Founder, Global Companies
I recently had the opportunity to interview Rick Rule, President of Sprott Asset Management USA, Inc. Our conversation ranged over currencies, social promises, precious metals and mining stocks.
I asked Mr. Rule about where he thought the value of the US dollar was heading. In the near term, he said, "I think the dollar's going to be strong…I've jokingly said, It's the worst currency in the world, except for all of the others." He stressed that the US dollar is still the world's reserve currency and it is the most liquid currency, which, in the short term, should help it retain its value against other currencies.
In the longer term, with the Japanese taking down the yen, which makes their exports cheaper, a ripple effect will develop. As Japanese exports become cheaper, other East Asian exporters, such as Taiwan, Korea, and Malaysia, and maybe even China, will have to answer the devaluation or face competitive pressures in their export markets. The ripple, however, will not stop in Asia. Europeans then will have to weaken the Euro or become uncompetitive. At that point, the United States will have to devalue, let the market devalue the dollar, or have our own trade deficit grow even more.
As I have stressed in articles before, Mr. Rule argued that in the longer term, all Western nations have levels of debt and lifestyles that cannot be continued given current levels of economic output.
What is going to happen?
At some point, there will be defaults on some of the social promises and obligations made by governments to their citizens, or currencies will further weaken. As I have argued, Mr. Rule believes that, "In the long term, all the fiat currencies will be weaker."
What sorts of social promises may be broken? One already has been broken. Mr. Rule said, "Cyprus showed that deposit insurance…is just another social promise."
A hundred years ago, it was expected that if a bank failed, the depositors would lose some or all of their deposits. What people need to realize, Mr. Rule emphasized, is that deposit insurance is a social promise, just like healthcare or pensions, which, when economic times worsen, can be broken - and already are beginning to be broken.
Mr. Rule said, "There is a range of social promises made in Europe over the past 30 years that are going to be too expensive to keep." Although Northern Europe's central economies are strong, they are far from strong enough to support all the social promises all of Europe has voted themselves, mainly at Germany's expense.
The Future: Less Benign than the Past
As I have been stressing recently, Mr. Rule emphasized that our experiences since 2008 have been relatively benign. He said, "It is comforting to believe that you don't have to secure your own financial future. That you don't have to prepare for catastrophe…That Obama will do it for you."
Many want to believe that the current solution being applied to economic crises - that liquidity is a substitute for solvency - will work in the market. Mr. Rule and I agree that such measures will work in the market for the short term, but certainly not in the long term, given rising debt, and decreasing confidence in fiat money as shown by increasing demand for physical gold.
Gold, Silver and Precious Metals
Based on interviews with gold whistle blower McGuire, I have written about a recent massive orchestrated attack on precious metals. Mr. Rule was uncertain whether such is the case, although he did not rule out the possibility.
He ascribed the recent precipitous decline in gold to a lot of leveraged players unwinding their positions. Mr. Rule argued that many structured products around gold and silver, such as yen-gold carry trades, involved investors who were required to meet margin calls or performance guarantees as they are called in that business. Some of this unwinding of momentum, leveraged, structured plays, he said, "were very, very, very vicious."
Mr. Rule said, "I think we are in a physical shortage in retail denominations (of gold and silver). There's no shortage of kilo bars. There is a shortage of coin rounds and strips, which are used to make coins." However, there is no reported shortage of silver or gold in larger denominations. Mr. Rule did forecast shortages in the wholesale bar market as wholesale bars begin to be converted into coin strip to make up for the shortages in the smaller retail denominations. He warned that retailers may kill off much of the retail market as many are beginning to charge 20% and 25% premiums on the price of precious metals.
When I asked about commitment of trader reports, Mr. Rule said he knew little about such reports, but did say that major banks' forecasts for precious metals over the past 15 years have been "so completely wrong…I mean their forecasts, and I mean all of them, in predicting the commodities markets 24 and 36 months out, is virtually unblemished by success." He did use such reports to give him a sense of where cash flow was going.
Turning to the mining sector, Mr. Rule agreed that there is a disconnect between the spot prices for precious metals and the futures hedge prices. Unlike McGuire and my belief, however, Mr. Rule argued that, given the price risks and current interest rates, "hedgers are getting the real price."
As Mr. Rule has stressed before, many mining stocks are now cheap enough to buy but Mr. Rule expects a recovery only in the very best by the end of this year. He emphasized that "Most of the companies on the TSXB are valueless." He said many such companies "could go to zero."
Mr. Rule warned that if interest rates begin to rise, "Look out below. Pick any asset class you want." He predicts major falls in every asset class if interest rates rise.
Mr. Rule's advice?
"Buy over time…gold should do well, silver generally does well with gold," he said. However, Mr. Rule especially likes platinum and palladium, given their easily understood fundamentals. As he has said before, he sees that "two or three years from now, we'll look back at summer of 2013 as a great opportunity."
Although he warned that many buys today could lose 20% or 30% of their value, he said, "Two or three years from now, I'll be kicking myself for not being more aggressive." Mr. Rule expects 500% increases in some asset areas. His picks: platinum and palladium, as well as cost-averaging into gold and silver.
Mr. Rule has dedicated his entire adult life to many aspects of natural resource securities investing. In addition to the knowledge and experience gained in a long, successful and focused career, he has a worldwide network of contacts in the natural resource and finance worlds. As Chairman of Sprott US Holdings, Mr. Rule leads a highly skilled team of earth science and finance professionals who enjoy a worldwide reputation for resource investment management.
The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AGQ, AGOL, DGL, DGLD, DGP, DGZ, DZZ, GLD, GLL, IAU, PHYS, SGOL, UBG, UGL, UGLD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.