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Ask The Expert

Ask The Expert - Rick Rule - March 2020

Headshot of Rick Rule

March 23, 2020

During a month unlike any other, Rick Rule of Sprott Inc. returns to share his wealth of knowledge with our listeners. Rick is a leading resource investor specializing in mining, energy, water utilities, forest products, and agriculture, and he has originated and participated in hundreds of debt and equity transactions with private, pre-public, and public companies. Mr. Rule is also the Founder of Global Resource Investments, President and CEO of Sprott U.S. Holdings, Inc. and a member of the Sprott Inc. Board of Directors. He is a frequent speaker at industry conferences and has been interviewed for numerous radio, television, print, and online media outlets concerning natural resource investment and industry topics.

This month, Rick answers seven of your listener-submitted questions, including:

· Is there hope for long-term investors who haven’t sold mining shares?

· What indicators will signal that the shares are turning a corner?

· Once this crisis passes, which sectors will provide the best value?


Announcer: You're listening to Ask the Expert on Sprott Money News.

Craig: Well hello again from Sprott Money News, and SprottMoney.com. It is March, 2020 and it's time for your Ask the Expert segment. I'm your host Craig Hemke and joining us this month is Rick Rule of Sprott, Inc. Many of you are familiar with Rick, you know he's a legend in the precious metal sector, and the information that he has, the wisdom he has gained over the years is invaluable. So Rick, thank you for so much for spending some time with us.

Rick: Certainly a pleasure to be back with you and to address your audience. Thanks for having me on.

Craig: When I call you a legend, is that okay? Usually only old people are legends, and you don't qualify as old yet, so...

Rick: You're very kind. I'm not so sure I feel legendary, but I definitely feel old.

Craig: All right. And hey, before we get started. It is March, 2002 and this is a month like no other, nothing any of us have seen before. And at this point, when will things start to clear with the COVID19, very hard to say. So please, just to everyone out there, please be safe. Take care of yourself. It's also a very busy time for us at Sprott Money, so thank you for choosing us for your gold and silver bullion and storage needs, we truly appreciate your business. And like I said, we look forward to serving you in the future. All right, Rick, I've got seven questions that have been submitted over the past couple of weeks for you. If you're ready, can I hit you with the first one?

Rick: Absolutely, let's go.

Craig: All right. As you know, as I know, as just about everybody else knows that's listening to us, mining shares have had a pretty tough couple of weeks. For those who have not sold, who are long-term investors or speculators, this first question just wanted to know if there's any hope?

Rick: Well, there's certainly no one-size-fits-all advice, and the answer to that question is sort of nuanced. For people who have the psychological and financial reserves to use this crisis as an opportunity, and for those of you who are willing to do the work to understand each individual gold stock rather than the market as a whole, this is, from my point of view, an opportunity rather than a crisis. For those people who do not have the financial or the psychological reserves to stay the storm, then, of course, cash or cash and bullion are your best possible options. I've said for many, many, many years that bear markets are sale. This is an extraordinary bear market. And by the way, the performance of the gold shares mirrors the performance of the gold shares in 2008. In panics, liquidity panics, everything gets sold. Gold stocks are stocks. What happens is that the policy response to the crisis should be good for gold, and in turn, ultimately good for some gold stocks.

Craig: I guess that leads us to question number two. And that's a pretty good segue actually, in that I know I've held on. It's kinda caught me by surprise, probably caught a lot of folks listening by surprise. And the temptation is to always to move to cash in crises like this, but then greed kicks in too because things bounce back so quickly. So the second question is just simply what indicators will you be watching for a signal that the shares are turning a corner?

Rick: My friend Steve Shibarus [SP] says that you make money in crisis by buying sectors that are cheap, check for gold shares, unloved, check for gold shares, but in an uptrend. Right now we're in a circumstance where the market is extraordinarily volatile, so I would say that people who are looking to pay attention to the last advice, that is an uptrend, probably pay attention to the XAU, and look for sort of a consistent pattern of higher highs and higher lows. The truth is I'm old-fashioned, I don't regard the market as a product or a source of information. I regard it as a facility to buy and sell fractional ownership in businesses. So, my own point of view is very different than the point of view of the person that asked that question. I believe that money is made on the delta between what something is worse and what it's selling for. So, I've been nibbling in this market already.

Craig: Yeah. And I think...but the other part of it, just kinda watch maybe some of the bigger industries or ETFs and see if they're trending?

Rick: That's what people who invest in that measure, I'm not one. It's good advice.

Craig: Okay. Well, let's kinda segue that into question number three because obviously we focus on precious metals a lot, and you do as well, but it's not just about the precious metals. I know you're experience and wisdom extends across the entire market, and so question three is just regarding the entire, the overall market, once this virus crisis passes, and it will at some point, which sectors of the overall market do you expect to provide the best value for people that then get back in?

Rick: I think that the impact of the virus on the economy and the market will be fairly long-lasting. People like to describe market rebounds in the context of Vs or Us. My suspicion is that we have a V, followed by a U. I'm not an economist, but the truth is that we've gone for 10 years in this latest economic recovery, and much of the recovery has been fueled by low interest rates. My nervousness is that the economy is in no condition to weather this downturn, and we finally we likely receive the reckoning that we have deserved for some time, that is to say a recession and probably prolonged economic contraction. In that circumstance, the generally commodity producers, which I am familiar with, will stay lower for longer. But when they come back, it could be two years from now, it could be three years from now, the response will be dramatic. The most oversold sector, which will continue to be oversold, in my opinion, is the oil and gas sector hit in Canada by idiotic government legislation, by extraordinarily low oil and gas prices, and in the junior part of the sector, by increasing constraints to credit. In addition, of course, there's the broad perception that we're going immediately into an electric economy, and of course Greta doesn't like oil. If your listeners care, if they believe that five years from now, or six years from now in the morning when they walk from their bedroom to the garage, turn the key to the right. If they believe that the car will start, they believe that oil prices will got to $50 US dollars, or $60 dollars, because at this oil price, the oil industry shuts down and there will be no more gasoline. Tesla owners, of course, all seven of them, exempted from that comment.

Craig: I'm sorry, I'm still...I thought the Tesla comment was funny. All right. Let's go to question number four then, because follows up on what you just discussed, Rick. You know, the Fiat currency regimes all seem to blow up in the end, history is replete with examples. The question, specifically, is could a global economic collapse result in a return to some type of sound money?

Rick: I think a localized return to sound money. I think there are political jurisdictions in the world, albeit small, that are showing signs of sanity. Lichtenstein would be an example. People tend to do the right thing when they have exhausted all other alternatives. Right now people want to have faith in their governments. I believe that's misplaced, but I've had numerous people tell me that the big thinkers in the world stick-handled, in Canadian parlance, our way out of the 2008 financial crisis, and they're reasonably confident that the increase in liquidity, albeit false liquidity provided by governments, will see us through this crisis too. The truth is, as was once said about the United States, and I think it's true about the western world, including Canada, there is a lot of ruin left in societies that are as great as we are. And despite our collective stupidity, our individual initiative in creativity allows us to generate so much wealth that we can often ride out the damage that we do to ourselves at the ballot box. If you would examine for a second the phenomenon called Silicon Valley, where five or six kids commandeer a garage with no money, and out pops Google. You have reason to be optimistic in the longer term. That doesn't meant that the way that we vote won't inflict significant pain on us in the near term.

Craig: Can you go back for a second? You mentioned Lichtenstein, what are they doing there?

Rick: Well, they seem to be interested in experimenting with, you know, either a gold-backed currency or a competitive currency environment where various currencies are allowed to compete against each other. Now, granted this will effect 35,000 people, my suspicion is if the experiment and some other things that they're thinking about, sort or progressed to a libertarian society occurs, I suspect that that 35,000 will go to 100,000. It doesn't matter much in the context of 7.7 billion people on Earth. But it says something about the fact that local experiments could prove to greater numbers of people, the different forms of regulation, self-regulation, are efficacious.

Craig: Yeah, yeah. That is definitely worth watching. I was thinking to myself as you mentioned it they might get 35,000 in one because that sure sounds good to me. Okay, the last three questions, Rick are actually kinda like questions we'd have had in January or February, maybe a little more light-hearted. So, let's wrap up with these last three. Four a retail investor, when it he best time to get involved in an exploration company? And I would imagine that has to do with, you know, at what point? Drill results, you know, ground floor, what do you think?

Rick: That depends on the nature of the retail investor. We are in a market right now where nobody cares about good news at all, so the best place right now for a retail investors, after the release of a good drill hole. You have the data that tells you something about the value, and tells you something about the probable answer to an unanswered question, but nobody cares. You don't have to anticipate data right now, all you have to do is react to data, and you have to be willing to own a stock for six months, or nine months, or 18 months. So right now, in the condition that we're in, when companies release good or great news releases, and the stock trade is sideways to down, the best time to buy a stock is after the release of great data. This will change when the markets return to favor, and my answer will change, too. We have a program internally, in fact a product internally at Sprott called Drill-Driven Alpha where a geologist portfolio manager who works for us, Dr. Neil Adshead, does precisely this. And he's encountering absolutely no competition in the markets when good data comes out because people are too afraid to act.

Craig: Interesting. All right. The sixth question, and this is a fun question, Rick. Which investment in your entire career has been the most fulfilling? Maybe not from a monetary standpoint but just from, you know, just kinda feel good that it worked.

Rick: Well, certainly the one that was the most educational was simultaneously the most rewarding, and that was Paladin Resources. I became convinced that the uranium price had to go higher in 1998 or 1999, by the way it's fully four years too early, and I bought a micro, micro, micro cap, uranium explorer, Paladin Resources. I bought it for 10 cents a share, being early of course, I was rewarded for my genius from seeing it go from 10 cents, to nice cents, to eight cents, to seven cents, to six cents, to a penny. If you're off 90% on a stock there is no hold decision, there's a buy decision or a sell decision. I revisited all my premises and decided that I was right and began buying again, and within five years that stock had gone from one cent to 10 cents. So there are many lessons there. Manage your emotions, revisit your premises, but also don't be afraid to be right. Certainly I enjoyed the move from one cent, or more honestly from 10 cents to 10 dollars, but by the way, it would be dishonest to leave your listeners with the sense that I bought all the stock at 10 cents and held it all to 10 dollars. That didn't happen, I sold along the way. But the lessons learned doing that, backing great people, revisiting your premises, having the courage of your convictions, and to study rather than to react to your own emotions, were all important and illustrative lessons for me. Of course, making an awful lot of money didn't hurt either.

Craig: Right, right. And finally, we did get some individual names sent in by regular listeners, so I've got four of them here for you, and I just get your quick thoughts. The first one, and actually quite a few people asked about this one, is Bontera.

Rick: Disclaimer here, I don't know your listeners, so this shouldn't be considered investment advice. I will talk about these names in the context of my own portfolio and my own preference. I hope everyone understands. I am not a Bontera shareholder, although I'm attracted to both the management team and the posit. My own belief is that because exploration finance is Canada-centric, and because Canadians, like all people, are ethnocentric, that Canadian exploration plays tend to be overvalued relative to, or overpriced, relative to exploration plays in other parts of the world. And I'm less active in Canada than many Canadians would be. I also note that I'm having a difficult time in those drill holes together, although other people in the firm who are better at this sort of thing than I, understand and like the geology better than I do. I think this fits in many exploration portfolios, particularly Canadian exploration portfolios. I think that flow-through investors should pay real attention to Bontera, but it's not suitable for me personally.

Craig: Okay. The second one is Northern Superior. Do you know anything about that company?

Rick: I would have almost the same comment with Norther Superior. The exploration is a little less advanced than it has been in Bontera, a good team of people, a nice piece of real estate. Extremely well supported stock, including by your namesake, Eric Sprott, who is a very smart guy. It's not a stock I own because I see other exploration terrain that, in the world, that to me seems cheaper.

Craig: The next one is NovaGold.

Rick: NovaGold, you know, you're really betting on a genius there. A first, first, first class guy. It's a real, real optionality play. At today's cost of capital, and today's gold price, it's very difficult to understand the evaluations, but if you believe in US $2500 gold, as an example, this is a very, very, very leveraged call option on gold. I'm not playing optionality plays currently. I think that companies that make money at today's gold prices are compelling enough bargains that I don't need personally to play the optionality game, but if you do this is a company that has an amazing lineup of some of the finest investors I know on the shareholders list. So, I would discourage it for people who believe in sharply higher gold prices in the near return.

Craig: And lastly, Rick, how about Jaguar Mining.

Rick: Jaguar Mining appears to me to be problematic in the sense that at present it's a capital consumer, and I suspect that capital is going to be A, more scarce, and B, more expensive. Again, if the Eric Sprott thesis proves out to be true, that if we see $2500 or $3,000 gold in the near term, Jaguar will make people 10 times their money. It's just that with that potential reward comes a lot of risk, given the operational challenges and the financial challenges that the company faces immediately. Make no mistake, the circumstance that we're in right now means that an industry that already believed itself to be capital constrained is in the near term going to be substantially more capital constrained. Any company in your portfolio that need consistent access to capital, particularly credit, is one that you should be concerned about.

Craig: Yeah, that makes sense. That makes sense. Well, before we wrap up, again it has been a crazy week, crazy month for all sectors, but in particular the precious metals. Again, we want to invite you to visit SprottMoney.com, check out all the precious metals that we have on offer, please check out our storage program as well. We offer safe, fully-insured and secured places to store your metals. So of course, visit us as SprottMoney.com or just call us at 888-861-0775 and we'll help find a storage solution for you. Rick, my friend, thank you so much for your time, it's been invaluable information, and I'm sure everyone who has been listening very much appreciates it.

Rick: Always a pleasure to visit with my Sprott cousins. It's great, thanks for having me on.

Craig: And hopefully we'll do this again soon. And from all of us here at SprottMoney.com and Sprott Money News, thank you for listening. We'll talk to you again next month.

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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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