Ask The Expert - Rick Rule - February 2018

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Craig: Well greetings once again from "Sprott Money News" and sprottmoney.com. It is February 2018 and this is your "Ask The Expert" segment for the month. I'm your host, Craig Hemke, and joining us today is Rick Rule. Most of you are familiar with Rick. He is the president and CEO of Sprott U.S. Holdings and a globally recognized expert in the precious metals and the mining sector. Rick, thank you so much for joining us this month.

Rick: Always a pleasure to relate to Sprott Money customers.

Craig: Yeah, it's a lot of fun and it's a big company with a lot of folks rolling in the same direction. And I very much appreciate you taking the time to visit with us, Rick. I've got seven questions this month that have been submitted by Sprott Money customers just for you. If you're ready, can I hit you with the first one?

Rick: Of course, let's go.

Craig: All right. Well, we're off to a hot start again this year in 2018. Gold actually just had, in 2017, its best one-year performance since 2010. So that places it at a five-year high. This Sprott Money customer wants to know what is driving this rally in gold and can the rally continue?

Rick: Well I think that's a great question. I think one of the things that you need to do is to find your starting date. Remember that gold got as high as $1900. So is gold up from a low of $1000 or is it down from $1900? You get my point. Gold performed poorly and then gold performed well. What I liked about gold last year was that gold did well during a period of relative confidence in the U.S. dollar and a period of relative stability in the U.S. 10-year Treasury. In other words, the treasury didn't kill gold in terms of a flight to quality. I think what's really helped gold as of late is the U.S. federal government's complete abdication from any sort of sense that the U.S. dollar ought to be strong.

The treasury secretary is an example, talking down the dollar. The budget accord, if that's what you can call it, adding, you know, substantially to the deficit, the near-term deficit looking like it's going to go from a trillion to a trillion three. The nervousness that people have to have that hold U.S. dollar alternatives in particular, the U.S. 10-year Treasury means that if you're prepared I think to own any obligation longer than five years that you have to offset the ownership of that obligation with the ownership of some gold.

Remember that if the purchasing power of the principal of your bond deteriorates, your bond yield deteriorates. And traditionally, the best way to guard against that has been to own gold. And I think the realization of that and I think the realization of mainstream investors, the John Paulsons and the Ray Dalios of the world coming around to the gold trade is beginning to increase demand for gold despite the fact that confidence in markets, confidence in the dollar, confidence even in the bond market still is very strong. To reiterate, the fact that gold did well last year, during a period of time when liquidity was very strong and confidence is also very strong, was particularly important for the gold pieces.

Craig: All right, so this leads us to question number two, Rick. Gold's doing fine. In fact, a number of commodities seem to be breaking out with the falling dollar, but silver has lagged gold last year and now again, here in 2018. What's holding it back, Rick? You got any ideas?

Rick: In the very, very near term, there is a real plethora of physical silver supply on the market. So if we're talking in the very near term, in the four to six weeks' timeframe, I think silver continues to be soft, maybe even ahead lower. I'm not smart enough to tell you where all the supply has suddenly come from. But bullion dealers, the Royal Canadian Mint, everybody we talked to talks about a plethora of physical supply on the market.

I'm not talking about the kind of engendered supplies that we saw early on were people were participating in, some would say manipulating the future's market or the contract market, the paper market. I'm talking about a surplus of physical supply on the market. Is that occurring because of increased production of copper or lead and zinc and hence increased byproduct silver production? I don't know. What I do know is that there is a shortage of some kinds of physical gold products, but there is no shortage of physical silver on the market whatsoever. Once again, I can't describe the cause. I can only describe, you know, what we see in the market.

Craig: Got it. Okay moving on to question number three. And this one, you probably want to just speak in generalities, but I think this is something a lot of folks think about. So in general terms, what percentage of an individual portfolio should be allocated to physical bullion?

Rick: Those rules of thumb don't work for me. I think it depends customer by customer. As an example, a customer whose portfolio was primarily denominated in inflation-sensitive instruments, long-term bonds as an example, would want to have a higher proportion of his or her net worth denominated in precious metals or precious metals related in...you know, products. By contrast as an example, a portfolio that was reasonably long, commercial real estate that was reasonably leveraged where the cost of capital was fixed but where the income could be expected to go up with inflation, would need to own less physical gold.

I tell people as a rule of thumb, if people are owning gold for the reasons that I own gold, which is really cowardice, as a response to fears about the depreciation of purchasing power over time, the people consider having 10% of their portfolio in precious metals. But I don't want the listeners to focus on the 10%, I want them to suggest that that's a guideline and that they should adjust their own percentages up or down, depending on how inflation-sensitive their portfolio is.

Craig: Makes sense to me. I think that's very good advice. Moving on to question four, Rick. This gets to the cryptocurrency arena, you know, big run-up in Bitcoin last year and all of that cryptocurrencies. And there was a lot of talk about, you know, is Bitcoin the new gold, that kind of stuff. And so the customer question is basically in your opinion, how much of that move in cryptocurrencies affected demand for gold, silver, and other traditional investments?

Rick: I'm tempted to say that speculative demand for cryptos impacted physical demand for silver. The silver trader has always been more aggressive and more momentum-oriented than the gold trader. Traditionally, the gold buyers had been more like myself, people motivated by fear. While the silver buyers have been more momentum investment buyers, motivated by greed. And although I'm not a market expert, I could see a circumstance where there was extraordinary momentum in a narrative like Bitcoin or Ethereum drawing the speculators out of the silver market and into the crypto market. Make no mistake, I am a fan of blockchain distributed ledger technology. I think it will change the way financial assets and many other assets trade.

I am also not an expert on cryptocurrencies. I think there's plenty of room in the market for both. In fact, I'm encouraged by the development of cryptocurrencies. I'm actually a currency consumer. I spend U.S. dollars, I spend Canadian dollars. Sometimes, I spend Euros, sometimes I spend dirham. And the idea that people want to construct a hundred brand new currencies to serve me better as mediums of exchange, from a consumer's point of view is wonderful. What I see seldom in the crypto markets, however, is a medium of exchange that is simultaneously a store of value.

The cryptocurrency nearly mediums of exchange. They're promises to pay that are only as good as the faith you have in the parties that are obligated to pay. By contrast, precious metals have fulfilled a role for centuries of being not merely promises to pay, but payment in and of itself. If somebody pays you an ounce of gold in satisfaction of an obligation, they haven't given you a promise to pay. They've given you physical payment. Your asset is no longer their liability or their obligation. Now, what I think we'll talk about in a little while is a technological adaptation that Sprott is part of in conjunction with IEX, the famous exchange operators and the Royal Canadian Mint and others to develop a crypto token that clears and settles via distributed ledger, but represents itself gold in a segregated account stored at the Royal Canadian Mint. In other words, the medium of exchange that is in effect, gold. That's an exciting development.

Craig: Well I couldn't have set that up any better myself, Rick. That was a perfect segue, my friend. Question number five deals with exactly that. We had a customer write in and say that they had read something that said Sprott Global was soon going to be rolling out a gold-backed cryptocurrency. This customer wants know if that was true and if it was true, where would the gold be held?

Rick: It's actually Sprott Inc., not Sprott Global. In conjunction of course with Eric Sprott, granddaddy, if you will, of both companies, the idea which has been in development for two years is as I say, a partnership with IEX, the exchange operators made famous by Flash Boys. And the token which exists today represents gold held at the Royal Canadian Mint in a segregated account. I should also mention that Goldcorp is now a shareholder in the same amalgam and we're expecting another one of the top five gold producers in the world to join us in this idea.

Note that this is a gold token, not a coin. So it's really used as a medium of buying, selling, exchanging, and storing physical gold. My hope is that ultimately the technology takes us to a place where the major mining companies among other users could use the token to pay dividends for those who cared in a physical gold equivalent rather than in a cash point...from distributing cash, which I think would ultimately be very, very attractive to gold users.

But we're really looking forward to dis-intermediating other forms of gold ownership for people who don't require the physical possession of the metal themselves. In other words, for somebody who wants the extraordinary efficiency of buying, selling, and clearing and settling gold via the distributed ledger?

Craig: And again, just kind of peaks my interest a little bit, Rick. This is a token that is backed by physical gold but is it something that's available now that regular investors can purchase

Rick: It is not available for retail investors at present.

Craig: Okay.

Rick: So it is in the beta testing, you know, mode. We want to make sure if their token for gold stored in the segregated account at the Royal Canadian Mint, that they receive it. In other words, we want to make sure that our technology is as good as our promises.

Craig: Right, right, no doubt. But eventually, a great way perhaps for the miners to kind of...I think just bypass some of the traditional routes of buying...of selling their product and hedging their product and that kind of thing.

Rick: Well that's of course speculative from my point of view. To make most aspects of nonphysical transactions amazingly more efficient.

Craig: Yeah, sounds good. All right, moving on to number six. I know this. I talked to Eric about this almost every week it seems, there's so much excitement about some of the discoveries down in that Pilbara region of Western Australia. I don't know if you've been down there yet but this Sprott Money customer is wondering about it, what you think about the claims that are made by some of those companies down there?

Rick: Well I've been to the Pilbara but because of its iron potential, you know, the Pilbara is the largest iron-producing region in the world, which says something to its mineral budget. Certainly the excitement in the region was actually kicked off by in some ways, Eric's investment in Novo Gold and the incredible nugget discovery that Novo made. As to Novo's primary assertion that the Pilbara represents the western opted extension of the Witwatersrand goldfield in South Africa, I think we're a long way from being able to either prove or disprove that to be true.

The incredible discoveries of these nugget horizons, fairly thin horizon because these are in effect paleoplacers and because the gold is extremely nuggety, the horizons need to be drilled off fairly extensively. So we're in for a period of extraordinary capital intensity so that the companies can build, can either prove or disprove the thesis about how much gold is contained and what the average grade is going to be. It's going to be very worthwhile to see the first couple of companies, the way the drill holes which are imprecise measurements for such types of deposits correlate with actual production. It is an amazing, amazing new development in the gold business.

Speculators need to know that we are very, very early on in our ability to explore for these types of deposits. So there's going to be lots of joy and there's going to be lots of sorrow. And people are going to have to analyze these companies very differently than they analyze other gold exploration vehicles. And in fact, the technology and the intellectual capital associated with that exploration is in its infancy, in its early stages. So it's going to be a very interesting place to be.

Craig: I have one last question for you, Rick, and I appreciate all your time and I think folks are going to find this tremendously helpful. This is a more specific question to an individual company, so I'm going to try to turn it into something a little more general at the same time. This customer wanted to know if you had any opinion on something it looks like it's called Tshukudu Metals. It's a copper play that it's in the Kalahari region of Botswana. His question was if you know anything about the jurisdiction of Botswana, but I'm also going to turn it into what do you think of copper and the base metals at the same time?

Rick: I'll start them in reverse order. I like the copper business. The truth is that one of the great jokes in mining is that you raise money based on gold and you make money as a miner based on copper. It's a big business. It's a well-understood business. The exploration technology is very much intact, as is the, you know, production and processing technology. Moving beyond that, the Kalahari Copper Belt which is really an extension of the copper belts in Katanga, in Congo, and also in Zambia is one of the great frontier exploration areas in the world today. The Kalahari Belt really exists both in Namibia and Botswana.

The Chakara discovery is an interesting discovery featuring some very high grades. We are interested in it, but at present do not own it. There are also discoveries made by a private U.S. company called Cupric Canyon that we're following closely and by an Australian-listed junior MOD Resources and their joint venture partner, the London listed Tiger Resources. We believe that both Namibia and Botswana are good jurisdictions for mining. Jurisdictions that certainly aren't as well understood from a social and legal point of view as an example, Canada and Australia are, but also jurisdictions that have in place mining culture, in place mining law, and thus far have proven themselves as countries to be wonderful hosts for mining activity.

Further, both Botswana and Namibia are much less thoroughly explored than Australia and Canada. So the probabilities of getting a very large tier one deposit in unexplored terrain but terrain where the genesis of the material has already been established like the Kalahari Copper Belt is an extremely attractive proposition to Sprott.

Craig: I tell you what, Rick, it's fantastic information. And I think, as I mentioned earlier, everybody listening has benefited from listening. So I want to thank you very much for your time. It's been great to visit with you again and hopefully we'll talk again soon.

Rick: I look forward to it. Thanks for the opportunity to address your audience.

Craig: And from all of us here at "Sprott Money News" and sprottmoney.com, thanks for listening. We'll talk to you again next month.