Rule’s Gold Investing Rules

In a recent interview, our friend Rick Rule’s comments essentially provided “An Investor’s Primer On Gold.”

Even for sophisticated gold investors, it’s one of the more valuable and important pieces of commentary that you’ll read as this new gold bull market takes off.

Dear Fellow Investor,

I’d like to say that it’s a classic case of “great minds think alike.”

That’s because everything my friend Rick Rule said in a recent interview rhymed perfectly with my views on gold, gold investing and the inevitable repercussions of the coming tsunami of stimulus.

The simple, undeniable fact is that gold has taken off on a new bull market run. And this one will be historic, as the policy response to this Covid-19 economic collapse has been completely unprecedented.

What To Do...

In this interview, conducted by Albert Lu for Sprott Media, Rick not only spells out the current situation with his usual aplomb, but also clearly states what you need to do to capitalize on this situation.

As I say, it closely follows a lot of what I’ve been telling you in these pages, but I think coming from someone else — especially someone as eloquent as Rick — can only help to get the points across.

It’s a lengthy piece, but well worth your time to read every word or view the recorded interview.

In the meantime, here’s an excerpt to get you started....

Rick Rule’s Primer On Gold Investing

Albert Lu: Last week we promised viewers that we would do a deep dive into gold and silver this week. I want to deliver on the first half of this promise and discuss gold with you.

Rick Rule: Let’s frame the discussion in two parts. First of all, gold the commodity, the physical, and, then later, the gold securities, if that’s okay.

AL: That’s fine and the other thing I want to lay out before we begin is from which vantage point will you be discussing these topics: Rick Rule the investor or Rick Rule the speculator?

RR: I think to begin with Rick Rule the investor. I think that one invests before one speculates and we’ll talk about why that’s important later in the discussion. Okay, let’s start with gold itself. I think it’s important to say now that the wind is very likely in gold’s sails. That is, that the macro set of circumstances strongly favors gold.

I probably had 50 questions in the last four weeks as to why gold didn’t respond more dramatically to the liquidity crisis, so let’s address that first. Gold did respond to the liquidity crisis — people who owned gold had liquidity and their liquidity was called on. They had to sell what had a bid, and that included gold, to add to the liquidity.

The Sprott trading desk, which, as you know, Albert, is very active in the physical bullion market, heard from their own sources that as much as $60B worth of gold was held in leveraged-long commodity trading accounts, [with] some of these accounts leveraged as much as 33:1. When credit dried up overnight that gold had to go to gold heaven to extinguish the credit. And, on top of that, gold held in other leveraged, even general securities, accounts often had to be sold to meet margin debt.

So the truth is that gold’s deep liquidity served the buyers in times of crisis as it always does.

It’s important to note, Albert, that if you look back at past liquidity squeezes — by this I’m thinking about primarily 2008, but also 2000, 1987 and 1988 — that the crisis itself, the panic [and] liquidity crisis, didn’t drive the price of gold because gold [was] sold off to meet the needs of liquidity.

What drove the gold price subsequently was the policy response to the liquidity crisis. The big thinkers of the world, the central banks, the legislators, those kinds of people, always seemed to deal with liquidity-driven crises with three things: spending stimulus, quantitative easing, which as you know I refer to as counterfeiting, and, of course, artificial lowering of interest rates.

It’s that triumvirate — spending money we don’t have on things we don’t need, conjuring money out of thin air and artificially reducing the compensation for saving — that moves the gold price. The most important determinant in my career of the gold price — I’m not trying to say that there haven’t been geopolitical events or other things moving the price of gold — but the thing that’s moved the price of gold mostly in my career has been faith, or lack of faith, in the ongoing purchasing power of the U.S. dollar, most importantly the U.S. dollar expressed by the U.S. 10-year Treasury.

So let’s look at the factors behind it, which we’ve done before, but let’s summarize them.

The first is that quantitative easing, which is adding to the stock of currency with no basis. This isn’t borrowing. This is conjuring currency [which] must, by itself, debase the currency. You’re increasing the float without increasing the value.

The second is that the on-balance sheet operations, which is to say the borrowing, adds to an already precarious debt situation facing the U.S. government. We’ve done these numbers before but let’s do them again. They bear repeating. At the federal level, $23T in recourse liabilities, $18T net of the balance sheet of the Fed and over $100T in off-balance sheet liabilities. That means simply, at the federal level, Albert, the U.S. government, which is to say indirectly unfortunately us, have $120T in liabilities. It’s important to note that these don’t include state liabilities or local liabilities, nor do they include the underfunded pension funds at the public and private levels.

Now this debt number is ugly in isolation, but you need to look at the debt number relative to our ability to service it. You service this $120T in liabilities with, of course, the national income taxes and fees less expenses. The problem is that the number is upside-down, meaning it’s negative to the tune of $1.5T. It is, as you know, impossible to derive a positive sum by adding a column of negative numbers and it would appear that the deficit goes on ad nauseam.

So the top of the equation, that is to say the credit quality of the borrower, is I think very much in question. How do we get out of this? Well, either a good old-fashioned default — it seems politically unlikely to me — or further debasement of the currency, which is to say further erosion of the purchasing power of your savings, and the quantitative easing, of course, goes on.

Any of our listeners who paid any attention to the Christmas tree legislation last week, by Christmas tree I mean the $2T in stimulus that awarded a reward to every politically connected constituency in the country, whether or not they happen to have the coronavirus, is ample evidence of what fiscal action is all about in the face of a crisis. Every politically favored constituency got a handout. The people who need it, of course, got very little because they don’t have very much clout.

Today, of course, Trump announced phase 2 which is a $2T infrastructure stimulus bill. Governments are famous for allocating infrastructure investments to politically favored constituencies, so I would suggest to you but one thing: What the coronavirus has spawned is $4T in additional expenditure with very little probable long-term benefit. So I think that is pretty clear that, firstly, the debasement of the currency as a consequence of quantitative easing or counterfeiting is occurring. The second thing that’s occurring is that we’re incurring recourse liabilities, and probably non-recourse liabilities, very, very quickly as well, which means that the debit side of our balance sheet is increasing at the same time that our ability to service it is decreasing. Finally, of course, there is the reward for savings. Who’s going to buy these bonds?

The U.S. 10-year Treasury, as I look at it today, is paying about 60 basis points — six-tenths of 1%. The CPI stated rate of inflation is 1.6%, meaning that the government is telling you that the value of your savings held in U.S. Savings bonds declines by 1% a year for the next 10 years. To reiterate, our mutual friend Jim Grant calls this return free risk.

This conjunction of factors — the debasement of the currency, the deteriorating balance sheet and the extraordinarily low [return] to investors for assuming risk to their purchasing power — I think can only be good for gold. When? I don’t know. Again, looking at past crises, it often takes three months or four months for the effect, or the anticipation of the effect, of the policy response to a crisis to impact the gold price.

It’s worthy to note, Albert, that you and I are not the only ones who have noticed this phenomenon. At the retail level across the United States, retail physical products, small denomination gold products like 1 oz. gold products or 100 gram gold products coins or small denominations silver products, are either sold out of retail dealers or only are available with astonishing premiums, to the extent where I heard today that there are several one ounce gold premiums that are selling for $2,200 in the face of the spot market, which is much below that.

So what I’m suggesting to you is that the anticipation of the fiscal response to the liquidity crisis is already such that people are beginning to diversify their savings to include, of course, gold.

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Watch Or Read The Entire Interview...

There’s much, much more to Albert’s interview with Rick. They touch on how quickly the policy response to the Covid crisis has been and what the repercussions of that may be, and Rick goes on to recommend the specific sectors (in addition to physical metals) that investors should focus on initially.

In short, I couldn’t give this interview a higher recommendation (because, of course, I agree with every word!).

To read or watch Albert’s entire interview with Rick, simply click here.

All the best,

Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference