Rick Rule shares his outlook on gold, and yes, it’s bullish

You have endured the pain. Will you have the courage to hang around for the gain?” That’s the familiar question Rick Rule, Sprott US Holdings’ president and CEO, posed during his keynote speech at Red Cloud Mining Capital’s pre-PDAC mining showcase in Toronto.

“I assume that most of the people in this room are resource-centric investors. And your experience from the immediate past, with the possible exception of the 1980s, could not have been worse.”

The junior mining sector’s performance measured by the TSX Venture Exchange has been more than disappointing. The market is down 85% since its high in 2007, with Rule estimating it is more than 90% off in real terms. “I’m not reciting that to make you feel bad. I’m just reciting that to say your expectation of the future is framed by your experience in the immediate past.”

He reckons that recent experiences will affect how investors perceive the current market, which he says is turning. “In a recovery, there will be hiccups and there will be declines, and you will be conditioned as a consequence of the spanking that you took in the period 2011 to 2015 to take a rather terminal view of any decline.”

Rule mentions resource markets are the most capital intensive and cyclical. As a result, to survive, he says an investor must become a contrarian to avoid becoming a victim. But he was quick to add that even an experienced contrarian, like himself, could be hurt in the short-term by volatility.

“Bull markets are the authors of bear markets” and “bear markets are the authors of bull markets,” Rule continued. The mistakes made in the bull market, in particular, the “misallocations of capital,” have contributed to the sector’s performance in the bear market, he says.

On a more upbeat note, he points out that the bear market, or at least the worst, is behind us. “We are past the beginning of the end, if you will. We are in fact in the beginning of a bull market … that will certainly be one to test us … that won’t be without its failures and its own declines.”

The narrative of the “good old times” from 2006 to 2010 has not changed, Rule argues. For example, in the U.S. the narrative in 2010 acknowledged the government’s US$15 trillion in on-balance sheet liabilities was unsustainable. Last year, that number surged to US$19 trillion, he notes.

“The truth is the narrative is unchanged. What’s changed is the perspective surrounding the narrative. I would suggest to you that the narrative that was bullish for resources is as true now, or more true than it was then.”   

Meanwhile, the broader commodity thesis is that the global population will grow and drive up the need and competition for resources, and in time the prices for commodities.

Gold is leading the mining sector out of the bear market, Rule opines, adding that the recent move in prices, which may decline briefly, have “real reasons” to climb.

Given gold is priced in U.S. dollars and that it competes with U.S. treasuries, Rule says the metal’s future “is very clear,” as it benefits from lower holding costs and historically higher returns.

“The gold price … from an American’s perspective … has an awful lot to do with it being locked in a battle for the risk off-trade with the U.S. 10-year treasury.”

The U.S. treasury securities have been in a bull market for the last 30 years, but the yield for the 10-year benchmark securities has dropped from 15% to 1.6% over the same period, Rule notes.

He cautions that it’s unlikely the other commodities will mirror gold’s move in the short-term. “The truth is across the other commodities, in the near-term, what I see on a global basis, is a lack of demand of all things.”

Since the low prices for commodities haven’t increased demand yet, Rule says it would lead to supply destruction, as producers sell supplies at a loss.

He notes that in the longer term the supply destruction will result in a “much more dramatic bull market,” with fewer companies able to meet demand.

“There is an inevitability with regards to an increase in commodity prices. Now, inevitable doesn’t mean imminent. It doesn’t have to happen right away.”