Rick Rule: Gold Is Insurance And You Want To Have Insurance

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by Tyler Durden
Friday, Jan 24, 2020 - 03:16 PM


Rick Rule talked with David Lin of Kitco News at the Vancouver Resource Investment Conference. Rule is the senior managing director at Sprott Inc., and he’s bullish on gold. During this discussion, Rule explains why, touching on a range of subjects including the Federal Reserve, the trade war, the US dollar, the bond market and more.

To kick off the interview, Lin points out that gold has been rather range-bound since the price spiked in the wake of tensions in the Middle East. Rule said this is a sign of a healthy gold bull market.

Some speculators, of course,  want to see rapid escalation. Rapid escalations are usually followed by rapid de-escalation. This gold bull market is what you want to see.”

Rule said the same thing Peter Schiff has been saying. Gold is climbing a “wall of worry.”

This is a very, very healthy market that you’re seeing.”

Rule noted that there is still widespread confidence in the economy. There’s widespread confidence in currency and debt as well.

The fact that gold is doing well concurrently with the US dollar doing well is something we haven’t really seen since the year 2000.”

Peter has pointed out the similarities between what was going in the gold market in the year 2000 – the cusp of the dot-com bust – and today as well.

So, why is sentiment turning toward gold?

For one thing, real negative interest rates. That means the holding cost of gold is zero. There is no yield on sovereign debt. But more significantly, the sovereign credits themselves are not good. Rule pointed out the rapidly skyrocketing US debt.

If you don’t like the interest rate you’re being paid and you’re nervous about the credit, then you’re nervous about US government debt, and by proxy, you have to become interested in gold.”

On the topic of quantitative easing, Rule called it what it is — counterfeiting.

If you and I did it, we’d go to jail... Understand that what they’re doing is debasing the currency. They’re getting away with it because there’s a lot of faith now... The truth is the quantitative easing and the low interest rates are only forward shifting demand. When is it over? That’s a function of confidence. I don’t know when it’s over.”

Rule said the US economy isn’t great, but it’s stronger than a lot of other economies. As a result, the dollar is strong relative to other currencies. It’s not doing absolutely well, but relatively well.

As far as the trade war goes, Rule emphasized the tariffs are taxes.

They are popular politically and they make everybody poorer. China does some things better than the United States. The United States does some things better than China. And the idea that you punish your own citizens to send a message to the adversary is very, very strange.

Rule said the fact that the Phase 1 deal lowered tensions is a good thing, but it would be better to do away with them altogether.

Peter has said he doesn’t think there will be a Phase 2 deal.

Rule said gold does well during periods of uncertainty.

If we head into a circumstance in particular where people are less sure about the ongoing purchasing power of the US dollar, particularly the US dollar as expressed by the 10-year Treasury, the world’s benchmark security, I think gold will do well. And unfortunately, I think gold will do well.”

He noted that we are more than a decade into an economic recovery. Historically, that is “very long in the tooth.” Rule said he’s certain the response to an economic downturn will be a further debasement of the currency.

If more and more people see that the currency is being debased, and they also see that their bonds, their so-called safe-haven security is being devalued simultaneously, then gold should do well.

Currently, precious metals and precious metals securities make up about between 1/3 and 1/2 of 1% of the savings matrix of North American investors. In the 1980s, it was around 7%. The three-decade mean was between 1.5 and 2%. If we simply see mean reversion, the demand for gold would triple and perhaps quadruple. Rule said he thinks that happens over the next five years.

Gold occupies a place in a portfolio as insurance. And there’s no prudent speculator that wants his insurance policy to pay off. Think about it. Life insurance means somebody died. And that’s what gold’s all about. Do I wish I didn’t find myself in the circumstances I find myself in? Yes. But certainly I don’t want to be uninsured.”