Introduction: Rick Rule began his career in the securities business in 1974, and has been principally involved in natural resource security investments ever since. He is a leading investor specializing in mining, energy, water, forest products and agriculture. A popular public speaker, Mr. Rule is a featured presenter at investment conferences and resource investment forums throughout the world. His firm provides unique insight into the workings of the natural resource marketplace. Global Resource Investments provides investment advice and brokerage service to individuals, corporations, and institutions worldwide. Rick Rule has originated and/or participated in several hundred transactions over the past 30 years, including both debt and equity in private, pre-public and public companies. These private placement activities have involved companies on six continents.
Daily Bell: We interviewed you nearly a year ago and we appreciate the opportunity to update viewers. It's been a most eventful time. How are things going at your company, Global Resources?
Rick Rule: It's been a pleasant year for us, if you can view what's gone on in the world as being pleasant. We largely anticipated the volatility, and we largely anticipated the fact that the recovery, such as it is, is a fraud. Our clients have maintained fairly large cash positions. We have lots of dry powder and suspect the volatility will continue and the cash will come in very handy. Customers have stuck with us through a very tough time and we regard ourselves as having been fairly successful stewards for them.
Daily Bell: Any new ventures you want to mention?
Rick Rule: Your question is two weeks early. Watch this space and you will see us in a fairly major transaction in the next 2-3 weeks, which I can't discuss for regulatory reasons. You must be speaking to God or something; you are just two weeks early with the question.
Daily Bell: Can you update us on the progress of the natural resource sector?
Rick Rule: The natural resource sector has a sort of stay of execution, if you will, from the stimulus. The demand may not be real demand but there is liquidity in the sector. All the printing that has been going on in the near term has been helpful for the resource sector.
Daily Bell: Does Canada remain a dominant player? What do you think of Canada's regulatory evolution?
Rick Rule: I think Canada is a dominant player because Canada has the infrastructure necessary for financial services resource success. The regulatory infrastructure is one thing, but the institutional infrastructure and the financial services infrastructure is another.
My views on regulators are fairly well known, and I suspect echo those of The Bell; I must say that the Canadian regulatory climate relative to other regulatory climates, is a blessing for Canada because Canadian regulators understand resource industries. I prefer the self-regulated environments of Dubai and London to the Canadian regulatory environments, but I have to say that Canada is very competitive.
Daily Bell: What do you think of the new financial regulatory regime being contemplated in the US? Are you a fan of the increased invasiveness?
Rick Rule: It's very difficult to answer that question in words that are suited for a family publication such as yours. It is the regulators that got us into the situation that we are involved in.
You know if you and I had a business, let's say a pension business that was run with the accounting standards of, for instance, social security, we would have committed a felony; we would have been in jail. The idea that the political leadership of the United States is in any condition to regulate anything would be comical except that it is so dangerous. An example would be Enron, a fraud that was for all practical purposes abetted by the Securities and Exchange Commission.
When that fraud took place, they passed a whole bunch of laws that were completely unrelated to the fraud that was perpetrated. The situation that we have just been through is a balance-sheet recession. Too many people had too much debt, at every level: personal, corporate and government. The federal response to that was to make it easier for people to borrow more.
I'm having a recollection of my University days, where I tried to cure a tequila hangover with white rum and it was temporarily successful, but it was not ultimately successful. That is exactly the type of cure that is being envisioned for the United States. The idea that you shepherd these big Wall Street firms and provide oversight, and at the same time you subsidize them with federal deposit insurance, is literally lunacy and very, very dangerous. The whole illusion of consumer protection is dangerous. My own experience with SEC personnel is that they are generally competent and well meaning but its existence in my point of view is a form of confidence game.
Investors are best protected when they are terrified and weary and the SEC – Doug Casey refers to it as the Swindlers Encouragement Committee – puts a veneer of protection in place where no protection exists at all. It deludes people to believe that something is happening for their benefit.
Daily Bell: Where do you see the natural resource sector headed?
Rick Rule: I think we are going to have extraordinary volatility in the sector because I think we will have volatility in all aspects of the financial economy. I do think that we are involved in a secular bull market in raw materials that probably has 10 years left to run. There are two reasons for that. One is that emerging markets are becoming slowly freer, and as people become slowly more free they become rapidly more rich they tend to consume more resources.
You yourself, if you get some money, you might buy a second iPod for your child, and you may load it with 10,000 songs. When a poorer person on the equator gets more money, he or she might get an air conditioner or refrigerator; a motor scooter will replace a bike; they might move from a shack to a cinder block home. All things that are made of things! So demand for resources is increasing very rapidly per capita. Thus, the demand side for resources I think is intact for another 10 years.
Interestingly enough, on the supply side from the mid-80s until three or four years ago, there was not a lot of investment in resources. We were living on resource deposits in oil and metals developed and discovered in the 60s, 70s and 80s. So for the next 10 years you are faced with stagnant or declining supplies and increasing demand.
Daily Bell: What investment criteria do you use these days?
Rick Rule: "Net present value." We want deposits that will make money at today's prices and reflect industry cost of capital. That's a very, very, very unpopular mechanism in financial services today because it's difficult to determine and it's relevant. People today seem to be more story-oriented rather than reality-oriented. Our background in our firm is we are credit analysts and as a consequence we have a much more granular look at free cash flow than many of our competitors.
Daily Bell: Do you use Austrian economic analysis?
Rick Rule: I would not describe myself as an economist but certainly for me the only economic philosophy which makes any sense at all is Austrian analysis. Certainly the only common sense analysis of the situation that we are in today and the political causes and political effects is Austrian.
There are people who criticize free market policies in government; those people mistakenly assume that free market policies existed in government. The idea that the Reagan revolution as an example had large free market elements to it is fallacious. It was just less restrictive. So there is some suggestion in the world that the banking failure, as an example, is a result of a free market failure. In fact, there's nothing about the banking business as exists on a global basis and has for 100 years that smacks of anything of a free market. So the suspicion that the Austrian thesis has been damaged or that free-markets don't work is laughable.
Daily Bell: Has your strategy toward identifying promising opportunities changed in any way?
Rick Rule: Not much. My strategy differs from many people in that I am willing to take more perceived political risk than most people. I don't agree for example, that the province of British Columbia is a low-risk destination. I remember 25 years ago when the saying was ABC (Anywhere but British Columbia). People tend for whatever reason to be fairly ethno-centric and Western investors believe that when your wealth is stolen from you in a political process that you understand, in English by white people and according to the rule of law, that the money is somehow less gone.
From my point of view, your money is gone when your money is gone, and who took it and how is less important. My own experience has been that I have to look in places that are perceived to be more politically risky because those places have been less thoroughly picked over in terms of opportunity. I have found myself that the opportunity justifies the risk. Canada and the United States … the political risks are much higher than investors see them today. You can describe me as a contrarian. We're in places where the political risks are believed to be higher, but from my point of view the rewards compensate for the risks.
Daily Bell: Is gold heading higher, or is it being supported by fears of war with Iran etc. How high will gold and silver go?
Rick Rule: Yes. Yes, and I don't know. I believe that the gold price is going higher. I believe that it is a denominator issue. Gold is denominated in US dollars. And I think the US dollar and the euro are headed inexorably lower. I also believe in the near term, the gold price escalation is being exacerbated by people's fears.
I came into the industry in the 70s, during a great bull market and in my experience I haven't seen another market like the precious metals market, where both primary investment motivators, greed and fear, oscillate and feed off each other. The fear-buyer buys gold because he or she is afraid; the greed-buyer looks at the momentum of gold and piles on.
Gold goes up, stimulating more fear-buying, which stimulates more greed-buying. I remember that toggle in the 70s, backwards and forwards, from $35 to $850; it was truly a spectacular bull market. When I talk about gold going higher, I have to say, from my own point of view, that I'm afraid it's going higher because I'm a fear-buyer. Gold occupies a position of liquidity in my portfolio; it functions as a store of value, but it's particularly there for catastrophe insurance and there's no kind of insurance that I own that I'm particularly eager to get paid on.
If you think about an event that precipitates a payment for life insurance, that means somebody died. Auto insurance means you had a wreck. Home insurance means your house burned down. And gold from my point of view is social catastrophe insurance. It's a policy I would prefer not to collect on but I think I will.
Daily Bell: Why hasn't silver made more progress?
Rick Rule: I do think silver will make more progress because silver is a monetary metal. I also think that because silver is produced as a by-product of base metals mining, that if we have an economic slow down and production of lead, zinc and copper decline, silver production will decline as well. Therefore, I think we're in line perhaps for some spot production shortages on the silver side. I am quite constructive toward the silver price and quite constructive toward primary silver properties when you can find them.
Daily Bell: How are the juniors doing these days?
Rick Rule: I think the juniors are doing spectacularly well. They are ridiculously over-funded. Canadian capital markets have been incredibly generous to management teams that as Doug Casey wisely said, "were it not for the junior stock market, would probably enter 7/11s with masks and guns." I think the thing that faces the juniors that's problematic is that there are too many of them. They're too spoiled and coddled by Canadian capital markets and there needs to be a massive culling.
Daily Bell: Do you see further progress in the sector and why? You said previously the sector was doomed. Still?
Rick Rule: Oh, sure. Let's do an exercise. If you take the 4,000 or 5,000 public exploration companies in the world and you merge them into one. Global Explore Co. That company in a very good year would only lose US$2 billion dollars. In a bad year it would lose US$6 or US$7 billion dollars – those are expenditures above buyouts. And it would do this for as long as it was continued.
So you decide! What's the industry worth? What multiple do you apply to losses? Should you do 5 x losses? 10x losses? 15x losses? The junior exploration sector as a whole is a really spectacular destroyer of capital and at some point in time, people will get tired of feeding it.
Now what's interesting is that there is a fair bit of value created by about 5% of the participants in the sector. Thus, when I make fun of the junior exploration sector I'm a little disingenuous in the sense that the sector has been enormously kind to me but that's partly a function of spending 30 years learning how to do it and I work at it full time. But I do believe that the sector as a sector is doomed. No sector can continue to waste billions a year, ad infinitum, ad infinitum, ad nauseum and prosper.
Daily Bell: Do you believe the gold and silver markets are manipulated with all that has come out about them? You said previously you didn't think so.
Rick Rule: I don't think so although my friends John Embry and Eric Sprott make some very good points with regards to manipulation. My own experience is that conspiracy theorists are people who can't be wrong. I notice there's a lot less discussion about manipulation now that the price is rising.
The second thing about that is who are the manipulators? Allegedly as an example, it was the US government. These guys can't deliver the mail, and they can't educate kids. They had a war against drugs, and drugs won. They had a war against poverty, and poverty won. So I have to assume some level of competence on the level of the manipulator and this isn't an assumption I am willing to assign them.
Daily Bell: Do you think the Internet is helping people understand the economy better? Do you think the Internet is in danger of being censored by government? Will it be?
Rick Rule: I think the Internet has enormous potential to help people understand the economy and society as a whole. The idea we can now narrow-cast information like The Bell is doing as opposed to the broadcasting like NBC or CBC, I think is enormously helpful. However, unfortunately, most people in the world prefer to feel, as opposed to think. The Internet in terms of its ability to change society, presupposes individuals' willingness to access the information that's there for them to grab. On that score I'm probably a bit less optimistic.
With regards to government controlling the Internet, well, that's what government is set up to do. They are set up to transfer; set up to control; set up to cheat; they are set up to steal and lie. The Internet proposes, I think, to reduce control of information, which is threatening to government; in the second instance it gives them a technological tool. If they know how to exploit it, they can extend their grasp. But I don't think they are smart enough. With 6 billion or 7 billion individuals out there, the government is outnumbered. There will always be those who find a way to outsmart them over time. And I think it will be a good fight.
Daily Bell: What countries are most hospitable to mining today? Last time you believed it was Chile, Australia too.
Rick Rule: Well I made a big mistake on Australia obviously. You know governments leave mining alone when the prices are low; they don't steal when there's nothing to steal. But now that resource activities are beginning to show some profits, the governments are holding out their hands again. Chile, however, is a fantastic example of a country that understands the way mining works. It's a wonderful regulatory climate. The Chileans are truly the gold standard of regulation with regards to mining. The Australians are clearly recidivists, once friendly to the mining industry, now less so. Behind Chile I would have to say Brazil. Despite its left-leaning government, Chile is becoming more constructive towards mining although its reputation is that it's pretty thoroughly corrupt. Certainly Chile is the gold standard.
Daily Bell: You were high on Pan American Silver and Silver Standard. Still?
Rick Rule: I still like Pan American silver. Silver Standard has had some problems. They had a change at the top, Bob Quartermain was somebody I had a very high regard for; he is no longer with them. They had development problems in Pirquitas. While I think their management team is technically talented, they're a large company and I don't think they always or necessarily understand the nature of the business they are in, so I would strike them from the list. But I still think the Pan American people are doing a good job.
Daily Bell: Is the recent economic crisis over? Is America on the rebound?
Rick Rule: NO and NO. I think what we are facing is a balance sheet recession. You may have noticed the news items recently that this year the US social security system will go into the red – in fact on a cash basis. In other words, more money will depart the system this year than comes in.
As recently as two years ago, crossover was expected to happen in 12 or 13 years from now. This is a very bad sign. Bill Bonner famously said when they were asking him what Greece should do, the debate in Greece was, should they fire workers, should they reduce pensions, should they renege on their debt? Bill said, yes, yes and yes. We made extravagant promises to workers, which can't be kept; we made extravagant promises to the pensioners, which can't be met; and we made extravagant promises to the savers that can't be met.
There is a reckoning that needs to take place to get these balance sheets in order and there is reckoning that needs to take place with regards to asset prices and it will be extremely unpleasant. We have a choice, we could drag this out and make it unpleasant for a long time or we can make it EXTREMELY unpleasant in the short term. Those are our two choices.
Daily Bell: Is the West headed toward price inflation now, or hyperinflation or is the risk still deflation?
Rick Rule: I think the near-term risk is deflation. Usually a credit liquidation cycle is deflationary. I think the political answer is inflation, because the yield to politicians for deflation is immediate and catastrophic. If the outlook is catastrophic, you as a politician would wish to defer it, which is what this money-printing is about.
Daily Bell: You thought America's bailouts were ineffective. Have you changed your mind?
Rick Rule: Not at all! You know if Goldman Sachs had gone broke, I don't know about you, but it wouldn't have changed my day. The sun would have risen in the East and set in the West. Some branches that used to be called Bank of America would have been called something else. Not much would have changed. What has happened now, is we have set the stage for much larger problems spread over a much longer period of time. So I think the bailouts have been an abject failure. What kind of recovery is a jobless recovery? What kind of recovery sees damaged balance sheets get worse? This isn't a recovery; it's a fraud!
I don't see a rebound in the United States until people understand that they have to take the bad-tasting medicine and return to the things that made the country so spectacularly successful for so long.
Daily Bell: Will the upcoming US$5 trillion Fed quantitative easing be effective, if it occurs, or merely feed inflation?
Rick Rule: Insane! The idea that counterfeiting is helpful for a currency is really beyond the pale. Do they really believe it? Hey, outsource it. Let me print some of the stuff! They know it's fraud.
Daily Bell: Sounds grim. How about overseas. Will the EU break apart given all it's going through?
Rick Rule: Yes I think, ultimately. There's still confidence in Europe, albeit shaken. The root word of confidence is CON. Doug Casey when famously describing the euro versus the US dollar said that the US dollar is an IOU nothing and the euro, as he described it, is a WHO owes you nothing, because internal contradictions are probably too great. Europe is famously tribal; despite the fact that they are Caucasian tribes they are still famously tribal. I have a very difficult time seeing it continue. My own belief is that smaller political units are more efficient than larger political units and that competition is a good thing for people – including competition among entities that have a monopoly on the use of force.
Daily Bell: How about China? Will China experience a slow down – or maybe even experience a kind of serious inflation as well? We've written a lot about that and were one of the first publications to broach the concept actually. Now it's everywhere, though China still seems to chug along.
Rick Rule: I don't know if they are going to face serious inflation. I think the Chinese leadership has done a very good job with the challenges they have at hand. However, I must say it is difficult to understand how 10,000 people rule 1.2 or 1.3 billion people efficiently, and without a real marketplace information-feedback and pricing mechanism.
You know, it's very difficult to balance the aspirations of 1.2 billion people via a policy mechanism, versus letting the market do it, and thus I am very nervous generally. This is an opaque system – both the Chinese markets and the Chinese banking system. My suspicion is that there is as much rot in the Chinese banking system as there is in the American banking system but the rot hasn't come to light yet.
I look at the success of Chinese people who have left China around the world, and I am awed by the potential of taking 1.2 billion Chinese people and making them a little more free so they can be as successful at home as they have been everywhere else. I suspect if China solves in some small measure its challenges over the next 20 years, the accumulation of wealth will be substantial enough to lift us out of our own morass. I hope that is the outcome.
Daily Bell: Is Africa becoming a bigger factor in resource development, or are countries in Africa too unstable?
Rick Rule: No. Africa is a wonderful place to invest. It's highly speculative; it's always been highly speculative but there are tremendous opportunities in Africa. And there is a younger class of African leaders who are much less burdened by the idiocy of socialism.
George Ayittey, who is a professor in the United States, describes the old political class in Africa as a hippo – big, ponderous, corrupt, clumsy, stupid, over-fed. This younger group of educated leaders in their 20s and 30s are a different breed. This young woman who wrote the book Dead Aid, for instance, as an example, criticizes NGOs and the traditional ways that the West has tried "help" Africa. There is, instead, an emerging social Renaissance that is happening in Africa. It is in its very, very early stages but there is an understanding among the African's themselves, that the corrupt model that has caused living standards to decline since Colonialism, is a bankrupt model.
Daily Bell: Where are we in the business cycle? We think the commodities bull has five years to run at least.
Rick Rule: I think that the commodities bull has ten years to run. I would caution your readers to look at history. To look at the great commodities cycle from 1970 to 1981 cycle. Where gold as an example ran from $35 per ounce to $850 per ounce. Notice also that in 1975, the gold price fell by half. So you can have cyclicality in a secular bull market that is truly ugly and I suspect in the next 2 or 3 years we are going to have an interim, down cycle as a consequence of a credit contraction that is going to make people believe that the secular bull market is over. I believe that we will have another set of circumstances like '07 and '08 where commodity prices collapse, commodity equities collapse, subordinated debt markets freeze, and I think a lot of people will go broke. But I think the sector cycle is intact for at least 10 years as a consequence of the supply and demand equation we described earlier.
Daily Bell: Any articles or books you like to mention?
Rick Rule: I don't know if I mentioned last time The Intelligent Investor, by Benjamin Graham. I would ask anybody who is interested in investing to read that book. It was the best book on investing that was ever written. If people read the book, they will know more about the investing process than 99% of the stockbrokers they talk to. I would also encourage some of your older readers to buy Henry Hazlitt's wonderful book, Economics In One Lesson to give to their grandchildren. It is a wonderful book for people between the ages of 12 – 22.
Daily Bell: Any closing thoughts for our readers?
Rick Rule: Be very careful! Governments are trying to force you into increasingly speculative investments as a consequence of re-flating the economy and subsidizing the banks with very low deposit rates. They are trying to force you not to hold cash. HOLD SOME CASH. Don't succumb to that. Better to lose 5% of your purchasing power on cash than lose 30 or 40% in a wrong-way market. Be very cautious but also pick your spots. When the down-cycle comes, be aggressive; don't be afraid to come back in, when everybody else is terrified. Buffet said it best: "Be brave when others are afraid; be afraid when others are brave."
Daily Bell: Thanks for this opportunity to catch up with you again and hear your well-considered insights.
Rick Rule: Thank you it's a pleasure. It's fun talking to an audience that speaks the same language.
Rick Rule as usual makes a number of great points in this interview. The one that leaps out at us the most is that he believes the bull market in money metals is up to a decade longer. This exceeds our attempts at prognostication, which set the outside limits at around five or six years. He uses the same logic, though, referring to the last great hard-money bull market that he has running from 1970-1981 and pointing out that this time around the correction is even more energetic and therefore should run longer.
Just in case anyone has missed it, however, we will delineate the logic flow once more, as we have in previous articles. Rick Rule, assuming most people "get it" did not entirely elucidate the reasons why these cycles exist and why this one has been worse, even, than the previous one.
The problem begins and ends with mercantilist central banking. This system got its start hundreds of years ago in Europe and Britain and continues today. It is an inflationary system in the sense that, during both booms and busts, central banks usually print too much money for the economy to absorb. During the boom part of the cycle, people are fooled into making stupid investments. When it becomes clear to the larger market that these investments are worthless, a bust occurs. As a result people are thrown out of work, businesses are ruined and assets continually consolidate into fewer and fewer hands.
Always, however, central banks print too much money. And almost always, therefore, there is money-stock "inflation," as it is the money supply itself, which defines inflation. (Yes, we know Dr. Fekete disagrees but that is an argument for another day.) The resultant rise in PRICES, according to accepted Austrian theory, is merely the after-effect of inflation of the money supply. Likewise, when the money supply shrinks, as the result of a depression or recession, prices go down as an after-effect.
Business cycle booms and busts occur regularly these days but every 30-50 years, the boom-bust cycle becomes especially virulent. We are living through one of those times now. The distortions in the economy simply became too great to handle and the currency itself – the dollar in particular – virtually collapsed in 2008-2009. Along with such a large collapse comes a diminution in the money stock, in our opinion. Rick Rule does us the favor, as well, by the way, of explaining the role of deleveraging, disinflation and even deflation within the business cycle. He points out that some sort of deflation is part of the inevitable process.
Let us unpack, too. When there is a downturn in the economy in a region where free-market money, gold and silver, are in use, the money/specie will cease to circulate with previous velocity. Gold and silver will be hoarded; mines will shut down; credit will be restricted. In simplest terms, the money stock will shrink. This is deflation. The after-effect, may be price deflation. In a fiat-money environment, the same sorts of things may happen to a degree.
While there is no gold or silver to circulate, people may begin to hoard physical dollars and certainly banks reduce lending of the electronic digits that constitutes money these days. Whether or not the money stock actually shrinks is something that can be argued about, and hard-money economist Gary North has made some of these arguments. But what cannot be argued is that credit is reduced at such times and certainly prices drop as a result of decreased demand.
The drop in prices is what Rick Rule is referring to when he speaks of how deflation is a signifier in extended hard-money bull markets. This corresponds to the arguments that we have been making as well. During a massive bust such as the West has undergone, inevitably there will be deflation/price deflation but like Rule we eventually see a resurgence of inflation, perhaps even hyperinflation. In fiat-money economies, such as those the West "enjoys" today, central banks are in charge and central bankers facing a bust will print money 24-hours a day for as long as it takes to ignite economies once again. They will print so much money that the larger economy will be flooded. We are seeing that now.
We are on record as pointing out that this time the bust is so big, and the results so severe that whatever the central bankers manage to reignite will be much different than what has come before. We are hoping, of course, for some sort of money metals standard that will occur due to the demand for it. But in any case, we are not in the camp that foresees a deflationary depression that tears apart the West. Instead, ultimately, we believe we may see something approaching a deflationary depression (it is happening now) followed by a depressionary/recessionary INFLATION. The great Austrian economist Murray Rothbard had a word for it as well – stagflation, which can be quite vicious in its more extreme forms.
Rick Rule understands the ramifications of mercantilist central banking fiat money printing. You do, too. The results are not pretty, but we are living with them now and there is no choice but to experience them and do what is necessary to get to the other side of them. Education helps of course – real education such as that which Rick Rule has imparted to us today and in his previous interview. And of course, employing Human Action on an individual basis is the best way to "Live Free in an Unfree World."
You don’t have to play by the rules of the corrupt politicians, manipulative media, and brainwashed peers.
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