Rule’s Silver Investing Rules

Last week we gave you Rick Rule’s “Investor’s Primer On Gold.” Now here are his thoughts on silver.

Dear Fellow Investor,

My go-to line when people ask me if I’m bullish on silver is this: “If you like gold, you should love silver."

And that pretty much sums up the investment case for silver.

But if you take your metals investing a bit more seriously and start to dig into the silver market, you realize it is considerably more complex than this. In fact, it’s fair to say that there are exponentially more factors driving silver than gold.

Believe me — we’ve written books on the subject. Literally. (And a special report you can find here.)

Once again, however, our friend Rick Rule has managed to summarize all of the important issues in one eloquent interview.

More Than Just Leverage...

We all know that silver moves for the same reasons as gold, but further (and in both directions). But as I say, there’s considerably more to the story, which Rick covered in an interview with Albert Lu for Sprott Media, which I’ve excerpted below.

As with Rick’s comments on gold, which we sent you last week, most of what he covers tracks closely with what I’ve been writing in Gold Newsletter. It helps, however, to hear these ideas through a different voice.

Rick’s original interview is comprehensive and deserving of your time to read every word or view the recorded interview.

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

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Rick Rule’s Primer On Silver Investing

Albert Lu: Welcome to Sprott Media. I’m Albert Lu, joined once again by Rick Rule, president and CEO of Sprott U.S. Holdings. Rick, thanks for joining me again. How are you doing?

Rick Rule: Albert, always a pleasure. I’m doing well considering the turmoil that the world is in. Like yourself, working from home, which I must say is not all bad.

AL: That’s right.

RR: I feel bad for billions of people around the world who are suffering. I must say other than thinking about them, I’m not one of them.

AL: We’re fortunate to be able to continue doing what we love and continue to be paid for doing it. That is for sure. Rick, we started earlier this week a series that is basically an investor’s primer in natural resource investing. We covered gold. I think we covered a lot of ground in that video. Anyone who wants to catch up on that can click the link here to go back to watch that video.

Today, we want to talk about silver, Rick, and I guess before you launch into the primer I want to say from my own standpoint I’ve learned over the years that investing in silver is very much different than investing in gold. So with that, why don’t you lead the investors through this topic.

RR: Well, I think that’s a great way to start and I think for anybody’s records we should note that today’s call is taking place on April 2, 2020. One of the things about these videos, Albert, is that they hang around on the web for years. People need to pay attention to when the information that they gather was presented, because things change, particularly, as you note, in silver.

Silver is extraordinarily volatile as a commodity and the stocks are even more volatile. Not surprisingly, our customers don’t seem to mind upside volatility but they don’t like downside volatility very much, which is why the primer is useful.

It’s also useful because I think over time it’s fair to say that Sprott itself has become a brand name for silver investment in speculation. We manage billions of dollars in physical silver and lots and lots of silver stock on behalf of hundreds of thousands of investors worldwide. And this discussion is particularly topical for our customer base and for people who are thinking about becoming customers of Sprott as a consequence of our long familiarity with and identification with silver.

So let’s start. Silver at the beginning of the discussion is unusual in that it is both a precious metal and an industrial material. And the market for silver and silver’s utility to investors and speculators is a consequence of both of those phenomena.

In terms of markets, precious metals markets are almost always led by gold. In my experience — in the last 45 years in the business, which we’ve discussed in the past — gold moves first because it moves based on fear. When the move, when the bull market is underway, silver moves later than gold. It’s more triggered, I would suspect, both by the momentum established by gold but also by virtue of the fact that the unit cost of silver is so much lower than gold.

It’s been called, as an example, poor man’s gold. And particularly in South Asia, Bangladesh, Pakistan, India and Sri Lanka, silver has been regarded for centuries as both a medium of exchange and a store of value — that is to say a real money. And in those economies, the fact that the small unit price relative to gold exists is one of the things that gives it utility.

We’re going to discuss a little bit more about silver’s function as a precious metal later. But I think it’s worth covering it as an industrial material, too, because the uses for silver — the industrial and fabrication uses for silver — are growing very rapidly, particularly [and] not surprisingly as a consequence of its low price.

...Now, it’s worth noting that the extraordinary economic slowdown that we’re facing right this moment is impacting silver demand from industrial applications worldwide. As the fabrication of all types of consumer and industrial materials has slowed down dramatically, particularly in China, which is the world’s largest market as we know for solar panels. Considering silver, it is a hellishly difficult material to do market forecasting on, hellishly difficult for a couple of reasons.

On the supply side, importantly, most silver in the world doesn’t come from silver mines. It comes as a byproduct of mining other materials, including primarily gold, copper and lead and zinc. So having a sense of byproduct supply involves making forecasts, not so much about the silver market but also about the gold market, the copper market, the lead market and the zinc market.

The second thing is that a surprising amount, historically, of silver that was used in industrial applications is recycled, which is to say that scrap is often a very important source of supply. And then finally, investment supply, because so much of the above-ground supplies of silver are held by living, breathing retail individuals, particularly in South Asia.

...What we know is that the primary determinant of the silver price in the near term is investment demand. And as we said earlier, what we know with regards to investment demand is that silver historically has moved later than gold but has moved further....

AL: Rick, when we talk about gold and recommending or suggesting what place it should hold in one’s portfolio people are comfortable at least I am saying 10 percent or even higher. With silver and the volatility, what approach do you take?...

RR: I would argue that there isn’t a one-size-fits-all answer, Albert. I would describe silver as much more speculative than gold. And I think that somebody who intends to have a position in either physical silver, but more particularly in the silver stock, needs to self-identify as a speculator. I would argue that the major silver producers worldwide and probably the metal itself don’t qualify as investment quality assets, but are much more speculative.

...We’ve discussed that over the last 40, 45 years in recoveries from oversold bottoms in precious metals, like the ones that we’re in, gold moves first [and] silver moves later. But silver moves further.

But the most volatile asset class is the silver stocks, because the outsize move in silver generates outsize margin gains in the silver stocks. And also because the silver stocks are so rare.

It’s arguable that there are 11 silver stocks globally worth considering. That isn’t to say that there are only 11 silver stocks. What I’m trying to say, there are probably only 11 legitimate silver stocks on a global basis. And historically what has happened is that after the precious metals thesis has been verified by movements, first in the gold price, then by the silver price. First of all, the precious metals money comes into the silver stocks but then later when the generalist money comes into the silver stocks. There simply isn’t the float of silver equities available to accommodate investor demand.

I remember myself very well in the 1970s, little shares like Coeur d’Alene going from 10 cents to $65. No, sadly, I wasn’t long. But I do remember also very well being part of the formation of both Silver Standard and Pan American Silver. Silver Standard, if my memory serves me correctly, we financed at 72 cents with a full warrant and it went above $40. Similarly, Pan American, we financed 50 cents and it went above $40 too.

I’m not pointing this out merely to boast but rather to illustrate the astonishing upside that exists in silver equities and hence the fondness with which speculators regard them....

AL: Rick, I can’t help but looking at it this way from a global macro standpoint. If you look at the silver price now hovering around [$]14.50. That’s a price that was available in 2008. And part of what goes into the dollar price of silver gold and everything is the amount of money in circulation. And if you think of all of the nonsense that’s occurred between 2008 and now, the idea that you could go back and buy silver at a price that [it] was, I don’t know, [in] February 2008 is like almost like having a time machine.

So from that standpoint it certainly looks like a very good time to buy, considering we’re looking at possibly $10T or more increase in the balance sheet of the Federal Reserve. So before we conclude here, Rick, do you have any parting thoughts for the speculator?

RR: ...What I would urge people who care about the sector to do is, first of all, examine how you have your physical position if you have one. And consider the alternatives that are available, particularly in today’s market where there is such an extraordinary markup on physical product, and where in fact counterfeit product is beginning to come on to the market.

And then, secondly, when you look at your silver stock portfolio, you really, really, really need to practice stock selection. Talk to your Global broker. We know the silver business inside out, the silver equities business. We’ve been in that business for 40 years. If you don’t have a Global broker, Sprott Global broker, I would suggest that you get one.

The truth is if you believe that we’re in a precious metals bull market and if you believe that history repeats, one big beneficiary of the gold move will be silver. But the biggest benefits here it could very well be silver stocks. It’s important as a speculator to be positioned, but it’s more important to be positioned in the right names.

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