While he owns both bullion and certificated bullion, many investors are better off buying bullion says the founder of Sprott Global Investments Ltd. and president of Sprott Asset Management USA Inc. in an Ask the Expert interview with Sprott Money News. Certificated bullion may be more convenient while bullion provides assurance that one has the actual good, rather than a promise.
Listen the interview here:
Sprott Money News (SMN): Thank you, listeners, for joining us today on Ask the Expert. My name is Neal Ohm with Sprott Money News. We’re very excited to have the pleasure of speaking with Rick Rule this morning. Rick Rule has been involved in the securities industry since 1974, and is a respected retail broker and investment manager in the United States.
With his expertise in mining, agriculture, energy, and water utilities, Rick has built a reputation for getting his clients involved in global investment opportunities in various resource industries. Rick is the founder of Sprott Global Resource Investments, Ltd., an independent broker dealer, and president of the Sprott Asset Management USA, Inc., a registered investment advisory firm.
Both companies are wholly owned subsidiaries of Sprott Incorporated, a large natural resource investment firm in Canada with over $10 billion in assets under management. For information on how to invest with Rick, email Rick and his team at email@example.com. With this, I’m pleased to welcome Rick Rule this morning. Hi, Rick.
Rick Rule: Hi, how are you?
SMN: Great. We’re just going to get right into it. Let’s assume the US government has leased out all of their gold reserves. Does this mean that the actual physical gold is still located in the US under US government control, but true ownership, as evidence by the lease contracts, or is it held as a paper promise by non-US government parties?
RR: I think the truth is that either of those could be true. That’s something that we would probably be better off asking an attorney. But there’s a whole variety of situations which can take place. The gold trade at that level is fairly opaque, and there’s a wide range of contractual opportunities available to gold lessers and vendors.
I’m not suggesting, as an example that the questioner was asking, or I think assuming, that the US government had in fact leased out their entire holdings. That isn’t anything I’m suggesting. But there really are a wide variety of alternatives available to them.
I think the questioner is supposing, or is asking the question as to whether the US government actually has the gold, or, in the event of a financial meltdown, would become an unsecured or semi-secured creditor. I don’t have an answer to it, but I think it’s a very relevant question.
SMN: So, with that in mind, what would prevent the US government from declaring a state of emergency and reigning on all their lease contracts?
RR: The US government has shown through time that they can do pretty much whatever they want. I don’t think there’s anything necessarily, other than the commercial goodwill, which the United States government hasn’t been famous for over time, to keep them from doing that. In particular, the US government’s relationship with gold over time has been fairly schizophrenic.
The confiscation of private ownership would be one example. Backing off the gold standard, Nixon’s closing the gold window would be another example. The continuing frustration that private investors have felt with regards to Dr. Ron Paul’s efforts is an example. To audit the Fed, point to the fact that the US government and US central banking authorities relationship with the gold community has been opaque at best.
SMN: When was the last time Fort Knox was actually audited? Do you know that?
RR: I don’t think Fort Knox has been formally audited.
RR: I think they sort of declared a starting balance. But again, I’m no expert on that. Their resistance to an audit or any sort of oversight has been interesting.
SMN: So the second question is from one of our customers, Brian. His question is, “My concern is, government confiscation of gold and silver, whether it is confiscation of the physical metal or the government debasing the value of mutual fund units that hold physical gold and silver within the portfolio, is it possible for the US or Canadian government to take away our mutual fund units or debase their value?
RR: It’s politically difficult for them to do that. But in terms of it being possible in a state of emergency or a declared state of emergency, they have pretty broad powers. I wouldn’t want to speak, because I’m not a Canadian, to what the Canadian government may or may not be, either A) willing, or B) able to do.
The United States government has shown that in times when they perceive an emergency – notice I said “they perceive an emergency” – that they consider their powers to be fairly broad. I would encourage citizens on either side of the border to be very careful in placing any trust in those officials and to assume that they are capable of the worst.
SMN: Yeah. With that in mind, would you find it better off to buy bullion then?
RR: I think many investors are better off buying bullion. The question becomes, how and where you store it. Certainly, I own both. That is, bullion and certificated bullion. While I find the certificated bullion to be more convenient, there is something about the – oh, I don’t know how you’d say it – the sort of assurance that one has when one has the actual good, rather than a promise with regards to the good.
I think that’s really up to the individual investor. I certainly wouldn’t encourage what is now euphemistically referred to in the United States as “midnight gardening,” where investors take physical possession and try and hide it around the house. I’ve been very nervous when my customers have described their efforts to do this to me. The nervousness is, of course, that you’re visited by people whom you normally wouldn’t invite over for tea.
So if one would engage in this practice, one would certainly be well-advised not tell anybody about it, myself included.
SMN: Okay. The third question comes from Cyril. “Only if you are arguing for deflation, Prechter and Dent to name a couple, but in the chance that the deflationists are correct, which commodities will be affected the least?
RR: Interestingly, in deflationary crashes, that is, in circumstances where the outcome is, at least for a while, catastrophic, gold and silver have done well. They were thought of as inflation hedges, but in fact, they’re catastrophe hedges. Other commodities that will do rather well in a deflationary crash are commodities that are A) undervalued, but B) are used on an ongoing basis.
So I would suspect, as an example, that people who have the ability to be invested in water, might do well in deflationary crash. But in the near-term, deflationary crashes take almost no prisoners.
SMN: Okay. The next question, I guess we could have put with Brian’s question, from question two. In your opinion, what percentage of portfolio would you recommend investing in either gold or silver bullion?
RR: I don’t think there is a one-size-fits-all answer. I hear this question an awful lot. But it really depends, as an example, on how much liquidity the investor has in other parts of his or her portfolio, and how much of the portfolio is concentrated in debt instruments. As an example, older investors that have large long- bond portfolios, looking to maximize income in their retirement years, run a real risk from inflation, and those investors should probably hedge their long-bond portfolios with gold or silver.
The long-bond in particular, in inflationary circumstances, becomes what, I think it was Franz Pique, described as certificates of guaranteed confiscation. As the pernicious, in fact, effects of inflation wear down the purchasing power of the individual savings. So there really is no one-size-fits-all answer. But I think, it’s depending on individual circumstance and depending on how much pricing power the individual has built in his or her own profession.
An individual that has lots and lots of income relative to expenditure, and has pricing power, in other words, has the sort of job that adds so much value to society that their own compensation, they can adjust their own compensation in some fashion, probably needs to have less bullion, with regards to their total portfolio. But I really do believe it’s an individual question.
SMN: Okay. Question number five is from Graham. “How can the common man invest in water rights? I know that you do this privately. However, is there a way for retail investors to invest via public company?”
RR: There are three public companies. I’m precluded from naming them in a public transmission like this. But to the extent that people are interested in public company investments in water rights, certainly they should contact us directly, and we can take them through the available options. With regards to private citizens investing in a privately traded water rights, it’s relatively straightforward, as opposed to being relatively simple.
I don’t want to give an answer for Canada, because I’m not versed with water law in Canada. But in the United States, water rights trade fairly freely, depending on the jurisdiction that one lives in. Certainly jurisdictions like New Mexico, Texas, Wyoming, and Nevada have very freely traded water rights. California has reasonably freely traded water rights, too. But they’ve largely been bought up over the last 25 years. So pardon the pun, they’re highly illiquid.
SMN: Okay. Question six is from Larry. “When the inevitable debt bomb goes off in the USA or Europe, do you think there will be an initial drop in the price of gold? For example, in the past, we’ve noticed an initial selling off of gold to cover losses in the stock market. Would you agree with this?”
RR: The answer to that is absolutely, yes. What happens in a cataclysmic default, a financial system default, is that sale decisions in most portfolios are made by the margin clerk, not by the investor for his or her own account, and the margin clerk doesn’t sell what the investor likes best. The margin clerk sells what has a bid.
Because gold and silver have always been liquid, they have sold off fairly aggressively in any kind of economic catastrophe. What’s interesting, however, is they hold their value better over time. But certainly, in a set of circumstances like, as an example, the 1987 crash, where major equity markets fell 25% overnight, everything gets sold to meet margin.
SMN: Great. Forex, in your opinion, for the near-term for gold and silver?
RR: No. Your viewers will note that I’m closing in on my 60th year, so any temptation to do that has been expunged.
SMN: Oh, well I’ll give you an early congratulations.
RR: Thank you.
SMN: Will you speaking at any conferences this fall, where our viewers might be able to watch you on podcasts or go see you speak?
RR: I have a very broad speaking schedule this fall, and I am delighted to say that viewers in either the United States or Canada can obtain podcasts and transcripts of most of the speech simply by going to sprott.com or sprottglobal.com.
The Sprott Organization has been pretty good, in the last year, of bringing ourselves into this century, with regards to capturing the content of many Sprott speakers in many conferences on a global basis. So rather than following us, we bring ourselves to you via those two websites.
SMN: Well, that’s it for us, Rick. Thank you so much for your time, and have a great fall and the coming winter here, and we’ll speak with you soon. Thanks again for your time.
RR: Our pleasure. Thank you very much.
Rick Rule will give a keynote address on "Bear Markets are Best" on Friday, Nov. 16 as well participate in a "Bulls and Bears" keynote panel and conduct a free education workshop on "How to Interview Junior Mining Managements" on Saturday, Nov. 17, during the San Francisco Hard Assets Investment Conference.
Rick Rule has been involved in the securities industry since 1974 and is a respected retail broker and investment manager in the United States. With his expertise in mining, agriculture, energy and water utilities, Rick has built a reputation for getting his clients involved in global investment opportunities in various resource industries. Rick is the founder of Sprott Global Resource Investments, Ltd. (an independent broker-dealer) and president of Sprott Asset Management USA, Inc. (a registered investment advisory firm). Both companies are wholly owned subsidiaries of Sprott, Inc., a large natural resource investment firm in Canada with over $10 billion in assets under management. For information on how to invest with Rick, email Rick and his team at firstname.lastname@example.org.