want to keep track of what you're doing, where can they find you?

Rick: The best place to find me is my website, ruleinvestmentmedia.com. You may recall, Craig, that I give an incentive for people to do that. I rank people's natural resource portfolios. If they go to the website and enter their natural resource stocks, I personally will rank them1 to 10, 1 best, 10 worst. And I will comment on individual issues where I think my comment might have value.

Craig: And for all of us who have endured the last five months, I'd say that's extremely valuable. So just go to ruleinvestmentmedia.com?

Rick: Correct.

Craig: Man, how can you not take Rick up on that for God's sake? And you can also find... Here comes a segue my friend. You can also find some of the best deals on precious metals and precious metal storage, of course, at sprottmoney.com. Always great deals. And again, what a great time to be adding to your stack while prices are falling, dollar-cost averaging, they call that. So call them up at 888-861-0775 to thank them for putting this content out. But even if you're not in the market right now, thank them by giving it a Like or a Subscribe on whichever channel you are listening to these podcasts that'll help them cast a wider net and get great information like this out to a wider audience.

Rick, it has been a crazy month. I think we can summarize it with the events that began the month with Powell at Jackson Hole doing a 180 from his July FOMC, and really drawing the line on trying to stop inflation, the inflation that, of course, was transitory just as recently as a year ago. At the September FOMC, they pledged another 125 basis points and rate hikes for the end of the year, and the markets have fallen sharply, really any risk-added asset has fallen sharply through the course of the month.

As we wrap up the month, Rick, some hints of trouble for the central bankers, with the Bank of England having to capitulate and actually do some QE today to halt what is some terrible liquidity and margin call issues in some of their pension funds and other private wealth. So, Rick, as we wrap up the month, where the heck do we go in October?

Rick: Well, I think at least in the U.S. economy, we probably have room to tighten a little more. I don't know how much more. It's worthy to note that the 30-year fixed mortgage rate is now over 7, which means that the 30-year fixed rate has doubled in a year. And we are beginning to see the impact both in property prices and inventory for sale. Albeit, the sellers' expectations are fairly sticky. But at present, it seems like more of the same in the sense that nominal interest rates are higher in the U.S. than the rest of the world. The action by the Bank of England will take down nominal interest rates in Britain, which means that more money will flow out of Britain and into the United States. Hence, at least for a little while, a stronger US dollar.

It's worthy to note that if Mr. Powell was really serious about stemming inflation, given that he has no control over the fiscal mechanisms in Congress that have created the inflation, all he would have to do is get out of the way of interest rates. Over the last 40 years, a return to mean would mean a positive real yield with the inflation rate at the United States at 9% that would imply a free market interest rate on the US 10-year treasury at 10%. That would certainly take care of inflation.

Craig: Yeah, that's for sure.

Rick: So what Mr. Powell is trying to do is run a politically expedient mid-course. And we'll see how long he's able to get away with that.

Craig: It makes me think about how I guess that they've run things now for decades really, but just even in the last 12 months, Rick, I mean, it was...a year ago at this time inflation was transitory. And so when they should have already been seeing the impact of these policies and inflation worsening and begun to tighten, then they held off. And now, we get Kashkari this week saying, "Yeah, well, we're not going to loosen anytime too soon this time," which is exactly opposite of what they were saying a year ago. Are they ever going to get it? Are they ever going to understand that their policy changes take time?

Rick: I think a better question might be, are we ever going to get it?

Craig: Yeah, right.

Rick: Are we ever going to stop believing in the Fed? Are we ever going to stop believing that the political class has our interest in mind or that the Fed actually has our back? Craig, what do you think would happen if they gave a treasury auction like in the 1990s and nobody came? These are interesting questions. And, you know, I think back to something you said at the beginning of the show, I realize that customers of Sprott Money are uncomfortable with the fact that gold hasn't gone up in the circumstance with as much turmoil as we've had. The fact is that gold as an asset class has done extremely well, extremely well, particularly given the strength in the medium of exchange that's dominated in.

Now, I'm a bit unusual relative to some of your listeners in the sense that since I would like to buy more gold personally, the fact that it's declined in price is paradoxically a good thing for me. Were the gold price to rise to $2,300, I wouldn't sell any. Were the price to fall to $1,500, I'd buy a lot. So, paradoxically, it's in my personal interest to see the gold and the silver price go lower. I'm not sure whether that will occur, but I would urge many of your listeners who are feeling discomfort at the response of gold to policy to think about their reason for owning gold and think about how they would like to shelter their wealth in various asset classes. Many of your listeners might find, paradoxically, that despite the fact that their own inventories are declining at least nominally in price measured by U.S. dollars, it would be in their interest to have the price of gold go lower rather than higher so that they could increase their exposure. I realized that you have some listeners who are all in, who can't affect that sort of strategy, and they have my sympathy.

Craig: Yeah, no, absolutely. But I think most of us do recognize, I mean, we're kind of in the long game knowing where the end of this Keynesian experiment is taking us. Do you think, Rick... I write a weekly column that gets posted at Sprott Money. We've been talking about worries for the stock market ever since April when the Bill Dudley came out and openly said the Fed's goal was to inflict losses and crush demand and create a reverse wealth effect and everything else. And now here we are. We're making new lows on the S&P on almost a daily basis. Do you see more of that? Is it gonna get worse?

Rick: I do. I think it is. Interest rates matter, Craig. Interest rates obviously matter to the bond market if you're a long bondholder. You saw what happened in Britain. I mean, rising interest rate obliterates the capitalized value of your distributions. They matter in equity markets, too. Equity as a percentage of the total capital stack among public companies in the United States is the highest it's ever been. An important input in production cost is the cost of capital. And the cost of capital has doubled this year. At the same time, increasing interest rates means that the capitalized values of distribution, meaning dividends go down.

A couple of years ago, a 2.5% dividend yield was an extremely competitive yield. Now, there is 3% available in various savings products and 4% available in the U.S. one-year treasury. So, equities, real equities, I don't mean the penny-dreadfuls, real equities are caught in a vise between an increasing cost of capital and lower share prices as a consequence of lower capitalized values of their distributions. So, yes, to the extent that the Fed is able to continue to increase the interest rate, it is going to be very hard on equity markets.

Craig: Do you think they run the risk of... I mean, this sounds crazy to even say because we're talking about the Treasury market, the U.S. Treasury market. Do you run the risk of losing control a little bit in that? I mean, where are the bonds... Yeah.

Rick: I think in the near term, I think confidence in the U.S. economy is very high. I think that confidence in the political class, confidence in the big thinkers, and confidence in the Fed while misplaced is also very high. And the concept of a failed Treasury market involves around a type of liquidity squeeze and a confidence squeeze that we saw in 2008, or perhaps before that in 1990, 1991. And I don't see in the very near term any lack of confidence.

The strength in the U.S. dollar I think is ample testimony to the fact that people would like to buy U.S. Treasury securities, even though they are guaranteed a loss in terms of purchasing power. Craig, remember the arithmetic with inflation, not inflation defined by some cranky old libertarian named Rick Rule, but rather inflation defined by the Congressional Budget Office running at 9% compounded per annum. If you buy the U.S. 10-year Treasury yielding foreign change, the Treasury absolutely positively guarantees that you're going to lose 5% a year in purchasing power. And perhaps the first time in my life, I believe they're guaranteed. That isn't particularly attractive to me. You know, a guaranteed 5% loss is not attractive, but it's a wonderful demonstration, a trillion-dollar demonstration of the faith, however misplaced that investors have in the U.S. economy and the US government. They are willing to buy aggressively into a market that guarantees them a 5% compound loss.

Craig: Well, I suppose it's somewhat self-fulfilling true as well in that if the Fed does lose control of the bond market temporarily, because there's just no buyers, I mean, it's not the Fed, it's not any other central banks, then the equity markets begin to collapse. And then as the equity market collapse, it drives the safe haven bid back into treasuries, right?

Rick: I suspect it will not be self-fulfilling. If we have a replay of the earlier part of the Clinton years, where they have a Treasury auction, nobody comes, and the Treasury is forced to counterfeit, pardon me, quantitatively ease to buy up the unsold issuance. In other words, if the market gets a real sense that there is no faith, that there is no private market for treasuries, I think that the pivot will take 30 seconds to occur.

Craig: Like the Bank of England.

Rick: I think that confidence would evaporate very, very quickly. The Treasury markets right now are very well subscribed. But if you had a circumstance where the sentiment changed, the same way the sentiment changed in 2008 around private credit markets, then you would see a very different and very dangerous circumstance.

Craig. A little bit like how sentiment changed in the last couple of weeks in England. But it certainly sets us up for an interesting fourth quarter my friend. I want to pivot now to the mining shares. You talked about stocks being caught in a vise, really bad sharp vise in the miners, is it not?

Rick: It is. And there are several things to say about that. And the very bottom end, the worst of the penny-dreadfuls, many of those companies delayed going to market thinking that they could raise additional equity in kinder terms as markets improved. Those guys made a critical mistake.

Craig: Oops.

Rick: They need to finance in a market that's closed. And my hope is that you'll see a couple 100 of them go broke, go extinct. The bottom end of the penny-dreadful market has no real reason for existence and it would be lovely if they disappeared. What's interesting is the bifurcation that you see in junior markets where there are probably 200 issuers worldwide out of 2,500 or 3,000 that are demonstrating very good results.

The markets are not differentiating well, and the babies are getting thrown out with the bathwater. We are in a market right now that's decidedly a risk-off market. And the consequence of that is that I decided to be risk-on. I'm coming into the junior market myself very aggressively, trying to originate and participate in private placements for my own account on the sort of 150 to 200 best juniors. Now, Craig, their pricing expectations are still set six months ago. So, there's a bit of a contrast between the bid and the ask. If you go up the quality trail, this vise that we talked about between increasing cost of capital and lower capitalized values of distributions has hurt the mining industry hard and the oil and gas industry hard, despite the fact that free cash margins are the highest that I've ever seen, which I think sets up some real opportunities for people who can tolerate volatility.

Craig: Sounds like...I don't want, in maybe two general of a term, to call it a stock pickers market at this point, but it sounds like one, two things, do your homework, and you can really find some bargains, and, two, what a great time to send your list to Rick Rule and see what he thinks.

Rick: Well, I think it's important to understand that if psychologically you can't stand volatility, just get out of the way. We're coming into a rodeo. I'm 49 years now a resource investor. This is not my first rodeo. To me, volatility is a series of sales. And I have learned over the years to have the psychological stability and the financial staying power so that I personally can take advantage of volatility rather than being taken advantage of by volatility. But I realized for many of your listeners that they neither have the time to do the study that's necessary nor the psychological or financial staying power to go through these markets. For the others, you know, for the Erics Bross [SP] of this world, this is tailor-made to make money.

Craig: Yeah, great. Rick, drawing on your experience, how can we tell the difference between...and again, comparing this back maybe to the 1970s, the difference between the kind of the fits and starts like we've been in, you know, in the period in the '70s where gold went to $200 back to $100. We've had, you know, these kind of fits and starts like that. Then, you know, went from $100 to $900. And, you know, shares that were 30 cents went to $30. How do we...you know, with hindsight, I should have sold everything at GDX-44 two years ago, and then now be buying it back now. But you hold on because you don't know if we're in that last final stage. How would you know? Drawing on your experience, what would lead you to think we're in that final stage?

Rick: Well, you start by saying hindsight is always 2020, but nobody has it. So don't beat yourself up too bad about what happened before. It'll happen again. I think the '70s were instructive. We had a period in the first half of the decade of the '70s where the monetary circumstance, while not as extreme today, was fairly extreme and the gold price did very well. Beginning in early 1975, the Fed began to raise interest rates. And the consequence of that is that the economy slowed, inflation slowed, and gold sold off by half. Towards the end of 1975, the political class made their preferences known, I'm trying to be polite, the Fed backed off the interest rate, lost their nerve, and it was off to the races.

If your listeners believe that the Fed will have to lose their nerve, if you believe that either they will give a treasury auction and nobody will show up because they're sick of minus 5%, negative real yields, or if you believe that things like home prices, equity prices, long bond prices, and real estate prices will matter to the Fed and they'll have to back off the interest rates, then I think that you buy precious metals and precious metal stocks in anticipation of the type of move that we saw at the end of 1975 when the Fed lost its nerve and the gold price went from $100 an ounce to $850 an ounce.

Craig: And again, how do we know? I guess we can't.

Rick: Well, I think the Fed will be fairly obvious. If the Fed says, "We have to pause this thing. We're trying to engineer a soft landing, and we're crash landing," then you'll know the game is on. As long as they are able to affect minor increases in the interest rate, the dollar will remain strong and gold will be weak. One thing that everybody needs to be aware of, Craig, a sort of a counterpoint, is there's a tremendous amount of cash on the sidelines. It's looking for a place to go. It's in bonds because it's scared to death, that it is dying to disintermediate from bonds because that money knows that they're suffering a guaranteed loss. And we don't know where that money is gonna go. We just know it's gonna go somewhere.

The other thing that could happen, the other not black swan, but rather white swan would occur if suddenly peace were to prevail in the Ukraine, if wiser heads figured a way out of war. Figuring a way out of war wouldn't solve the solvency issue worldwide, but it would solve the confidence issue and the liquidity issue worldwide. And I think the relief rally that you would see if there was an announcement that led to a political settlement in Ukraine, I think that that would be a tremendous shot for bond markets, a tremendous shot for equities markets, and a shot the wrong way for the gold market.

Craig: Yeah, yeah. I think we'd all be willing to take it at this point...

Rick: Yes, sir.

Craig: ...because it is so concerning. All right, Rick, this kind of is a segue to what I selfishly want to ask you with my final question before we wrap up because I am a follower. You made me...help make me into a follower of the uranium markets. And what great possibilities there are there, this latest move, that explosion of the Nord Stream 1 pipeline has prompted Germany to say they've got to keep a few more nuclear plants online for a little longer. It's such an interesting fundamental story, but yet, I mean, talking about fits and starts, you get these rallies and pullbacks and rallies and pullbacks. But it's definitely trending in the direction that you think it had been telling everyone that is trending. Where do we stand now? What are your current thoughts on that market?

Rick: I think uranium has the best risk-to-reward characteristics of any market that I follow. The primary risk would be a plant failure or some form of disaster, or the Russians blowing up that plant in Ukraine, anything that reignited fears, popular fears, non-scientific fears around the future of uranium is the risk that you run. I have said on your show, Craig, and in numerous other interviews that the near-term catalyst would be the resumption of the pace of Japanese restarts.

We have determined now what year that will happen. It's 2022. In other words, right now. Three years ago, a popular opinion poll in Japan showed that just 21% of Japanese voters favored nuclear restarts. Today, the number is 61%. And the consequence of that is that the largest group of dormant nuclear power plants on the planet is being turned on. And the inventories that the Japanese industry had formerly had, which were classified as held for sale because they weren't going to use them, is now held for power. And that's made a massive, massive, massive difference.

Remember, though, that despite the fact that the uranium prices increased from below $20 a pound to about $50 a pound, that the fully loaded cost of current production worldwide, including cost of capital, social rents like tax, and importantly, prior year writedowns exceed $60 a pound. So, the price of uranium still needs to go up merely to maintain current production. It's important to note, too, that despite the rapid growth in nuclear power consumption, right now, we have all-in-supply deficit of about 30 million pounds a year. In order to bridge that 30 million pound a year gap, the incentive price needed for new plant construction, including newer higher interest charges probably exceeds $75 US dollars a pound. So, my belief is that there's an 80% to 85% probability in the three to five-year timeframe that the price of uranium goes from $50 to at least $75 a pound, and perhaps overshoots, given the very long lead times necessary to bring in new production. This is the sort of clearest risk-reward juxtaposition that I see in natural resource investing.

Craig: And, Rick, for people listening to us, they understand...yeah, that fundamental story sounds pretty good. They're thinking to themselves that, "Yeah, I want to play the long game." What are some of the best ways for people to get involved? I would assume that Sprott Physical Uranium Trust is one. Do you try to be a stock picker? How do people get along?

Rick: It's certainly very self-serving, but the lowest risk way to participate is to buy the uranium itself. Not to be a stacker but rather to buy the Sprott Physical Uranium Trust. If you think in a very uncertain world that it's highly certain that the price of something is going to go up by 50%, buy it. That one's fairly simple.

I think that there is enough beta in the uranium market, beta defined by me as the difference between the uranium sector performance and the performance of broad markets, that one doesn't need to take too much risk with the equities, which is to say, buy the biggest, buy the best. Start with Cameco, which is where the generalist money will flow into when the uranium narrative becomes popular to them. And if you aren't willing to do the work to get to know the smaller companies, if you want to participate in more alpha, which is to say you want to generate more yield by taking more risk, then perhaps consider the URNM, the Sprott Uranium ETF, rather than doing the individual work. Make no mistake, the enormous money will likely be made in a select portfolio of the juniors. But doing that means that you accept risk, and you are willing to do a lot of work and tolerate what I think will be bone-jarring volatility.

Craig: We've already seen a lot of that.

Rick: More to come.

Craig: Yeah, I'm sure of that. And again, that's the key, got to kind of long term this thing. There're so many people who are conditioned now that if you don't make 100% in six weeks, you're in a dog. You know, we're used to be, "Geez, if you could double your money in six years, you were doing great."

Rick: Well, I'm 49 years investing. I'm still in the latter camp.

Craig: Yes, me too, as a matter of fact. Well, I tell you what, Rick, this has been fantastic. Again, I want everybody to thank Sprott Money for providing this information by going to sprottmoney.com or calling them and checking to see their pricing, their storage options, all that for precious metals. Call them at 888-861-0775. And again, maybe like or subscribe on whatever channel you're listening to this on. But again, I also at a time like this, what great value Rick is offering. So, Rick, let's close again by you telling everyone how they can reach out to you if you'd want your portfolio review.

Rick: Absolutely. Particularly of interest, maybe to Sprott Money customers, certainly, I will review portfolios. In order to avail yourself of that offer, go to ruleinvestmentmedia.com. Two further things, if you're willing to go risk-on, I will provide a list of the private placements that I'm participating in for free. There's no guarantee that you can get in in the placement. Sometimes people are kinder to me than they might be to other people. But when you're at ruleinvestmentmedia.com in the rankings database and you care about the private placements I'm investing in, write down "Placements." But there's something much more exciting for gold owners.

Many of your listeners know that in retirement, I'm starting a new bank, Battle Bank, where we battle for better banking. We are in advanced discussions with Sprott Money about providing loans against physical precious metals holdings that are stored with Sprott Money. Our bank proposes to lend money to people who will pay us back against good collateral. And there's no collateral that we like more than physical gold or silver.

If you care about that, go to Rule Investment Media, in the rankings database, write down "Bank," and we will keep you informed as to our progress with the bank, and when you might be able, if you would like to, to obtain liquidity to borrow against your physical gold and silver holdings. So, ruleinvestmentmedia.com, placements, rankings, bank.

Craig: That's fantastic. I'm so excited to hear that. You know, so many people think, "Well, you know, I got this physical metal, it's in storage, and I'm paying storage costs," and all that kind of stuff, and it just sits there and waits for whatever day is coming. And what a great way to utilize your precious metal.

Rick: We are looking forward to helping those people who would like to access some liquidity, which, by the way, we're happy to see them used to buy more gold and silver.

Craig: Right, right. Fantastic. Well, I very much look forward to get more updates on that. That's news to me. We'll have to check with Eric and the folks at Sprott Money for more details that comes out. We're gonna have to follow up with you again, my friend, maybe sometime before the end of the year and see how things are looking.

Rick: We look forward to it. Thank you so much for having me back, Craig, and I look forward to addressing your audience whenever you deem it appropriate.

Craig: Let's make sure we do it again. Thank you, Rick. And from all of us here at Sprott Money News and sprottmoney.com, thank you for listening. And we'll have another monthly wrap-up at the end of October. We'll see where we are come then. But for now, again, thanks, everybody, for listening.

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About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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