RICK RULE: My name is Rick Rule. I run the US business for Sprott Inc., a Canadian
domiciled and listed company that manages investments in the natural resources and precious
metals business worldwide. The US dollar’s relative strength I think
is the most important determinant of precious metals prices. There are many factors of course that go into
precious metals pricing, but in my experience over the last 40 years, the single most important
determinant in precious metals pricing has been global faith in the ongoing purchasing
power of the US dollar. At points in time where global investors’
perception of the purchasing power of the US dollar was weak, precious metals prices
were strong. If we look back, as an example, to the decade
of the ’70s, when the United States was trying to affect the war in Vietnam, the war on poverty,
all of those other wars, and it looked like we were going to lose when worldwide faith
in the strength of the US dollar was weak, the gold price and the silver price, too,
rose and I still see that being the single most important determinant in precious metals
pricing. Certainly, negative real interest rates are
important in many regards. The first thing is that the strength in the
US dollar right now, I would suggest, doesn’t relate so much to strengthen the US economy,
which is becoming increasingly doubtful, but rather to the fact that the US economy is
relatively stronger than other economies. My friend Doug Casey describes the US dollar
as an example, as the prettiest mare at the slaughterhouse. Well, US interest rates measured by the US
10-Year Treasury are paltry around 2%. Nominal interest rates, well, real interest
rates in other countries, particularly in the Eurozone are negative. The idea that an investor could lend money
to Greece, who is almost guaranteed not to pay back and suffer a negative yield, when
you look at that the US 10-Year Treasury at 2% seems relatively strong. What’s interesting about the circumstance
that we find ourselves in right now is that both the US dollar and gold are relatively
strong, which suggests that while the US dollar is relatively strong, investors on a global
basis believe that the US dollar will falter, too. From the historic point of view, the interest
yield on the US 10- Year Treasury relative to the implied rate of inflation in the United
States is the weakest that we’ve seen in 40 years and the consequence of that is that
gold is strong even while the US dollar and the US Treasury market is strong. The whole implications of sovereign credit
quality over time and the efficacy of gold holding relative to those sovereign credits
is, from my point of view, one of the classic questions that confront ourselves. The political process in the Western world
and maybe in other worlds, too, involves what I would describe as a war on savers by spenders. Spenders are much more numerous. What that means is that spenders vote themselves
access to the wealth generated by savers. There’s a wonderful description of democracies
as being described as four coyotes and a lamb voting on what’s for lunch. Clearly, the lamb, the saver, doesn’t come
out too well. If you look in the United States as an example,
I’m not going to do a worldwide example, but if you look at the United States, ostensibly
the strongest credit in the world, what you see is the debtor with $22 trillion in recourse
obligations, $22 trillion. Those are 12 zeros. It’s a big number, but more importantly, you
see offbalance sheet obligations, but allegedly obligations to be sure. By the way, you’re looking at one in the mirror,
I’m 66 years of age. Medicare, Medicaid, Social Securities, those
numbers the off-balance sheet liabilities of the US government exceed by the government’s
estimate 100 trillion dollars. That’s before state obligations, local obligations
and unfunded pension liabilities which the pensioners believe that the government will
pick up. How do we service 120 trillion dollars in
debt? Well, traditionally through the national income,
defined as taxes and other fees to the government less expenses. The problem is that that number comes up negative,
meaning that our income statement shows a trillion dollar shortfall every year. It is very difficult, obviously, to add a
column of negative numbers and come up with a positive sum. What the political class in the United States
is trying to do is service 120 trillion dollars in debt with income that’s negative to the
extent of a trillion dollars a year. In the long term, it is very obvious that
you can’t overcome arithmetic with political narrative and the consequence of that is that
savers on a global basis are gradually losing faith in the US currency, in the US 10-Year
Treasury and beginning to embrace gold. The only way that I can see that circumstance
changing would be a circumstance where the US somehow swung to a very, very strong budget
deficit, while simultaneously reducing recourse off-balance sheet liabilities, and reduced
government spending. I’ve been observing government spending for
my entire adult life, and the ability of the US citizenry to embrace belt tightening doesn’t
seem to me like anything that will happen in my lifetime. If I could paraphrase it, who gets stiffed? The off-balance sheet obligations are all
promises that various elements of society have made to other elements of society. The most important transfer is, of course,
from your generation, a younger generation, to my generation, an older generation. We voted ourselves all these benefits, and
we magnanimously decided that you would get to pay for them. My suspicion is that ultimately, that’s going
to be up to you. It would be my suggestion that you tell me
that since I made the promises to myself, that I should keep them because you have no
interest in doing that. It would be an extraordinarily interesting
circumstance if the voters of the United States decided that earlier generations had made
promises to themselves that the younger generation could not keep. Interesting, maybe like a horror movie for
many people of my age that failed to save early on. When you think about it with 120 trillion
dollars in on-balance sheet and off-balance sheet obligations, and the negative national
income, we have to call the question at some point in time. It’s interesting to me actually, that as odd
as that equation is in the United States, the equation in the United States is less
severe than it is in places like Japan, China and the European community. One of the things I think you see is that
the faith in the United States dollar is strong only relative to competing currencies. I think really in the near term, and by the
near term, when you’re my age, you think in three to five-year term since the near term,
the question becomes confidence. We are able to avoid being concerned about
arithmetic in the very near term because the system still has liquidity in it. Many people in your generation, probably many
people in my generation, confuse the concept of liquidity that is cash in the system with
solvency, which is the durability of the system to maintain and service its obligations over
time. The truth is, there’s lots of liquidity in
the system. There’s lots of cash sloshing around. That’s what quantitative easing is about. If you and I were to engage in quantitative
easing, the government would call it counterfeiting, but when they do it, of course, its quantitative
easing. The quantitative easing has left the system
with lots of liquidity, but in my opinion, with the solvency in question. The suggestion by the question is that quantitative
easing results ultimately in inflation. I would suggest that’s true. It’s a very interesting suggestion. When the government gives us the number, the
CPI, consumer price index stated rate of inflation, I have a couple comments to that. The first thing is that the people who assembled
that basket of goods and services don’t shop where I shop. They say that the purchasing power of the
dollars that I have in my savings depreciate by 1.6% a year. That’s inconsistent with my experience. Let’s look at why. In the first instance, when it’s inconvenient
for them, in other words, when there’s too much volatility in the pricing, they don’t
include food or fuel. If you are looking at me, we’ll see that food
is important to me, I consume it. It’s part of my budget, and I drive and fly. An inflation number that doesn’t include food
and fuel is, by my reckoning at least, a floating abstraction. The second thing is that the CPI calculation
is about 20 years old. While it includes many goods, it doesn’t include
many services and our economy is becoming more service centric. The prices of services are rising faster than
the price of good– goods. Pardon me. My final criticism of the index, however,
is the most profound. The CPI index does not include taxation. Now, believe me, if I didn’t have to pay tax,
I’d complain a lot less about the index, but my own experience is that the purchasing power
relative to my lifestyle of my savings, is depreciating by about 4% or 4.50% a year. The value proposition that the government
offers up to me is that they’ll take my savings in a US 10- Year Treasury and they will pay
me 2% a year in a currency that depreciates at 4% a year. My friend Jim Grant describes this value proposition
as return free risk, and return free risk is just not particularly attractive to me. My suspicion, however, is that it gets worse
in the out years. The idea that you can conjure up $4 trillion
in fresh currency units through quantitative easing, and have that not show up somewhere
really, truly beggars belief. If you ever had a circumstance where savers
had a strike on treasuries, that is where people’s faith in the system was slowed up
enough that you had a replay of the Clinton years where they gave a treasury auction,
and the buyers forgot to show up. The circumstance that I think that you would
have then would be something more akin to a reckoning, a circumstance that where you
would have a crisis in confidence and probably a liquidity crisis. I’m not saying, by the way, that this is going
to happen anytime soon. Most of the world is driven by narrative rather
than arithmetic, but over time, arithmetic is real and narrative is just that. The question, I guess, involves the price
performance of all precious metals in the context of a questionable US dollar. We start the discussion of course with gold,
with the basic precious metal. A historic mechanism as a medium of exchange,
and simultaneously a store of value. As far back as Aristotle, it has been known
that fiat currencies were a promise to pay but gold was payment in and of itself. It wasn’t a promise to pay. It wasn’t a note. It was in fact, payment, a store of value
and a medium of exchange simultaneously. The current strength that you see in gold,
I think, is the recognition of the fact that the value proposition associated with fiat
currencies is becoming increasingly challenged. Silver has, of course, always moved later
than gold but moved more spectacularly. The lower unit cost means that silver is if
you will democratized gold, poor or people in emerging markets, particularly in South
Asia, have for 1000 years stored a lot of wealth in silver because they simply couldn’t
afford the unit of exchange represented by gold, speculators like silver, too, because
it’s more volatile. Historically, when the gold prices move, it’s
moved fast– it’s moved first, pardon me. Silver moved in second position, but move
further. Coming down to platinum and palladium, they’re
really interesting markets in the sense that their primary uses on a global basis have
not been as stores of value or mediums of exchange, but rather because of their utility
and fabrication, applications, things like catalytic converters for internal combustion
engines, or refining or chemical fabrications, but in certain societies, particularly northern
China, Korea and Japan, platinum and palladium have also been favored over gold as jewelry
and as stores of wealth. One of the things that you’re seeing now with
the increasing amount of private savings in Korea and Japan, as private citizens become
nervous about their own governance is an increasing amount of utilization of platinum and palladium
for functions with regards to stores of value that have traditionally been assigned to gold. What we’re seeing, I think, on a global basis
is a very gradual substitution for government debt by precious metals. It’s important to note that in a historical
sense, this substitution is really in its infancy. I read a story very recently that suggests
that precious metals– physical precious metals and precious metals investments, like precious
metals mining stocks, currently occupied between one third of 1% and one half of 1% in the
savings and investment matrix in the United States. That is to say, if you looked at all the savings
and investment products in the United States, precious metals related investments would
comprise less than one half of 1% of aggregate market share. Now, as recently as 1982, the same number
was 7%. The three decade mean, has been between 2%
and 2.50%. My argument is that precious metals won’t
win the war against as an example, Treasury securities, they’ll just lose the war less
badly that precious metals, all precious metals market shares, combining gold, silver, platinum
and palladium and of course, the mining shares will resume their historic place in the investment
matrix and they will go from one half of 1% market share to 2% market share just a reversion
to mean, but that little reversion to mean would quadruple demand for precious metals
and precious metals equities in the largest investment market in the world. That’s the circumstance I see. From the point of view of precious metals
holders, that’s extremely attractive. If your readers are able to contact me, if
you can have some contact on the screen, I will send your readers a Barron’s 40-year
Gold Mining Stock Index and it’s a really dramatic graphic presentation of where we
are. The first thing to note is in a historical
context, the prices of Gold Mining Index, the prices of gold mining equities are at
historic, historic lows. The second thing is that the average recovery
or up move in the mining stocks is very explosive. The up moves show between 200% index price
escalations and 1200% price index escalation. I don’t want your readers to go away thinking
that in the next three months, every gold stock in the world is going to go up by 200%
or 300%. I just want them to understand that in a historical
context, precious metals mining stocks are cheaper than precious metals, which are themselves
reasonably cheap and the recoveries historically have been extraordinarily dramatic. If a circumstance comes where savers worldwide
begin to question the efficacy of sovereign debt on a global basis, but particularly US
sovereign debt, then I think you see your recovery in precious metals prices first,
which I think you’re in the early stages of seeing, and then you see a much more dramatic
recovery, if past is prologue in the shares of precious metals, mining stocks. When I say precious metals mining stocks,
I don’t just mean gold stocks, I mean gold stocks, silver stocks, and platinum and palladium
stocks. Well, that’s a wonderful question. The truth is that the blockchain and the distributed
ledger are precisely what you describe democratization and in fact, the privatization of the medium
of exchange. Hitherto for most of human history, mediums
of exchange were either stores of value, things like precious metals, or promises made by
society things like fiat currencies. With the distributed ledger technology, with
the blockchain, with cryptocurrencies, other private arrangements can be made for mediums
of exchange. Bitcoin as an example, the best known and
probably the most popular of the crypto currencies, isn’t tethered to anything of value. The value comes from the network, from the
community and from the contractually implied scarcity. We can’t continue to print bitcoins forever. Their ultimate population is fixed in the
white paper, so you can’t necessarily be inflated away. You can only acquire new Bitcoin by providing
a service to the Bitcoin community. I am an international businessman, I use numerous
mediums of exchange. If you look in my wallet today, you would
see pound sterling, US dollars and Canadian dollars. From my personal point of view, the idea that
there are many currencies, many mediums of exchange, competing to offer me utility is
a wonderful thing. If the promise offered up by US society in
the form of the US dollar becomes less competitive, and I have the ability to look at gold as
a medium of exchange, the Canadian Dollar is a medium of exchange, the yen as a medium
of exchange, Ethereum or Bitcoin as a medium of exchange, I, as a consumer, am benefited. I’m really delighted to see the democratization,
the privatization of these promises that society makes to itself in terms of mediums of exchange. A cryptocurrency may evolve that’s uniquely
suited to your lifestyle, your trade, your commerce, and the different one may evolve
that suited to me and the idea that the market suits you, while simultaneously suiting me,
is, I think, an absolutely wonderful thing. Now from my own particular viewpoint, given
my own historical observation that gold holds its value through thick and thin, one of the
really interesting transitions that I’ve seen in my lifetime is the very fact that blockchain
and the distributed ledger can be used to securitize gold by using distributed ledger
receipts for gold stored, in our case, in the Royal Canadian Mint. Rather than having to own physical gold, I
can have a delivery receipt, a deposit receipt, that’s evidence to this good delivery by the
Royal Canadian Mint, but I don’t have to store the gold myself. In fact, I can download a gold link credit
to my credit card right now. I can buy a cup of coffee at Starbucks, I
can borrow against my gold. If I buy physical gold or sell physical gold,
I pay a commission to a dealer that’s as much as 3.50%. Then I have to pay to store it and then I
have to pay to ensure it. The distributed ledger and the blockchain
gets rid of all of that. It takes all the friction out of a gold or
silver transaction and really, really, really, for the first time in history, makes gold
and silver efficient mediums of exchange, cheap mediums of exchange, rather than stores
of value. For me personally, given my attraction to
precious metals, the most exciting part of the blockchain and the distributed ledger
as it relates to mediums of exchange is its ability to make exchanges and ownership and
trading of precious metals much more efficient, much easier and much cheaper. Listen, at age 66, I would describe myself
not so much as a Luddite, as an inefficient adopter of technology. The fact that I can do this myself on my phone
at age 66, I described myself as having a rotary intellect in a digital world. If I can make this work on my phone, imagine
how simple it’s going to be for people with your education, of your age. The question, as I understand it, has to do
with anonymity in the utilization of currencies. One of the initial benefits, the initial utilities
of cryptocurrency was, in fact, their anonymity, the idea that there was social trust built
in as a consequence of technological verification. The trust wasn’t so much individual to individual,
as it was trust in the system and as a consequence of trust in the system that the system would
be anonymous. This has worked by the way. There are people in countries with blocked
currencies. People’s Republic of China, Zimbabwe, Venezuela,
people have used in particular Bitcoin to translate their money from currencies that
they couldn’t use outside their host countries or for that matter, inside their host countries
and transferred them out. One of the difficulties that we’ve begun to
see in the crypto community is that some of the users of crypto want those currencies
to become or want those technologies to become more broadly adapted. They’ve ironically asked for more regulation. They have ironically begun to lobby for one
of the key utilities of crypto has to be obviated by greater regulation. This is ironic, to me. This is odd. It seems to me that the two or the three really
big utility features of the crypto are the fact that they are anonymous, differently,
that they aren’t government controlled, and therefore can’t be restricted or quantitatively
eased and that they are extraordinarily cheap. When I say cheap, I mean the transactions
denominated in crypto can be frictionless and extraordinarily cheap. The idea that the community would voluntarily
obviate the two of the three most important utilities of the currency seems very strange,
seems very odd to me. One of the things that’s happened very recently
is– well, not very recently, but over the last five years, is that one attraction of
the cryptocurrencies has been their volatility, the way they trade. It would seem to me that Bitcoin is thought
of worldwide now as a speculation, as a trading sardine, rather than as an eating sardine. The volatility– of course, particularly to
the upside, people don’t like that downside volatility. They like upside volatility, but the very
volatility in some of the crypto currencies has obviated any utility that they might have
as mediums of exchange. If you have a crypto that varies in price,
at least denominated in US dollars, if you’re using this medium exchange, you don’t know
how much you’re paying for something. If a Bitcoin goes from $10 a coin to $1,000
a coin, and you believe it’s going to go to $10,000 a coin, the idea that you use that
Bitcoin to pay for something means almost by definition, that in your mind, you believe
you’re overpaying for the item that you are receiving in return for your Bitcoin. Simultaneously, if you’re a merchant, and
you’re accepting Bitcoin for something, you don’t know the value of the species that you’re
getting in return for the good that you sold. The very volatility that occurs right now
in the cryptocurrencies, I think goes a long way to obviating the utility in cryptocurrency,
the utility in cryptocurrencies that is expressed as their utilization of a medium of exchange. If you take away their efficiency as a medium
of exchange, and you take away their utility, I’m afraid that you have dealt a real blow
to the cryptocurrencies. By the way, I’m not saying that this is going
to occur. My hope is that we develop 50 or 60 cryptocurrencies
that offer up various utility to consumers over time. I think that the utilization of technology
to affect mediums of exchange is limited only by our imagination, but our imagination thus
far has been compromised because we’ve courted volatility, which obviates the currency’s
efficiency as a medium of exchange. On the other hand, using distributed ledger
technologies that are tied to commodities as an example, like gold and silver, that
have traditional utility probably means, at least for some consumers like myself, that
the distributed ledger will ultimately offer up frictionless stores of value that can be
utilized as medium of exchange. At least for me, as a transactor, that’s much
more attractive. Credit to Doug Casey, he tells a wonderful
joke about a guy who bought 1000 crates of sardines as a speculation and he opened what
one sardine that was terrible and the guy who sold it to him said, “Well, these aren’t
eating sardines. These are trading sardines.” The question is how will the cryptocurrency
market evolve? I think it’s evolving very quickly right now. Sprott as an example, and others have invested
millions of dollars to adapt the distributed ledger and the blockchain, to trade gold,
silver and platinum and palladium. I think the future of cryptocurrencies could
only be limited by two things. It could be limited by legislators, by groups
of people who didn’t want other people to be free, or it could be limited by lack of
imagination. We live in an age right now, where technology
is freeing imagination to generate utility for people like you and I, at a rate that
we’ve never seen before in human history. The advantages of technology are cumulative,
and compounding and technology will involve people being able to generate value for each
other and communicate with each other, completely unconstrained by legislatures which has never
happened before in human history. When people listen to some of what I have
to say about liquidity versus solvency, people assume that I’m a pessimist. I’m an unbridled optimist. I see this circumstance where people around
the world are talking to each other more, interacting with each other more. I see technology broadly but Bitcoin and blockchain
in particular, as enabling free exchange between free people, unconstrained by groups of gangsters
that call themselves legislators. I think this is a wonderful circumstance. What we’re doing is fraught with regards to
gold is just one thing that goes to our imagination. You might have a different form of imagination. It might be access to communication that forms
the utility that becomes the key to your medium of exchange, but the idea that groups of people
around the world, in science fiction they’re called files, groups of people around the
world who are attracted to each other voluntarily as opposed to politically as an accident of
where they were born, what race they are, what religion they are. The idea that people can make connections
with each other that are unconstrained by previous mores, and can affect these mediums
of exchange through technology, like Bitcoin and blockchain, points to me to an absolutely
glorious future for all of us. Well, thank you for the opportunity. It’s obviously a topic I’m interested in.