Understanding the nature of the big thinkers vs. the market is rarely described well. Chairman of investment management firm Sprott USA Rick Rule explains the disconnect between big institutions and free markets and the growing debate around global currencies, precious metals and crypto-currency.
Kurt Wallace for Rare: Janet Yellen is likely to become the next chairwoman of the Federal Reserve. Rand Paul is calling to audit the Federal Reserve. Gold prices are declining and currency around the world is inflating. Here to discuss all of these issues is Chairman of Sprott USA, Rick Rule. He has been active in Natural Resource Investing for over thirty years, and Rick, thank you for being with us today.
Rick Rule: A pleasure; thank you for the opportunity.
Kurt Wallace for Rare: Now, Janet Yellen is likely to become the next chairwoman of the Federal Reserve, and she’s got a stellar resume – champion for women, Harvard grad; she’s been with the Fed for more than a decade. Do you think that her replacing Bernanke is a benefit, and will it help, somehow, boost our economy?
Rick Rule: Well, I’m delighted that she’s a champion for women. I think that’s a wonderful thing. I have nothing against Harvard grads. The fact that she’s a Fed alumni is problematic for me. Probably more important to me, unfortunately, is the fact that as far as I can tell, she’s never had a job. She has been around policy and the bureaucracy for her entire career. I think increasingly there’s a disconnect between the big thinkers of the Yellen-Bernanke-sort of matter Obama-sort of clique of the world, and I think that’s very problematic. I suspect that Ms. Yellen is an honest, capable woman as far as it goes. I just wish that at some point in time in her life that she had her compensation. She had her family’s well-being tied to real productivity. I wish she had had to be responsible for producing a product as opposed to papers. I wish she had to meet a payroll. I wish she had to be subjected to arbitrary regulation. I think as long as this disconnect continues between the real market and the big thinkers — that the problems that plague our country and our currency will continue. So while I don’t think that Yellen was probably a bad choice, relative to the people who were considered for the job, I think the club itself that was considered for the job — of the club that makes up the governors of the Fed — are indicative of the problems that face us all as Americans, with regards to you know, Ron Paul and now Rand Paul’s suggestion that we audit the Fed. I don’t know why they wouldn’t do that. I don’t know why when faced with ongoing citizen suspicion if there’s nothing to worry about, why wouldn’t they put the suspicion? Why wouldn’t they put the fear? Why wouldn’t they put the accusations behind them? I think the citizens have a right to know.
Kurt Wallace for Rare: Well there’s been a decline in the price of gold and silver. Is this the bottom or is gold no longer a good investment as some of the larger institutions would suggest?
Rick Rule: Well, that’s a big question. I don’t know if this is the bottom or not. It’s worthy to note that in the 1970’s bull market — the great gold bull market – when gold went from $35 to $850. In the middle of that bull market — in 1975/1976 — there was a 50 percent retracement in the gold price. You may recall that gold ran from $35 to $200 — collapsed to a $100. And people who didn’t have either the courage or the cash to stay the trade got shaken out of a market that’s an advance from 800 to 850 — you know 850 percent advance in six short years. Certainly, when I look at the set of circumstances on a global basis, when I look at the excess liquidity in the market, when I look at the currency devaluation — competitive currency devaluation on a global basis, when I look at the sort of club of big thinkers — the Merkels, and the Bernankes and the Yellens of the world, I feel more comfortable owning gold. So, from my own viewpoint, while I wish I could say that everything was under control, and that it wasn’t necessary to own gold, because it wasn’t necessary to have, if you will, social catastrophe insurance. I don’t happen to believe that to be the case. I believe that most portfolios should have a waiting — in fact a substantial waiting — to precious metals. As for the big institutions, remember that these were the same sort of people who suggested, as an example, that the residential real estate bull market in the United States would continue ad infinitum, ad nauseam. These were the people who believed that you could operate a big commercial bank or a big investment bank like one operated a hedge fund that you could operate with a three or four percent equity slice. So the fact that the big institutions…the big financial service institutions…say something through long, sad experience, watching them, I don’t hold an awful lot of hope, if you will, that all of their pronouncements are true whether or not they are talking their books or nearly making an honest mistake, I don’t think matters much. But I think I would prefer to keep my own council with regards to my own pocket as opposed to relying on the sort of genius of the big thinkers or the big institutional investors.
Kurt Wallace for Rare: How is global inflation going to play out with hard assets in the future?
Rick Rule: Well, I guess from the tenor of my earlier questions, you know what I think. The most recent salvo in global thiet currency devaluation was of course the deliberate devaluation by the Japanese, which is of course, being heralded by the big thinkers as a wonderful thing. The idea that the Japanese will get away with devaluing their currency and making their exports cheaper, relative their competitors, strikes me as being highly improbable. The idea, that as an example, the Koreans, the Taiwanese, or in fact, the PRC will allow Japan to gain export share at their expense and use exports as a development strategy relative to their other Asian neighbors, seems highly unlikely to me. And if the Asian neighbors engage in competitive devaluation, which I think is highly likely, other countries that use exports as a development strategy — an example would be Russia, Brazil, Indonesia, Thailand — they’ll have to answer. And if they answer, the sclerotic Western economies have a choice between either being the dumping ground for subsidized exports from developing nations around the world or engaging in the same range of competitive devaluation that the Japanese have engaged in. And of course one must remember that the artificially low interest rate strategy being pursued with regards to both the euro and the U.S. dollar has the affect — whether intended or not — of also devaluing the currency. So, my suspicion is, that the sort of global policy both of low interest rates and also competitive devaluation, will over time, continue to diminish the purchasing power of the thiet currencies on a global basis, leading to continued erosion of purchasing power — which is a fancy way of saying inflation — and continuing attractiveness for the precious metals complex.
Kurt Wallace for Rare: Well, how do you see this new introduction of crypto-currency like Bitcoin — it’s around 195 dollars per Bitcoin at this point — affecting the precious metals market?
Rick Rule: I don’t. I see Bitcoin as a wonderful competitive currency. I think it’s a spectacular thing. For myself, personally, I’m, if you will, too old and nontrusting to be a big Bitcoin adherent. I would rather have a medium of exchange and a store of wealth that, well, a medium of exchange that is a store of wealth that has value in and of itself, payment, if you will, rather than a promised pay. I understand the implicit value of Bitcoin with regards to the technology, the anonymity, the scarcity, all those kinds of things. I guess at age 60, I personally prefer a tangible as payment. So for myself, I’m attracted to gold, silver, platinum and palladium. But I’m wise enough also, I think not to confuse myself with the market, and if there’s a bunch of people around the world who would like to transact with Bitcoin in preference to a corrupt theit currency, I think that can only be good for mankind.
Kurt Wallace for Rare: Rick Rule, Chairman of Sprott USA, thank you for spending some time with us today on Rare.
Rick Rule: Thank you so much for the opportunity. I enjoyed it.
- Rand Paul will block Yellen’s Fed nomination (rare.us)
- Janet Yellen: A Woman Atop the Fed (newyorker.com)
- Janet Yellen, Bravest Woman in the World? (silveristhenew.com)