Gerardo Del Real,
Editor
May 3, 2022
Publisher’s Note: We have the pleasurable and profitable opportunity today to listen to Rick Rule’s thoughts on the market. I encourage you to pay attention. Rick is one of the most successful resource investors in history and has made numerous astute calls over his career, and has been kind enough to share some of them with us over the past few years. Below, you’ll find his current bull theses on gold and uranium. Enjoy!
—Nick
Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is someone who really needs no introduction, Mr. Rick Rule. Rick, how have you been, sir?
Rick Rule: I've been doing very well, Gerardo. Thank you for having me on. I enjoy the opportunity to talk to your listeners.
Gerardo Del Real: Well, thank you for your time. I can't think of a better person or a better time to have a conversation with you about multiple, multiple things. Let's start with the overall indices, which have been in a pretty, pretty tough sell off. We have interest rates on the ten-year above 3%. I would love your take on the overall markets.
And then of course, we have to talk about uranium a bit because I think that you're likely one of the few people that has seen the percentage gains possible in a uranium bull market. I want to get your thoughts on that. And then of course, for the first time since 2019, you're putting on the Rule Symposium on Natural Resource Investing live in person. And I know that's a big deal. So congratulations on that front as well.
Rick Rule: Thank you.
Gerardo Del Real: State of the markets, overall indices, selling off, we have the ten-year above three, thoughts on what's next.
Rick Rule: I think it's fair to say that the broad markets were pretty frothy coming into this. I'm not pretending to be an economist and I'm not pretending to be a technology analyst, but the idea that the equity markets generally could continue on stair steps to heaven forever seemed odd to me.
It was understandable in the sense that part of the propulsion had to do with easy money — quantitative easing, excess liquidity in the system. And in particular, a lot of it had to do with negative real interest rates and very low deposit interest rates.
Which meant that the capitalized value of dividends on those types of stocks went higher and higher and higher. As the cost of capital increased with increasing dividends and the capitalized value of distributions decreased, it makes perfect sense to me that they would let some air out of the balloon that was, and is, equities markets.
Gerardo Del Real: So without asking you to look into your crystal ball, because we know that typically the market has a way of making fools of forward looking predictions, right? Where do you see gold's role in the overall financial markets as a hedge given where we are with current debt levels, given where we are with interest rates being what they're being, and given the backdrop of what at least in words is a hawkish Fed.
Rick Rule: Well, that's a question that I'm more comfortable with. In the very near term perhaps gold might weaken. Traditionally increasing nominal rates and an increasing US dollar, which is a consequence of increasing nominal rates, can be bad for gold. But the truth is that I consider those, in a word that's so fashionable now, to be transitory.
In my lifetime, precious metals prices have moved through a variety of usually fear-driven reasons. And in particular, fears around the ongoing purchasing power of savings and investment products denominated in fiat currencies, particularly the US dollar. And I think that will be the case this time. And I think it'll be the case for three primary reasons.
One, quantitative easing, which as you know, if you did it, would be called counterfeiting. Printing all of these currency units, even Warren Buffet who is no fan of gold suggests that if you print a whole bunch of new money, the old money that you had becomes reasonably less valuable.
I read the other day that 35% of all the US dollars in circulation have been printed in the last 30 months. That isn't certainly to accommodate the liquidity needs of an economy that's grown by 30% or 35% in 30 months. It's frankly counterfeiting. And that makes people concerned about the real value of the dollar.
The second reason is more pernicious and hence better for gold, which is to say debt and deficits. The on balance sheet liabilities of the US government, not including state and local governments exceeds $30 trillion. And worse yet, the off balance sheet liabilities, which is to say the net present value of entitlements as an example, exceeds $120 trillion.
Collectively at the federal level, we owe each other — or, more properly, the spenders owe the savers — over $140 trillion. And we presume that we're going to service this debt with a budget that's in deficit by $3 trillion a year. So rather than servicing it, in fact, we increase it to the tune of $3 trillion a year.
But the worst is, of course, negative real interest rates. While it's true that the nominal interest rate has been climbing of late, the real interest rate is negative. Let's do the arithmetic. The US 10-year treasury, the benchmark security for savers and investors in the world, recently showed a yield above 3%. But let's call it 3% just for arithmetic sake.
So you get paid 3% a year for 10 years in a currency where the Congressional Budget Office itself says that the purchasing power is decreasing by 8.5% a year. So for taking the time-risk and taking the credit-risk over 10 years, you are rewarded with 5.5% less purchasing power cumulative and compounded over 10 years. Jim Grant famously calls this return-free risk.
It is this return-free risk that's the primary foe that gold faces in its sort of battle for investment market share. And let's look at market share. Precious metals and precious metals-related assets comprise less than one half of 1% of the value of all savings and investment assets in the United States.
One half of 1%. If the demand for precious metals returned to its four-decade median or mean, which is between 1.5% and 2%, the demand for precious metals and precious metals-related assets would go up somewhere between three and four fold. It doesn't have to follow the old gold bug thing where the dollar is headed to oblivion and we go back to a gold standard.
Gold doesn't need to win the war against the dollar, it just needs to lose it less badly, which is precisely what I think is going to happen. And I think it's going to happen because of negative real interest rates. Gerardo, imagine yourself, if you were the manager of a huge pension fund and you were responsible for the wellbeing of retirees 15 years out and 20 years out.
And for the last 40 years you had followed an investment allocations scheme where 60% of your assets were in equities, 40% was in debt. You have a situation now where your bonds — your whole bond portfolio — 40% of your total portfolio is reducing the purchasing power of your clients. What do you do?
You have to begin — unless you think for some reason that we're going to return to a period of real interest rates, we can talk about that later if you want — to sell your bonds. It's a process in finance called disintermediation.
And my suspicion is as the largest investors in the world are forced to sell some of their bond holdings because of the negative real yields implied in them, that some of the money that they reinvest gets reinvested in assets, precious metals, that traditionally have offered savers an insurance policy, if you will, against inflation.
So I believe that the most important thing to look at in the precious metals market for the next five years is a selloff in debt instruments by huge institutional investors and the reinvestment of some of those proceeds into precious metals so that precious metals at least return to mean in terms of market share relative to other asset classes.
Gerardo Del Real: It sounds like, and correct me if I'm wrong, please, but it sounds like you're saying new all-time highs for the price of gold. It's a matter of when, not a matter of if.
Rick Rule: That's my belief. And understand, these new all time highs are nominal.
Gerardo Del Real: Correct.
Rick Rule: If you look at inflation-adjusted dollars, we don't need to take out all time highs in inflation-adjusted terms to give people truly spectacular investment returns from here.
Gerardo Del Real: Let's talk about spectacular investment returns. You made a similar, very concise argument for a much higher price of uranium. And frankly, you've been making this argument for years. Had people heeded your advice and took the contrarian stance and bought some of those uranium equities at or near their lows, the returns in what I think is the early stage of a new uranium bull market would've already been spectacular. I mentioned when we started that there's few people that have seen a uranium bull market as often as you have. But I should have more correctly described it as there's few people on the planet that have profited as much as you have in uranium bull cycles. Where do you think we are in the uranium space?
Rick Rule: I think it's fair to say that the easy money has been made. When the price of uranium was of 18 to $20 a pound, and nobody cared, the obvious equation was that given that uranium supplied 20% of US baseload power and given that the industry produced uranium for $60 a pound and sold it for $20 a pound… Meaning they were losing $40 a pound… That either the uranium price went up or the lights went out. That was the equation.
And I just assumed it was more likely that the price would go up than that the lights would go out. And it turns out like many simple assumptions like that, that I was right.
There are a lot of people in the world who either don't think about uranium or they think about uranium in terms of the narrative, rather than the economics. When they think of uranium, they think of Hiroshima, Nagasaki, Chernobyl, Three Mile Island, and Fukushima. They don't think about the substance that makes the light go on when they flip a switch.
Increasingly, that's changing. For the first time in my life, uranium is becoming, at least in some sectors, politically correct. Because it provides baseload fuel, secure base load fuel that isn't carbon generating. So as an example, in the People's Republic of China, the government estimates that particulate airborne pollution from power generation and transportation kills 500,000 Chinese people a year.
The Chinese have a real incentive, first of all, to generate more electricity, to lift more of their people from poverty. But to do so, if they can, in ways that don't generate as much carbon. The consequence of that is that the Chinese have a very aggressive nuclear build, as do many countries on Earth.
The second thing that's happened much more recently is the concept of energy security. In Europe in particular, which had been becoming determinedly anti-nuke, the consequence of becoming anti-nuke is that they inadvertently became pro coal. Not something which they intended to do. But probably more importantly for them, they became unusually dependent on Russian oil and gas, which was fine until it wasn't. Now, the concept comes around to energy security.
There is no fuel in the world that is as energy-dense as uranium. A very small amount of uranium, as an example, could operate the whole Japanese nuclear fleet, an important thing on an energy-scarce island that doesn't have room to store very much oil or gas or coal. So the energy security, the geopolitics of uranium are attractive now.
At the same time, the ability to generate baseload, reliable power that isn't carbon burning drives the uranium future too. I think it's important to note that the International Energy Agency itself suggested two or three years ago that the average fully loaded cost to produce a pound of uranium — I don't just mean the mining cost, but the taxes, the cost of capital, all that — was about $60 a pound.
So the industry's been making the stuff for $60 and selling it for $20 losing $40 a pound. Even today's price at $52 a pound, doesn't come up to the fully loaded cost of production two and a half years ago. But the costs, the fully loaded costs, are increasing. Inflation throughout the value chain, as an example, in steel or cement to build plants, increases in the interest rate, which increases the cost of capital.
That suggests to me now that the hurdle rate for bringing new mines in production is between $70 and $75 a pound. So you have a commodity, which is essential for the wellbeing of humankind that requires $75 a pound, where the world consumes between 200 and 225 million pounds a year and produces 125 million pounds a year. In other words, you have something where there's a shortfall in excess of 75 million pounds a year where the price of new production has to go up. The price of uranium, absent a worldwide depression or recession, has to go up.
Gerardo Del Real: You said that you believe the easy money in the uranium space has been made. And I want to make sure that our audience doesn't confuse that. Unless, and again, please, correct me if I'm wrong, there isn't money to be made in the uranium space, right?
Rick Rule:There's lots of money left, lots of money left. But in commodities, the easy money is made when nobody believes it. When the only direction is up. The move from $20 a pound to $50 a pound was the simple move. The truth is that the price of uranium has to go from $50 to $75. And if past is prologue, by the way, it goes higher than that.
The reason for that is that supply isn't easy to change. As the market sees the price of uranium increase, it is difficult to bring on new supply. It's difficult to find mines. It's difficult to build mines. It's difficult to permit mines. It's even difficult to restart mines.
So just because the uranium price in the near term goes above the incentive price for new projects in uranium, doesn't mean that supplies actually increase in the short term. I'm not saying it's going to happen, but it would be easy to see $100 uranium.
And Gerardo, probably more importantly, you're going to see an increase in the supply of uranium coming out of the fixed term market rather than the spot market, meaning that mines are going to have better security of pricing over time. That's important because the share prices will respond to the certainty of free cash flow over decade-long periods of time, which you see with term contracts rather than spot contracts.
Gerardo Del Real: I want to talk about the Rule Symposium on Natural Resource Investing. Because again, one, it's the first live event in more than three years. Two, you have an absolutely phenomenal lineup. I mean, Grant Williams, Robert Friedland, Ross Beaty, Brien Lundin, Danielle DiMartino Booth. I could go on. So I definitely want to touch on that. But it's hard for me to talk energy metals and not ask you about copper. I would love to hear your thoughts on copper.
Rick Rule: Well, copper's had a nice move. And I think it has a better move to come, absent again, global recession and depression. And one of the things I really want to do in this year's conference is talk to the global macro guys about what the probabilities or possibilities are of global recession or depression, because that's the only thing that can derail the resource thesis, including copper.
When you look at copper, I think the important thing to know is that it should go up for very good reasons. I mean, reasons that are good for humankind. Many people listening to this broadcast will not know that 1.2 billion people on earth have no access to electricity at all. Another two billion people have intermittent or unaffordable access to electricity.
We've done a great job as humankind over the last 30 years improving the lot of the poorest of the poor and the bottom half of the income scale worldwide. Over the next 30 years, we need to eliminate energy poverty. And the way we do that is electricity. The investment theme that everybody talks about is batteries, electric cars, new gizmos for rich people in the West.
But the last increase, the last dramatic increase in copper prices came about as a consequence of the urbanization of China. The wonderful economic accomplishment of lifting 500 million people out of absolute rural poverty into the middle class. And that job needs to be done around the world. Poorer people are becoming rich, not fast enough.
And when I say rich, I should be saying less poor. And as they become less poor, what adds utility to their families is material, commodities. Gerardo, when you get more money, you spend it on services or some little technology gizmo that doesn't require very much stuff. But when a very poor family gets more money, they increase the calorie count for the family.
They get electricity, they get better means of transportation. All the things that add to their lifestyle are material, they're good for commodities. And in particular electricity, which requires copper. So that's the demand side.
The supply side is equally interesting because by my count for the last 30 years the world has dramatically under-invested in exploration and construction of copper mines.
And it's getting more, not less difficult. It's getting more difficult to finance copper mines because of Basel 3. It's getting more difficult to prosper from new copper mines as a consequence of the social take, which is to say royalties and taxes. At the same time, most of the copper that we employ in the world today, most of the copper that we enjoy in the world today is coming from copper mines that were discovered and put in production 40 or 50 years ago.
The big copper mines in the world as an example. Bingham Canyon is now 120 years old. Chuquicamata is 105 years old. Ertsberg is 60 years old. Even Escondida, the newcomer, is 40 years old. These mines that have provided for this wonderful increase in the wellbeing of humankind are long of tooth. They've passed their peak production and they're on the way down.
I remember 20 years ago when we looked at a copper mine, the median mine grade worldwide was about 1%, meaning that 1% of the weight of the ore was copper. The median grade now is four tenths of 1%. We have to mine more and we aren't finding it. So I think the direction of copper prices barring a recession or depression are inevitably higher, simply because we as a species need to increase the material well being of the poorest half of humanity. 
Gerardo Del Real: We live in interesting times. I touched a bit on the lineup that you've been able to put together. I mean, frankly, there's legends in the copper space, the gold space, the macro space and the micro space on all things resource sector, and overall indices. Can you give us a slight preview of what people can expect at the conference?
Rick Rule: Gerardo, our conference has always been driven by the attendees. And so we invite back the speakers that the attendees have told us on the evaluation forms that they enjoy most. So in terms of the big picture, people like James Rickards, Danielle DiMartino Booth, as an example, Grant Williams, Doug Casey, the people who have proven themselves, particularly in the resource space year after year will be there.
What's always set my conferences apart from other people's conferences, however, has been investor and analyst participation. Every year I've had a function called the Living Legends, where in addition to having the gurus, we have entrepreneurs who built multi-billion dollar natural resource companies from scratch, talk about the investing lessons that they learned building those companies, and how those lessons are employed by themselves investing their own money.
And I think that's absolutely critical. Having Robert Friedland, who's become a billionaire by building natural resource companies, tell you what he looks for is critically, critically, critically important. And then of course, where the rubber really meets the road is the exhibitors, the ability to employ the lessons that you learned to increase your own material well being.
For the whole time that we've put on this conference, we haven't allowed a company on the exhibit floor if portfolios that we manage or our own portfolios didn't include that stock. It doesn't mean, sadly, that every stock I own goes up in price. What it does mean is that the criterion to exhibit on our floor is that we know the company well enough that we own it ourselves. They are really vetted. At many conferences, the qualification to exhibit is a check that cashes and a pulse. Here, we have to know the company well enough that we own them. I think that's important.
The consequence of all of this is that we have much more confidence in our product than other conferences, which means that if you come to the conference and you pay the admission fee, and at the end of the conference, you don't think that you got your money's worth email me, and I'll give you a full refund, 100% money-back guarantee. I've done this for years. You may note that I just got done doing a virtual conference, a uranium conference.
Enormous, enormous success. We anticipated 1,000 attendees. We had 3,300 attendees. We got almost no requests for refunds. If you put on a good conference, the refund request guarantee, it really is of no consequence if you give your attendees more than their money's worth. And that's what we do.
Gerardo Del Real: The expertise from the type of lineup that you've been able to put together and conferences was initially for me, the very first real exposure I had to expert analysis and information.
And it did wonders for me as far as my curiosity for the resource space and eventually being able to build several successful businesses as a result of the type of networking and information that you can get at one of these conferences. It doesn't hurt that it's in Florida and it sure doesn't hurt that it's in late July, Rick. I want to thank you for your time. Is there anything else that you'd like to add?
Rick Rule: Just that what you say is very true. One of the big advantages of a conference isn't just the speakers. You'll be there with 500 high net worth successful speculators. The idea that all of the knowledge in the conference flows from the dais to the crowd is stupid. The information that you gather in workshops from other attendees. And in particular, the organic knowledge. I remember four or five years ago, following at a polite distance, Robert Friedland around the exhibit hall. Here, you have a guy who's built several multi-billion dollar companies and made a separate fortune investing. And I get to watch which exhibitors he goes up to, what kind of questions he asked them, whether the exhibitors make him smile or frown. Just that experience was worth the price of admission.
Gerardo Del Real: Couldn't agree more. Rick, it's always a pleasure. Looking forward to having you back on. Thank you so much for your time today.
Rick Rule: My pleasure. Thank you.
Gerardo Del Real
Editor, Resource Stock Digest