The U.S. Federal Reserve’s decision not to taper quantitative easing last month was no surprise to some analysts.
As I have discussed before with Rick Rule, president of Sprott Asset Management USA, and he reiterated in a recent interview, QE is not just a program to add liquidity. There is plenty of liquidity in the markets. Rule said, “The federal government is spending $1.2 trillion per year more than it takes in.” The government can borrow about half of that amount, but to get the other half, it has to create it. QE is a means to create the money needed to cover the difference between government income and spending. Or, as Mr. Rule said, and I agree, “It is counterfeiting, plain and simple.”
The mainstream media has spent a great deal of time on the current debt ceiling impasse. Mr. Rule believes that the politicians will find a way to agree to raise the debt ceiling for the simple reason that if they do not, they will have to significantly cut spending. As Mr. Rule said, “They will find a way to continue to perpetrate this fraud, and find a way through it….There are some concrete spending measures they could take, but if they save money in one column, it’s already spent in several other columns.”
The key for wise investors is to distinguish between, as Mr. Rule explains, “entertainment as news,” such as the focus on the debt ceiling negotiations, and real news. Mr. Rule said, “Much of the information we receive now is entertainment, not news.” As one example, he offered the government’s consumer price index (CPI). When he was a child, Mr. Rule said, Motel 6 was founded and named because a room cost $6. Now those same rooms can be $69, yet “The utility of the room has not increased 11 fold in 30 years.” In short, Mr. Rule said, “The Consumer Price Index is an insane number. My cost of living increases far more than the CPI.” Based in part on the fact that is does not include tax, Mr. Rule said, “The inflation number that is being reported is nonsense.”
The mainstream media often mentions the threat of the U.S. credit rating being lowered. Mr. Rule said, “I don’t think the U.S. will be downgraded. We run the worst currency in the world except for all the others. Ironically, despite our problems and counterfeiting $700 billion a year,” we have various comparative advantages that will ensure that “we’ll still function as the reserve currency. There isn’t a viable competitor.”
Turning to gold, Mr. Rule is bullish on gold, as am I. The recent pullback in gold, according to our analysts at the Equity Management Academy and to Mr. Rule, is a case of gold being oversold. Mr. Rule said, “We had a massive move three months ago from weakness to strength.” Gold flowed from weak Western central banks to stronger developing market central banks. Gold flowed from leveraged markets to physical markets. In short, Mr. Rule said, gold went “from weak hands to strong. I see that continuing.” In part the flow was driven by the liquidation of the momentum-driven hedge funds as the carry trade unwound in the paper markets.
As our Equity Management Academy experts have been predicting, Mr. Rule said, “We are ready for a much more sustained gold rally.” Eric Sprott also believes we are, Mr. Rule said, “on the doorstep of a really major move in gold and silver to the upside….I am taking advantage of these spot prices to add to my clients’ holdings.”
Mr. Rule agreed with me that there has been relentless demand from China for gold. Mr. Rule said, “I think it will continue.” He stressed a convergence of factors in China: a cultural predisposition to invest in gold and silver; a government encouraging individual savers to invest in gold and silver; and rising household incomes. Based on these factors, Mr. Rule said, “I would suggest that Chinese demand will continue and even accelerate.” He stressed that the same story of massive demand for gold is repeated in Vietnam, Thailand, Malaysia, United Arab Emirates, Turkey, and elsewhere. “Retail gold stores are doing land-office business,” he said.
Mr. Rule disagreed with my analysis that the creation of a Latin American Central Bank funded with $20 billion signified a move away from close ties to the U.S. dollar. Mr. Rule argued that the founding of the bank had more to do with Latin American domestic politics. However, he said, “Whether the bank succeeds is less important than the fact that those countries are trying to develop their own solution.” IMF attempts at development have largely failed, so at least the Latin Americans are now trying to find their own road to development. “Maybe the Latin American countries can find things that work,” Mr. Rule said. He worried that adding a central bank is just adding yet another layer of government to the economy, but “at least we have competing idiots, and that’s probably a step in the right direction.”
Finally, talking about mining stocks, Mr. Rule sees a “generational opportunity, but also generational risk.” The junior mining community is composed of 60% to 80% of firms that are “worthless.” If no new money flows in, Mr. Rule sees it as a potential good in that “useless corporations will be taken out of the industry.” The key now, he argued, is “Differentiating between the good and the bad companies in bear markets,” which, he said, “Is behind my and Eric Sprott’s fortunes.” In talking about whether and, if so, when, mining stocks may rebound, Mr. Rule said, “I can’t tell you when, but I know the question begins with when, not with if.” With research or assistance in picking good mining companies, now might be an excellent time to invest in mining stocks.
