Source: Maurice Jackson for Streetwise Reports 07/07/2018
Rick Rule, CEO of Sprott U.S. Holdings, speaks with Maurice Jackson of Proven and Probable about investing in precious and base metals, energy, agriculture and water.
Maurice Jackson: Today, we will have a discussion regarding the value propositions you may be overlooking for your natural resource portfolio. Joining us for our conversation is legendary Rick Rule of Sprott Global Resource Investments, which is the preeminent name in the natural resource space.
Rick Rule: Maurice, it’s always a pleasure and congratulations on the incredible success of your site in the last couple of years.
Maurice: Thank you, sir. Rick, a wise man once told me and, by the way, you are the wise man I’m referring to here, two things that fit into the narrative for today’s discussion, “Everyone is a contrarian when the price goes up,” and “having courage and conviction.” I referenced these quotes because as speculators, we hear a thesis and it makes sense. We put some capital into the market and the price goes down or there are no press releases. In your experience, what actions do you see the speculator do next?
Rick: Well, that reminds me a lot of Mike Tyson’s observation that everybody has a plan till you hit them in the face. The truth is describing the rationale behind being a contrarian, buying straw hats in winter and buying things cheaply makes absolute sense, but people like company. When you’re standing alone, you often have to call into the courage of your convictions to stay a trade, even a rational trade, where the market action isn’t justifying the narrative. It can be very, very difficult to stay a trade as a contrarian. It is also a necessary thing to do.
Maurice: That’s why I wanted to cover the value propositions that aren’t obvious. Can we begin our discussion today with physical precious metals and in particular, not gold, but silver, platinum and palladium?
Rick: Those are different topics, of course. Silver is interesting because it’s difficult to know the fundamentals, so it’s inherently speculative. Let me explain that. In the first instance, unlike gold, silver is also an industrial material. So it gets used up. That’s an important part of silver. It’s used in many, many applications and only some of them involve recycling. Unlike gold, some of the supply in silver goes to what I like to call silver heaven. It gets used up in applications and goes away. The supply side of silver is much more problematic or at least much more interesting.
First, most silver isn’t produced from silver mines. It’s produced as a byproduct of other metal production like copper, lead, zinc and gold. So rather than just understanding the market dynamics in silver to forecast the future supply, you have to understand a lot about the production of other materials, where silver is a byproduct.
The second interesting thing about the silver market is that a bunch of the supply is held in private hands in South Asia, in Pakistan, in India, in Bangladesh, in Nepal and in Sri Lanka. Much of the silver is undeclared. It’s private wealth. So circumstances occur that you and I wouldn’t think of because we don’t live there. Things like the impact of a very good harvest in rural India, which means that the farmers have increased capital to save and rather than saving in rupees, that is in government currency, they might save in silver.
Conversely, difficult economic times in India or Pakistan, where their currency is collapsed, might cause those people to sell some of their silver simply because they need to use the money to feed their families. So it’s a very interesting topic in terms of supply and demand, one that I’ve worked on for 40 years and one that I must admit I have not mastered yet.
The second part of the silver story is very uncontrarian. That is, it’s the poor cousin, poor man’s substitute for gold. So when the gold market runs, because of the volatility of silver and because of its lower unit cost, because it’s more affordable to more people, it tends to run more than gold, both to the upside and the downside. So the ability that people have to forecast supply and demand in silver is very, very constrained at the same time as it is much more volatile than gold.
Moving on to platinum and palladium, these are, in addition to being precious metals, even more industrial materials. The important thing to know about both is that they have a way to move to the upside simply because the cost associated with using platinum and palladium is a very small part of the cost of the finished products that they are used in. The best example of it is, of course, as an auto catalyst.
It takes probably $150 worth of platinum and palladium to deliver the air quality standards that allow a new vehicle to be sold in developed nations markets like Germany, Japan and the United States. Now, the finished price of that vehicle is somewhere between $30,000 and $40,000 on average. So it takes $150 worth of PGMs to enable the sale of a $40,000 automobile. If the price of platinum were to double, it would have no discernible impact on the sticker price of a new car. So there’s some demand elasticity relative to price.
The second thing that contrarians need to understand about platinum, and this story has been a long time in coming, is that in the most important market for the production of platinum, South Africa, at current platinum prices, about 60% of the existing production is uneconomic. At a certain point, the South African government and the South African industry is likely to be unable or unwilling to continue to subsidize the production …read more
From:: The Energy Report