Proven & Probable: Interview with Rick Rule

Maurice Jackson:  Welcome to Proven & Probable. I’m your host, Maurice Jackson, and joining me today is a very, very special guest, the Chairman of Sprott U.S. Holdings, Mr. Rick Rule. Rick, how are you doing today, sir?

Rick Rule:  Maurice, I’m doing great. It’s a pleasure to be here with you. I’ve enjoyed some of your recent interviews, those I’ve been able to catch.

Maurice Jackson:  Well, thank you, sir. You know, Rick, you’re one of the most respected and trusted names in the natural resource space. I’d like for you to talk to investors today why it is paramount to have a position in precious metals.

Rick Rule:  Well, I think for a couple reasons. One, because precious metals over millennia have been a form of—a medium of exchange that is simultaneously a store of value. Maurice, you’ve done a great job of educating your listeners and viewers and readers as to what money really is and many forms, many mediums of exchange represent a promise of payment. Gold, by contrast, and silver to a different degree doesn’t represent a promise to pay. It represents payment itself.

And at a point in time when the currency is being debased, that is the common occurrence, it is being debased, having an alternative is a good thing. There’s discussion on a global basis about negative interest rates. Nobody can pay you negative interest rates on your physical holdings of gold and silver. So that would be the first reason.

The second reason is that at least relative to prices that have existed for the last few years, they’re cheap and we’ve learned in markets that money is made by buying low and selling high. That presupposes, of course, that you bought low in order to sell high.

The third reason is more limited I suspect to Americans, and that is that for us at least precious metals are denominated in U.S. dollars. It’s worth noting the people who hold precious metals denominated in other currencies have been seeing rising precious metal prices for the last 18 months. But I think it’s fair to note that the most important determinants of gold prices at least in the U.S. dollar has been the interplay between gold and the U.S. Treasuries. And the U.S. Treasuries have been in a bull market for 30 years.

30 years ago, the interest rate on the bellweather Treasury, the U.S. 10-year Treasury, which is sort of that which others are judged against. 30 years ago, the 10-year Treasury yielded about 15%. Now it yields 1.62%. The reason that I bring this up is not to give you a history lesson but rather to say with the interest rate declining from 15% to 1.62%, one thinks about how much lower it can go relative to where it’s been and one understands that a 30-year bull market in the Treasury is much closer to ending than beginning, which is a different way of saying that the competition offered up precious metals by U.S. Treasuries is much less impactful going forward than it has been in the past. Sorry for that long-winded answer.

Maurice Jackson:  Well, you know, Rick you said something that caught my attention there. You mentioned the bull market. at the present, we’re in a bear cycle during a secular bull market for precious metals. Rick, for the listeners, can you please share the significance between a bull market versus a secular bull market?

Rick Rule:  Well, I think what you say is accurate there too. I think that gold has been in a bull market really since the rollover in Treasuries that we experienced in 2001, and I think you make a very good point. Some of your listeners will recall that in 2001, gold was priced at $260 an ounce. It reached the high of $1,900 and then fell to $1,100 before recovering to its current $1200 in change.

There are those who will say that the decline from $1,900 to $1,100 violated the bull market. But people who have a sense of history will remember that in the great bull market of the 1970s when the gold price advanced from $35 an ounce to $850 an ounce, in the middle of that gold bull market in 1975, the gold price retreated from about $200 an ounce to $100 an ounce. That is a 50% retrenchment and it wasn’t the violation of a bull market. It was a bull market hiatus of bull market retrenchment, and I think the point that you made is excellent there. I think that we are still in a gold bull market. We are in a rather vicious correction in a gold bull market; a correction which I suspect but do not know is over.

Maurice Jackson:  And I know—I’m very familiar, Rick, that you don’t want to answer question of where is the price of gold or silver going. But if past is pro log, what should investors anticipate will occur to the valuation of precious metals?

Rick Rule:  Well, I suspect because I suspect that the U.S. 10-year Treasury will decline in price that the gold price— and I can’t give you a number, but I think it will do better and I think it will do substantially better.

Last year, I had the opportunity at the New Orleans Investment Conference to both listen to a public interview and then conduct a private interview with Alan Greenspan, Ms. Yellen’s predecessor, and I asked him the same question. I said, “It would appear to me that gold trades inverse to U.S. Treasuries. What might I suspect given that being the truth for the next 5 years?” And Mr. Greenspan’s answer was, “Oh, higher, probably substantially higher.” And I said, “What should I expect on the yield of the Treasury?” He said, “Higher, that means substantially higher.” And I said, “What would that do to the price of Treasuries today?” And he said, “Lower, probably substantially lower.”

So, you don’t have to take Rick Rule’s word for it. You don’t have to take the word of a person who is the chairman of a company that’s involved in the precious metals business. In other words, you don’t have to take a conflicted viewpoint for it. You can take the word of the former Fed chairman’s word for it whose reputation was tied up in a strong bond, not strong gold.

Maurice Jackson:  You know, Rick, based on your response, it seems fairly transparent what action investors should take, which is to own bullion, but that isn’t always the case. I have a two-fold question here for you. Why do you own bullion? And describe for us the type of investors that deploy capital to precious metals specifically during the bear cycle in a secular bull market.

Rick Rule:  Well, I have owned bullion in varying amounts for a very long time and the place that bullion holds in my own portfolio, Maurice, is not for short-term capital gain but rather for long-term insurance. I actually regard bullion as cash, volatile cash but good cash, a medium of exchange that simultaneously store a value. And ironically, Maurice, unlike many of your viewers probably, while I’m certain that the precious metals prices go higher, I actually don’t want them to go dramatically higher because I own them for insurance.

If you think about it, getting paid off in an insurance policy means something bad happened. Auto insurance means you had a wreck. Homeowner’s insurance means you had a fire. Life insurance means that somebody died. So, I’m ironically in the position of being a guy with a fair bit of bullion that hopes the bullion price doesn’t go up.

The second part of your question as to who should own bullion, I suspect goes to virtually everybody who figures that they have a financial life to ensure, which is a different way of saying if you can afford to have a portfolio at all, some of it ought to be in bullion. Now, with regards to the distribution, if you will with bullion, as I have aged, I have tried to make my life simpler and I have increasingly smaller amounts of physical bullion, although I do own physical bullion, and I have increasing amounts of my bullion held by way of certificated bullion, specifically our own Sprott Physical Gold Trust and the Physical Silver Trust and I have less of it in physical bullion in a safe deposit box. I do that simply because I’m trying to simplify my life, but I also do it in an effort to lower my transaction costs.

I know that if I buy reasonable amounts of bullion, say less than $20,000 at a time, when I go to buy bullion, I don’t pay the spot price. I pay spot plus a dealer mark-up like 3% or 3.5%. If I went to sell that bullion, I wouldn’t get spot for it either. I’d get spot less 3% or 3.5%, which means that buying $20,000 worth of bullion overnight I’d lose 6% or 6.5% on the trade. If I buy the certificated New York stock exchange traded products, the Sprott products is an example, the spread between the bid and the ask is frequently 1 quarter of 1% rather than 6% or 6.5% and I don’t have to go to a bullion dealer. All I have to do is click a mouse to buy or sell my bullion, so that would be my preference.

Maurice Jackson:  And for the listeners that are not aware, there are 3 symbols for the Sprott Physical Trust Funds. They are PHYS, PSLV and SPPP. In full disclosure, I am a shareholder of SPPP, which is Sprott Physical Platinum and Palladium. And Rick, you made a reference to premiums. If you are looking for physical bullion in platinum and palladium, my response to you would be good luck. I travel frequently. I attend a lot of coin shows. Coin dealers do not have them and if you go online, the premiums are sometimes 60% to 80% above the spot price and as you mentioned, Rick, for SPPP, it is actually below the spot price.

Rick Rule:  Right.

Maurice Jackson:  It’s a wonderful opportunity for someone to get own a proxy to the bullion which is again SPPP. I’d like to also, Rick, if I may, just give a breakdown of how the shares work.

Rick Rule:  Sure. You mean the internal architecture of the—

Maurice Jackson:  Yes.

Rick Rule:  Unlike ETFs, which are a more common form but less efficient form we think of physical proxy, in the case of the Sprott products, we have from time to time on the market raised money in exchange for trust units and we have used that money to buy physical metal, which is then placed in the case of gold and silver in the Royal Canadian mints, and in the case of platinum and palladium, in segregated Swiss storage.

We don’t, unlike the ETFs, ever loan our physical precious metals to other people and we never take deposit receipts for physical precious metals like the ETFs are forced to do. You will note, Maurice, that the ETFs have to buy or sell physical precious metals every day to accommodate increases or decreases in their net asset value and holding, which means sometimes when they’re adding assets rapidly, rather than being able to cover their assets with physical metal, they have to accept deposit receipts from banks or dealers.

Many hard money advocates don’t like the deposit receipts holding because if you had that combined with the sort of financial liquidity crisis that we had in 2008, it might be that the ETF rather than being a bullion holder for some portion of its inventory became the unsecured creditor of the defaulting dealer that had a deposit receipt up.

Maurice Jackson:  Yes. I’ve also noticed that the ETFs that you’re referring to, they’re not redeemable. I think a lot of investors are under the impression that they own gold but as you pointed out, they actually don’t own gold. Whereas with the Sprott Trust, there is ownership and you can actually redeem. And for the redemption on that, we ask that you just contact the Sprott Physical Bullion Trust for more information on that as well.

Rick Rule:  It’s an important point you make, Maurice. Unlike the other principal trust on the North American market, the central fund of Canada, we are redeemable. That does 2 things for you. It gives you the ability to redeem for physical precious metals if that’s what you really want to do. The other thing it does is it causes the Sprott Trust to very neatly track the price of gold and silver. If we ever sell a substantial discount which would make us an inefficient proxy for the metal, of course, arbitrageurs would short the metal by the trust, tender for the metal and use the metal to cover their short position, arbitrage away the discount.

The fact that we are redeemable at once makes us a more efficient mechanism for holders and also gives us an efficient market, which tracks the price very closely. So, thank you for bringing that up, Maurice.

Maurice Jackson:  And thank you as well, Rick. For the listeners, I would like to point out; if you own, for example, SPPP which is Sprott Physical Platinum and Palladium, if you own 345 shares, you own 1 ounce of platinum and 2.31 ounces of palladium, just so you’re aware. And for the numbers for the PSLV, which is for the silver and the PHYS, we ask you to please contact a representative for the Sprott Bullion Trust and we’ll give you that information here shortly.

Rick, before we leave, I’d like to ask you one final question here and that is, do you still provide a free portfolio analysis for prospective investors?

Rick Rule:  We absolutely do, Maurice. At this point in time where people are more and more interested in resource stocks, many people who have resource portfolios, have constructed them without sufficient fundamental knowledge of resource businesses. So, any of your subscribers or listeners who contact us and identify the source of their inquiry as Proven & Probable, we will provide them in absolutely no obligation review of the natural resource stocks in their portfolio. We will also rank the non-resource stocks in their portfolios if we are familiar enough with the individual stocks to think that our ranking might be of value.

Maurice Jackson:  For all the listeners, please do take advantage of it. It’s quite an honor, I must say. Thank you so much, Rick. You know, having your name—the preeminent name in natural resource investing, it doesn’t get any better than that.

Last year, if I may share a quick testimony, I had my portfolio reviewed by Tekoa Da Silva. He’s one of your hand-picked investment executives and I must say it was very constructive and it allowed me to retool and refocus and identify some dead weight in my portfolio, so I was very, very appreciative. Listeners, please do take advantage of it.

Before we leave, Rick, what’s the best way for someone to reach out to Sprott?

Rick Rule:  There are 2 different ways: In the United States and Canada, you can call us toll-free 800-477-7853. If you don’t want to call or if you live outside the United States and Canada, the best way to reach us is via email and the best email address is [email protected]. If you are looking for the portfolio review, please specify that. Put your portfolio in the text and please reference Proven & Probable so we could know who we made the promise to.

Maurice Jackson:  Rick Rule, Chairman of Sprotts U.S. Holdings. Thank you so much, sir.

Rick Rule:  Always a pleasure, Maurice. I look forward to visiting with you again.

Maurice Jackson:  Thank you, sir.

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Maurice Jackson