Rick Rule is the president and CEO of Sprott US Holdings Inc., as well as being an expert and long-time investor and speculator. His area of expertise is in natural resources, commodities.

On Commodities, Public or Private Shares?

“I actually like public shares because if I make a mistake, which is not uncommon, I can address it very quick with the quick click of a mouse. Painfully, painfully, but quickly. As to why. Precious metals have moved up in price over the years for many reasons, most of them not good. It has functioned for years as a medium of exchange and a store of value. And that's important to know. Most mediums of exchange that we use are abstractions, floating abstractions. Our mutual friend Doug Casey once said that the dollar is an "I own you nothing," and the Euro is a "Who owes you nothing." In fact, promises printed on a piece of paper. Gold isn't a promise to pay. It's payment in and of itself. It has value separate and apart from a medium exchange, which is important to know. You mentioned trust. If you acquire gold that you are relatively certain is what it purports to be, you don't need to trust the counterparty. It isn't a promise to pay, it's payment.”

Explain or define a ‘counterparty’.

“A counterparty is the person who sold you the gold or who you sell it to. It's the other part in a transaction. When you go to the grocery to buy bananas, the grocery is the counterparty.”

“The important thing about gold and silver is that they aren't checks or they aren't fiat currency. They're payment in and of themselves. And in periods of time when there are various forms of turmoil, war would be an example... And social trust is very low, precious metals do very well. Now my own experience has been that the global perception of geopolitical risk, which is to say war, isn't a long-term impactor on precious metals prices, unless the war impacts you. If you were a Vietnamese person, wanted to leave Vietnam, got off on a boat, gold was worth a lot more to you than Vietnamese currency.”

“What does move precious metals' prices in my lifetime has been investors and savers fears of the depreciation of their savings and investment instruments, denominated in fiat currencies, but particularly, even on a global basis, denominated in US dollars. During periods of time when there have either been negative real interest rates or the threat of negative real interest rates, either as a consequence of low rates or high inflation or both, gold has done very well. And when you ask about why, right now, I would suggest that there are five reasons why people need to be afraid of the maintenance of their purchasing power in conventional instruments and why I think that gold and silver are much more likely to do well and poorly. If I may, I'll list them. People often say to me, "Rick, when will you sell your gold?" Well, when the reasons to own it go away, the gold will go away. So, I'm going to give you five reasons why I think gold will increase in price. And when those reasons are satisfied, then I'll sell my gold. It's a real simple answer. So, let's do them. Quantitative easing, which is a real fancy word for counterfeiting. If you issued Kiyosakis and went around and tried to spend them in Arizona or wherever you are, that would be a felony. They would plant you in a slammer. But if you were Congressman Kiyosaki, then this would be a highly popular policy, something for nothing, and you would be reelected forever.

It has been estimated that 30% of all the US dollars in circulation have come into circulation in the last 30 months. Now, clearly this isn't to accommodate economic growth. The economy isn't 30% bigger than it was 30 months ago. There wasn't need for liquidity to manage a buoyant economy. And when you increase the supply of something without increasing its utility, of course you depreciate the value of the existing stock. There's just no arithmetic way around this. So quantitative easing is the first reason, I think, why investors are concerned about the efficacy of their savings and conventional instruments.

But it gets worse, of course. The next is debt and deficits. And this is arithmetic again, too. We have the dubious honor of having crossed $30 trillion in on balance sheet liabilities, admittedly only $22 trillion net of counterfeiting. In other words, the federal reserve’s balance sheet is $8 trillion, that was printed up. But let's use the $30 trillion, it's their number. But more importantly, Robert... And you and I are partly to blame. The net present value of off-balance sheet liabilities, entitlements, Medicare, Medicaid, social security, all that stuff... Not some crank yield libertarian, but rather the Congressional Budget Office suggest that the net present value off balance sheet liabilities of the US government, not state and local governments, just the federal government is $120 trillion. That's 12 zeros after 120. It's a big, big, big number.

And we proposed to service that debt with a budget that's in a deficit $3 trillion a year. I was taught as a young man when you're in a hole stop digging, but that is not what's happening. Many, many, many observers, Buffett included, has said, "We're not going to pay this off. We're going to reschedule it." Any creditor, and I'm a creditor, who looks at a borrower, the US government, that has debts that they can't service and they're continuing to refinance them, becomes concerned about their principle. An investor's principle is the maintenance of the savings in US dollar denominated securities.

But it gets worse. The worst is negative real interest rates. For the first time, Robert, in your life and mine, the government has made a promise to you that they're going to keep. And I'll explain that promise. If you lend the government money in the US 10-year treasury, the base security in the world, the most important security in the world, they promised to pay you 2%. And they will because they can print it. They don't have to earn it. They can print it. They promised to pay you 2% in a currency that depending on which government agency you read, is losing its purchasing power at six and a half percent a year or seven and a half percent a year.

So, they solemnly swear to reduce your purchasing power by 4% compounded a year for 10 years. And they will keep that promise. If you give them money now, they will give you back less later. They're guaranteeing this and they will do it. Our mutual friend Jim Grant calls this return free risk. And the whole concept of return free risk, the whole promise that the government makes you less rich if you give them money is the real reason why people might own gold.

There are two more reasons that are arithmetic too and hopefully amuse you just as well. The first is that the market share of precious metals is the lowest that it has been in my lifetime. Let's face it, we've lived through 40 years of pretty easy economic times. You as an apartment building owner every five years get to refinance at a lower interest rate. The capitalized value of your rents relative to your cost of capital is certainly low. Sadly, that's over. We've learned in the last 40 years that we don't have catastrophes, so we don't need to own gold. The consequence of that is that the market share of precious metals and precious metal securities relative to other savings and investment assets in the United States is less than one half of 1%. Less than one half of 1% of the value of savings and investment assets in the United States is in precious metals or precious metals securities.

The three-decade mean is between one and a half and 2%. So, if demand was to return to mean... Not go crazy like it did in the '70s, Robert, when you learned about the gold trade. If the demand for precious metals returned to mean, demand would triple or quadruple. And there's one more that a lot of people overlook and that is that after 40 years of really beatific economic conditions, the biggest investors in the world, the pension funds, the endowments, the insurance companies, operate on an asset skew that's roughly 60% equity, 40% debt. And that's worked well for them. The debt has been the stability. The debt has been the stable income. The debt component is a real, real, real anchor in a positive sense to the returns that they've promised their beneficiaries 20 or 30 years out. That's all different.”

When you say debt, are you talking about bonds?

“It could be bonds. Mostly bonds in the case of these big, big, big institutions, but also long-term fixed rate mortgages. And this is really where the rubber meets the road. If you are a great big pension fund and 40% of your portfolio is giving you a guaranteed negative yield compounded, the ability that you have 20 years from now to meet your pension obligations or to service a whole life policy or to fund the maintenance of the Stanford University or Harvard University or the ability of Norges Bank to look after the wellbeing of Norwegian citizens 20 years or 30 years from now is gone. It becomes an anchor in a pejorative sense. If you look at debt markets today, even the junk bond index where you're taking real credit risk is yielding 4.7% in a currency where the purchasing power is deteriorating by 6.5%.

It's almost as though your guaranteed loss is twice, once on the instrument and once on the currency. And I believe that you're going to see fairly massive disintermediation out of bonds and debt instruments by the largest institutional investors in the world because they have to do it to fulfill their mandate. I'm not suggesting that 40% of their assets are going to go into gold. That's not going to happen. But if you are leaving an asset class, that's called disintermediation, because of your fear of inflation, it is logical that some of the money that you take out of one asset class goes into an asset class that has a millennium long track record for protecting you against the depreciation, the deterioration of the purchasing power of fiat instruments. And those five reasons for me are the why. It's all arithmetic.”

What is your stance on advice to buy bonds?

“I think you have to segregate, first of all, when you're buying bonds between long term bonds and short-term bonds. The long duration bonds, the idea that you would subject yourself to negative real interest rates is stupid. You forego consumption in favor of somebody else and you take the credit risk, and in return for that, they give you back less money than you gave them. This is not a force of nature. It takes Congress to do this, right? Short term debt is something very different. It's liquidity. I have had periods of time in my life, Robert, when I had no cash and I've had periods of time in my life when I had a lot of cash. And I was happier and slept better during periods of time when I had a lot of cash. I consider cash to be a so soporific. And I like to sleep.

From the point of view of a financial plan, cash liquidity gives you the means and might give you the courage to take advantage of a circumstance where there was a liquidity shortage. Going back to 2008... Late 2008, 2009 were very good investing periods for me because of the liquidity crisis. I maintained a lot of liquidity going into that and I was able to buy assets because I had the ability and because I had the ability, I had the courage. The consequence of that is that ever since I've been running fairly high cash balances, even though the cash guaranteed diminished returns in the near term on my purchasing power, I consider the negative real interest rate that I suffer to be an option premium because the cash gives me the tools and the courage to take advantage of any future crisis in confidence or crisis in liquidity.

And I actually think that a crisis, while not a certainty, is a probability. So, I understand that on my cash holdings, I'm losing 4% or 5% a year in purchasing power. But I think the circumstance might come about in the next two or three years where the consequence of having that cash is 50%, 60% or a 100% returns on capital employee by deploying that cash.”

I don’t save cash, I save gold and silver as if they were liquid…am I wrong?

“No gold and silver are extremely liquid. They're one of the most liquid asset classes in the world. I'm a lender and I love lending against gold and silver, particularly gold and silver where I control rather than the borrower controlling the collateral. They're enormously liquid. I live in a circumstance that even given the problems that we face today is substantially more civilized, more benevolent than the young Vietnamese woman who... The choices that she had in terms of her savings and her business were limited compared to the choices that you and I exhibit also because of the asset classes that I deploy capital into include what you would call derivatives, what I would call securities. Having access to cash to access securities markets without having to sell my gold or silver is convenient for me. Interestingly... Because as an example, I'm the largest shareholder of Sprott, a large financial services concern, which is built around gold or silver.

A financial planner would tell me that I didn't need to own any gold, that my life was already leveraged to gold. But again, owning physical gold makes me sleep better, right? 69 years of age, I like to sleep. And I consider, like you do, gold and silver to be cash, good cash. But it's volatile cash. The problem breaks down with some in your audience, Robert, because if they own gold and there was a liquidity crisis and the price of gold temporarily fell, they would be less inclined to sell the gold and turn that into an asset which they could then use to buy another asset. Many people, although they own gold, don't regard it as liquidity. They don't regard it as cash. And let's say that their average cost in gold is $1,800 and the price falls to $1,500. The price of another asset that they want to buy fell by half. But they feel this strange compulsion not to accept a small loss in cash to take advantage of a bigger opportunity.

So, in that sense psychologically, for many people, precious metals aren't cash. I don't suffer that same circumstance. For me, it's good cash. It's volatile cash. I, like you, have had some precious metals for a very long time and it's lovely to see my savings appreciate as opposed to depreciate.”

You say with everything going on globally right now, you are holding some cash and you’ve mentioned that two to three years from now there will be opportunities. Can you talk more about that?

I can't. I don't know where the opportunity will come. I really can't. My crystal ball is cracked and cloudy. I know that we've come off a 40-year period that has been as benign as any 40-year period in human history. And I believe that some of the benefits that we saw over the last 40 years, globalization and free trade, the demographics of the baby boom, technology, but particularly declining real interest rates, are over.

And I don't know how that manifests itself. I know that as the world becomes more political, as people to believe that the allocation of utility in society should occur by government rather than by delivering utility to the customer, that the world will become more political and hence more hostile. People will come to believe that other people owe them something irrespective of the utility that they've delivered. And that's not a recipe for peace. I don't know where or how that will manifest itself. And I hope I'm wrong. I hope it doesn't manifest itself.

But separate and apart from the macro, the simple arithmetic around the fact that the political equation around quantitative easing debt and deficits and negative real interest rates is broken, tells me that I can't rely on other people. I can't rely on the big thinkers. I can't rely on the government. While I don't know how the disruption will manifest itself, and I hope it doesn't until I shed my mortal coil, it isn't the way that I'm prepared to bet. It just isn't the way that I'm prepared to bet.

For me, we have geopolitical problems with the Russians. That doesn't mean that we shouldn't talk to them. It doesn't mean that we should rely on vilifying the Russians to solidify the political base that some people might have in the United States or to set up geopolitical blocks in the world that make people hate each other and want to shoot each other. That just feels to me to be pathologically stupid. Robert, you saw that in its rawest form earlier in your life, and there's no part of it that's good. And I'm not suggesting that we're headed towards broader military conflict. I'm only saying that in a world where assets are allocated because a group finds that they can vote themselves to benefit to the detriment of another, that the ending is not happy.

You get value in real estate because you deliver value for your tenants. You out-compete the guy who has apartments down the road based on price, based on location, based on amenity. Your customer is free to come to you and free to go. A taxpayer doesn't have the same freedom. You have no enforcement to make somebody rent your house. But if a taxpayer doesn't pay tax, they come and haul him off to jail. They go to take his property. And if he resists them taking his property, they either incarcerated or kill him. Those are very different value propositions.”

Up until 1974 it was illegal for Americans to own gold. Explain what happened and why.

“There's a wonderful economic saying, and I forget whose quote I'll steal. Good money drives bad out of circulation. Roosevelt wanted to greatly expand the role of government in the American economy. He believed, for some reason, that the big thinkers would do a better job of healing the excesses in the economy than individual people. I'll leave that aside. He knew that given the greatly increased level of public expenditure and the inability of the citizenry to pay for it on a current basis, that anybody who could add or subtract would sell US dollars in favor of gold. He couldn't stand the competition. And so very simply, rather than try to convince the citizenry of the future of the country and the efficacy of the currency, it was more convenient for him to coerce than to convince.

Remember, and I hate to sound like an anti-government cook although I am, governments have a monopoly, Robert, on force and violence. You saw that in Vietnam. If I had become angry at the North and I had commandeered a helicopter myself and floated over there and gone and shot people as a private citizen, Nixon wouldn't have had any sense of humor at all, but he made you do it. And so you need to understand that at its most basic, government is about coercion. Mr. Roosevelt knew for sure that he couldn't convince people to allocate money politically away from their family to somebody else's family. And the only way that he could do it was to coerce them. Chairman Mao, describing politics famously, said that all political power ultimately flows from the barrel of a gun.”

You recently said that ‘the average person hasn’t been bitten’ yet by inflation. What did you mean and what do you see coming with inflation?

“Through the fifties and sixties, we had a very benign economic circumstance coming off of World War II. Wonderful demographic boom, lowering interest rates, US homogeny, a wonderful, wonderful, wonderful time. And then, as now, we had government overreach. We tried the war in Vietnam, didn't work out so well. We tried the war on poverty, we lost that one too. And we were trying to finance guns and butter in a circumstance where the government couldn't raise tax. And the consequence of that, not surprisingly, was inflation.

They devalued the currency because although the warning signs were all over the place in '68, '69, '70... Actually '67, inflation was higher than the yield on the treasuries. But because people hadn't been bitten by inflation, although they noted it, they didn't fear it. It wasn't until '73 or '74 when people had gone through four or five years where the cost of living increased substantially faster than their savings did or their salaries did when their lifestyle was actually really impacted by inflation that the specter of inflation rather than becoming interesting, became terrifying.

And I think we're in precisely that circumstance today. You talk to the average sort of person in the street, or for that matter, the average Congressman, and you say, "The economy is growing if it's growing at one half of 1%, the savings rate on the US 10-year treasury is at 2%, and the depreciation of the purchasing power is either at 6.5% or 7%." This doesn't end well.

And the conversation, to most people, is academic because it hasn't hit them yet. They can be angry at the increase in gas prices, but they haven't experienced a cumulative and compounding effective inflation that we experience in the decade of the seventies, where people over time experienced a meaningful deterioration, meaningful deterioration, in their standard of living. While I'm on this rant, the other thing that people don't understand... When they calculate CPI inflation... This is amazing.

Yeah, they don't include tax. Now Robert, if I didn't have to pay the tax, I wouldn't bitch so much about the index. But the idea that the cost of government isn't one of the factors in my cost of living just astonishes me. And yet there's this discussion of the CPI and inflation around the country with no discussion in the increase in income tax, property tax, excise tax, ad valorem tax, sales tax. It astonishes me. And I think the fact that we have lived through 40 benign years has led us to believe that these things are issues rather than problems. I think they're problems as well as issues.”

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