Sprott Global Chairman and Founder Rick Rule recently spoke on a conference call to clients. He answered questions from clients on the current market environment for gold and silver.
Whatâs going to happen with gold and silver?
Theyâre going to be extremely volatile. But these are the sort of times where gold and silver have done very well over time. Remember, as my friend John Mauldin puts it, âWe want to own things central bankers canât print.â They canât print gold and silver.
Right now, weâre seeing a classic move from one set of hands to another. For the last 10 years, the pricing of gold and silver has been determined by the futures markets -- not the physical markets. Futures markets are highly leveraged and momentum-driven. Currently, long leveraged carry trades by institutions are unwinding. The buyers are unleveraged individuals purchasing record amounts of physical gold and silver around the world. A number of central banks in developing countries are also adding to their gold bullion reserves.
The Reserve Bank of India is doing everything it can to constrain purchases by individuals of physical gold and silver. Government in India has historically done everything it can to impede access to legal gold and silver. The citizens themselves happily go into real markets that smuggle gold. I believe the governmentâs efforts will fail.
What's your outlook on gold and silver if the Federal Reserve succeeds in putting an end to QE without triggering runaway inflation?
I donât know, but lower. I have substantial suspicions about the ability of the Federal Reserve to exit QE, however. What they are doing is liquefying the banks and issuing more debt than they can sell. Right now, new aggregate on-balance liabilities on the Federal level is $1.5 trillion per year. They finance that by selling $750 billion of debt, and by printing up $750 billion of debt which they use to buy existing bonds. The off-balance-sheet liabilities of the Treasury exceed $60 trillion and grow by about $4 trillion a year.
The idea that we are going to get through this without either defaulting on our obligations or inflating them away defies any rational analysis of the problem.
From my point of view youâre safer with gold in your portfolio. Experts who follow the market closely, including Eric Sprott, but also Morgan Stanley and the big bullion banks, say that the âanti-goldâ â what you consider in place of gold â is the U.S. 10-year Treasury. Mainstream institutional investors say that gold is ârisk-onâ and the 10-year Treasury is ârisk-off,â but I think that the world has it exactly confused. The U.S. Treasury -- the âanti-goldâ -- pays a 1.75% interest rate, which is well below the rate of inflation and assumes that there is no credit risk with regards to U.S. obligations. If nothing else, the lower interest rate lowers the cost â in terms of avoided cost â of owning gold.
Are you concerned that the government will put in place price controls or confiscate gold at some point in the future?
I think that the risk of that is relatively low given the transportability of wealthy today. They would have to put currency controls in place first, in which case we would all have greater concerns than the price of gold or gold equities. You can buy certificated instruments that hold gold outside the U.S., which may help protect you depending on how the law was enacted.
Will investors continue to look to the U.S. as a safe-haven for investments? Where should I invest if the U.S. is no longer safe?
The US dollar is the worst currency in the world â except all the others. The US dollar is the most liquid currency on the planet. As bad as we are in the US, we started off from a very good place. Compared to the Euro or to the Yen, weâre in pretty good shape.
But the ultimate outlook for the dollar remains bleak. The Western World is going to have a very difficult time with the debt burden that we have taken on to sustain our standard of living over the last 30 years, and that is going to have dire consequences for the dollar.
What types of investments make sense? I think you have to have some cash, despite the fact that your purchasing power will decline every year. You need to have bullion to hedge your cash. I think those of you who can afford to speculate will get some extraordinary bargains in the next 6 months, and I suspect that the very volatility that I see in the next 6 months will give investors a once in 20-year opportunity to buy high quality natural resource and infrastructure stocks at once in 20-year style prices.
Are any gold or silver miners stockpiling their production until precious metals prices go up? Why donât more gold and silver miners do this?
Sadly, most gold and silver mining managers donât believe in their product. They do not necessarily believe that gold and silver are money. Eric Sprott tried to convince many mining companies to hold their working capital in precious metals without success.
In my opinion, the 20-year bear market in mining from 1982 to 2002 did not attract the best and brightest management teams. Thatâs not to say that there arenât bright minds. But when gold goes from $250 per ounce to $1,250 per ounce and per-share cash flow goes down, the bulk of the businesses may be management-challenged.
What should I be buying now? Bullion or mining shares?
If you think that the metals prices are going up, own the metal â not the miners. Own the miners because you thinkthat there is something intrinsic to them that will take them higher. So, to begin with, own cash and the metals. Buy the miners if you can withstand -- financially and psychologically -- the risks and the volatility of the sector. Take particular attention, if youâre an accredited investor, to the private placements and the full warrants that should someday be coming to us.
Whatâs going to happen with gold and silver?
Theyâre going to be extremely volatile. But these are the sort of times where gold and silver have done very well over time. Remember, as my friend John Mauldin puts it, âWe want to own things central bankers canât print.â They canât print gold and silver.
Right now, weâre seeing a classic move from one set of hands to another. For the last 10 years, the pricing of gold and silver has been determined by the futures markets -- not the physical markets. Futures markets are highly leveraged and momentum-driven. Currently, long leveraged carry trades by institutions are unwinding. The buyers are unleveraged individuals purchasing record amounts of physical gold and silver around the world. A number of central banks in developing countries are also adding to their gold bullion reserves.
The Reserve Bank of India is doing everything it can to constrain purchases by individuals of physical gold and silver. Government in India has historically done everything it can to impede access to legal gold and silver. The citizens themselves happily go into real markets that smuggle gold. I believe the governmentâs efforts will fail.
What's your outlook on gold and silver if the Federal Reserve succeeds in putting an end to QE without triggering runaway inflation?
I donât know, but lower. I have substantial suspicions about the ability of the Federal Reserve to exit QE, however. What they are doing is liquefying the banks and issuing more debt than they can sell. Right now, new aggregate on-balance liabilities on the Federal level is $1.5 trillion per year. They finance that by selling $750 billion of debt, and by printing up $750 billion of debt which they use to buy existing bonds. The off-balance-sheet liabilities of the Treasury exceed $60 trillion and grow by about $4 trillion a year.
The idea that we are going to get through this without either defaulting on our obligations or inflating them away defies any rational analysis of the problem.
From my point of view youâre safer with gold in your portfolio. Experts who follow the market closely, including Eric Sprott, but also Morgan Stanley and the big bullion banks, say that the âanti-goldâ â what you consider in place of gold â is the U.S. 10-year Treasury. Mainstream institutional investors say that gold is ârisk-onâ and the 10-year Treasury is ârisk-off,â but I think that the world has it exactly confused. The U.S. Treasury -- the âanti-goldâ -- pays a 1.75% interest rate, which is well below the rate of inflation and assumes that there is no credit risk with regards to U.S. obligations. If nothing else, the lower interest rate lowers the cost â in terms of avoided cost â of owning gold.
Are you concerned that the government will put in place price controls or confiscate gold at some point in the future?
I think that the risk of that is relatively low given the transportability of wealthy today. They would have to put currency controls in place first, in which case we would all have greater concerns than the price of gold or gold equities. You can buy certificated instruments that hold gold outside the U.S., which may help protect you depending on how the law was enacted.
Will investors continue to look to the U.S. as a safe-haven for investments? Where should I invest if the U.S. is no longer safe?
The US dollar is the worst currency in the world â except all the others. The US dollar is the most liquid currency on the planet. As bad as we are in the US, we started off from a very good place. Compared to the Euro or to the Yen, weâre in pretty good shape.
But the ultimate outlook for the dollar remains bleak. The Western World is going to have a very difficult time with the debt burden that we have taken on to sustain our standard of living over the last 30 years, and that is going to have dire consequences for the dollar.
What types of investments make sense? I think you have to have some cash, despite the fact that your purchasing power will decline every year. You need to have bullion to hedge your cash. I think those of you who can afford to speculate will get some extraordinary bargains in the next 6 months, and I suspect that the very volatility that I see in the next 6 months will give investors a once in 20-year opportunity to buy high quality natural resource and infrastructure stocks at once in 20-year style prices.
Are any gold or silver miners stockpiling their production until precious metals prices go up? Why donât more gold and silver miners do this?
Sadly, most gold and silver mining managers donât believe in their product. They do not necessarily believe that gold and silver are money. Eric Sprott tried to convince many mining companies to hold their working capital in precious metals without success.
In my opinion, the 20-year bear market in mining from 1982 to 2002 did not attract the best and brightest management teams. Thatâs not to say that there arenât bright minds. But when gold goes from $250 per ounce to $1,250 per ounce and per-share cash flow goes down, the bulk of the businesses may be management-challenged.
What should I be buying now? Bullion or mining shares?
If you think that the metals prices are going up, own the metal â not the miners. Own the miners because you thinkthat there is something intrinsic to them that will take them higher. So, to begin with, own cash and the metals. Buy the miners if you can withstand -- financially and psychologically -- the risks and the volatility of the sector. Take particular attention, if youâre an accredited investor, to the private placements and the full warrants that should someday be coming to us.
