Rick Rule Interview Transcript
Speaker key:
BS Boaz Shoshan
RR Rick Rule
BS Hello and welcome to our silver symposium. In today’s video, you’ll be seeing an interview I did with Rick Rule of Sprott US Holdings Incorporated recently. Now, Rick Rule is a very wealthy man. He’s become very wealthy from his knowledge of the resources sector in general, and he’s probably forgotten more about silver than most of us will ever know.
I do hope you enjoy this interview where we discuss silver, its past, its future, and the manner in which commodities cycle over time. That’s all from me at the moment, you’ll see me again at the end, and I hope you enjoy the interview.
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Well, Rick, thank you so much for joining me today. I can’t wait to get into it and discuss silver with you.
RR It’s a pleasure. I’m looking forward to it as well.
BS I thought, to start us off, where exactly and how exactly did you come across silver in the first place? What was it that really drew you to the white metal and what interested you about it?
RR I’m going to give way my age now. I came of age as an investor during the bull market of the 1970s. I had the good fortune to be involved in natural resources, really, from early adulthood. And the performance of precious metals, but particularly, the performance of silver in that decade, is still legendary. So, I would describe my first exposure to silver really as a beneficiary.
As a young man, I went to university in British Columbia, the University of British Columbia, and was active in resource markets in western Canada and north western United States, which was a fairly formidable silver producing area. Just to give your audience a sense of how that market went, the silver price at the beginning of the decade was something like a dollar and a half an ounce, US. And by the end of the decade, after the Hunt silver squeeze, the price was $50 an ounce.
The performance of the stocks was, if anything, more dramatic, but one that comes most immediately to mind is Coeur d’Alene Mining, now Coeur Mining, which began the decade at ten cents a share and ended the decade, if my memory serves me correctly, at $64 a share. If you are a young man with an appetite for risk, trying to get ahead, those types of rewards are absolutely intoxicating. And then, of course, there is the narrative around precious metals generally.
Many of your audience won’t remember or have any knowledge of the late 60s and the early 70s, but they resembled, in many senses, the circumstances that confront us now. Social tensions between generations, social tensions, if you will, between classes. Excessive government expenditure, trying to win the war in Vietnam and the war on poverty, simultaneously, of course, losing both.
And the whole narrative around precious metals relative to fiat currencies was one that played out in the decade in the 70s. And as a young, impressionable man, the whole narrative, the idea that you could defend yourself against your government through the ownership of precious metals, was extremely attractive to me, much, as I believe, it’s going to become very attractive to people of your generation in the next ten years.
BS When you describe the incredible rise of silver during the 70s, it really does make me wish I’d been there to witness it myself and partake in it. But when you describe those forces that were very evident then, it does really feel like a lot of them are evident now, right?
RR Yes. In many senses, this is a better time. At that point in time, in terms of the equities market or in terms of private investment and means of production with regards to silver, most of the good silver producing areas in the world were closed to foreign investments. Mexico was closed, Peru was closed, Russia was closed. And if you look at political locales that had the potential to produce economic silver, we wouldn’t have a silver equities market today without access to Mexican production, Peruvian production, and Russian production.
So, if anything, today’s circumstance is better than the circumstance that existed in the 1970s. It doesn’t mean that it will play out the same way, because certainly, it’s progressing from a higher base.
BS On that note, when you’re looking at silver production and it can now be sourced and investors can partake in it in a precious metal rally in ways that they couldn’t before, when you’re looking at the price itself, when it comes to silver and its history as a monetary metal, and its more recent history as an industrial metal and with its evolution of industrial applications, is there any advice you can give when it comes to the volatility of silver?
How you can tell what hat it’s wearing. Is there any way that you can see whether or not the price action is being justified by industrial demand or a lack of industrial demand, or its desire for the monetary aspect that it, historically, is in?
RR You’re going to hate this answer.
BS No. Go ahead.
RR No. And let me explain that. Looking at supply and demand fundamentals on silver, which I’ve done now for 45 years of my life, there are so many variables that Warren Buffett describes the process as attempting to know the unknowable, and therefore, a waste of time. On the supply side, first of all, nobody knows how much silver exists above ground as private savings, particularly in South Asia, India, Pakistan, Bangladesh, Sri Lanka.
So, understanding supply and demand, because it’s a savings instrument for poor people, involves making economic forecasts about South Asia. Will the harvest be good? Will the peasants have surplus capitals to orient silver? Will the Indian rupia decline? Will peasants need to dishoard to feed their families? Of course, the other part of supply, new mined supply, is tricky, too.
Because most silver isn’t produced in silver mines. It’s produced as a by-product in goldmines, in copper mines, in lead zinc mines. So, on the supply side, you need to understand something about the economics of all of those base metals, while keeping tabs, too, on the production profile of mines and production and mines coming into production. On a different side, we, in the West, of course, think of both industrial demand.
And, by the way, industrial demand is growing very rapidly. Your listeners, being young and tech savvy, probably understand this. But silver’s application, as an example, in solar panels, where it’s indispensable because of its malleability and its reflective qualities, are growing really worldwide. And what most people don’t understand is the efficaciousness of silver in various biomedical applications.
It turns out to be a spectacular germicide, which means that its use in healthcare and hospitalisation, and more recently, in the industrial treating of wastewater, is becoming very important. It would seem that silver, the utility of silver in industrial applications, means industrial demand will continue. And we need to talk about that utility. Silver has some properties that means it has extremely high fabrication utility.
Because of its reflectivity, as an example, there are very few other materials that you can use to generate solar power, other than silver. A fairly small amount of silver allows you to sell a solar panel and generate electricity. And were the price of silver to double or triple, in the near term, the technology doesn’t exist to effect a substitute for it. So, demand is relatively inelastic in the near term, relative to price.
Similarly, in its biomedical applications, it turns out, in certain circumstances, that silver is easily the most efficient germicide on the planet. If the price of silver were to triple or were to quadruple, that pales before the price of a human life. And the consequence of that extraordinary utility is as industrial applications grow, in the near term, there is very little inelasticity of demand, relative to price.
Certainly, brilliant young people your age are going to find fabrication applications in a higher silver price environment that will allow us to use less silver and achieve the same outcome. But that won’t happen quickly. I’m very sorry for the long answer, but it’s a question that I get asked, literally, on a daily basis with incoming emails. And it’s easier, for an outlet like yours, where I’m talking to 5,000 or 6,000 people at the same time, to do it once.
BS On that note, with industrial demand for it, because it does seem like there was… Humankind is constantly coming up with means of using silver, just because it has all of these great properties. And then, as you describe, on the supply side, it’s very hard to really estimate just how much silver is being recycled and the manner in which more supply is coming onto the market from above ground stock and things like that. So, when you’re looking at what could be, what is the driver of the silver price? Do you really just look to gold as the key underpinning force for that?
RR In my experience, in the West, precious metals markets are led by gold. Gold moves first because gold is based on fear. Gold is, in fact, and investment class. I would argue with you that silver is more of a speculative class. Silver moves after the momentum has been established by gold, but it, historically, has moved both further and faster after it got going. That’s true, I think, for two reasons.
One is because the silver market is a factoid, which is to say, it has always been that way and as a consequence of that, it still is. But the second is because the unit price of silver is low enough that in emerging and frontier markets, where people have the same concerns that you and I have, but they don’t have the same means, the lower unit cost of silver affords them metal denominated savings that they can afford.
And so, as an example, among the South Asian peasantry, to the extent that they become concerned about the purchasing power of their savings in rupia, which they’ve been occasioned to do for 1,000 years, assuming that they have surplus income to save, silver has been a preferred source of savings. There are other things that poor people do, obviously. They can buy two or three extra sheets of steel roofing above and beyond their needs.
But in terms of a liquid asset class, a liquid savings class, that is an asset without being somebody else’s liability, silver performs a unique role for very poor people on a global basis.
BS Yes. It’s that dynamic of having that lower unit cost, it seems to be forever in its favour, as it were. When it comes to investing in silver, by itself as a speculative asset, not going directly to gold, when you say gold, gold is what leads it, gold is what starts, and then silver catches up. During that period in between that where gold is rising for a while and silver hasn’t popped yet, are there any specific catalysts that you see as what really begin the rally?
RR There probably are, I’ve just never been smart enough to see them. My suspicion is if we looked at the anatomy of prior silver bull markets, the truly anomalous ones were led by South Asia, and I’m not intelligent enough to be able to forecast South Asia. An example would be in the middle of the decade of the 1960s, when Warren Buffett announced that he had purchased about 15% of the world’s above ground supplies of silver, the silver market, at first, soared and then collapsed.
The silver bugs, of course, thought it was some grand conspiracy, the Trilateral Commission, and the Bilderbergers, and all this kind of stuff that they do. In fact, what happened was that there was a poor harvest in India, the Asian contagion happened, so the rupia fell and the Indian peasantry were confronted with two things. One, really severe economic shortfall, but two, a repricing of their silver, relative to their currency, that was up 400%.
They had the choice, themselves, to feed their family, which is to say, sell their silver, or not feed their family. And this immense hidden stockpile of silver came out of the Indian peasantry and absolutely clubbed the bull market.
BS Right, yes.
RR The consequence of that is that when you’re looking for rule thumb indicators around silver, you have to be extremely cautious about the probability of finding one. That isn’t to say that younger, smarter people, with a better grasp of history, might be able to do it. But certainly, for me, I’ve been trying for 45 years, and I would say it’s an extremely difficult thing.
I can only say, let’s back up a little bit, if you take the pieces that silver bull markets are kicked off by gold markets, if you look back over 50 years, what you will see in the gold and gold equities markets, is eight or nine recoveries from oversold bottoms that were really cyclical, rather than secular, recoveries. Dramatic events, to be sure, dramatic events. And they pulled silver up, too.
But you’ll see a different phenomenon, and I’ll talk about this chart later in this interview, you will see two distinct bull markets in precious metals. One beginning in 1970 and ending in 1981, the one that we talked about at the top of this interview, and another, beginning in the year 2000 and probably topping out in 2008 or 2011, depending on your point of view. What you will see when you look at those markets is different relative strength.
You will see flow of funds, first into gold, and you’ll see that gold needs to establish some momentum, before silver picks up. And you’ll see then the beginnings of a silver catch-up, which we certainly saw in the earlier part of this year. When silver really starts taking off in a bull market, what you will see is that the metal, historically, in the last two bull markets, seems to have outperformed gold about two and a half to one.
And what you see that’s really dramatic is the outperformance of the high quality silver stocks. Notice I said high quality silver stocks. I’m not talking about a Vancouver penny dreadful, amalgamated moose pasture or something like that. I’m talking about people that actually have a chance at the silver business. When a silver bull market gets underway, it’s important to note that both primary investment motivators are in place, greed and fear.
Most investment classes appeal to one or the other, greed or fear. Silver appeals to both and the price ricochets higher on greed buying than fear buying. But the most dramatic moves, traditionally, have taken place in the silver stocks. And the reason for that is that the silver stocks are more leveraged in the silver metal itself. And their population is small and the market cap is small.
So, when the silver narrative becomes appealing, first to the traditional silver bug, and then to the broader investment audience, there simply isn’t enough market capitalisation to hold the money that comes into the space. My friend, Doug Casey, who you should interview some time, describes the phenomenon of the generalist money trying to come into silver equities as, quote, attempting to siphon Hoover Dam through a garden hose.
At the top of the interview, I teased your audience with Coeur d’Alene, ten cents to 64 cents, but other examples in the last decade, I remember that we started off the romp in silver standard, financing them at 72 cents. They went to $45. Similarly, Pan American Silver, I think we did the first financing at 50 cents, it went to $45 as well. I’m not suggesting a blanket approach to buying speculative silver equities, because most of them are looking for silver. They don’t have any.
And if the price of something you don’t have any of goes up, it shouldn’t affect your value. But in terms of the ten or 12 companies that are sensible speculations in silver, if this bull market follows the pattern of the last bull market, they’ll produce very handsome dates, indeed.
BS Yes. They’d stick with the higher quality silver names, those that do exist, rather than ones that simply have silver as part of the company name, and thus, attract an awful lot of capital. On that, with really risky things that you would think silver investors should really try and avoid, are there any other myths or things that you think are false indicators, false signals that a lot of people pay attention to, which maybe they shouldn’t be?
RR One common fallacy, I suspect, is the idea that people have that an increase in the commodity price has some fundamental impact on the explorers. It increases the value of the public perception around them and it lowers their cost of capital. But when you’re buying and exploration stock, what you’re betting on is the answer to an unanswered exploration question, it has much less to do with the silver price than whether or not the company will find any.
And I probably correct this mistake in ranking submitted portfolios four or five times a day, 250 days a year. That’s extremely important. The second thing, and this is really true across all asset classes, is that when you’re competing with other investors in the equities in the sector, the first thing to know is that there’s a fairly small group of people who are serially successful and a much larger group of people who are serially unsuccessful.
And knowing enough history to hang out with the smart guys and avoid the dumb guys is, I know it sounds silly and simple, but it’s most of what you need to do. There are some people who are extraordinarily good promoters. They have $750,000 financial relations budgets. Those stocks will go up, but the backside of the move, the backside of a hockey stick graph, is just as steep as the front side of a hockey stick graph. It’s a hell of a lot less fun. And so, people need to pay some attention to that.
BS When it comes to the silver price itself, and some of the indicators that people pay attention to as to whether or not silver’s going to go up or down, or undervalued, overvalued. I know you have some relatively controversial, for the silver bug community, at least, when it comes to the gold/silver ratio. Could you expand on your thinking about that?
RR The gold/silver ratio seems to be like another factoid. I’m using factoid to describe something that is, arguably, true, but also irrelevant, and a truth is taken out of context. Make no mistake, the gold, silver ratio moves markets because of its psychological impact. When people look to study something, they look for easy to grasp facts, whether or not those facts are economically valid or not. And I would argue that the gold/silver ratio was that.
The idea that the utility of a commodity, and therefore, its price, is a function of its relative abundance or scarcity in the Earth’s surface makes no sense to me. If the production cost of silver in a copper mine is effectively zero because it’s a by-product, and the production cost of gold is $1,200 an ounce in a primary gold mine, for one thing there will be differences on the supply side as a function of operating cost.
Similarly, their utility is different. Gold is really, truly, from my point of view, a form of money. That doesn’t mean that it doesn’t have industrial applications. It does, certainly, of microelectronics, as an example, and then jewellery. But silver has a full different set of utilities and a whole different set of circumstances, and even its utility as money is different than the utility of gold. It is true that silver, like gold, importantly, is a medium of exchange that’s simultaneously a source of value.
It isn’t a promise to pay, but rather pay by itself. But it’s a much more volatile form of money as a store of value, it unnerves people. The third thing that speculators need to understand about silver, particularly speculators your age that haven’t been rewarded or punished, rewarded and, in every circumstance, punished over the last 45 years, is the stupendous volatility in silver. Speculators don’t seem to mind upside volatility, because it validates their thesis, but they’re unnerved by downside volatility.
And if you were to unpack either of the last two bull markets, or even any of the last eight recoveries from oversold bottoms, what you will see is that each of the gold price and the silver price or the silver equities prices, can fall by 10% to 20% in cyclical declines, in secular rallies, with the same ease and frequency that you and I inhale and exhale. So, if you are going to play this game with the Robinhood mentality, where you’re attempting to trade ticks, you can and will become a victim of your own emotion.
A victim incrementally, maybe, because your trading costs are so low. But the truth is that if you decide that you’re going to embark on this course of action without the sense, at the beginning, that the bet is right sized, relative to your net worth, in other words, that you have the financial l staying power to stay the trade, and the psychological staying power to stay the trade, if you don’t have that, you don’t belong in this business.
The truth is that I guarantee you very few things about the silver and silver equities market, but this idea I take, in the next two years, you will see at least one, but probably two or three, cyclical declines and these could be dramatic. 10% to 20% declines. They’re irrelevant, actually, if, at the end of this bull market, you look at the chart, you won’t be able to see these declines. But living through them is a very, very, very different matter.
The truth is that if you’re correct about the thesis, and you’ve done the work, and you’ve identified how you’d like to participate in the market, however that is, volatility really is a series, a compressed series, of sales. It’s a very good thing, if you happen to be psychologically prepared. If you happen not to be psychologically prepared, what happens is, sequentially, you snatch defeat from the jaws of victory, which is, in fact, the way most people traded, unfortunately for them.
BS Right. Silver can be a very cruel mistress, when it comes to market movement. Do you think that means it lends itself much more to the buy and forget investor when it comes to going for high-quality equities?
RR I don’t think it does. I think it lends itself to the speculator who understands volatility for what it is and chooses to use volatility, rather than be used by volatility. Were I to be establishing a position in physical silver, by the way, I did that in 2015, so I have no need to do that, knowing that there are so many variables that I couldn’t understand anything about the micro moves in silver, I would probably try and establish part of a position upfront and then establish the rest of the position either through selling puts, as an example, or some other mechanism where I looked to use volatility to build my own position.
The silver stocks lend themselves, if one is going to be a trader, and I’m not suggesting that you should trade it. If one’s going to be a trader, the larger, more liquid, silver stocks, there’s only a few of them, have very active options markets, and one of the things that I personally have done has been trading the options. Not to make money on the options necessarily, but to be paid for volatility, and delightfully, be paid to buy low and sell high.
Let’s say that you liked Pan American Silver at some price and you buy yourself 1,000 shares in Pan American Silver, because the volatility is so extraordinary, you are often able to sell 90 or 120 a day below market puts, meaning that somebody is willing to pay you for the right to make you buy low. Simultaneously, someone else might, somebody who wants real leverage, might be willing to buy a call on your position 15% above market.
The idea, first of all, that you get paid to buy low and sell high is absolutely delightful. It’s difficult psychologically because when stuff gets put to you, it gets put on down days where you feel bad about your existing position. And when stuff gets called, it gets called in ebullient conditions and you think about receiving the call premium, but losing your position, and you get angry.
But the truth is, over 35 or 45 years, I’ve learnt that the idea that people are willing to pay me to make me do the right thing, buy low, sell high, is a wonderful way to increase my position and decrease my cost. When I was in university, I learnt that something like 98% of the options contracts ever written, they failed at maturity and would expire worthless. So, selling puts in calls, although they don’t have the blowout spreads that you can get buying them, is highly predictable.
And the idea that you can, two or three times a year, sell puts and calls around a core position, park your premiums, and use the premium payments to either increase your position, buy more of the underlying security, or reduce your average cost in the security, is an extraordinary way to take advantage of a bull market.
BS Yes, providing you have the right mindset, then it can be a real boon.
RR Yes, the right mindset. It probably requires to do it correctly, in other words, in order to have sufficient capital that you can put, you can buy, it probably requires $50,000 or so as a starter position, which is beyond the reach, I realise, for many beginning speculators.
BS Of course, yes. Going back to the silver price, itself. We’ve spoken about the industrial metal side and, at the same time, that monetary history that it has. Just in terms of the way you think about it, my memories of the great silver surge, up to 2011, were an awful lot of the narrative behind it was when it came to solar panels, so it was all about green energy and the usage of silver in these, in solar panels, this was going to become a structural buying force within the market that is going to put a floor on prices at a relatively high level.
Of course, the industrial consumption was there, it is there, but it didn’t create a floor on the silver price. I wonder, looking forward, and I think we’re both bullish on silver to some degree, it’s just really a matter of timescales and things like that, what do you think the prevailing narrative is going to be about this price move?
Because the monetary aspect of silver, the history of it, we’re further and further away from silver being used in any coinage, any official coinage, really, and certainly in the developed world, it’s less confined and it’s been used as a form of savings product. And yet, as you’ve already elucidated, when it comes to medicine and things, silver, we’re just finding more and more applications for it. What do you think the narrative is going to be when it comes to higher moves in silver in the future? And how true do you think the narrative’s going to be?
RR The narrative will continue unchanged. Part of human nature is that narrative becomes more compelling as it becomes less valid, due to price. What I mean is the narrative behind silver is of interest to people at $25. If the price of silver will go to $50, which is to say if industrial demand hadn’t changed, silver would be precisely half as attractive because some of the upside would have been taken away by price. But the price action would have validated the narrative.
Investors really need to think through this. There’s a wonderful book by [Ludwig] von Mises called Human Action that describes human volition. And it describes, in particular, the fact that we’re misinformed about our own characteristics. We believe that we’re dispassionate truth seekers. That we study all of the information available in the cosmos and we process it rationally and we come to conclusions, however unpleasant those conclusions might be.
The technical phrase for this is horseshit and this isn’t what we do at all. We look around for information that supports our own thesis and our bias and the information that means the most to us is recent information, rather than historical information. And what happens is that the increase in price validates, in our own mind, the narrative. And as the price goes up, which is to say the thesis becomes less important, people adhere to the thesis much more dramatically.
It bears out in the stock market all the time. Some penny stock will go from a buck to three bucks, without any underlying move or much of an underlying move of the silver price, as an example, and without any increased operating efficiency in the mine. Which means that arithmetically, the stock is precisely a third as attractive as it was before it went from a buck to three bucks. The fact that it’s in our portfolio makes us love it more.
We feel more, all this kind of thing, and the price action justifies the narrative. That’s probably the single, mots pernicious, aspect of speculation. The truth is that bear markets are always the authors of bull markets and bull markets are always the authors of bear markets. Which is to say that one makes money, over time, by being aggressive in bear markets and being cautious in bull markets. But in almost every circumstance, almost every speculator does exactly the opposite.
BS Yes. It seems the irresistible human nature aspect, I guess, of that. When it comes to, you’ve mentioned a few times cyclical moves in silver that are to be expected and are, of course, very regular. When it comes to the kind of cycles you’re referring to, can you explain a bit more about that, in terms of longer commodity cycles and silver cycles, and how that plays into your thesis and your investing?
RR In silver, I think you need to look at, at least, four different cycles. The easiest, and the one that everybody pays attention to, is the precious metal cycle. Precious metals bull markets, at least in my career, have been very long affairs, ten, 11 years. So, when people look at this cycle, which, arguably, began in 2018, some people say, is it over? Well, from an historical point of view, no. It doesn’t mean it isn’t, but from an historical point of view, no.
But the second thing that you need to look at in silver, which is much more difficult, is a broader economic cycle, and that’s true for two reasons. One, industrial applications for silver require demand, which is, in some ways, economically sensitive. If we can’t, as an example, afford to make millions of silver panels, we’re not going to make millions of silver panels and, as a consequence of that, demand for silver is going to be soft.
But, more importantly, remember that most silver is produced as an adjunct of base metals production. So, if copper production, lead production, and zinc production is down, by-product silver production is down too. The circumstance that’s probably the best for silver is rising precious metals prices, with a soft, general economy, which limits by-product silver production. My suspicion, by the way, is that the next three or four years may offer up exactly that.
I’m not saying it’s going to, but it might offer up exactly that. And then, of course, there’s the interest rate cycle. Low interest rates, in effect, lower the holding cost and reduce the impact of competitive investments relative to silver. A lower interest rate is bullish for silver, both because it limits the attractiveness of other investment products and lowers the holding cost of silver, but also, in terms of the silver equities, because it lowers the cost of capital silver produces.
It affords higher earnings because of lower interest charges, and higher price earnings ratios, because of the relative attractiveness of dividends, relative to the yields on savings products. I’m not an economist, but I could make the argument that the next three or four years will offer up, precisely, that scenario.
Artificially low interest rates, strong precious metals markets because of government policies, and a weaker broad economy, which would limit, particularly, construction of new copper mines, new lead mines, and new zinc mines. I’m not going to say, for sure, that this would occur, because I don’t know. But it’s a scenario that I’m using for my own planning purposes.
BS In that kind of scenario where we’ve got very, very low interest rates and a weak broader economy on top of it, so the interest rates aren’t doing what they’re meant to be doing and stimulating activity, this harkens back a little, to me, at least, when it comes to things like the stagflation of the 70s where you end up with too much money, chasing a weak economy and just driving up the prices. Is that a scenario that you can see in the future or is it something that will remain in the past?
RR That’s above my pay grade. I’m not ducking the question, it’s that although the past is often prologue, the economy has changed so much since the 1970s. It’s become much more internationalised. Importantly, a lot of the bottom 20% of humankind has improved markedly over 35 years. And the great bullish trend the most people in the west ignore is the incredible increase in purchasing power and wealth among the bottom billion and a half people on earth. An unalloyed good in every circumstance.
But also, I think an important driver, coming out of this recovery. While it’s arguable that the policies being pursued by western governments are horrific for the economy, and probably pretty good for precious metals, the unsung positive is simply the ascent of man. There’s 1.2 billion people on the planet that don’t have access to electricity. They would like it. And they become enormously more productive and they become better consumers, particularly by the way of basic goods and commodities as that occurs.
And I think one of the things that will change the performance of the economy in the decade that’s in front of us, relative to the decade of the 1970s, will be precisely this ascent of man among the poorest of the poor. I’ll give you an example. In Malawi, a Central African country for those of your listeners who don’t know, 30 years ago, the greatest public health challenge was starvation. Today, the greatest public health challenge is obesity.
Now, I’m not suggesting to you that obesity is a good thing, but if you are a poor Malawian, obesity is a choice. Starvation is something that happened to you. And it’s worth using that as an illustration of the ascent of mankind. And it’s worth considering it as a way that changes the way that the economy will perform. Now, we have the ability, as a collective, to derail this. Trade wars. Politics. Everything that interferes with the free exchange of goods and services between free people makes the world poorer.
And it’s still possible that Xi and Trump, and Merkel, and all these big thinkers, could, through their best efforts, derail, temporarily, the ascent of man. It is still possible, politically, that we can snatch defeat from the jaws of victory. But my own suspicion is that three or four years out, the economy begins to recover irrespective of the best efforts of the legislature to make us all poorer.
BS We’ll go on that. When you’re talking about the grand ascent of man, and we’ve spoken about these periods like the 70s before and the great progress that’s occurred since then, and yet, still we find things like cycles taking place.
This is still something that we always are going to need to respect and expect as time goes on. Now, I’ve heard from you before in terms of your expectations for the performance of cycles in the future, that you expect there to be, you expect, in fact, the bookend of your career, in fact, to coincide with a grand upswing in a commodity cycle. And I was wondering if you’d be able to explain that a bit for our listeners. And also, if you’d be able to give it a silver tarnish with how you would expect it to tie in with the silver price.
RR Delighted. With a beginning disclaimer that seriously, I’m not an economist or a political scientist. The truth is, I’m an old credit guy. So, this is my suspicion. It’s the way I’m organising my life because it makes more sense than not to me. But don’t take it to the bank, please. I do believe I’m going to enjoy, in the next, say, seven years, two bull markets. One in precious metals, which I think I’m 18 months into.
I believe that this precious metals bull market has lots of room to run. Lots of room to run. And I believe this for several reasons, which is probably worthwhile, if you’ll indulge me conveying to your audience, so that they can understand my thesis. The first is that precious metals move particularly as a consequence of debasement of the currency. And debasement of the expectation of the purchasing power of other savings products nominated in fiat currencies.
Particularly, maybe this is US centric, the US dollar, which is the world’s reserve currency. The currency that most of my wealth has operated in. And I think that fear, with regards to US dollar-denominated savings products, is justified, I think, from policy. The first policy is, of course, quantitative easing. Which, if you and I did it, would be called counterfeiting. Creating, by keystroke, of currency units that aren’t the response to the liquidity needs of and expanding economy, but rather, our crack cocaine for a declining economy.
Irrespective of the politics, you cannot deny that increasing the free float of a currency debases the value of the existing float of a currency. If counterfeiting were good, you would be encouraged to do it and I would, too. The fact that it isn’t good means that if you do it, you go to prison. If they do it, it’s policy and they get re-elected. And I don’t see any demand around the world for less quantitative easing. Everybody is looking at the central pot and try to steal more, and more, and more.
The second thing that needs to be considered, jointly and severally, is debt and deficits. In the United States, our on balance sheet federal liabilities, not state and local federal liabilities, exceed $24 trillion. More alarming is our off balance sheet liabilities. You’re a young audience, if they don’t know what an off balance sheet liability is, all they have to do is look at me. I’m 67 years old. I’m not taking social security yet, but I could.
I get Medicare, I get Medicaid. I voted myself all this really cool stuff, all these really cool entitlements. I get it and you got to pay for it. That’s really what deficits are about. It’s about stealing money by old folks from young people. But separate, apart from the editorial, it’s not good for the currency. Then the third is artificially low interest rates.
Artificially low interest rates means that the savers who are building up the productive capacity of society are subsidising the spenders, who are reducing the productive capacity for society. And at the same time, they send the wrong signal to the economy and they are certainly bad. Artificially low interest rates are certainly bad for the bond market. Let’s look at the US ten-year Treasury. The US ten-year Treasury, for your younger viewers, is regarded as the world’s benchmark security. It’s the security, against which, all others are appraised.
It’s the deepest and most liquid securities market in the world. At present, well, let’s go back, 1981, the yield on the US ten-year Treasury peaked at about 15.5, which is to say that the US government proposed to give you 15.5% for loaning them money annually over ten years. A handsome rate of return, albeit in a currency that was devaluing. The ten year’s been in a bull market ever since then. The price, of course, varies inversely with the yield.
The yield now is at about 60 bases points. That tells me, first of all, that the bull market in the US ten-year Treasury, is either over or damn near at an end. It tells you something else though. 60 bases points in a currency that is devaluing at 1.6% a year, that number is not from an old, bald, libertarian crank. But rather, from the Congressional Budget Office, a different group of old, bald cranks. Their suggestion is that the currency is depreciating at 1.6% a year.
Simple arithmetic tells you, then, that the US ten-year Treasury loses you 1% a year. Jim Grant calls that return free risk. And if you argue that gold is particularly important as a substitute for other savings products, particularly debt, the concept of return free risk means that gold has to win a war that arithmetically, would be very difficult for it to lose. The fourth is related, which is to say, for institutional investors who have always applied 60, 40 equities debt split.
The idea being that when the economy faltered, the interest rate went down. And hence, the capital value of the bond went up. With a negative interest rate, the big institutional investors increasingly can’t afford to own debt. They have to disintermediate. They have to remove some of that 40% that they have stored in debt instruments and look for rother stores of value, which, I suspect, will be precious metals.
The fifth factor, and I’m sorry for this soliloquy, but it’s important for people to understand my thesis, the fifth is simply that precious metals are still broadly under owned. People don’t recognise this, but they’re broadly under owned. A recent study indicated that precious metals and precious metals related assets had a less than one half of 1% market share in all savings and investment products in the United States.
Important, first of all, in the absolute, this is an infinitesimal market share. But more important because the three decade mean was between 1.5% and 2%. So, if artificially low interest rates, quantitative easing, and deficits result in an increased interest in gold, which I think you’re seeing, gold doesn’t need to win the war against the US dollar. It just needs to lose it less badly.
We don’t need a gold standard. We don’t need a return to the 70s. All we need is a return to mean. And I think that we’re going to get something much more handsome than a return to mean. For those reasons, I believe that the precious metals bull market that we’re looking at is not a 12-month affair. I don’t see the legislature in any of the western countries, eliminating quantitative easing or artificially low interest rates or debt and deficits.
So, the circumstance propelling precious metals higher, I think, is intact. And I think it will be intact for quite some time. The thesis, with regard to industrial materials, is very different. The thesis with regards to industrial materials goes like this. the world has experienced, and perhaps, enjoyed an economic recovery beginning in 2009 from the sell-off, the liquidity related sell-off in 2008.
But I would argue that that recovery had more to do with excess liquidity and artificially low interest rates than it did with increases in productivity, increases in trade, in fact, there were decreases in trade and increases in wealth. In other words, I believe that some of that recovery was artificial. At any rate, in my experience, 67 years of age, a ten-year-old recovery is one that’s very long in the tooth indeed, and requires, if you will, a pause, a reset.
The truth is that recessions are a natural and normal part of human affairs, despite the fact that the big thinkers like to make them illegal. So, I suspect that the economy has to wear off of a ten year recovery. And I think the economy, too, needs to adapt to the new reality of the Covid-19 virus and the impact that the virus is having on global economies, which we haven’t seen in financial markets because of liquidity.
If I’m right about those two things, the global economy will be soft for two, or three, or four years, which will be very hard for industrial materials markets, because you require demand for those to occur. But this sets up a tremendous rally and here’s why. The soft commodity prices will soften both producer cashflows and increase the cost of capital, equity capital, to producers, and it will limit dramatically, constrained sustaining capital investments and new project construction.
I believe that you will balance supply and demand by reducing supply. In fact, that’s already gone on. We’ve under invested in productive capacity around natural resources for seven or eight years already, and if we do it for another two or three years, what happens is that when you balance supply and demand by reducing supply, when the market comes into balance and the price begins to move up, the producers can’t increase production to match the pricing signal because the lead times necessary to establish production are measured in decades, rather than months.
We saw precisely the circumstance occur in the 1998 to 2006 rally. We had underinvested in natural resources through the decade of the 90s, so that when we began to see emerging markets demand, particularly Chinese demand, come into the market, we were absolutely unable to supply that demand. And because of the extraordinary utility that commodities offer up, which is to say that the component price of a commodity, relative to the finished price of a product, is so low, fabricators are willing to pay whatever price in the near term that they have to.
So, if we look back to that last decade, the oil price ran from $15 a barrel. I remember the Economist magazine talking proudly about the end of oil. A headline, by the way, which they’ve just reran. Great to see them running twice. the price ran from $15 a barrel to $140 a barrel. The price of uranium ran from $8 to $140. The price of copper ran from 75 cents to $4.50. Will past be prologued in the same quantum? Probably not.
History, I would say, rhymes, rather than repeats. But we are putting in place a circumstance where we’re doing real damage to productive capacity in industrial materials around the world. My favourite, probably, is conventional oil and gas. The thought leader on conventional oil and gas worldwide seems to be an unsuccessful Swedish high school student. And the idea that the narrative around oil and gas is led by Greta is enormously amusing to me.
Not that she isn’t more competent than Merkel or Trump, but that’s putting her in a pretty paltry league. The truth is that most indications are that peak oil demand will occur in about 2035. And if you don’t invest in productive capacity, what you see is that every day that you pump an oil well, your business gets smaller. You have to make sustaining capital investments and we have to make large capital investments.
And if you don’t, you have supply shortages. Your generation, at least those who aren’t having $100,000 Teslas parked in their garage, need to ask themselves a simple question with regards to the oil price, and that is this. When you go from the room that you’re in now to your garage, and you turn the key to right, will your car start? Will your car start?
Because if you answered yes to that question five or six years from now, then you are saying that the oil price will rise to a price that’s high enough that the industry can earn its cost of capital, which is about $160 a barrel. If you make the stuff for 50 and you sell it for 40, and you lose $10 a barrel 90 million times a day, it gets rather boring. And that’s the circumstance that the industry finds itself in.
I’m saying that not to encourage investment in energy, but rather to illustrate my point for your listeners, that after or during this gold bull market, we’re going to have a stealth bull market in industrial materials. And that bull market will come out of a circumstance where the industrial materials and their producers have performed very poorly, so that nobody would be attracted to them at all.
Remember, again, what we said at the top of the interview, which is that bear markets are the authors, the cause of bull markets. And the bear market I see in industrial materials, I think, will set the pace for, pardon the rude phrase, a rip your face off rally in industrial materials three years out, four years out, five years out, I can’t tell you when. Sorry for the longwinded answer, but it’s a broad question.
BS No. I think it’s a great answer. And just pulling from that, when you talk about the industrial materials and the lack of investment in it is going to create some serious supply in elasticity, ultimately, and we’ve been talking about silver, of course, being a by-product of so many of these materials, like zinc and copper. I guess that just ties into the silver story a bit more, right?
RR And the silver speculator’s fantasy would be increasing monetary debasement and a very sluggish economy, which further reduced lead, zinc, and copper production worldwide. Now, before one carries that fantasy too far, remember the phantom above ground stocks in savers’ pockets, particularly in South Asia. I see some commentators now who are talking about $300 or $400 silver.
Simply based on its monetary attractiveness and the limitations in terms of by-product, I studiously avoid price targets personally. But I think that the really inflammatory price targets that people throw out there ignore the indeterminate, but large nature of existent above ground inventory.
BS Which is different from gold, right? Because the gold above ground is much more often recycled and we know a lot more about it.
RR Mostly, you can see it.
BS Yes, exactly. Well, Rick, I think this has been a great conversation. It’s been great listening to your observations on silver and, broadly, commodities as well.
RR Thank you. I hope this helps people your age avoid some of the mistakes I made at your age.
BS Well, there you have it, folks. That was Rick Rule of Sprott US Holdings Incorporated. I hope you enjoyed that interview as much as I did. It was great listening to Rick’s thoughts on the ascension of man and other broader, almost philosophical, concepts, all with the backdrop of silver and the prospects of a face-ripping rally in the future. But that is all that we have for the moment. I hope that you enjoyed it as much as I did and be sure to tune in for the next one.