Precious Metals Bull Markets Last Longer Than People Think - Weekly Wrap Up

Announcer: You are listening to the "Weekly Wrap-up" on Sprott Money News.

Craig: Happy Friday from Sprott Money News, sprottmoney.com. It's the last Friday of April, April 30th, 2021. It's time for your "Weekly Wrap-up." I'm your host, Craig Henke. We hope to have Eric rejoin these weekly podcasts soon but as you know, we've been entertaining a number of guests that have been able to sit in for Eric. And this week, we're happy to invite back in Rick Rule. Of course, Rick is a legendary precious metals and natural resource investor and wise beyond his years. Would you say that, Rick? Thank you for joining me.

Rick: Well, a lot of years wise beyond my years, it's a challenge but thank you. And it's a delight by the way to step in for Eric Sprott, who is truly a legend who I've known for now almost four decades.

Craig: My goodness gracious. Yeah. And thank you so much. We really appreciate you doing it because we always get a lot of questions whenever you sit in. Anyway, back to everybody that sent in the questions, we'll get to them in a minute. We've got a lot of responses whenever you come. Just make sure if you do us a favor at Sprott Money, we want to get as much word out as possible on these podcasts, these "Weekly Wrap-up." The "Ask The Expert" segment. Our new precious metals projections that we do with Chris Vermeulen. We'll have another one of those next month. So just give us a like, maybe a thumbs up on whichever channel that you listen to.

And before we get started, a lot of folks have written to Sprott Money asking about this idea that I first mentioned 10 days ago about kind of a silver squeeze, 2.0 something on the anniversary of the Mayday masker May 1, 2011. Sprott Money just wants you to know that they're open for business, that's for sure. And I just want to stress, it's not just May 1, at least in my book, if you've got the time horizon, the risk tolerance and physical metal fits in your portfolio, anytime is a good time to consider buying some and diversifying out of dollars. Whether that's today, April the 30th, whether it's Saturday, whether it's next week. And to me at least it's always a good time to think about whether physical metal fits in your portfolio. That's really all I'm asking you to do. Rick, it has been an interesting week in the metals. We are off to a pretty good start, even look pretty good after Chairman Powell got done speaking on Wednesday afternoon but suddenly today the dollar is soaring. And we're going to end up the week, maybe down a little bit. What are your thoughts as we wrap up the month of April?

Rick: You know, Craig, I've been at this for over 40 years and I pay zero attention week to week, almost zero attention month to month. With regards to Chairman Powell, I have to admit every time I see him, I want to buy gold and silver. Given that I have a lot, I try not to see him too often. But I think that what people need to do is pay less attention day to day and week to week and pay much more attention to the fundamentals behind precious metals. If you think less about things like gold is up today and gold was down yesterday, and more about things like quantitative easing, debt and deficits, negative real interest rates, and disintermediation of long bonds, you'll do better. I think the idea that you right-size your investments and you think about why you made the investments and you are attracted to an investment because the fundamentals are in place and you come off an investment when the fundamentals are no longer in place that you will live a happier life and that your portfolio will do way better than what otherwise would be the case.

Craig: I have to echo that. As a guy that does have to watch it every day, I know where you're coming from. In terms of Powell, we had a number of people write in this week because he continues to use the term, "This uptick inflation is transitory." A lot of folks want to know what your thoughts upon are about inflation at least, you know, in the U.S. And let me lay this one on you, I think his repeatedly stating that inflation is transitory is actually his first foray into jawboning long-term interest rates lower. What do you think of all this?

Rick: I think that to the extent that the economy can tolerate higher interest rates, to the extent that an increase in the yield in the U.S 10-year treasury, which will migrate to other credit classes, the 30-year mortgage rate, the prime rate, the refund rate to the extent that the economy is strong enough and there's enough liquidity in the system to tolerate the interest rate increase that the Fed would like to see the interest rate marginally higher. Because it gives them the tools to lower it if a more difficult circumstance arises. So from my own point of view, the Fed will postpone yield management, which is to say selling short-term instruments to buy long-term instruments and take the long-term rate lower. They will postpone reinitiating that for as long as they can get away with. And you know, there is really surprising strength, surprising to me at least strength in the U.S economy. We've seen this before. Liquidity seems at least in the near term to, you know, absolve us from all sin. My nervousness, I guess, is twofold.

When you do see an economy with artificial liquidity, what you really do is forward shift demand. You take demand that would occur in 2022 and 2023 and you use it in 2021, which means that you need to replace it then with some other, you know, form of stimulus. The other thing that makes me a little nervous is I'm not sure how the economy will deal with higher interest rates. If the U.S 30-year fixed mortgage market, as an example, sees rates increase to the extent suggested by the yield on the U.S 10-year treasury, I think that existing home sales and new home construction might falter despite the fact that they're booming now. I wonder too about the short-term debt refunding requirements, federally, state, and local at these higher interest rates, and what the interest rate burden might be particularly on entities that don't have the Fed attached to them to monetize their obligations.

So I'm concerned about that. I think too, Craig, and I'm sorry for this long-winded answer but it was a big question, I think too, that the CPI stated rate of inflation while it's useful as a factoid, which is to say that it's the standard that's widely reported is an inaccurate measure of inflation. The idea that a consumer price index, as an example, doesn't include taxation seems very odd to me. I guess I wouldn't bitch so much if I didn't have to pay the tax. But with, you know, 46% of aggregate expenditure in the U.S economy accounted for by federal state and local government spending, the idea that the accumulation of debt, which is forward-looking inflation and tax isn't included in the cost of living, seems to me very odd. We are beginning to see increases in various things that are more directly tied to the cost of living as an example, higher oil prices and higher gasoline prices. Spot lumber in my market has tripled. We are seeing, while there's a lot of unemployment in the country, we're seeing real labor scarcity in skilled trades and other applications. There are something like 7 million unfilled jobs in the U.S economy at current wage rates. And so I'm afraid that Mr. Powell is going to get what he wants, which is to say higher inflation.

Craig: Yeah. Let me ask you this. There was a four-week T-bill auction yesterday, one-month T-bills that actually priced at 0.00%. "So here's my million dollars, Mr. Treasury department. Four weeks from now just give me my million dollars back." So, I mean, they were that close to negative. I did a thing, Sprott "Ask The Expert" a couple of months ago with Danielle DiMartino Booth. And she said this is a real problem for Powell because all of this, you know, keeping their weighted average maturity so short on their QE program is crowding out all the money market funds and everybody else that has demand for that paper. What do you think of that idea that eventually, if this continues because they can't allow those rates to go negative, that they're going to have to shift that weighted average maturity, which will in effect put a cap on longer rates or at least a Fed put to it?

Rick: See, I think she's spot-on in terms of that observation. I would point out to you though that negative real interest rates are not a force of nature. I guess I can understand them in terms of a four-week paper because people are concerned about credit quality in other debt instruments, particularly longer-term debt instruments. They don't have the jam, you know, to go into a 10-year piece at 175 basis points. They'd rather get paid nothing in the short term than expose themselves to interest rate rise in the long term. You know, I get that. And I certainly get the problem with regards to crowding out. It's difficult to comment on policy prescriptions around negative real interest rates because negative real interest rates are not a force of nature.

Craig: You mean like nominal, Rick? I'm sorry, nominal negative, just straight up nominal rates?

Rick: Well, either to be honest with you. The idea, I mean, what interest is supposed to be is the compensation that you as a saver receive for forestall and consumption in favor of somebody who has more immediate wants and needs that they're willing to pay you for. It's also supposed to be compensation for the time value of money and for the risk associated with the quality of the issuer, including the U.S government, which has over $150 trillion in on balance sheet and off-balance sheet liabilities. The idea that a saver like me would pay somebody to consume now in favor of me consuming now, and the idea that I should pay them to offload to me, the risk associated with the time value of money or their credit quality is not a natural circumstance. And the attempt of Rick Rule or Eric Sprott or Danielle DiMartino Booth or Powell to talk around a subject that's an artificial construct, a political construct, is dangerous. I can't understand it because it isn't understandable. You have to observe it. You have to be very, very, very nervous about it but it's very difficult to explain an artificial circumstance.

Craig: All right. Rick, I bet probably half the questions, maybe a third but anyway, a lot of questions this week when we announced that you were going to be the guest had to do with uranium. As far as I know, Sprott Money doesn't sell uranium. That would be interesting but obviously very intriguing investment options there. Sprott Inc has a new uranium trust. It's something that you've been focused on for years but it seems like your interest is increasing in uranium. And someone wrote in and said, you know, there was a point where you said that when Cameco, which is a big uranium miner restarts one of its mines you'll know the game is on in earnest. So let me just set that up for you and let you take it from there and give everybody your thoughts on uranium at present.

Rick: Well, three things there with regards to Sprott Money, you know, uranium is probably the wrong asset to stock.

Craig: Exactly.

Rick: It isn't the sort of thing you want to store in your basement unless you have a lead-lined basement. But there are options for people who want proxies for physical uranium, including Uranium Participation Corp on the Toronto Stock Exchange, where the management contract will be taken over by Sprott. I guess the headline with regards to uranium is that whether people like it or not, it is a fuel of the future. 15% of total U.S. energy demand is fulfilled by uranium and 20% of base-load energy is supplied by uranium. Meanwhile, uranium in the spot market sells for $30 a pound, and the total production cost worldwide, not the cash cost but the total production costs including cost of capital and prior-year write-downs exceeds $50 a pound. So the industry makes this stuff for $50, they sell it for 30$. They lose $20 a pound and they try and make it up on volume given that they're minors but totally insane. Either the price of uranium in the next 5, 6, 7 years goes up above $50 a pound, or the lights go out. Those are the two choices. Does it have to happen this year? No. Next year? No. But it has to happen.

The last uranium bull market that I participated in 1998 to 2006 was the most profound financial event of my personal career. And at age 68, I'd like to have that much fun one more time before I shed my mortal coil. Now, we're in a perplexing place because the juniors are ahead of themselves relative to the risk-adjusted net present value of their reserves at current uranium prices, which is to say they are overpriced. Their response to being overpriced has been to issue equity and use the money to buy physical uranium, which they believe is underpriced. That's the first thing that tells me that the uranium price is going higher.

The second thing that tells me that the uranium price is going higher is that Cameco has said, you can decide yourself whether to take them at their word, that they wouldn't restart Cigar Lake until they had obtained high enough prices in the term market that they could earn a reasonable return on capital employed. The prices that you see quoted for uranium are spot market prices, where about 20% of the total trades take place. The rest of the trades take place in private contracts between and consumers in the term market. And the term market is invariably higher priced than the spot market because it offers the utility security of supply over time.

So I'm in this odd place where I am going into a sector where the equities that I have the most experience in are uniformly overpriced with regards to the current price. I'm doing it because I think that titans in the term market will pull the spot market up. And that in turn will ignite truly ferocious demand for the uranium equities. Your listeners need to know that I'm very much a contrarian, very much a fundamental investor. And I am often 18 to 24 months early. If you are the type of speculator who has trauma holding stock over a long weekend or is concerned about momentum or relative strength or anything like that, this is not a trade for you. If you are a contrarian investor who is willing to be wrong before you are right but is looking for a quantum move rather than an attractive move, this might be precisely the space for you. And that describes me to a T.

Craig: Describes Eric too. I remember him telling me multiple times, you want to be in the room by yourself at the party waiting while the party is outside.

Rick: You know, Eric and I really formed a friendship in the 1998 to 2000 timeframe when nobody wanted to own precious metals stocks, and nobody wanted to own uranium stocks. I had thought of Eric Sprott as a small-cap generalist. You know, I had thought of him as a CA, which he was. And what I learned is that he was a brilliant, courageous and wild speculator, which is the period of time when he and I became close. If anything, he's even wilder than I, which is perhaps damning me by saying praise.

Craig: And, you know, the other thing I learned from him too, was when you get a winner, you maybe think about putting more money in once it's proven itself. You know, a lot of people get up 50% and they think, "I'm going to sell that." He's buying more when it's up 50%.

Rick: Eric is probably more aggressive than me in that regard because Eric takes a more generous view of commodity prices. And Eric also believes that his view of commodity prices is relevant. I don't have the same faith in my ability to predict commodity prices. So when I do discounted net present value calculations, I'm inclined to be an earlier seller than Eric, which is why he's a billionaire and I'm not.

Craig: I'm not either. All right, well, you teed it up for the one last question that I had for you that had come in this week. And I thought it now obviously fits right in with our discussion. There was news I don't know, two weeks ago with the production reports for the first quarter out of Endeavor Silver, which is one of the few primary silver miners out there. That they mined about a million ounces in the first quarter but they only sold about half of that. They retained half, which is a little bit kind of what you're alluding to with some of these uranium producers. Keith Neumeyer has often done that with First Majestic. So it's a two-pronged question. What do you think of the silver miners at this point? They've been performing better than the gold miners, at least on balance for the first third of this year. And what do you think of that strategy?

Rick: Well, there's two parts of the question, Craig. In terms of the strategy to the extent that you have a management team that believes in their product, I think they end up being at least better speculators. Too many precious metals mining company executives don't believe in their product. They're in precious metals markets because it's an easy place to raise money. And I like management teams myself that have the courage of their own convictions. It increases the optionality, which is one of the reasons why people, myself included but more likely Eric are invested in them.

With regards to a more general question around the silver miners and silver producers, my experience has been that in precious metals bull market, the first mover is gold because it's a fear buyer. And that you don't see silver perform or outperform until the middle and the later stages of a bull market. I believe myself based on my prior experience that precious metals bull markets are of much greater duration, typically 10 years and much greater dimension than most people believe them to be. I think that the bull market that we're in now probably began in 2018, which is to suggest that we're three or three and a half years into, maybe four years into a 10-year bull market, which would suggest that we're coming into the middle part of the market.

And if the 1970 to 1981 experience or the 2000 to 2011 experience repeats itself, we are coming into the part of the market where once gold re-establishes momentum, that silver will move further and silver will move faster. In my experience too the scarcest asset class in precious metals is high-quality silver stocks. My friend, Doug Casey has pointed out that the market capitalization of the legitimate silver stocks is so small that when the generalist money comes into the space, there isn't enough market cap to hold it. And the share price escalations that you get in the middle and the later stages of the precious metals bull market in the silver equities can be truly epic. So to the extent that I'm able, I'm over-weighting silver equities with the caveat that I'm, you know, sort of limiting my exposure to sort of the 15 or 20 companies, which I think are the best of the best in a sector with probably 80 or 90 companies in it.

Craig: I'm not sure if there's a Sprott-managed silver miner ETF. Do you know? Is there?

Rick: For Canadian investors, there is a public mutual fund managed by Maria Smirnova. I don't know the name of it but you can get it from the Sprott website or from your Canadian financial advisor. For U.S. investors, there's a silver segregated managed account offered by my former colleagues at Sprott Global, also managed by Maria Smirnova. By the way, if I can give an unabashed commercial to the extent that your listeners care about their uranium portfolio or their silver portfolio or my opinion of their companies, they can always go to sprottusa.com/rankings, list their natural resource companies, and I personally will rank them one to 10 and comment on those companies where I think that my comments might have value. That offer is, of course, extended to silver and uranium but covers really any natural resource companies in people's portfolios.

Craig: You've offered that before, Rick. Again, is that through the website, or was that an email address?

Rick: There's a website, sprottusa.com/rankings. You'll find a pull-down, pull-down list where you can enter your companies. And to the extent that I know something about them I'll say, "No opinion." if I have no opinion. I'll rank the companies one through 10, one being best 10 being worst and I will comment where I think my comments might have value.

Craig: Perfect. Why wouldn't somebody do that for crying out loud? I always tell folks, "You need all the help you can get if you're interested in the mining sector." Gosh, what a great service, Rick. And thank you so much for your time, man. It is always so valuable to hear from you. As we begin to get wrapped up here and get ready for the weekend and first day of May, just want to remind everybody that sprottmoney.com is a bullion dealer. One that should always be on your list whenever you're in the market for physical metal or a place to store it. Go to sprottmoney.com or if you want to talk to an actual human being, give us a call (888) 861-0775. The Sprott Money team is always going to be there to answer any questions you may have and help you place your order. Rick Rule, sure nice visiting with you, my friend. Thank you for your time and maybe we'll do this again soon.

Rick: Craig, thank you for having me on. Thank you for the honor of filling in occasionally for Eric Sprott. Wonderful evening.

Craig: You do a great job. And from all of us here at Sprott Money News and sprottmoney.com, thank you for listening. Have a great weekend.