From Henry Bonner in Sprott's Thoughts:
On March 18th, Rick Rule, Chairman of Sprott Global Resource Investments Ltd., answered the most important questions on natural resources and precious metals today.
Rick has recently warned investors not to become too bullish too soon – there will be more pullbacks and sell-offs ahead, he says.
Where is gold headed in the next one-to-five years?
"I believe that the gold price bottomed in 2013," Rick begins. "Between 2011 and 2013, traders drove the gold price down, unwinding leveraged bets on gold. For most of that period, there were forced sellers and not much buying.
"In the middle part of 2013, we saw a stalemate between exhausted sellers and buyers. As the forced selling by leveraged traders passed, gold began to find a bid, taking the price higher so far in 2014.
"The gold price rally will not necessarily continue through 2014. But as an investor with an outlook of three-to-five years, I believe ownership of gold will be critical to maintaining your wealth in the next few years."
Are institutions intentionally driving down prices by shorting the metals?
"The situation is different depending on the metal you are talking about," says Rick. "In platinum and palladium, for instance, there are almost no short-sellers of the metals.
"On the gold side, traders are now covering their short positions, which could indicate that downwards momentum has subsided."
Was there a concerted effort to drive down the metals?
"I believe that any potential manipulation is disappearing," said Rick. "The banks' and other major institutions' ability to manipulate metals prices is under increasing regulatory scrutiny."
How long will the Fed keep interest rates low?
"As long as they can get away with it," says Rick. "Suppressed interest rates take money from savers, who receive an artificially low return, and rewards spenders with the ability to borrow more at lower rates.
"Because spenders outnumber savers, elections and political powers tend to favor low-interest-rate policies like the current ZIRP (zero-interest-rate policy) in the United States."
So far, a weak recovery has prevented low interest rates from causing high inflation, he adds.
"We are in a very strange situation – a jobless recovery with little new investment in production. The demand for capital has been muted as a result, which has prevented easy money from translating into greater inflation.
"Because the economy remains anemic, interest rates could stay low for the next two or three years. But markets always win in the end. Eventually, I would expect inflation and higher interest rates to arise."
Will there be a 'meltdown' in the metals sector before a new bull market takes off?
"I don't think that we will see another move down like the one from 2011 to 2013, where gold dropped 30 percent and mining stocks fell by over 50 percent. But this is still the most volatile sector in the world. Just as gold went up by over 1,000 in only a few months, we could see it return to around 1,150 at some point before the year is over.
"In fact, I believe the market will mostly move sideways over the next 18 months with intermittent rallies and subsequent sell-offs. Once this period is passed, we could see a major bull market truly take off."
Is there any store of wealth that cannot be manipulated?
"The biggest threat to your wealth is not the government, the banks or market manipulators," says Rick. "It is almost always your own lack of conviction, courage, or knowledge.
"Everyone wants to be a contrarian, but only when it's popular. That is why lots of people wanted to invest in 2011 when precious metals had enjoyed an unprecedented rise. Meanwhile, nobody wanted to invest in 2012 and 2013, when both the precious metals and the mining stocks were much cheaper.
"If you believe in the precious metals in the long term, then manipulation by financial or government institutions to drive the price lower is an opportunity. You can buy the assets you want at an artificially low price.
"So don't fear manipulation. Fear your own mistakes due to emotional decision-making and prejudices set by your experience in the immediate past."
Where are platinum and palladium headed?
"We have recently seen an increasing popularity of platinum group metals among financial institutions, who are now speculating in the price of the metal. I believe they could now begin to unwind these positions now, which could drive the price lower in the short term.
"But in the longer-term, I see them going higher," he adds. "Mining companies are losing money on their platinum production, which could force them to shut down. But platinum and palladium are extremely useful to modern society – primarily because they help prevent smog.
"For these reasons, the price has to go up," he believes.
What about silver?
"We often joke that 'silver bugs' are 'gold bugs on steroids,'" says Rick. "Moves in the price of silver tend to be more dramatic than in gold. So if gold moves up, silver can move up even more – and fall by a lot more too.
"The problem with silver is that a lot of it comes as a by-product of producing some other metal. So in order to predict the silver production from mining you need to understand the economics of the other metals, where silver is mined as a by-product.
"Another hitch is that estimates vary widely on how much silver really exists in circulation today – especially in places like India, Sri Lanka, Bangladesh, or Pakistan."
Is the general stock market in for another crash?
"It seems the general stock market has been driven by artificially low interest rates. If interest rates were to rise, as I believe they will eventually, it could severely adversely impact most stocks.
"There is no real economic recovery going on to justify higher stock prices today. Few jobs are being created and there is little capital investment. It looks like a recovery 'on paper' – but it is a confidence recovery driven by low interest rates.
"If confidence wears off and interest rates start to rise, I believe it could be extremely damaging to the overall stock market," he concludes.
If the resource sector recovers, how will we know when to get out?
"Remember back to 2010 and 2011 – and how well your portfolio was performing. Many investors were seeing their portfolios rise by double-digits each month. That is when we felt the smartest and the most aggressive.
"As the height of a bull market, investors confuse a bull market with brains. So when we become most fearlessly bullish it is time to begin to sell stocks. The easiest sign of a top is really that you begin to see solicitations everywhere to invest in that sector – from the media and publishing companies.
"In contrast, publishers begin to cancel their publications that have to do with natural resources when we are in a bear market. It is a harbinger of a bottom."
What effects will Russia's annexation of Crimea from the Ukraine have for investors?
"I believe that the impact for investors of what is happening in the Ukraine should be fairly small. The events in the Ukraine are part of the natural resources narrative, and have been used as a reason for the rise in precious metals prices. I believe that gold and other metals would be rising regardless of the situation in the Ukraine, because the buyers are simply overtaking the sellers.
"One important effect may be to diversify the supply of natural gas in Europe – resulting in greater production in Western Europe and fewer exports from Russia.
"Additionally, lawmakers in the United States could use 'energy security' for Western Europe as a pretext to allow oil and gas to be exported there – which seriously scares non-US energy producers. The crisis could provide a useful excuse for oil and gas interests in the US to bring production to the world market. And Western Europe would likely favor an alternate supply of oil and gas."
What impact will the Mexican mining tax have on the industry?
"Politicians and governments frequently turn to mining and oil and gas to increase their tax revenues because the assets are fixed. They cannot be moved elsewhere.
"I believe the new tax will not be beneficial to Mexico. State ownership of the oil industry has severely impeded the oil and gas industry there. Now, they are turning their attention to mining, which is certainly not a positive development.
"The mining industry has been a stellar contributor of revenues for the government and jobs for the Mexican people. It will only be weighed down by this tax, which is very unfortunate."
What will happen to the price of uranium in the near and long term?
"In the near-term, the market is still working through the excess supply caused by Japan's shutting down its nuclear power plants and selling supplies onto the market," says Rick.
"But in the long term, I believe uranium is a 'no-brainer.' Uranium miners spend 70 dollars per pound to produce the green metal, but it only sells for 35 dollars. They lose approximately 50 percent on every pound of uranium produced.
"As a result, the industry is using up the capital it raised during the bull market from 2004 to 2011.
"Once they run out of capital, they will have to shut down their operations unless the price of uranium has risen to a profitable level. This will cause nuclear power plants to shut down – a tremendous drain on electrical production capacity.
"Because so much energy can be produced from a small quantity of uranium relative to oil or gas, the cost of uranium represents a small portion of the costs of producing electricity from a nuclear power plant. Therefore, nuclear power generation will remain competitive as an energy source even if the cost of the metal were to double, which I believe is likely as utilities will pay what they must to ensure a supply."
Where should an investor in natural resources put their money today?
"Personalized investment advice is only available to clients. The full depth of our research and expertise at analyzing natural resource stocks is available through your Sprott Global broker.
"The best investments for your portfolio will depend on your individual situations and willingness to tolerate risk. If you would like to know what are favorite companies are today, I urge you to either contact your Sprott Global broker or become a client of Sprott Global.
Rick concludes: "Investing in natural resources and precious metals is attractive today because the sector is so much cheaper than it was three years ago. Many of the stocks are trading at a 90 percent discount to their prices in 2011. For a contrarian investor, I believe that we are seeing a historic opportunity now."
Rick Rule is the Chairman and Founder of Sprott Global Resource Investments Ltd., a full-service brokerage firm located in Carlsbad, CA. Sprott Global is an affiliate of Sprott Inc., a public company based in Toronto, Canada. Mr. Rule leads a team of earth science and finance professionals who form an intellectual pool for resource investment management. He and his team have experience in many resource sectors including mining, oil and gas, water, agriculture, forestry, and alternative energy.
