Rick Rule: Be a Risk Manager, Not a Reward Chaser

San Francisco Hard Assets Investment Conference 2012 Online Review

The Gold Report met up with Rick Rule, founder and chairman of Sprott Global Resource Investments Ltd, at the Hard Assets Conference in San Francisco. In this interview with The Gold Report, he shares his belief in the power of gold as both "catastrophe insurance" and an investment vehicle. As to equities, he sees a new discovery cycle lifting the prospects of majors and juniors alike, as long as they act like "rational" businesses.

The Gold Report: Rick, you believe the natural resources sector is experiencing a cyclical decline in a secular bull market similar to the 1970s. Is that true for other sectors as well?

Rick Rule: I learned the hard way not to assume that my success in the natural resource business was transferable to other sectors, so I am going to stick with resources.

However, there are parallels with the gold market. In the 1970s, we had a spectacular resource market, in particular for gold. Its price soared from $35/ounce (oz) to $850/oz. By 1975, in the middle of that secular bull market, gold had fallen to $100/oz. Those who sold at the bottom missed an 800% move in six years.

It is important to understand that in cyclical markets like resources, declines in secular markets are to be expected. From my point of view, you need to understand cyclical declines for what they are – sales.

TGR: Is it fair to think that the prices of natural resources will bounce back as they did in 1970s, when the recession was much shorter and not as global?

RR: That depends on the resource. For gold, the answer is yes because the parallels between the 1970s and today are striking.

The US dollar has stayed fairly strong, not because of the strength of the economy but as a function of the dollar's liquidity. As the US dollar appreciates relative to frontier and emerging market currencies, we are causing very real inflation in places like India, Vietnam and South Africa.

In the US however, we are seeing inflation in two places: in the liabilities that we are leaving for our heirs and in a tremendous bond bubble. The prices of US Treasury securities, the inverse function of the yields, suggest that we are in the biggest economic bubble in history.

When the US went through the economic turmoil of the 1970s, we went into it with a much stronger national balance sheet than we have today. Then, we had the ability to capitalize our reconstruction while we serviced our debts. I am not sure we have that ability anymore. Our federal on-balance sheet and off-balance sheet liabilities, relative to our ability to service those obligations, are much lower. The alternative is to inflate our obligations away, which would be good for bullion.

Finally, in a demographic sense, our needs will continue to outpace our means. In the 1970s, you and I were coming into our productive years. Today, you and I are at the opposite end of our productive years, no matter how much we want to forestall it. The demographic implications of that are profound. If a country cannot produce its way out of its deficit, it has to default.

TGR: Or quantitative ease.

RR: That is a form of default. There are two ways to default. You can renounce your obligations or you can lie. Quantitative easing (QE) is the lying part. You depreciate the currency that your obligation is in.

TGR: But with the entire world in that situation, are we in a cyclical decline or is the bull market over, specifically for gold?

RR: The West is in for a period of muted demand for commodities. As the advanced economies become less free and poorer, and frontier markets become more free and richer, it will lead to volatile demand characteristics for many industrial commodities.

Overall, I am afraid that the circumstances ahead of us will be very good for all precious metals. Traditionally, gold has been a great way to avoid the impact of chaos. When other exchange mechanisms – yen, renminbi, euros, dollars – are engaged in competitive devaluation while managing a staged default, people will look for a medium of exchange that is also a store of value: gold. It is not a promise to pay; it is payment.

TGR: Does more QE portend that gold or equities will be a better return?

RR: They are very different asset classes.

Rationally, I might not be well advised to own any gold at all because I have so much of my net worth tied up in my business, which reacts to the gold market. Nonetheless, I own a lot of gold, silver and platinum bullion. I own it the way that I own life, auto or homeowner insurance. I regard it as catastrophe insurance.

I would suggest that your readers establish a core or insurance position in bullion and hope to God that later on they can regard that investment as a waste of time and money.

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