Sprott USA’s Rick Rule: “No Market Goes Straight to Heaven” - Weekly Wrap-Up (August 16, 2019)

Speaker 1: You're listening to the weekly wrap-up on "Sprott Money News."

Craig: Well, hello once again from "Sprott Money News" and sprottmoney.com. It's Friday, August 16th, 2019. This is your weekly wrap-up. I'm your host, Craig Hemke, going it alone for a few minutes here this Friday because Eric Sprott is currently North of the Arctic Circle fishing for char, which is what retirees do. I'll be joined in a few moments by Rick Rule instead, and Rick has some very, very interesting commentary that I encourage you to listen to.

Before we get there, though, just a quick wrap up of the week's events. It has been a very busy week for the precious metal. As we record this on Friday morning gold is actually up more than 1% on the week, though. Doesn't feel like it after that crazy day we had back on Tuesday. I've got a last of about 1524 in the December COMEX contract. That's up $16 so far in the week, so we're looking at another good solid weekly gain for gold.

Silver up as well, looking to close above $17 today if it can hang in there. It's currently around $17.15. Both of those are really nice levels and some of the highest levels we've seen in quite a while, particularly in gold. If gold can close up here in North at 1520, that will be the best weekly close for gold since before it broke down back in April of 2013. So that would be a really good level to watch all through the day today to see if we can close North of 1520.

Really, any time you can put on another green candle on that chart, it's a good sign. We've had quite a rally. No doubt there are some indications that, at least on the COMEX level, things are getting a little overbought and a little heavy. And as you know, bull markets in the precious metals are typically defined by kind of a two-steps-forward, one-step-back pattern. Were quite obviously, at least to my eyes, in a renewed and solid bull market once we broke above 1360, a couple of months back.

And things are just looking very solid for the precious metals at this point. Helping us along is the global bond market. We now have over $16 trillion worth of negative-yielding bonds around the planet. Most of that is sovereign debt, where the entire yield curve of Germany, the entire yield curve of Switzerland, the entire yield curve of the Netherlands is in negative yields. Negative yields. My goodness.

But besides just that, there's now more than a trillion dollars worth of corporate debt that is also hosting a negative yield. It is a remarkable world that we live in here in 2019. Eric and I often talk about negative yields being one of the strongest fundamentals for physical gold ownership. You are ever going to find the argument from traditional asset managers, is always that gold doesn't pay a dividend, right? And you actually have to pay to store it, giving it a negative yield.

Well, heck if the bank or government is going to charge you interest to store hold your cash, well, that sure makes the argument for owning physical gold even stronger. So please remember to always visit Sprott Money. You can come to sprottmoney.com and find all sorts of great opportunities to acquire and hold physical precious metal. We'll also store it for...if you'd like. You can also hold physical precious metal in your registered investments. You can diversify your RRSP portfolio or your IRA with physical gold and silver through Sprott Money. So, again, sprottmoney.com and call us at 888-861-0775 at any time.

And one more thing, if you ever do find yourself in a cash crunch, in need of some liquidity, hey, Sprott Money will buy your metal from you as well. We actively buy investment-grade precious metals, and we'll buy back any precious metals that you purchase through us as well. So, hey, we are all-purpose. Give us a call 888-861-0775 to learn more.

I'm gonna turn it over now to a conversation I had yesterday with Rick Rule of Sprott, USA. Rick, gosh, there's hardly anybody in this industry more respected, and more wise and experienced than Rick Rule. I urge you to listen to this entire conversation as it is full of really insightful points from Rick. I asked him to kinda elaborate on some of the things that Eric and I talk about on a weekly basis. And Rick has some thoughts of his own that you're going to wanna hear. So please finish up this podcast by listening to the entire thing here with Rick Rule. And then, of course, come back next week when Eric will return, and we'll see how things look then.

So joining us now is Rick Rule. Most of you are familiar with Rick. He is, of course, a renowned natural resource investor. He's with Sprott, USA, and is obviously well-respected in our industry and in our sector. And so it's with Eric's absence today, it's great to get Rick's perspective on things. Rick, thank you so much for your time.

Rick: Always a pleasure and a delight and honor to fill in for Eric. Big shoes.

Craig: Very big shoes. Thank you for helping me. I wouldn't want to try to do this myself. Nobody would listen. So thankfully, I've got your expertise to rely upon this week. My friend, I wanna ask you...we're gonna just hit three quick topics, if anything, because these are topics that Eric has been mentioning frequently almost every week for the last month or two. And I thought, hey, you know what? You guys have known each other for a long time, but you look at things...you know, you don't look at things identically. So I'd love to get your perspective.

First and foremost, I mean, this has been a fun year, especially since the end of May. We've had this tremendous run in gold. Silver just now starting to pick up. Eric's obviously really excited about where he thinks prices are headed the remainder of this year and in the next. Rick, what do you think? How do you feel about the metals, in general, at this point?

Rick: I think you can't not be excited particularly about the precious metals. We could talk about industrial materials later. But with regard to the precious metals, which are of course Eric's focus, I don't think you could help but be excited. Eric and I, for years, have agreed on the slogan, which is, "The bear markets are the authors of bull markets and bull markets are the authors of bear markets." These are extremely cyclical businesses. And the bear market that we just been through is really truly one for the record books.

The Toronto Stock Exchange venture resource index was off by something like 85% in nominal terms, more in real terms. So what you've seen so far, rather than being a rally, has been just a bit of a bounce from oversold levels. I don't think that the equities prices that we've seen so far come anywhere close to matching the underlying move that we've seen in the metal. And historically, the equity prices substantially outpaced the metal. So, yes, I'm absolutely excited. By the way, that doesn't mean that we won't back and seal in this market. No market goes straight to heaven.

Craig: Right.

Rick: So there are going to be ups and downs, but I think you're going to see higher highs and higher lows. In other words, my own belief is that the bull market is now with us.

Craig: That's an excellent point, Rick. I mean, you think the price of gold's up what? 30% maybe? And yet the GDX and ETF is up what, 60? I mean, you'd think the leverage should be greater than that.

Rick: The leverage is greater than that. I think one of the things that we're seeing is typical of the early stages of a bull market. The people move in to the primary metal first, and that makes perfect sense. If you think that gold's gonna go up, the first thing you do is buy gold. You don't do the collateral trade.

Now, the more sophisticated response is, of course, to buy the equities where there is both greater risk and greater reward. So we are where we would expect to be in a rally. I'm just surprised, with the strength of the gold move, that we haven't seen a better response so far from the equities.

Craig: Yeah, I wonder too if there isn't a little bit of skepticism still. You know, that 2016 really kind of pulled the rug out from under so many people because they didn't believe it at first. And then maybe didn't start buying the miners until the summertime and then you know, that was the final 10% of the move. Maybe there's still some, you know, a healthy degree of skepticism there.

Rick: Well, certainly that's human nature. You know, people can be intellectually interested in the narrative, but the fact is that it takes a price move to justify the narrative. And people's expectation of the future is set by their experience in the immediate past, which is why a 40% or 50% move is what it takes to begin to stimulate people's baser instincts, their greed.

Craig: Yeah.

Rick: That's why bull markets go on longer than they should and why bear markets fall more deeper than they should. A really interesting point is, very recently, I was able to give a lecture at our own Sprott Vancouver Natural Resources Symposium with a 40-year gold mining equities chart from [inaudible 00:09:50]. A superb chart. And one of the...There were a couple of interesting things about the chart.

And I'm not a technical analyst by the way, but it was so obvious where we were in terms of the market, that is at the bottom on a 40-year cycle. And also, so obvious how much room there is in even a small gold equities bull market. You know, if you look back over sort of seven or eight recent recoveries in gold equities, a poor recovery is 150% or 200%. A grand recovery is 1200%.

Now, I'm not suggesting that your listeners go out, take a second mortgage on their house and buy penny gold stocks. What I am suggesting is that, as an investing public...I'm speaking in US terms now. I know there's a lot of Canadians that listen to this. But in US terms, the market share of precious metals and precious metals equities as a percentage of total investable assets ownership is between one third and one half of 1%.

Craig: Yeah.

Rick: In 1981, at the top of the epic gold bull market, the same number was 8%. And the three-decade mean is between 2% and 2.5%. So if you assume, don't assume that gold and precious metals equities will reclaim their prior market share in terms of investable assets. Just think about a return to the three-decade mean. If you had a return to the three-decade mean, demand for precious metals and precious metals equities in the United States, which is 24% of the world's investable assets, would quadruple or quintuple.

Craig: I want everybody to kind of mark that spot in this podcast. And when we're done, go back and listen to that again, please. That's some fantastic information, Rick. And that's something everybody needs to give a thorough consideration to. My second question for you is, kinda gets to process, if you will. Eric alerted us all, myself included, a couple months back, that it's the large-cap, highly leveraged, if you will, producers that surge first in a bull market because you know, if you're making $100 an ounce at $1200 gold, you're making $200 an ounce at 1300 gold so your earnings might, you know, come close to doubling.

At some point, the shift begins to go more toward juniors and explorers and things like that. I don't know what that dollar amount is for gold. It's gonna vary from company to company. But I just kinda wanna get your process in how, you know, that whole thing kinda lays out as you shift your investment focus from the big companies to the smaller ones.

Rick: Well, you're gonna have to take me off this question with a hook. I love this question. You know, to begin with, Eric is as good a judge of the impact of the story on a market as anybody that I've ever seen. Understanding not just a primary bull market, but the phases of the market, and how the phases of the market will attract various constituencies is just an absolutely astonishing talent of Eric's. It's also worthwhile to know that Eric's financial and psychological tolerance for risk is very, very high.

Craig: Yeah.

Rick: That's why he's a billionaire. But the truth is that while, most people that listen to your podcast might pretend to be investors, I suspect they're mostly speculators. And if you are a speculator, the idea that you would reserve some of your speculative portfolio for circumstances that, if you were wrong, could cost you half your money, but if you were right, could make you 10 or 15 times your money. That's just exactly the style of risk-reward that has made Eric Sprott, Eric Sprott.

The arithmetic that you talk about is very worth repeating. If you are, what the industry would term, an inefficient producer, let's say last year you made gold at $1100 an ounce all and you sold it for $1200 an ounce, so you made $100 an ounce. Now the gold price goes from $1200 to $1400 now, so the gold price is up 12% or 13%. But as a producer, your earnings have tripled. Think about that.

Craig: Yeah.

Rick: And it actually goes beyond that. You will have...I'm talking about you as a company. You will have mineralized material that isn't economic to extract at a certain gold price. But as the gold price goes up, more of the material that you have, which is marginal at lower gold prices, becomes economic. And the capital cost associated with extracting it is very low because you've already spent the capital to extract the higher quality rock.

So not only do you get an earnings escalation, but even as you're producing, you get a resource and reserve escalation. It's really a double or triple whammy in a positive sense. Now, don't do this with 100% of your capital. If you happen to be wrong about the gold price...I don't believe we are. But if you happen to be wrong, don't use money that you need for a child's college education or your breakfast to do this kinda thing with.

But for surplus capital, where you're looking for truly outside gains, where you have the financial and psychological staying power to take the risk, this is a very, very, very valid and, in fact, highly intelligent strategy.

Craig: Yeah, no doubt about it. And then hopefully, we're all going to get a chance to reap some of those rewards in the months ahead because, as you said, we think we know where the metals prices are going. To that end, the last thing I wanted to ask you about Rick, Eric has been very vocal over about the past month on this podcast about where he thinks silver is headed, and consequently, it's, like, he's looking under every rock that he can find, no pun intended, to find silver plays.

You know, there are very few straight-up silver plays, you know? Most silver mining is done as a part of base mining or gold mining. You know, you get silver on as a byproduct almost. So he's having a hard time finding silver plays. I would imagine you probably in the same boat. How would you try to find silver miners and investments?

Rick: First of all, you couldn't be more right. Historically, in precious metals bull markets, gold moves first. Silver lags and then silver moves further. Silver, however, is ubiquitous. There's lots of it around, maybe not enough to cover what's been contracted for in paper markets, but there's a lot of silver.

Silver stocks, however, are rare and high-quality silver stocks are rarer, yet. One of the formulative experiences of my career was in the early 1970s. First of all, watching the silver price go from, over the course of that decade, from say, what, a buck-sixty, a buck-seventy up to a peak of $50, which was pretty spectacular. But compare that with the shares of Coeur D'Alene Mines, which went from a dime to $65.

The truth is that the leverage inherent in silver stocks, the operating leverage is fantastic but the fact that they're so scarce, and the fact that the upside volatility drives capital into them in such extraordinary senses, it's really hard to imagine. My friend, Doug Casey described capital flowing into silver stocks during a silver bull market as being the equivalent of trying to siphon Hoover Dam through a garden hose. A fairly apt discussion.

So, my suspicion and Eric would, of course, describe me as granny Rule in terms of the conservatism that I'm about to display. But, you know, I would suggest that you begin a silver portfolio while silver prices are low like they are now, by owning silver. The first thing to go up will be silver. And of course, if you're a U.S. taxpayer, I would suggest the Sprott Physical Silver Trust...

Craig: Yes.

Rick: ...which is taxed at the capital gains level rather than the ordinary income tax level. But if you have a predilection for physical, I'm sure my good friends at Sprott Money could help you with that.

Craig: That's for sure.

Rick: Beyond that, I would move into the very highest quality silver companies. You want to participate in the market beta. In other words, the move up in the silver stocks will be dramatic enough that for most people having at least 75% or 80% of their silver portfolio in high-quality companies is recommended.

Now, if you're Eric Sprott, and you have owned the high-quality silver companies for three or four years, what you do is you move into the companies with the most leverage, which is precisely what Eric's looking for. And when he describes himself as looking under every rock, that's a little disingenuous. Eric has probably provided somewhere between 15% and 20% of the equity finance in the Canadian mining sector this year. So everybody, ourselves included, are bringing those rocks to Eric. He isn't having to look too hard. He just happened to be fairly selective.

Craig: Yeah, good point. Yeah, that's right.

Rick: Sprott, to the benefit of Eric, to the benefit of me, and to the benefit of you, has become an effective financial brand name for silver.

Craig: Yeah. Yeah. No doubt about it. And in searching for that high-quality silver producers, you said, what's the main thing you look for? Is there a certain metric?

Rick: Well, the high-quality ones, you look for people who generate cash at this level. They're few and far between.

Craig: Yeah.

Rick: The second thing you do is you go to where Eric goes. That is to say, producers that have the ability to produce a lot of silver but don't make any money at this level. I personally air towards companies that have larger deposits because, in my experience, large deposits generate positive surprises and small deposits generate negative surprises.

The other thing that you need to be able to do is you need to be able to consider jurisdictions that you might otherwise be uncomfortable with. The big silver producing countries in the world, Mexico and Peru, are countries where the jurisdiction is sometimes uncomfortable for Canadian or American investors. And to really be represented in silver you need to go where silver is.

Craig: No doubt about it. Gotta be ready for that and do a lot of your own homework and your own due diligence and make the assessments whether it fits in your long-term plans before doing anything, obviously, as well.

We've been speaking with Rick Rule, Sprott, USA. Rick, this has been extraordinarily valuable. Thank you so much for your time.

Rick: Well, once again, I'm honored to fill in for my mentor and former partner, Eric Sprott. It's been an absolute delight.

Craig: Thank you, Rick. And from all of us at "Sprott Money News" and sprottmoney.com, thank you for listening. We'll talk to you again next Friday.