Sprott’s Rick Rule: The Debt Ceiling The FED’s And Gold!

PM: Good morning everybody this is Patrick MontesDeOca with Trading Talk. This segment is brought to you by Equity Management Academy. We have the distinct honor and pleasure to have with us today Mr. Rick Rule, President of Sprott Asset Management, USA. Mr. Rule has dedicated his entire adult to many aspects of natural resource securities investing. In addition to the knowledge and experience in the long, successful, focused rear career, he has a worldwide network of contacts in the natural resource and finance worlds. As chairman of Sprott Asset US holdings Mr. Rule leads a highly skilled team of earth science and finance professionals who enjoy a worldwide reputation for resource investment management. Welcome to Trading Talk, Rick.

RR: Pleasure to be with you, Pat.

PM: To move right into the first question here everybody has in mind…the Fed’s decision not to taper this week. What do you think is behind this surprising move not to taper and what do you make of this moving forward here?

RR: Well, that interesting, Pat. If you dial back to an interview we did in this office 9 months ago, we were talking about the so-called quantitative easing. And, the point I was trying to make is that it wasn’t just about adding liquidity into the system. The system was full of liquidity. What I think it was about, and is about still in some measure, is the fact the federal government is spending 1.2 trillion dollars a year more than it takes in. Its able to borrow about half the deficit and the other half of the deficit, it has to buy from itself. It has to create the money to buy the bonds it can’t sell in the market. So, of course they can’t taper. Where is the money going to come from? This seems to me to be an incredibly losery discussion. And, the only thing that really amuses me is the lack of sophistication on the part of alleged big thinkers in major media who don’t understand this for what it is, which is counterfeiting plain and simple.

PM: We have a another ratio coming up which is the debt ceiling deadline coming up in a couple of weeks. Can you give us your insight on this very important issue?

RR: Well, I think they’ll find a way to perpetrate what under generally accepted accounting principles would be a fraud and find a way through it. I think the republicans were punished for their political gamesmanship last time. And, when I say ‘political gamesmanship’, I don’t see an awful lot of republicans that are interested in spending less, either. They just seem to be interested in spending on different constituencies. Spending issue seems to be less current in Washington than scoring political points against your opponents, with the grandstanding associated with the debt ceiling is. If either side or any side or anybody was really seriously interested in the deficit, there are some concrete spending measures they can take. It seems however when they conspire to save money out of one column it’s already been spent in two or three other pet columns. I think that the markets will respond hysterically to the discussion about the ceiling, but I personally believe the discussion will be characterized as entertainment [rather] than news.

PM: Do you think that the US credit rating will be downgraded and again and if so how will this affect the financial markets and, in particular, precious metals?

RR: Ironically, I don’t think the US will be downgraded because as rapidly as our situation is deteriorating, my joke has been for years, Pat, we run the worst currency in the world except all of the others. What we are is simply the prettiest mare in the glue factory. I think that we will not devalue. And, I think ironically despite our problems and despite that we’re counterfeiting circa 700 billion dollars a year, that the US because of its comparative advantages over other countries and the depth and liquidity and transparency of our currency markets, will still function as the reserve currency and the United States will still get the benefit, unbelievably, of seignior age. It’s funny but there isn’t a viable competitor which is the only reason we’re able to get away with what we’re getting away with.

PM: We had the best rally in gold and silver in the last three years after the Fed’s decision. Was this a short covering rally or is this the beginning of a more significant move to the upside?

RR: Well, you know, I am a gold bug, Pat, so I always it’s part of a significant move to the upside. I think there were a few things [that] happened. I think one thing is that gold was simply oversold. We had a massive move from weak hands to strong. You and I talked about that. That’s a very good thing. Gold went from weak central banks, sclerotic central banks, to emerging market central banks that were under-indebted. Gold went from overly leveraged futures markets, weak hands, people engaged in hedge funds engaged in leveraged carry trades to the physicals markets, the so-called Chinese housewives. So gold moved from weak hands to strong which is a very, very, very good thing. And, I see that continuing. I see one of the reasons for the snap back being simply the liquidation of the momentum driven hedge funds, the carry trades that came unwound in the futures markets ran their course… less available on the sell side, which meant that the market snapped back from an oversold condition. I am very permissive to the point of view that we are ready for a much more sustained gold rally. If you look at the actions of the guy whose name graces my door, Eric Sprott, who’s been a singularly successful directional investor for the 30 years I’ve known him, Eric believes we’re on the doorstep of a really major move in gold and silver and gold and silver equities to the upside. I’m not prepared to be as bullish as he is I am a credit analyst, while he is a market commentator. But, I certainly wouldn’t discount that and I am currently taking advantage of these soft metal prices to add to my own and clients’ holdings.

PM: And in front of this, we have the general sentiment investor that seems to think the Fed is winning on the inflation front and there is no reason to buy precious metals as a hedge against inflation. Can you comment on this?

RR: Yeah. It’s interesting. I made the wise crack earlier differentiating news and entertainment but an awful lot of the so-called information that the public is consuming these days is truly entertainment rather than news. The idea is an example that you buy a packaged inflation number from the government, which has an interest in lower inflation numbers for a whole bunch of reasons, is interesting to me. I mentioned in an interview that you and I did that I driven on the way to an interview past a Motel 6. And, what was interesting was that the Motel 6 sign said, ‘69 dollars for a room’. Pat, when I was your age it was called ‘Motel 6’, because a room there cost 6 dollars. I guarantee you that the utility associated with a room there has not increased an eleven fold in the last 30 years. It’s that the denominator that you evaluated the room with has depreciated.

And, with regards to the inflation number that’s reported, the CPI number, the consumer price index number, this is an insane number. I don’t spend any money. I’m not really a consumer and my consumer cost of living increases more rapidly than the consumer price index. When they report the thing excluding food and fuel, how does that make any sense? These guys don’t drive and they don’t eat? But, the worst thing, Pat, and people buy this thing every damn day out of network television, is the CPI, your cost of living as figured by your government, doesn’t include tax. If I didn’t have to pay the tax, believe me I’d complain a lot less about the index. But, I do so I do. Now, the inflation number that’s being reported to you is nonsense. There’s less information in the CPI than there is in the average Marvel comic book.

PM: ‘Suppressed inflation’ is what I call it.

RR: Sure. Absolutely.

PM: Let’s move away Rick from the US markets for a moment and talk about, in particular, one of Latin America’s fastest growing economies in the world, Ecuador. According to the the International Monetary Fund, Ecuador is growing at 5.5 percent annually. And, Nathalie Cely the Ecuadorian ambassador to the US, commented in a recent presentation in New York, that ‘Ecuador is ready to compete on the global stage and go back to the financial markets. As we speak, the Ecuadorian central bank has issued and released a silver dollar coin currently in circulation. Is this a very strong sign that emerging economies pegged to the US dollar see the writing on the wall and are hedging their economies against the inevitable, the collapse of the US dollar as the world reserve currency?

RR: I think with regards to Ecuador , in particular, that this may be more domestic politics than having the foresight. I wouldn’t give the political class in Ecuador enough credit to be smart enough delink themselves from the United States for any reason other than domestic political consumption. I would also point out that Ecuador is a classic case of a country that to the extent that the short term interest rates in the United States continue to rise, will be a victim of an extraordinary flow of hot money from Ecuador back to the US. Much of the money that’s gone in the secondary and tertiary markets globally ,in the last two years, has gone in desperate search of yields as a consequence of the artificially low interest rates in the US. And, if as some commentators have suggested, the US irrespective of quantitative easing, has lost control of short term interest rates that would be very detrimental to third world markets, including Ecuador.

PM: I’m not sure too many people are aware of this, but Latin American countries have established a Latin American central bank and they have funded this with 20 billion dollars in order to provide any financing requirement or needs for the rest of the Latin American countries. This is ,in fact, a political move obviously. But also, isn’t this a sign that they’re moving away from the IMF in terms of the reliance for loans and this tremendous austerity programs that they implement that actually doesn’t allow them to develop?

RR: Well, I think its important first step. I very much believe in any form of multilateral cooperation that can be established. Whether or not the Latin American development bank or Latin American central bank succeeds is probably ultimately less important than the fact that the affected countries decided that they would develop their own solution. Twenty billion dollars to you and I and to your listeners is an awful lot of money. Twenty billion dollars in the context of the budget deficits, the current account deficits and the trade deficits run by some Latin American countries is sort of a burp in a windstorm. But, the fact that they have developed or are beginning to develop at least institutions where they have some of their own money at risk and they propose to implement some of their own decisions, will provide for secondary feedback mechanism, a different sort of information, a different way trying to address problems. When you look at the IMF and the World Bank and the money they spent wasted over the last 50 years, we have an awful lot of information about things that don’t work. And, perhaps the Latin American countries, using their own money, can figure out something that does work. You know, Pat, that I’m not a fan of government. I’m not a fan of local government, state government or federal government. And, the imposition of a fourth level of government, be it the European economic community or the Latin American central bank, seems to me to be adding another layer of idiocy on top of great pile of communal idiocy that we’ve developed in the world over the last few years. That notwithstanding, at least we have competing idiots as opposed to monopoly idiots. That’s probably a good thing.

PM: At least it’s a step in the right direction.

RR: Correct. Competition is always good, even if it’s in the race from the bottom.

PM: With the current gold and silver ratio running at around 59:1, is this signaling that silver is about to make a significant move to the upside against gold?

RR: I’m the wrong one to comment on that. Eric Sprott has certainly made that case persuasively. But, he has the data much more diligently than I and so I would defer and say having watched him for 25 years when he speaks people do well to listen.

PM: Can you share with us your data points on the relentless demand that is coming from China, increasing their physical purchase tenfold this year? And, do you think that it will continue?

RR: I do think it will continue. Chinese people that I know, this is anecdotal, not statistical, evidence themselves and discuss also a cultural predisposition to gold and silver. And, it would appear that their is central government encouragement for the diversification of individual saving in China to include gold and silver. If you juxtapose three trends which are rising household incomes in China and concomitantly rising private savings in China with the cultural predisposition to storing wealth in the form of precious metals and official sector encouragement of the storage of wealth in precious metals and the discouragement of some other investment forms in China, I would suggest that Chinese demand will continue and perhaps accelerate. I also note with interest an article yesterday that I read in Bloomberg … it may have been written earlier, but I caught it yesterday…where the largest physical bullion dealer in Thailand, a company that imported 80 tons of gold into Thailand last year, anticipates importing 140 or 150 tons of gold in Thailand.

PM: Where is it coming from?

RR: That’s a hell of a question. Given that when the Germans asked for 1200 tons of gold back, the US said, “Yes you can have it over 7 years.” Maybe the Thai’s are better at putting gold on planes than the Germans are. It would appear, however, that the market can supply physical gold. It is dubious central bank gold that appears to be in odd supply which might confirm one of Eric Sprott’s suspicions. But, the point I was trying to make is simply that while everyone is focused on China and India, the story’s repeated in Vietnam. It’s repeated in Thailand. It’s repeated in Malaysia. It’s repeated in the United Arab Emirates. I was just in Turkey last week and the week before. It’s repeated in Turkey. There are retail gold stores in Istanbul. You never read about this in the western press and their doing land office is there is incredible physical retail unleveraged demand for bullion.

PM: Rick I know your expertise deals with natural resource markets like platinum and palladium. What do you make of the prospects for these products in the Australian market, in particular?

RR: You’re talking about the demand for physical platinum in Australia?

PM: Yes… the actual demand for precious metals, in particular?

RR: I would think the physical investment demand will be really strong. I expect the Australian economy overall to be weaker for the next couple of years. It’s been white hot for almost ten years. So, I would expect that physical platinum and palladium demand tied to automobile sales as an example will be flat in Australia for the next couple years. There are, however, very, very major natural gas liquefaction and petrochemical processing plants under construction in Australia that will require large amounts of platinum and palladium for their air quality and pollution abatement activities. But, I would anticipate that non-investment physical demand for platinum and palladium would be flat as a consequence of the fact that I think the Australian economy will under-perform relative to historic standards.

PM: Will that affect the gold and silver demand as well?

RR: The gold and silver demand in Australia is largely investment demand. And, I would suspect that investment demand would be relatively strong for gold, silver, platinum and bullion I note however the Australia is a relatively small market. I don’t think the Australia demand is substantial enough to have much impact overall precious metal prices given the relatively small size of that market.

PM: Anything you would like to add regarding mining shares which have been literally brought to the point of extinction here? Are we looking at a potential generational opportunity here, Rick?

RR: I think we are. I think we’re looking at generational risks, too. You point out and you use wisely the use of the word ‘extinction’. We have talked before, Pat, about the dysfunctional nature of the junior mining community as a whole and the fact that 60 or 70 or maybe even 80 percent of the companies are valueless. If money doesn’t come into the sector in the near term it will be a very good thing, a Darwinian cleansing, extremely unpleasant for people who hold shares in companies that fail, but, in fact, useful in the sense that you take useless corporate vehicles, useless legal expenses, useless legal fees and useless general administrative expenditures, out of an industry that could ill afford them. The opportunity is that in the bull market, investors took up bad companies with good and in a bear market they take down good companies with bad differentiating between the good and the bad companies and buying the good companies in a bad market is what is responsible for my fortune today and Eric Sprott’s fortune today. I can tell you this Pat, because I’ve lived through it many times bear markets are the author of bull markets and bull markets are the author of bear markets. The bear market that we experienced through the mid 1990’s, well the whole 1990’s really, was answered by this incredible bull market in the early part of the last decade and past is prologue. I can’t tell you when, but I know that the question begins with ‘when’ it doesn’t begin with ‘if’ and that’s a very good thing.

PM: How can our audience get in contact with you if they choose to do so, Rick?

RR: The easiest way is to come to our website which is www.sprottglobal.com. I would urge your audience to look at the top of that webpage and subscribe to Sprott’s Thoughts or else go to www.sprottsthoughts.com. Sprotts Thoughts is a blog that is put out by 26 opinion leaders including myself and Eric Sprott within the Sprott community. It comes out 3 times a week addressing a variety of subject including some we’ve discussed. It’s absolutely free and we hope to have it come out 5 times a week when we get a little less busy.

PM: Once again, Rick, it’s always a pleasure to talk to you. And, on behalf of our audience, thank you for your wisdom and insight here in this most auspicious time in the precious metals market. Until next time, my friend, take care.

RR: Always a pleasure thank you.

PM: Take care.