By Henry Bonner (hbonner@sprottglobal.com)<\/p>\n
\u201cI plan on using this recording a few years from now as marketing material,\u201d said Rick, speaking to current clients and friends of Sprott Global Resource Investments Ltd., the firm he founded in 1994. \u201cWhat I\u2019m going to talk about today I think will seem like a prescient market call three or four years from now.\u201d<\/p>\n
His recent update was about putting the \u2018carnage\u2019 and heavy damage to people\u2019s natural resources portfolio over the last two years, and acutely in the last couple of weeks, in perspective.<\/p>\n
\u201cIt\u2019s times like these that you\u2019ll look back on as the \u2018good old days,\u2019\u201d Rick suggests. \u201cIn 2017 or 2018, I believe we will think of 2014 as the days when you could buy companies with the most compelling projects and management teams at 75 percent discounts from their previous highs. \u2018Back then, we could see a company fall 30 percent after they refused to take money from us in a private placement, and we could buy the stock at even more attractive terms,\u2019 we\u2019ll say.<\/p>\n
\u201cWe have all had the experience of seeing goods on sale and procrastinating, and later on seeing them priced much higher. You think to yourself \u2018I really wish I\u2019d participated.\u2019 Those are the kinds of times that get referred to as \u2018the good old days.\u2019\u201d<\/p>\n
Right now, it feels like we couldn\u2019t be done with good old days soon enough. As Rick puts it, \u201cYou are either a contrarian or a victim, I\u2019ve often said. Sometimes, it\u2019s possible to be both.\u201d Right now certainly feels like one of those times.<\/p>\n
That\u2019s no reason to give up on your contrarian investments, according to Rick. If you were correct in your initial assessment, and the goods you bought were indeed \u2018on sale,\u2019 then the right thing to do is to hang on.<\/p>\n
As Rick explains, this is what made his fortune during the last period of \u2018good old days\u2019 for the resource sector \u2013 the profound bear market of the 1998 to 2001 period. He checked his reasoning for investing in the companies he owned, and decided he\u2019d made the right choice.<\/p>\n
Rick tells the story: \u201cCompanies in the resource sector were in a once-in-a-decade sale at the end of the 90\u2019s. There was one commodity in particular, uranium, which had been in a 20-year bear market. The price had gone from 32 dollars to 8 dollars a pound. Not only did people lose money, but, to make things worse, it was a despised material. It was perceived as having cost people their lives at Hiroshima, Nagasaki, or Three Mile Island. The commodity had underperformed so badly that the margins on producing it were now negative.<\/p>\n
\u201cThere was one Australian company at the time, called Paladin, which owned a uranium mine. The bear market for resources was even more severe in Australia than it was in Canada.<\/p>\n
\u201cIn 1998, I realized that uranium was a spectacular contrarian investment. Nuclear power made up 16% of the world\u2019s energy. As long as the Western world continued to want to have electricity, the price would have to go up, or the lights would go out. I had decided that Paladin was a highly speculative bet on that outcome.<\/p>\n
\u201cI financed them at 10 cents, and the stock rose a little. I financed them again at 12 cents. Then, things got ugly. The price went to 11 cents, then 9, then 8. A crisis of confidence had occurred among shareholders. The stock went all the way to 1 penny. That\u2019s the kind of situation where you have to re-examine your premises. Was there something wrong with Paladin\u2019s asset? Or was it my thesis that uranium would get more expensive that was wrong?<\/p>\n
\u201cI decided that my premises were accurate. The world consumed 160 million pounds of uranium, and it only produced around 80 million pounds. There was a standing supply of around 400 million in the way of a shortage. The deficit was getting worse because of low uranium prices. I also figured that Paladin\u2019s deposit would not make money at 8 dollars a pound, but could make money at 25 dollars per pound.<\/p>\n
\u201cI got the courage to stay with the trade, partly thanks to George Soros\u2019 comments that his fortune was made by finding commonly held perceptions that were false and betting against them.1 He had pulled 4 billion dollars out of a trade where he found that the perception that the bank of England could keep the Sterling strong was false. I decided that I was in good company with my bet on Paladin. My only enemy was time. I had to remain solvent, and make sure that Paladin remained solvent too.<\/p>\n
\u201cA few years later, my courage was rewarded. Shares went to 10 dollars a share from 1 cent. The stock added three zeros2. That was the single most important financial event of my career. I\u2019m not saying that the resource market will add three zeros from here, but when you think about the \u2018good old days\u2019 of 1998 to 2000, you\u2019ll find they have a lot in common with today\u2019s predicament.<\/p>\n
\u201cThe stock market was zooming higher, especially technology stocks. Debt markets were on fire with decreasing interest rates, and resources were cheap. Does any of that sound familiar?\u201d<\/p>\n
Listening to this, I thought \u2013 \u2018well there are some differences.\u2019 First off, there was no QE in 2000. I\u2019m not sure how that changes things; for all we know, QE and low interest rates fundamentally change the game. We\u2019re also in a situation where corporations are making record profits despite a poor economy. In 2000, the economy was arguably in a real boom phase, but corporate profits were lower. Perhaps Rick will address these questions on a future call. For now, let\u2019s go back to his premise on gold.<\/p>\n
\u201cNow is the time to re-examine our premises on gold. Let\u2019s look at how gold compares to US Treasuries, which compete with gold for savings worldwide. I\u2019m not advocating that you switch all of your dollars to gold, but given that gold currently represents around 0.25% of investment portfolios, there is room for more gold in most people\u2019s portfolios. The 10-year US Treasury currently yields between 2.5 and 2.6 percent. Those bonds are guaranteed by taxation and the Fed\u2019s ability to print. On its face, that yield comes when CPI inflation is around 2.5 percent. That\u2019s what Jim Grant famously calls \u2018return-free risk.\u2019 More reliable numbers suggest your cost of living increases by around 5 to 6 percent a year. In other words, you put in 100,000 and you get back 60,000 in purchasing power after 10 years.<\/p>\n
\u201cBesides this, there\u2019s the fact that the US currently has around 70 to 80 trillion off-balance-sheet liabilities3. Does anyone believe that they have the ability to service these obligations? These numbers, by the way, could become a lot worse once the full costs of Obamacare are determined and factored into Social Security and Medicaid.\u201d<\/p>\n
In other words, according to Rick, buy gold and precious metals as insurance against risks to your US Treasuries and US dollars.<\/p>\n
On the other hand, buy commodities if you believe in a long-term trend of population expansion in the world and greater worldwide GDP.<\/p>\n
\u201cIf you believe in the thesis that world GDP will continue to expand and that population growth will continue, then you should own natural resources. New people who are born will want to eat, drive, and build houses. This trend offers long-term support for natural resources.\u201d<\/p>\n
Rick warns that there are still risks to owning natural resource companies now – technical analysts tell us to watch out for a \u2018triple-bottom\u2019 in gold. If that happens \u2013 and we\u2019ve had two bottoms, in July and December of 2013 \u2013 then watch out below, says Rick.<\/p>\n
\u201cIn the near term, the efficient market is a sham, because sentiment outweighs fundamentals. We are approaching a potential capitulation sell-off. I don\u2019t know whether that will happen or not. If it does, it will terrify all investors in the sector \u2013 including me. It would be akin to the summer of 2000, where investors simply \u2018gave up the ghost.\u2019 If it doesn\u2019t happen, then expect to continue a gradual, \u2018saucer-shaped\u2019 recovery.\u201d<\/p>\n
The good news? Rick doesn\u2019t expect the \u2018good old days\u2019 to last forever. \u201cI\u2019m not talking 5 to 10 years to be right. I\u2019m talking 2, 3, or maybe 4 years down the road. I believe we will be talking about these as the \u2018good old days,\u2019 and I look forward to sharing those memories with you.\u201d<\/p>\n
P.S.: Want to hear more from Rick Rule, Eric Sprott, and other members of the Sprott team? Subscribe to our free e-letter, Sprott\u2019s Thoughts.<\/p>\n
1 The Alchemy of Markets: Reading the Mind of the Market, by George Soros. Wiley & Sons Inc. 1987, 1994<\/p>\n
2 Bloomberg online stock charts: Paladin Energy Ltd.<\/p>\n
3 The Wall Street Journal online: Cox and Archer: Why $16 Trillion Only Hints at the True U.S. Debt. November 28, 2012.<\/p>\n
Rick Rule is the Chairman and Founder of Sprott Global Resource Investments Ltd., a full-service brokerage firm located in Carlsbad, CA. Sprott Global is an affiliate of Sprott Inc., a public company based in Toronto, Canada. Mr. Rule leads a team of earth science and finance professionals who form an intellectual pool for resource investment management. He and his team have experience in many resource sectors including mining, oil and gas, water, agriculture, forestry, and alternative energy.<\/p>\n","protected":false},"excerpt":{"rendered":"
By Henry Bonner (hbonner@sprottglobal.com) \u201cI plan on using this recording a few years from now as marketing material,\u201d said Rick, speaking to current clients and friends of Sprott Global Resource Investments Ltd., the firm he founded in 1994. \u201cWhat I\u2019m going to talk about today I think will seem like a prescient market call three […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"footnotes":""},"categories":[3],"tags":[],"_links":{"self":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/5797"}],"collection":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=5797"}],"version-history":[{"count":1,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/5797\/revisions"}],"predecessor-version":[{"id":5798,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/5797\/revisions\/5798"}],"wp:attachment":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=5797"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=5797"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=5797"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}