In a June 25, 2015 interview by Patrick MontesDeOca of the Equity Management Academy with Rick Rule, President of Sprott Asset Management, USA, Rule discussed the Euro-zone crisis and the relative financial security of the United States, but also the need to own physical precious metals.
When asked about the Euro-zone crisis, Rule said the most important issue was how long could central bankers and financial leaders in government “continue with the easy money program and continue to depress interest rates,” and “How long until private sector borrowers respond to market forces and demand higher yields given the increasing vulnerability that borrowers have to overleveraged balance sheets?”
MontesDeOca raised the issue of the crisis spreading to the United States, but Rule said, “I think we have the ability internally if we put our own house in order to survive Eurozone instability.”
Rule said we have had three years to prepare for a Greek default, and private sector banks have done “a very good job” of shifting potential costs to taxpayers. He said banks have followed the “Fascist response: privatize the profits, shift the risk to the public sector.” He said a Greek default will not have real ramifications in the private sector, but may affect sentiment.
When asked if a major economic crisis is coming, Rule explained, “I’m not an economist. I’m a credit analyst.” As an analyst, he said, “We are less well prepared to handle a crisis than we were in 2008” because debt levels are higher now than in 2008. Therefore, the ability to add liquidity and generate economic activity has been damaged because “we have played that card so much.”
Looking to history, Rule said the 1960s shared similar traits with today, in terms of easy money, which led to instability in the 1970s. He does not believe current conditions will lead to an economic apocalypse, but he said that the 1970s were “very good for the price of precious metals.”
He advised holding physical precious metals “not for collapse, but to bolster the purchasing power of the US dollar.” He mentioned that in the 1970s, Motel 6 rooms near his home cost $6; now they cost $69. The dollar’s purchasing power has decreased 90% in 30 years. Rule advised listeners to be aware that “the purchasing power of your dollar depreciates at 3% or 4% every year,” so you should keep some money in gold and silver.
Discussing the paper market, Rule said the gold and silver paper markets will lead most of the time, whether they are moving higher or lower. He also pointed out that over the past “14 or 15 months, gold and silver have been in bull markets in every currency except for the US dollar,” which is a phenomena eerily similar to the market of 2000. At that time those who held precious metals were “worn out,” yet gold was up in every other currency. Then in 2001, gold and the US dollar began to rise against other currencies. Gold rallied from $252 up to $1,900 an ounce by 2011. Rule did not predict such a rise, but he believes circumstances now are similar to 2000.
Rule argued that all currencies are weak, with the US dollar the “prettiest mare in the slaughterhouse,” but “don’t bet it will continue.” He sees confidence in the market as “artificially high.” Many people believe that since financial leaders appeared to have saved the world from an apocalypse in 2008, they can do it again if there is another financial crisis.
Rule argued that at other times when most people were wrong, a few have made fortunes. George Soros’ famous run on the British pound was based on his belief that broadly held support for the pound was wrong. He was wrong for two years, and then he was “a billion dollars right.” Rule also mentioned those who bet against real estate debt in the early 2000s made billions when the real estate and bond markets crashed. He warned that the crash can come quickly because confidence can vanish overnight.
Rule believes that gold will not replace the dollar, but that “It will lose the fight less badly.” Precious metals account for about one-third of 1% of US savings, so if that percentage rose to even just 1%, demand would triple and prices would rise.
In comparing gold and silver, Rule said, “Silver is in effect gold on steroids.” In bad markets, silver underperforms gold; in bull markets, silver outperforms gold. Silver is cheaper per unit to acquire, so if there is a bull market, poor people have more access to silver than to gold. If there is a bull market and more and more poor people use silver as a medium of exchange, silver will outperform gold.