In a recent interview, Rick Rule of Sprott Asset Management made a strong case that this bear market may be looked back on as “the good old days” in terms of the golden opportunity to invest in the precious metals sector.
Rule said there has been “carnage” in the precious metals markets over the past three weeks, adding to “slow motion” carnage since 2012. He said it is “Difficult for people to see benefit in this type of carnage.” However, he argued, “Three or four years from now, we’ll look back and describe these as the good old days.”
Rule suggested looking back at 1998 to 2000, when the US dollar was strong, general equities markets were booming, and the debt markets “were truly on fire.” Oil was in the 20s, natural gas was a dollar and gold stood at $260. Rule said that for precious metal investments, the times “could not have been worse.” The track record for gold investments in 1980 to 2000 “looked like a topographic map of a sky hill.” In 1980 gold was at $850 and by 2000 it was $260, concluding “an abysmal two decade long period.”
In 1999, Rule published a paper called “A Case for Gold.” He did not call it “The Case for Gold,” because it seemed too extreme at the time. Rule argued that with gold and gold mining assets accounting for one quarter of one percent of investment portfolios in North America, when this under-representation changed, “the impact on the markets for precious metals would be profound.” He was right. Between 2000 and 2007 precious metals had “a spectacular run.” His precious metal funds returned 50% and 60% compounded rates of return by 2007. Given that run, he referred to the 1998-2000 slump as “the good old days.”
Rule sees the situation today as similar to that of 1998-2000. He said, “In 2018 we will be referring to 2014 as the good old days, when we could find discounts of up to 75% on [attractive] companies.” He argued that both periods were times when assets he wanted to own were priced “at truly once in a decade bargain levels.”
Rule told a story about the uranium market. At the time, uranium had “enjoyed a 20-year bear market.” Production cost $20 a pound and uranium was selling for $8 a pound. Uranium was a despised material, “perceived as having cost people lives,” with ties to Nagasaki, Hiroshima, and Three Mile Island. In 1997, Rule determined that uranium was “a spectacular contrarian strategy.” Uranium was 16% of the world’s power; if energy use increased, uranium had to go up. Rule found a small Australian company, Paladin Resources, which he bought at 10 cents, and more at 12.5 cents, before the stock fell to one cent.
Concerned, Rule re-examined his premises. Paladin was a good company. Some 160 million pounds of uranium were consumed each year, and the world was only producing 80 million tons a year. Uranium still cost $20 to make and was selling for $8. The uranium deposits Paladin had were unprofitable at $8 uranium, but could be profitable at $20. Rule said, “The only thing working against me was sentiment.”
Rule mentioned the famous George Soros bet against the British pound, when everyone mocked Soros for going against the common wisdom and Soros and his partners made $4 billion.
Rule had the courage to stay the trade. Between the 2001 crisis and the top of uranium market in 2005, Paladin rose from 1 penny to $10. The stock added 3 zeros. Rule called it, “The single most important financial experience of my career.”
Rule warned that “The resource market isn’t going to add three zeros from this point….[But] I am suggesting the whole set of circumstances…in support of precious metals investing is intact.”
Rule argued that the key adversary for precious metals is the strength of the US dollar. The US 10-year Treasury is paying 2.5 percent, yet the CPI inflation rate is about 2.2%. Therefore, the treasury pays just 3/10ths of one percent per year. However, Rule said, the CPI excludes food, fuel and taxes, which are rising. Rule estimates real inflation to be about 5%. Therefore, investing in treasuries is locking in a 2.5% loss each and every year. Rule argued, “The US dollar and US treasuries are very, very, very weak competition” for precious metals.
If the world population continues to grow, those new people will consume natural resources, driving demand for precious metals. If optimists are correct and GDP expansion is occurring, such growth will increase demand for precious metals. Rule said, “If you buy into what is driving the equities market, then you should also own natural resources.” Conversely, he argued, if you disagree, and GDP is not growing, buy gold because others will start to lose their confidence.
Rule said, at some point in the future, three to five years, you and I “will be on a call discussing 2014 as the good old days when we could buy very, very, very high quality assets at deep discounts…[with] no competition from terrified peers.”
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Learn more about Patrick MontesDeOca here.
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