Rick Rule: Are gold critics right?

By and large, the voices of Wall Street are now openly telling the public to dump gold. Forbes reports[2]:

“The sentiment around gold has been diminishing since April, when billionaire investor George Soros indicated that gold was no longer a safe haven and the smart money was getting out. The shadow over gold has continued through this month, when Goldman Sachs’ head of commodities research said gold was a ‘slam dunk’ sell and headed for $1,050 an ounce.”

Goldman Sachs isn’t the only large investment bank advising the public to rid their portfolios of the yellow metal. As Bloomberg reports[3], Morgan Stanley expects that “Bullion will average $1,313 an ounce in 2014, down from $1,420 forecast for this year.”

And that’s to be the first of five years of lower gold prices! “Bullion will average lower every year through 2018,” says the write-up on Morgan Stanley’s forecast.

So should you sell your gold? Rick Rule, Chairman of Sprott Global Resource Investments Ltd. and Sprott Asset Management USA, talked gold with me in a recent conversation. I asked Rick if he could comment – he says the critics, not gold owners, will be proven wrong.

“I suspect the call on the part of Goldman Sachs and Morgan Stanley will resemble their disastrous calls about collateralized mortgage bonds and real-estate heading into the 2007 and 2008 collapse. I think this call on gold is just as ill-timed and ill-advised.”

What about the ‘recovery’? What about the debt-ceiling deal? Aren’t those good for stocks and bad for gold?

“I have a difficult time seeing a recovery in anything besides asset and equity prices. It mostly looks like the direct result of short-term liquidity injections into the market. What do you think about a recovery that has no jobs? Or the only new jobs are flipping hamburgers, that don’t pay much better than welfare?

“With regards to Quantitative Easing, unlike Goldman Sachs and Morgan Stanley, I believe that the spending isn’t about creating new jobs. It’s about the fact that the Federal Government spends about 1.2 trillion dollars more than they take in per year. They appear able to ‘hoodwink’ bond-buyers into buying about 750 billion dollars’ worth of bonds… which leaves them about 450 billion shy.

“This idea that they would stop this process implies the kinds of mathematical operations that Goldman Sachs and Morgan Stanley used to make collateralized mortgage obligations seem attractive — when the underlying mortgages were to people who couldn’t afford them.”

Is the new Fed Chair, Janet Yellen, good for the dollar – and therefore bad for gold?

“The new Fed Chairman is regarded as the most dovish of all possible candidates, which I can imagine would find favor with firms like Goldman or Morgan Stanley, because they are beneficiaries of artificially low interest rate and big liquidity injections.

“On the other hand, savers should not like her so much. How could the dollar stay strong over time with an artificially low interest rate, and loads of new dollars entering circulation?

“Gold is there to protect against fiat currency risk, which can be envisioned as the U.S. 10-year Treasury. These bonds return 2.8%. CPI inflation is less than this, but the number doesn’t represent the cost of living. They exclude food, fuel, and tax – which definitely are part of my cost of living. Using the inflation rate the way it was measured in 1980, as reported by ShadowStats[4], you’re guaranteed to lose 3% in purchasing power per year.

“Morgan Stanley and Goldman Sachs are focused on maximizing short-term payouts and bonuses to employees in the current quarter, based on short-term, highly-leveraged transactions made much easier by the currently high liquidity and artificially low interest rates. And they expect even more under the new Fed Chairman.

“Hence the difference between my point of view and theirs. Time will tell who is right.”

P.S.: Take advantage of Rick Rule’s free investing guide, with the 10 questions he asks before investing in any natural resource play. Click here for the free report.

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Rick Rule founded Global Resource Investments in 1994. Global provides brokerage and investment banking services to high net worth individuals, institutional investors, and corporate entities worldwide. In 2011, Global was acquired by Sprott, Inc., a public company based in Toronto, Canada, which has in excess of $7.1 billion in assets under administration in the resource and commodity sectors.