Transcript of RealVision‘s interview with Rick Rule, president and CEO of Sprott U.S. Holdings Inc., discussing the worldwide explosion of negative yielding debt shapes his bullish outlook on gold and precious metals mining stocks.
RICK RULE: The truth is there’s lots of liquidity in the system. There’s lots of cash sloshing around. That’s what quantitative easing was about. If you and I were to engage in quantitative easing, the government would call it counterfeiting, but when they do it, of course, it’s quantitative easing. The quantitative easing has left the system with lots of liquidity, but in my opinion, with the solvency in question.
The current strength that you see in gold, I think, is the recognition of the fact that the value proposition associated with fiat currencies is becoming increasingly challenged.
Most of the world is driven by narrative rather than arithmetic, but over time, arithmetic is real and narrative is just that.
My name is Rick Rule. I run the US business for Sprott Inc., a Canadian domiciled and listed company that manages investments in the natural resources and precious metals business worldwide.
Does the U.S. dollar's relative strength impact your short-term view of precious metals?
The US dollar's relative strength I think is the most important determinant of precious metals prices. There are many factors of course that go into precious metals pricing, but in my experience over the last 40 years, the single most important determinant in precious metals pricing has been global faith in the ongoing purchasing power of the US dollar. At points in time where global investors' perception of the purchasing power of the US dollar was weak, precious metals prices were strong. If we look back, as an example, to the decade of the '70s, when the United States was trying to affect the war in Vietnam, the war on poverty, all of those other wars, and it looked like we were going to lose when worldwide faith in the strength of the US dollar was weak, the gold price and the silver price, too, rose and I still see that being the single most important determinant in precious metals pricing.
What is your long-term view on precious metals given negative interest rates globally?
Certainly, negative real interest rates are important in many regards. The first thing is that the strength in the US dollar right now, I would suggest, doesn't relate so much to strengthen the US economy, which is becoming increasingly doubtful, but rather to the fact that the US economy is relatively stronger than other economies. My friend Doug Casey describes the US dollar as an example, as the prettiest mare at the slaughterhouse. Well, US interest rates measured by the US 10-Year Treasury are paltry around 2%. Nominal interest rates, well, real interest rates in other countries, particularly in the Eurozone are negative.
The idea that an investor could lend money to Greece, who is almost guaranteed not to pay back and suffer a negative yield, when you look at that the US 10-Year Treasury at 2% seems relatively strong. What's interesting about the circumstance that we find ourselves in right now is that both the US dollar and gold are relatively strong, which suggests that while the US dollar is relatively strong, investors on a global basis believe that the US dollar will falter, too. From the historic point of view, the interest yield on the US 10- Year Treasury relative to the implied rate of inflation in the United States is the weakest that we've seen in 40 years and the consequence of that is that gold is strong even while the US dollar and the US Treasury market is strong.
How does sovereign credit quality impact the prospects for gold?
The whole implications of sovereign credit quality over time and the efficacy of gold holding relative to those sovereign credits is, from my point of view, one of the classic questions that confront ourselves. The political process in the Western world and maybe in other worlds, too, involves what I would describe as a war on savers by spenders. Spenders are much more numerous. What that means is that spenders vote themselves access to the wealth generated by savers. There's a wonderful description of democracies as being described as four coyotes and a lamb voting on what's for lunch. Clearly, the lamb, the saver, doesn't come out too well.
If you look in the United States as an example, I'm not going to do a worldwide example, but if you look at the United States, ostensibly the strongest credit in the world, what you see is the debtor with $22 trillion in recourse obligations, $22 trillion. Those are 12 zeros. It's a big number, but more importantly, you see off- balance sheet obligations, but allegedly obligations to be sure.
By the way, you're looking at one in the mirror, I'm 66 years of age. Medicare, Medicaid, Social Securities, those numbers the off-balance sheet liabilities of the US government exceed by the government's estimate 100 trillion dollars. That's before state obligations, local obligations and unfunded pension liabilities which the pensioners believe that the government will pick up.
How do we service 120 trillion dollars in debt? Well, traditionally through the national income, defined as taxes and other fees to the government less expenses. The problem is that that number comes up negative, meaning that our income statement shows a trillion dollar shortfall every year. It is very difficult, obviously, to add a column of negative numbers and come up with a positive sum. What the political class in the United States is trying to do is service 120 trillion dollars in debt with income that's negative to the extent of a trillion dollars a year.
In the long term, it is very obvious that you can't overcome arithmetic with political narrative and the consequence of that is that savers on a global basis are gradually losing faith in the US currency, in the US 10-Year Treasury and beginning to embrace gold. The only way that I can see that circumstance changing would be a circumstance where the US somehow swung to a very, very strong budget deficit, while simultaneously reducing recourse off-balance sheet liabilities, and reduced government spending. I've been observing government spending for my entire adult life, and the ability of the US citizenry to embrace belt tightening doesn't seem to me like anything that will happen in my lifetime.
Who gets stiffed?
If I could paraphrase it, who gets stiffed? The off-balance sheet obligations are all promises that various elements of society have made to other elements of society. The most important transfer is, of course, from your generation, a younger generation, to my generation, an older generation. We voted ourselves all these benefits, and we magnanimously decided that you would get to pay for them. My suspicion is that ultimately, that's going to be up to you. It would be my suggestion that you tell me that since I made the promises to myself, that I should keep them because you have no interest in doing that.
It would be an extraordinarily interesting circumstance if the voters of the United States decided that earlier generations had made promises to themselves that the younger generation could not keep. Interesting, maybe like a horror movie for many people of my age that failed to save early on.
When you think about it with 120 trillion dollars in on-balance sheet and off-balance sheet obligations, and the negative national income, we have to call the question at some point in time. It's interesting to me actually, that as odd as that equation is in the United States, the equation in the United States is less severe than it is in places like Japan, China and the European community.
One of the things I think you see is that the faith in the United States dollar is strong only relative to competing currencies. I think really in the near term, and by the near term, when you're my age, you think in three to five-year term since the near term, the question becomes confidence.
We are able to avoid being concerned about arithmetic in the very near term because the system still has liquidity in it. Many people in your generation, probably many people in my generation, confuse the concept of liquidity that is cash in the system with solvency, which is the durability of the system to maintain and service its obligations over time.
The truth is, there's lots of liquidity in the system. There's lots of cash sloshing around. That's what quantitative easing is about. If you and I were to engage in quantitative easing, the government would call it counterfeiting, but when they do it, of course, its quantitative easing. The quantitative easing has left the system with lots of liquidity, but in my opinion, with the solvency in question.
How does inflation play into your thesis?
The suggestion by the question is that quantitative easing results ultimately in inflation. I would suggest that's true. It's a very interesting suggestion. When the government gives us the number, the CPI, consumer price index stated rate of inflation, I have a couple comments to that. The first thing is that the people who assembled that basket of goods and services don't shop where I shop. They say that the purchasing power of the dollars that I have in my savings depreciate by 1.6% a year. That's inconsistent with my experience.
Let's look at why. In the first instance, when it's inconvenient for them, in other words, when there's too much volatility in the pricing, they don't include food or fuel. If you are looking at me, we'll see that food is important to me, I consume it. It's part of my budget, and I drive and fly. An inflation number that doesn't include food and fuel is, by my reckoning at least, a floating abstraction. The second thing is that the CPI calculation is about 20 years old. While it includes many goods, it doesn't include many services and our economy is becoming more service centric. The prices of services are rising faster than the price of good-- goods. Pardon me.
My final criticism of the index, however, is the most profound. The CPI index does not include taxation. Now, believe me, if I didn't have to pay tax, I'd complain a lot less about the index, but my own experience is that the purchasing power relative to my lifestyle of my savings, is depreciating by about 4% or 4.50% a year. The value proposition that the government offers up to me is that they'll take my savings in a US 10- Year Treasury and they will pay me 2% a year in a currency that depreciates at 4% a year. My friend Jim grant describes this value proposition as return free risk, and return free risk is just not particularly attractive to me.
My suspicion, however, is that it gets worse in the out years. The idea that you can conjure up $4 trillion in fresh currency units through quantitative easing, and have that not show up somewhere really, truly beggars belief. If you ever had a circumstance where savers had a strike on treasuries, that is where people's faith in the system was slowed up enough that you had a replay of the Clinton years where they gave a treasury auction, and the buyers forgot to show up.
The circumstance that I think that you would have then would be something more akin to a reckoning, a circumstance that where you would have a crisis in confidence and probably a liquidity crisis. I'm not saying, by the way, that this is going to happen anytime soon. Most of the world is driven by narrative rather than arithmetic, but over time, arithmetic is real and narrative is just that.
How do precious metals fit in your thesis?
The question, I guess, involves the price performance of all precious metals in the context of a questionable US dollar. We start the discussion of course with gold, with the basic precious metal. A historic mechanism as a medium of exchange, and simultaneously a store of value. As far back as Aristotle, it has been known that fiat currencies were a promise to pay but gold was payment in and of itself. It wasn't a promise to pay. It wasn't a note. It was in fact, payment, a store of value and a medium of exchange simultaneously.
The current strength that you see in gold, I think, is the recognition of the fact that the value proposition associated with fiat currencies is becoming increasingly challenged. Silver has, of course, always moved later than gold but moved more spectacularly. The lower unit cost means that silver is if you will democratized gold, poor or people in emerging markets, particularly in South Asia, have for 1000 years stored a lot of wealth in silver because they simply couldn't afford the unit of exchange represented by gold, speculators like silver, too, because it's more volatile.
Historically, when the gold prices move, it's moved fast-- it's moved first, pardon me. Silver moved in second position, but move further. Coming down to platinum and palladium, they're really interesting markets in the sense that their primary uses on a global basis have not been as stores of value or mediums of exchange, but rather because of their utility and fabrication, applications, things like catalytic converters for internal combustion engines, or refining or chemical fabrications, but in certain societies, particularly northern China, Korea and Japan, platinum and palladium have also been favored over gold as jewelry and as stores of wealth.
One of the things that you're seeing now with the increasing amount of private savings in Korea and Japan, as private citizens become nervous about their own governance is an increasing amount of utilization of platinum and palladium for functions with regards to stores of value that have traditionally been assigned to gold. What we're seeing, I think, on a global basis is a very gradual substitution for government debt by precious metals. It's important to note that in a historical sense, this substitution is really in its infancy.
I read a story very recently that suggests that precious metals-- physical precious metals and precious metals investments, like precious metals mining stocks, currently occupied between one third of 1% and one half of 1% in the savings and investment matrix in the United States. That is to say, if you looked at all the savings and investment products in the United States, precious metals related investments would comprise less than one half of 1% of aggregate market share. Now, as recently as 1982, the same number was 7%.
The three decade mean, has been between 2% and 2.50%. My argument is that precious metals won't win the war against as an example, Treasury securities, they'll just lose the war less badly that precious metals, all precious metals market shares, combining gold, silver, platinum and palladium and of course, the mining shares will resume their historic place in the investment matrix and they will go from one half of 1% market share to 2% market share just a reversion to mean, but that little reversion to mean would quadruple demand for precious metals and precious metals equities in the largest investment market in the world. That's the circumstance I see. From the point of view of precious metals holders, that's extremely attractive.
What is your outlook for precious metals mining stocks?
If your readers are able to contact me, if you can have some contact on the screen, I will send your readers a Barron's 40-year Precious Metals Mining Stocks Index and it's a really dramatic graphic presentation of where we are. The first thing to note is in a historical context, the prices of Gold Mining Index, the prices of gold mining equities are at historic, historic lows. The second thing is that the average recovery or up move in the mining stocks is very explosive. The up moves show between 200% index price escalations and 1200% price index escalation.
I don't want your readers to go away thinking that in the next three months, every gold stock in the world is going to go up by 200% or 300%. I just want them to understand that in a historical context, precious metals mining stocks are cheaper than precious metals, which are themselves reasonably cheap and the recoveries historically have been extraordinarily dramatic.
If a circumstance comes where savers worldwide begin to question the efficacy of sovereign debt on a global basis, but particularly US sovereign debt, then I think you see your recovery in precious metals prices first, which I think you're in the early stages of seeing, and then you see a much more dramatic recovery, if past is prologue in the shares of precious metals, mining stocks. When I say precious metals mining stocks, I don't just mean gold stocks, I mean gold stocks, silver stocks, and platinum and palladium stocks.
What is most exciting thing about the relationship between crypto and precious metals?
Well, that's a wonderful question. The truth is that the blockchain and the distributed ledger are precisely what you describe democratization and in fact, the privatization of the medium of exchange. Hitherto for most of human history, mediums of exchange were either stores of value, things like precious metals, or promises made by society things like fiat currencies. With the distributed ledger technology, with the blockchain, with cryptocurrencies, other private arrangements can be made for mediums of exchange.
Bitcoin as an example, the best known and probably the most popular of the crypto currencies, isn't tethered to anything of value. The value comes from the network, from the community and from the contractually implied scarcity. We can't continue to print bitcoins forever. Their ultimate population is fixed in the white paper, so you can't necessarily be inflated away. You can only acquire new Bitcoin by providing a service to the Bitcoin community.
I am an international businessman, I use numerous mediums of exchange. If you look in my wallet today, you would see pound sterling, US dollars and Canadian dollars. From my personal point of view, the idea that there are many currencies, many mediums of exchange, competing to offer me utility is a wonderful thing. If the promise offered up by US society in the form of the US dollar becomes less competitive, and I have the ability to look at gold as a medium of exchange, the Canadian Dollar is a medium of exchange, the yen as a medium of exchange, Ethereum or Bitcoin as a medium of exchange, I, as a consumer, am benefited.
I'm really delighted to see the democratization, the privatization of these promises that society makes to itself in terms of mediums of exchange. A cryptocurrency may evolve that's uniquely suited to your lifestyle, your trade, your commerce, and the different one may evolve that suited to me and the idea that the market suits you, while simultaneously suiting me, is, I think, an absolutely wonderful thing.
Now from my own particular viewpoint, given my own historical observation that gold holds its value through thick and thin, one of the really interesting transitions that I've seen in my lifetime is the very fact that blockchain and the distributed ledger can be used to securitize gold by using distributed ledger receipts for gold stored, in our case, in the Royal Canadian Mint. Rather than having to own physical gold, I can have a delivery receipt, a deposit receipt, that's evidence to this good delivery by the Royal Canadian Mint, but I don't have to store the gold myself. In fact, I can download a gold link credit to my credit card right now. I can buy a cup of coffee at Starbucks, I can borrow against my gold.
If I buy physical gold or sell physical gold, I pay a commission to a dealer that's as much as 3.50%. Then I have to pay to store it and then I have to pay to ensure it. The distributed ledger and the blockchain gets rid of all of that. It takes all the friction out of a gold or silver transaction and really, really, really, for the first time in history, makes gold and silver efficient mediums of exchange, cheap mediums of exchange, rather than stores of value.
For me personally, given my attraction to precious metals, the most exciting part of the blockchain and the distributed ledger as it relates to mediums of exchange is its ability to make exchanges and ownership and trading of precious metals much more efficient, much easier and much cheaper.
Listen, at age 66, I would describe myself not so much as a Luddite, as an inefficient adopter of technology. The fact that I can do this myself on my phone at age 66, I described myself as having a rotary intellect in a digital world. If I can make this work on my phone, imagine how simple it's going to be for people with your education, of your age.
Is the reduction of anonymity in the crypto space concerning?
The question, as I understand it, has to do with anonymity in the utilization of currencies. One of the initial benefits, the initial utilities of cryptocurrency was, in fact, their anonymity, the idea that there was social trust built in as a consequence of technological verification. The trust wasn't so much individual to individual, as it was trust in the system and as a consequence of trust in the system that the system would be anonymous. This has worked by the way. There are people in countries with blocked currencies. People's Republic of China, Zimbabwe, Venezuela, people have used in particular Bitcoin to translate their money from currencies that they couldn't use outside their host countries or for that matter, inside their host countries and transferred them out.
One of the difficulties that we've begun to see in the crypto community is that some of the users of crypto want those currencies to become or want those technologies to become more broadly adapted. They've ironically asked for more regulation. They have ironically begun to lobby for one of the key utilities of crypto has to be obviated by greater regulation.
This is ironic, to me. This is odd. It seems to me that the two or the three really big utility features of the crypto are the fact that they are anonymous, differently, that they aren't government controlled, and therefore can't be restricted or quantitatively eased and that they are extraordinarily cheap. When I say cheap, I mean the transactions denominated in crypto can be frictionless and extraordinarily cheap. The idea that the community would voluntarily obviate the two of the three most important utilities of the currency seems very strange, seems very odd to me.
How does price volatility impact your view of cryptos and precious metals as monetary tools?
One of the things that's happened very recently is-- well, not very recently, but over the last five years, is that one attraction of the cryptocurrencies has been their volatility, the way they trade. It would seem to me that Bitcoin is thought of worldwide now as a speculation, as a trading sardine, rather than as an eating sardine. The volatility-- of course, particularly to the upside, people don't like that downside volatility. They like upside volatility, but the very volatility in some of the crypto currencies has obviated any utility that they might have as mediums of exchange.
If you have a crypto that varies in price, at least denominated in US dollars, if you're using this medium exchange, you don't know how much you're paying for something. If a Bitcoin goes from $10 a coin to $1,000 a coin, and you believe it's going to go to $10,000 a coin, the idea that you use that Bitcoin to pay for something means almost by definition, that in your mind, you believe you're overpaying for the item that you are receiving in return for your Bitcoin. Simultaneously, if you're a merchant, and you're accepting Bitcoin for something, you don't know the value of the species that you're getting in return for the good that you sold.
The very volatility that occurs right now in the cryptocurrencies, I think goes a long way to obviating the utility in cryptocurrency, the utility in cryptocurrencies that is expressed as their utilization of a medium of exchange. If you take away their efficiency as a medium of exchange, and you take away their utility, I'm afraid that you have dealt a real blow to the cryptocurrencies. By the way, I'm not saying that this is going to occur. My hope is that we develop 50 or 60 cryptocurrencies that offer up various utility to consumers over time.
I think that the utilization of technology to affect mediums of exchange is limited only by our imagination, but our imagination thus far has been compromised because we've courted volatility, which obviates the currency's efficiency as a medium of exchange. On the other hand, using distributed ledger technologies that are tied to commodities as an example, like gold and silver, that have traditional utility probably means, at least for some consumers like myself, that the distributed ledger will ultimately offer up frictionless stores of value that can be utilized as medium of exchange. At least for me, as a transactor, that's much more attractive.
Credit to Doug Casey, he tells a wonderful joke about a guy who bought 1000 crates of sardines as a speculation and he opened what one sardine that was terrible and the guy who sold it to him said, "Well, these aren't eating sardines. These are trading sardines."
How will the cryptocurrency space evolve to increase its utility?
The question is how will the cryptocurrency market evolve? I think it's evolving very quickly right now. Sprott as an example, and others have invested millions of dollars to adapt the distributed ledger and the blockchain, to trade gold, silver and platinum and palladium. I think the future of cryptocurrencies could only be limited by two things. It could be limited by legislators, by groups of people who didn't want other people to be free, or it could be limited by lack of imagination. We live in an age right now, where technology is freeing imagination to generate utility for people like you and I, at a rate that we've never seen before in human history.
The advantages of technology are cumulative, and compounding and technology will involve people being able to generate value for each other and communicate with each other, completely unconstrained by legislatures which has never happened before in human history. When people listen to some of what I have to say about liquidity versus solvency, people assume that I'm a pessimist. I'm an unbridled optimist and I see this circumstance where people around the world are talking to each other more, interacting with each other more. I see technology broadly but Bitcoin and blockchain in particular, as enabling free exchange between free people, unconstrained by groups of gangsters that call themselves legislators.
I think this is a wonderful circumstance. What we're doing is fraught with regards to gold is just one thing that goes to our imagination. You might have a different form of imagination. It might be access to communication that forms the utility that becomes the key to your medium of exchange, but the idea that groups of people around the world, in science fiction they're called files, groups of people around the world who are attracted to each other voluntarily as opposed to politically as an accident of where they were born, what race they are, what religion they are.
The idea that people can make connections with each other that are unconstrained by previous mores, and can affect these mediums of exchange through technology, like Bitcoin and blockchain, points to me to an absolutely glorious future for all of us.
Well, thank you for the opportunity. It's obviously a topic I'm interested in.