A Different Phrase For Bear Market Is Sale

March 22, 2020

Rick Rule of Sprott USA and Maurice Jackson of Proven and Probable explore the effects of coronavirus on the precious metals markets and the best ways to invest in a recession.

Maurice Jackson: Today, we will find out if there is a crisis response for your investment portfolio. Joining us for a conversation is legendary investor Rick Rule of Sprott USA.

Rick Rule: Maurice, thank you so much for having me on. These are really interesting times, and it's fun to address your audience in times like these.

Maurice Jackson: Sir, it is an absolute privilege to have you on our program during these extreme global market conditions. Speculators want to find out what you're doing as a crisis response and what actions they may take on their portfolio under these current market conditions. From your perspective as one of the most highly regarded credit analysts in the world, was this financial collapse inevitable?

Rick Rule: I believe it was. I think what is more interesting than the pin, the pin being the virus, was the balloon. I really believe that the balloon is a function of various policy decisions and decisions that people, individually and as a society, made. I'm not belittling, by the way, the virus. I think that the rapid spread of the virus and the fact that there is, at present, no cure per se for the virus—that what you do is support the patient until the patient heals themself—means that there will be circumstances where the number of patients that require care exceeds society's current ability to provide that care. So, I'm not belittling the impact of the trigger or the virus.

What I would point out, however, was that the virus was the pin, and debt and the lack of savings, a lack of equity, was, in fact, the balloon. What we're into in an economic sense right now is a classic liquidity squeeze, a classic circumstance where trust between individuals, trust between individuals and their government, trust between banks has all eroded. Everyone is holding cash. Anything that has a bid is being sold, not necessarily by the investor but, as often as not, by the margin clerk where margin is unwinding.

Among gold investors, the lack of near-term response to go buy gold in the event of a crisis is always bewildering, because everybody buys gold in anticipation of the fact that gold will respond. First of all, gold has done its job. It hasn't held all of its value, but it's held a lot of value, and the fact is that gold has been sold to meet margin calls, which means for its owners, gold did the job. It provided the liquidity that enabled investors to hold on to some of their portfolio. That bid was there to hit while other bids weren't hit, but more importantly for gold investors and gold stock investors, the circumstance that causes the gold price to go up is not the crisis itself, but rather the policy response to the crisis.

In every circumstance, governments around the world are responding to the lack of liquidity, the lack of trust and the economic dislocation caused by the coronavirus to increase liquidity—that is, to pump more currency into the markets. Understand what this is. The currency isn't backed by anything. What the governments are doing with quantitative easing and liquidity operations, with overnight operations, is really truly counterfeiting.

The second thing that they're doing, of course, is that they are lowering the interest rate. In the case of the United States, 10-year treasury now to zero. So, if we think about the combined response of increasing the stock of currency unbacked by anything while simultaneously reducing the compensation to savers on borrowing, what we are doing is guaranteeing that people who save for future consumption in conventional instruments—U.S. 10-year treasuries and things like that—are absolutely guaranteed to enjoy lower purchasing power in the future than they enjoy today. That set of circumstances historically has always favored gold.

So, my suggestion to people is that the near-term performance of gold has been good. The intermediate and longer-term performance of gold should be very good. Notice that I said should be, because predictions often tell you more about the predictor than the future, and while everyone wants certainty, the only certainty that exists is that there is no certainty. We exist in probability. But if you think about gold's response over time to circumstances where officially sanctioned liquidity—that is, government debt and things like that—are questioned, gold has always done well in those times. I would expect gold to do well in those times today.

My own suspicion is that the gold stocks will continue to suffer relative to gold, but my belief is that ultimately, the gold stocks will do well relative to other stocks, and even relative to gold itself. If one remembers the period of time 2008–2010—that financial crisis—you will see immediately after the crisis that the gold price fell off. Then, the gold price recovered as a consequence of policy response. Then, the price of gold equities really took off as a consequence of the gold price.

In this circumstance, it is my suspicion that past will be prologue, and I think that your subscribers and our clients should look at their portfolios in that same vein. Sorry for the long answer, Maurice, but I've been answering this question all weekend so it's fresher on my mind.

Maurice Jackson: Well, you're speaking my language, and you've covered all the bases of what I actually want to cover, but I'll ask a couple more questions here, because these are questions that we received, of course, from shared clients and subscribers. What are the Fed's actions indicating to you? Second, are they enough? Is this finally the collapse that we've heard for a number of years? Is this finally going to come to fruition?

Rick Rule: Well, I think it depends on how you define a collapse. I don't think that we're going to have a circumstance where faith in the U.S. currency and U.S. institutions goes away. I don't think we're going to see the end of the dollar. I don't think we'll see the end of the Fed. I don't think we're going to see the end of the U.S. economy. It would not surprise me to have a legitimate debt crisis in this country. It would not surprise me to see a circumstance where major equity markets ended up being down by 50%. None of those things would surprise me.

The truth is, and this is hard for people to understand, a bear market doesn't cause real wealth to disappear. The fact that the price of your home falls from, I don't know, $700,000 to $500,000, doesn't make the house less livable. The brick and mortar, the real estate don't disappear, but sometimes they change hands. While that is unpleasant for the person whose hands the asset slipped from, over time, it's not unpleasant for the person to whom those assets were accrued.

This is a period of time where you have to manage your emotions and you have to manage your balance sheet. We've discussed many times, Maurice, in these interviews that a different phrase for bear market is sale. These are sales. It doesn't mean that the prices can't go lower. It doesn't mean that you go all in in this circumstance. What it means is that you look for circumstances where your estimation of the reward is much greater than your estimation of the risk, and where you personally can afford the risk that you were taking. I'm nibbling in this market now, Maurice, but I intend to be gobbling in the next while.

Maurice Jackson: This reminds me of our last conversation we had. To my disappointment—and I take full responsibility—it's been nine months, but we last talked about courage and conviction, and how fitting that is for this moment right here, right now.

Rick Rule: Agreed. Absolutely agreed.

Maurice Jackson: I also think back to your recent interview with Albert Lu of Sprott Media. An event that causes panic that is other than permanent is an opportunity. I couldn't have stated that any more perfectly, and I don't even know if you can expand on it any further than what you've already have, but it just makes so much sense, and it has so much clarity that if someone has been listening to our interviews, they should be prepared for opportunities that are generational here. Literally speaking, generational lifestyle changes are ahead of you.

So, we've talked about the natural resource space—in general, gold stocks—but are there any other sectors within the natural resource space that kind of have your attention as a shopping list item that you're looking at?

Rick Rule: The answer to that is yes, Maurice, and that merits a brief explanation. My own outlook, four or five weeks ago, was that in natural resource commodities other than precious metals, we were in for a long, slow, grinding bear market—that the price of those metals and materials was dependent on demand, and demand was going to begin to be constrained because we'd been in a 10-year economic recovery. That recovery itself was more driven by low interest rates than anything else.

What I think will happen now is that the economic decline will be much more precipitous rather than the unwinding of a recovery that would normally take place over two or three or four years, a long, slow, grinding retreat. I think we're going to have a hard recession, and I think the hard recession will do all of the damage to commodities that I expected to happen over three or four years in three or four months.

It would not surprise me; I'm not saying it's going to happen. This is not a forecast. It would not surprise me to see the copper price go below $2. It would not surprise me to see the oil price go to $20. It would not surprise me to see the uranium price go lower. It would not surprise me to see a whole range of commodity prices that I had expected to decline gradually, decline rapidly. That's bad news for those who hold the stocks like myself, some of them.

Now, the good news is that I would expect the recovery to begin to occur, not that we will feel it, but I would expect the recovery to occur this year rather than in 2023, 2024. I think the materials trade—that is, I think the time to buy the oil stocks, as an example, the big base metal stocks—may be the fourth quarter of this year or the first quarter of next year. That doesn't mean that there won't be individual opportunities in industrial materials that get so oversold this year that people with a long-term perspective shouldn't buy them. It just means that the buying opportunities that I see today in the better gold equities will likely appear in the raw materials sector Q4/2000 or Q1/2021.

Maurice Jackson: Let's take this conversation now back to the physical precious metals, if I may. I'm a licensed representative from Miles Franklin Precious Metals Investments, and I can tell you over the last couple of weeks here: huge demand on gold and silver; zero—I mean flatline—on platinum. What does that tell you about the current situation?

Rick Rule: I think a couple things. It probably tells you that people are nervous about any industrial recovery. Platinum is viewed in the United States as an industrial material rather than a precious metal. Were you, Maurice, a retail physical dealer in Japan or Korea or China, you would be feeling substantial demand for platinum investment products, but culturally, that isn't the way that Americans respond. Americans look at platinum as a component in catalytic conversion. Americans, probably rightly, are expecting lower auto sales this year and next year and, as a consequence, aren't buying platinum.

Similarly, I think the decoupling of gold and silver tells you that this market, in particular, is a fear-driven market. Gold responds to fear. Silver responds to greed. The people who are buying silver—except for people who are buying junk silver because they think they might need it for day-to-day liquidity—the people who are buying silver are buying silver because they believe that after gold moves, silver will move, and silver will move further. There is less greed buying, less silver buying in this market, than there is gold buying. What's driving this market right now is fear, and probably not misplaced fear.

Maurice Jackson: Just for clarification, because you introduced the value proposition to me regarding the platinum and palladium group elements here, as well as rhodium. . .so is platinum on your shopping list, or you're not a buyer right now?

Rick Rule: Platinum is on my shopping list. I have a reasonable proxy in physical platinum, in the Sprott Physical Platinum and Palladium Trust. I should note parenthetically that at my age—I'm 67—it's simply easier for me to buy physical precious metals on the New York Stock Exchange through the Sprott products. I don't discourage physical ownership; in fact, I encourage physical ownership. But for me, it's just easier to buy the stuff and sell the stuff online in an account, and I like the tax advantages of the Sprott product.

Were I younger and more inclined to take physical delivery and store it in a safe deposit box, I would likely be a platinum buyer now. The reason for that is that the utility of platinum is so extraordinary. The amount of platinum that it takes to deliver the air quality that we enjoy today relative to the cost of the vehicle that that platinum enables the sale of is incredible. At today's platinum prices, it takes about a $100 or $125 worth of platinum in catalytic converter to sell a $40,000 car. Were the price of platinum to double, it wouldn't impact the price of the vehicle whatsoever.

Also, the disparity in price between platinum and palladium means that people are investing like crazy in fabrication technology that will allow us over time—and by time, I mean two to five years—to begin to substitute platinum for palladium in many fabrication applications, but particularly in gasoline-powered internal combustion engines. So, I think that the price disparity between platinum and palladium will begin to close. I don't expect this to happen until the very real fears associated with the economic impact of the coronavirus fade.

In other words, don't be looking for a six-month response in your platinum trade, but the truth is that almost all of the people who are [reading] today will be spending money five years from now, 10 years from now, and 15 years from now. Their portfolio response over the five-year term, while it doesn't seem important today, will be very important over the course of their lifetime. In that circumstance, making investments that take into account longer time frames is always critical, and platinum fits very well in that thesis.

Maurice Jackson: Unfortunately or fortunately, I think you're probably aware of this, there was an explosion recently at the Anglo American platinum plant there in South Africa.

Rick Rule: Correct.

Maurice Jackson: So, that adds to the value proposition. By the way, you referenced the Sprott Physical Platinum Palladium Trust. The symbol for that is SPPP. That is a proxy; what that means, ladies and gentlemen, is you actually have the opportunity, if you had enough of a position in that, you could actually receive physical delivery, which is unique in and of itself because other precious metals exchange-traded funds (ETFs) do not allow you to take possession in kind, meaning physical possession. Rick, if you wanted to expand on that further, please jump in.

Rick Rule: The Sprott products, differently than ETFs, always have physical metal representing the investments that the shareholders have. In the case of our gold and silver products, as an example, that metal—the physical metal—is stored at the Royal Canadian Mint. The ETFs, which must respond every day to inflows and outflows of capital, often, for some portion of their portfolio, hold delivery receipts or deposit receipts, which means that for some fraction of the overall portfolios in a real liquidity crisis, rather than having physical metals, you would have physical metals and unsecured credits to financial institutions—that is, their promises to pay. While it would take a real extraordinary circumstance for that to be a problem, if you are the type of investor that buys gold and silver so that you won't have problems, that's something to consider.

Maurice Jackson: All right. In closing, sir, what keeps you up at night that we don't know about?

Rick Rule: There's a lot that keeps me up at night, Maurice. When people panic, they ask their government to do something, and I'm terrified that my government will do something. The circumstances that we find ourselves in today cannot be cured by government. They were caused by government. My hope is that all of your [readers] read a wonderful book by Nassim Taleb about being anti-fragile, and understand that the way out of this circumstance is for everyone individually to look after himself and herself and their families and their friends and their communities. Build strength yourself. By strengthening each of ourselves as individuals and families, we strengthen our society organically. The circumstance that we find ourselves in can't be solved by a policy response. It's a consequence of policy responses. Don't be looking to the collective to make you strong. Make yourself strong. Make your family strong, and the collective will take care of itself.

What keeps me awake at night is the specter of increased government interference in private affairs. The fact that people have been trained that there is a Fed put, that Big Brother will take care of them rather than Big Brother will victimize them, that's what keeps me awake at night.

Maurice Jackson: Last question. What did I forget to ask?

Rick Rule: I don't think much. One thing that I would say is that people who think like you think and I think, Maurice—people who are nervous about the ongoing purchasing power of the U.S. dollar—[may] decide as a consequence of that not to have any dollars. Big mistake in the short term. Maintain liquidity, including U.S. dollar liquidity. The fact that your purchasing power will decline by 3% or 4% annually compounded does not mean that you can afford not to have dollars. Having liquidity gives you the cash and the courage to take advantage of hard times rather than to be taken advantage of by hard times.

Repeat: Despite the fact that you are losing purchasing power holding dollars, hold some dollars. You will need liquidity to get through this next patch comfortably. Gold and silver are liquidity, but they're not the only form of liquidity. They are volatile liquidity. In addition to holding physical precious metals, hold U.S. dollar liquidity.

Maurice Jackson: Rick, I was dumb enough to listen to those words of instruction you provided about 10 years ago on one of your many interviews, and it has positioned me right here, right now to take advantage of opportunities that are presenting themselves. So, thank you for those words of wisdom. Rick, in the past, you've been extremely generous to us. May I ask, does Sprott USA still provide a free portfolio ranking?

Rick Rule: Yeah. There's no better time to avail yourself of this service either. I personally will review every precious metal portfolio submitted to me. This will not be investment advice because I don't know the person reading this interview. I don't know what will work for them. What I will do is review every company that I am familiar with. I will rank them on a scale of one to 10, one being best; 10 being worst. I will provide comments on the companies where that is appropriate.

All that the subscriber need do is e-mail me their portfolio, both names and symbols in text. Right now, our IT people won't let me open attachments for fear of viruses and my own technological incompetence. So, names and symbols in text. As an added bonus, I will include in my response a chart of the Barron's Gold Mining Index, which will show you just how cheap gold mining companies are in the historical context, and also a hundred-year commodity chart.

So, email those portfolios to me, names and symbols in text to rankings@sprottglobal.com. By the way, we're being buried in requests, so please be patient. It could take us a 10 days or two weeks to get these responses back to readers.

Maurice Jackson: For our readers, please make sure that you put in the subject line, Proven and Probable. Sir, for someone listening that wants to get more information on Sprott USA, please share the contact details.

Rick Rule: I think the best way to do it is to go to our website, www.sprottglobal.com. I would also urge anybody who is interested in our general point of view to go to Sprott Media, www.sprottusmedia.com, or look up our playlist on YouTube. All useful additions to your Proven and Probable subscription.

Maurice Jackson: They certainly are, and that's Albert Lu spearheading their Sprott Media. Before you make your next bullion purchase, make sure you call me. I'm a licensed representative for Miles Franklin Precious Metals Investments, where we provide a number of options to expand your precious metals portfolio from physical delivery, offshore depositories, precious metal IRAs and private blockchain distributed ledger technology. Call me directly at (855) 505-1900, or you may e-mail maurice@milesfranklin.com.

Finally, please subscribe to www.provenandprobable.com, where we provide mining insights and bullion sales. Subscription is free. Rick Rule of Sprott USA, thank you for joining us today on Proven and Probable.

Rick Rule: Always a pleasure, Maurice. Thank you.

Maurice Jackson is the founder of Proven and Probable, a site that aims to enrich its subscribers through education in precious metals and junior mining companies that will enrich the world.

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According to the Talmud you should keep one-third of your assets each in land, business interests, and gold.

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