Don't Confuse a Bull Market for Brains – Rick Rule (Sprott US Holdings, Inc.)



my number one crypto stock pic will be interesting I didn't understand that meirin allowed people to recommend shorts from the podium it does bring up one small observation you know being in the mining business or at least in my part of the mining business is pretty interesting because occasionally you have to concern yourself with things like arithmetic and facts and not knowing anything about Bitcoin not understanding very well I mean understanding the basic premise of the utility offered to customers the anonymity the frictionless trade I mean I get all that I get the utility part the economics of course have been somewhat missing for me much to my chagrin frankly I learned from tika that I'm about to be obsolete actually and becoming becoming obsolete as a consequence of an algorithm well I guess has happened to other people too and I'll be able to live with it but I do want to make come one observation with regards to crypto currencies and stocks that is a stock and I even forget the name of the stock it's allegedly a Bitcoin mining stock and I noted that four weeks ago they had a market capitalization of 700 million dollars and they made a twenty million dollar acquisition that almost tripled their revenues so I'm thinking if a company with twice the revenues was sold of them for 20 million cash and they had a seven hundred million dollar market cap pre-acquisition how that arithmetic worked but I guess people like me who are stuck in addition and subtraction and multiplication just don't get this era at any rate having gone from literally in this case the sublime to the mining business which is always ridiculous I'd like to return us to earth to assets that are simultaneously stores of value and mediums of exchange actually before I do that though as mayor and still in the room yeah he is I want you all to do something for me you know putting on a conference is an amazingly difficult task you have pre-madonna speakers you have exhibitors that either don't show up or don't want to pay you have attendees that are too hot or too cold or don't like crypto currencies or lost money on gold I want you to do me a favor and give a big round of applause to Marin the people who put on this fine fine that's an old speakers trick you do it to make sure that at least once during your speech you get an applause line Marin may have been doing but I got to receive it so I want to begin talking about where we are in the mining business by sort of noting something about my past many of you have known me for a long time but my premise with regards to the mining business is that it's the most cyclical business on the planet it's also very volatile but that's a different story and that cyclicality is good for me because it means that mining unlike things like algorithms are fairly easy to understand and predict you can be wrong for two years two and a half years or in my case three years but over time you're going to be right because the good news about the mining business is that always each and every time a bear market is the author is the cause of a bull market and a bull market is the cause of a bear market those of you who are feeling discouraged as a consequence of the bear market that you just went through by the way the second-worst bear market in my career should in fact be delighted that you have been through that because that bear market is what guarantees teeka notwithstanding the bull market to follow and it happens for very very understandable reasons in bull markets course everyone is Evelyn which means that everyone over pays and this is really truly not a reference to Bitcoin but people's expectation of the future is set by their experience in the immediate past and if your experience in the immediate past has been that even your mistakes make you money you come to believe that the future is going to be benign because you're experienced in the immediate past has been benign and much more problematically you come to confuse a bull market with brains which is why bull markets go on for longer than they should the inverse of that of course is that if you work really hard in a bear market and make a decision you get punished for the decision irrespective of the good work that you did your expectation of the future is bad because your experience in the immediate past is being spanked it is for that reason that bear markets are in fact the authors of bull markets it is true as we have discussed many times at this conference in the past but in the resource based business you are either a contrarian or you are going to be a victim I remember at this very conference in it would have been 2006 2007 the expectation in the crowd was so euphoric that there was no set of circumstances that would have satisfied the crowd the expectation was that only good things were going to happen to us in the future and my experience has been when the unanimous opinion the unanimous expectation is good everybody has already expressed their preference in the market in other words there's no buyer left to buy when things can't possibly get any better surprise surprise they don't and when things can't get worse they don't get worse either they get better so what I'd like to begin with for all of you is another wisecrack slogan you've suffered through the pain I hope you enjoy the game and I hope this time that you all learn the lessons that you learned in the bear market and the preceding bull market and I hope everybody harvests some this time I remember myself coming out of my first bear market which of course came after my first bull market I remember being in Enid Oklahoma a town which have lost almost 50 percent of its population in the bear market I mean that's that's a real bear market where a town loses half not a portfolio and I remember seeing a wonderful bumper sticker that I want to leave with you it went like this God give me one boat one more bull market I promise not to waste this one when I look out in the crowd and I look in some cases at the gray hair and in other cases that no hair whatsoever I recognize that some of you like me have been through several bull markets and several bear markets I think we have a pretty good bull market coming so my first admonishment is you've just been through a bear market don't waste this bull market so that's sort of the opening stanza they say you have about four minutes to get the audience's attention before you give your speech and I hope I've done that I want to give you a couple reasons why I think we have a fairly decent bull market coming the first notwithstanding the preceding panel is that I personally feel pretty good about the gold price I'm not going to stand in front of you and say the gold is gonna go to 2500 bucks and nine trading days or any stuff like that that's for Kryptos gold gold actually goes up and down based on things like buyers and sellers and the Kryptos they don't seem to be any sellers but I feel pretty good about what the gold price does the gold price has maintained its store of value over time which is what gold is supposed to do in my experience over 30 or 40 years in the market I've heard I don't know 500 narratives about what makes the gold price go up people hate Trump Gold is up people hate Trump Gold goes down people are afraid of North Korea gold goes up whatever this guy's name Kim gets the flu Gold goes down but I don't think any of that really over time matters what has mattered in my life has been real investors expectation of the continuation of the purchasing power of the US dollar particularly as expressed by the US 10-year Treasury the US 10-year Treasury is the world's benchmark security it's the one that real investors around the world base every other instrument on and when the Delta the implied yield between the regular Treasury and the tip the inflation preferred Treasury narrows in other words when the expectation is that there is a problem with regards to the purchasing power of the dollar gold does well when there's confidence in the u.s. dollar is expressed by the US 10-year Treasury gold does poorly and if you believe that that I want you to think about three things if you believe that they traded and converse fashion these three things will be interesting to you the first is that the US 10-year Treasury pays about 2.1 percent jim grant famously called this return free risk now think about how attractive return free risk is in other words the big competitor that gold has which by the way is not Bitcoin the big competitor that gold has is the US 10-year Treasury and the value proposition offered up by the big competition is return free risk sounds like a reasonable fight doesn't it but let's move forward the US 10-year Treasury has been in a 35-year bull market beginning I believe in March of 1982 the yield at that point in time was fifteen six the yield is 2.1 2.2 something like that one would have to suspect after a 35 year bull market where the bond has gone high enough that the yield has fallen by what 90% that that market is closer to the end than to the beginning a 35 year bull market is a wonderful thing to behold but I don't think anybody in the room suspects that a bull market will go for 50 years or 60 years so I would argue with you that the chief competitor for gold is at the end of a 35 year bull market maybe two years from now maybe a year from now maybe three years from now but that would suggest if you believe in the converse trade the gold is early earlier in a bull market is closer to the beginning of the bull market than the end and finally I know that we live in the age of narrative not arithmetic but I want to point out some arithmetic the narrative notwithstanding and that is that the US Treasury the US 10-year Treasury is backed by The Full Faith and Credit of the US government a government that has 20 trillion dollars in on balance sheet liabilities write that down 20 trillion dollars by the way that's a 20 with 12 zeros it's a big number it's so big that when I say that number I look out in the crowd I see impassive faces because nobody can comprehend a trillion but it gets worse it gets worse the off-balance sheet liabilities of the US government are a hundred and ten trillion dollars anybody here know what off-balance sheet liabilities are me I'm 64 pretty quick Medicaid Medicare Social Security's a bunch of promises that we've made to each other except for we forgot to describe how we're gonna pay for them so think that through think about the US 10-year Treasury as an obligation and unsecured obligation of an entity that at the federal level at the federal level is something like a hundred and thirty trillion dollars upside down by the way we didn't talk about pension funds or states or local governments or anything like that not moonbeam not the governor of this state think about whether you think that 2 percent a year is adequate compensation to be behind an unsecured credit for a hundred and thirty trillion dollars if you want to own the treasury god bless you I don't moving on from gold which I think will do okay as opposed to great I think the gold stocks will do really well having tested you with a subject as boring as gold after the crypto currency narrative let's move on just for fun to the gold equities and this is really really really fun to talk about we'll do a little history actually the paradigm for gold stock investors in fact the paradigm for resource stock investors generally for our generation I mean old folks like us was really said in the 1970s the price went from $35 an ounce to 850 dollars an ounce sort of like another asset class recently but again leave that aside and the interesting thing about that is that the equities did better than the commodity did if that's possible the consequence of that is that as investors from the biggest to the smallest the smartest to the dumbest what we asked of resource companies but gold companies in particular was to exhibit leverage to the price of gold this ability to participate in the upside became more important than any other characteristic and that's an ironic investment request because the companies that do the best in increasing gold price environment are the companies that have the highest costs in other words asking people to be leveraged was asking them to be marginal and the investment community demanded that the mining industry become marginal and it took them 30 years but they achieved it they became really marginal they raised their costs they made stupid acquisitions they made stupid investments they actually set a new stage for marginality they did exactly what we asked them to do then we gave them a nice bear market a bunch of them went broke sold their assets fired their management team and in the last three years an interesting thing has happened in the gold business new management teams understanding that their predecessors were allowed to pursue other employment opportunities and even some investors became rational discussions became centered around rational allocation of capital a phrase that had never before polluted the gold industry companies began to talk about generating free cash about the Delta between cost of capital and return on capital employed I see some people yawning already in other words we begin to ask the gold mining industry to actually be an industry not to be marginal anymore and I see signs now that this rationality is actually percolating through the industry there are companies that are generating free cash that our company our companies even though they have cash on the balance sheet that feel no particular predilection to do something stupid with it which is a good thing the industry is doing itself no harm for the first time in 40 years and that leads me to my second point the expectation that the investing public including mining industry investors have of the gold industry in 2018 is so low that it will be more difficult to get under the bar than over the bar so we haven't expected we have an industry that's set to perform and we have an expectation in the industry that the industry won't perform changes in market sentiment occur as a consequence of positive surprises and I suggest to you that the mining industry after 40 years of failing is about to deliver positive as opposed to negative surprises and my suspicion is that the best of the best REE rate pulling up I suspect some of the rest positive surprises rational performance rational expectation I think the stage is set for an interesting bull market one of the consequences of that because the industry has under invested and invested poorly for many years will be the necessity for mergers and acquisitions hopefully this time strategic acquisitions as opposed to acquisitions before they can so I think you see a situation where the best of the best perform lower their cost of capital and use the capital to make intelligent as opposed to stupid decisions meaning that you make money on the best of the best then you make money on what they acquire and finally for reasons I'll explain later I believe we're coming into an exploration market too which means that there will be money to make money to be made with the best management teams across the whole spectrum of the gold equities business but I think we're gonna be in a broader bull market than that I think the other materials are beginning to poke their ugly heads up too meaning that I think the oil and gas business will continue to do well the copper business will do well the whole range of industrial materials will do well and in this case for other reasons we have seen a situation in the bear market the materials industry literally was D capitalizing itself once again I know everybody prefers narratives two numbers and once again I'm gonna disappoint you and give you some numbers in fact I'll give you two numbers the recovery in oil as an example everybody's blaming on a young Saudi Sheik who threw his uncle's in jail it's not what happened I mean yes he threw his uncle's in jail but it didn't have much to do with the oil price the oil price moved because the industry was making oil worldwide for 60 bucks a barrel and they were selling it for forty five bucks a barrel losing $15 a barrel on a worldwide basis including cost of capital and doing it a hundred million times a day in other words the industry was losing a billion and a half dollars a day and of course trying to make it up on volume they got tired of this and they stopped making sustaining capital investments both because they didn't have the courage and also because they didn't have the cash the International Energy Agency suggests that the worldwide oil industry over the past three years has deferred which means not made about two and a half trillion dollars in sustaining capital investments if you don't make sustaining capital investments your ability to produce begins to go away and in places like Mexico Venezuela Colombia Indonesia Canada the under investment at least in conventional production has impaired for a very long time the ability to produce oil and what happens when you balance supply and demand not by increasing demand which we haven't done as a consequence of weak weak economy but rather by constraining supply when you balance supply and demand by killing supply it takes a very very very long time to wrap the supply back up if you allow a mine to flood it can take you six or seven years to put the mine back into production if you allow a water flood to cohn meaning that the water comes through the oil you um you over produce the oil and under inject the water it can take ten years to recover from the damage that you did so markets that balance from supply destruction are markets where the commodity price rises aren't meant by increased production because the industry can't continue to produce so I think that we are in for a decent market in gold and gold equities in the surprisingly good market in the materials because of supply destruction now the fact that I said it first of all doesn't make it so and the fact that I said it almost guarantees that I'm early in other words this circumstance takes a very long time to unfold and one of the things that you need to do as investors is that you need to orient yourself in terms of your investment horizons with the time necessary for this thesis to come out I'm always asked on places like BNN well Rick is the price of gold gonna go up or down and I always smile and say yes it is the question becomes when and the honest answer is there you don't know I don't know but what I've learned in this business will go back to my beginning statement which said that in this business you're a contrarian or you're a victim that bear markets are the authors of ball markets what I've learned for 40 years in this business is if you ask yourself a question where the answer has to begin with when not if you're asking yourself a very high-quality question whether you are right tomorrow or right three years from now if the certainty is that you're gonna be right and the question becomes the time the rent on the answer rather than the answer itself you are gonna make money over time and I think that's the circumstance that were in today think about the uranium business again you make the stuff for 60 bucks a pound today after a bunch of production gets shut in you sell it for 25 bucks a pound so you lose 35 bucks a pound and you do that a hundred million times a year kind of boring isn't it but the truth is that the equation goes like this wind and solar not withstanding either the uranium industry earns its cost of capital or the lights go out those are the two choices what do you think's most likely yeah can I tell you when no but I don't have to ask myself a question where the answer begins with yeah this is a when question it's a high quality question so I want to move on from this general thesis I hope that I've explained the thesis well enough that at least if you disagree with me you disagree with me for good reason and I want to move on to tactics because of course that's what the audience wants to hear one of the things that I have found in a bull market particularly the early stages of the bull market is that you don't need to take penny stock risk to get out sized returns and I would urge all of you to make as the bedrock of your portfolio the best of the best you don't need to take risks early in a market when a sector returns to favor the biggest and the best names move first and they can move an awfully awfully awfully long way I hear a lot of people coming by my booth saying if this happens this happens and this happens will the Prowse with the price of amalgamated moose pasture go up you know well probably but who cares if all those things happen the price of Franklin Nevada is going to go up too but if they don't happen the price of Franklin Nevada won't go down too much so in the beginning if you think the gold price is gonna go up buy stock in a company with a bunch of gold it makes some sense does it buy the best of the best by the franco's by the wheat and precious metals by the ríos by the B HP's if you have the guts for some balance sheet risk buy yourself a little bit of tech buy yourself a Glencore but start your portfolio with the best of the best and the materials market the best of the best moves first doesn't move the farthest it moves the first and particularly in the materials business now with 3% 4% 5% dividends you get paid money while you wait you get paid rent which really takes away the pain of being early so start with the best of the best the second thing is consider the whole balance sheet of the company most of us cut our teeth is equity investors for better or for worse let me give you an interesting statistic in the bear market that we just went through and I'm not talking about now about the best of best I'm talking about the penny dreadfuls the Toronto Stock Exchange the Toronto Stock Exchange venture resource sub-index in the bear market fell by 88% in nominal terms that's bad enough but it fell by more in real terms because they gave the index now think about that the sector fell by 88 percent I don't have to sell some of you because you suffered through it at the same time at Sprott in our lending business I won't talk about our equities business which was much less pleasant in our lending business we generated a 19% annual compound internal rate of return the worst piece of debt on any individual balance sheet is better than the best piece of equity so when you're investing in resources think about the bonds think about if you have the ability to the mez lending or the project lending business because the truth is over time the money that you save in a bull market is much more valuable that the Munda and the money the money that you save in a bear market pardon me becomes much more valuable than the money you might make in a subsequent bull market so think about the whole balance sheet and think about the best of the best these lessons are of course investment lessons I know if I talk to each of you individually each of you would describe yourself as a conservative investor which is of course ridiculous you're all wild ass speculators which is why you're here so now we're going to move on from this rational response to talk about what you're actually going to do and why you're actually here another thing that I learned about in bull markets and bear markets is that although we think of this businesses and ask that intensive business it's not it's a people business here in San Francisco and Silicon Valley don't think about exploration as being about a property a property has a 1 in 3,000 chance of success if it was actually accounted for properly it would be regarded as a liability to excuse to make it's an excuse to spend money this is an intellectual capital business and capital isn't Alec allocated fairly it's allocated very very disproportionately to a few Warren famously says millions of people in the world can play good basketball but if you want to win games you got to have a 7-footer on your side and after 30 years in the mining business it's pretty easy to find the seven footers there's Lucas London's there's Ross biddies there's Bob Quartermaine's there's about 30 teams in the world that have generated say 90% of the value that has been accrued in the junior mining sector so if you have 30 teams out of 4 or 500 teams worldwide that have generated all the value why do we screw around with anybody else the truth is when I look back over 40 years in the business if I'd worked half as hard and back to 10% of the people that I backed I would well I'm not sure I would have more fun actually but I certainly would have made money and I would have worked a quarter as hard so one of the things that I'm gonna do in the next 3 or 4 years is I'm gonna stick absolutely with the 7-footers certainly the old generation of 7-footers my age but also with the people who prove themselves in the last bull and bear market in other words I'm not gonna worry about missing a 10 cent stock that goes to 45 cents because some coalition of butchers bakers and candlestick makers jit need the narrative up I'm not gonna miss I'm not gonna worry about missing 400 percent gains that happened really is a consequence of error I am going to back the scientists who have been see really successful involved in the same set of circumstances that they're proposing this time I think it's a very very very important lesson for us all to learn I hope I didn't make people sick then thinking about how many 7-footers are or are not in their portfolios but I want to leave one other thing with you that I think is going to surprise a lot of people and that is that I think that for the first time in 20 years we're coming into a legitimate exploration market the last time we were in exploration market from my point of view as I define them was in the early part of the 1990s which was the most dramatic bull market of my own career and I think this is gonna happen because as an industry we have under invested and mis invested in exploration for 20 years yes there was money that went into exploration the last bull market but it didn't go into attempting to make discoveries in many cases it went to drill a drill hole that was a twin to an earlier drill hole in a property that failed in the last three bull markets it went not so much to make a discovery but it's to cause a stock to go up the consequence of that and the consequence of the under investment by majors in the exploration industry is that the industry of as a whole is facing a really truly critical shortage of high-quality projects and when a high quality project is discovered it sells as we've seen in reservoir as we've seen in Integra as we've seen in Mariana as we've seen in SOL gold although it hasn't been sold yet discoveries are selling for really good multiples and the industry is starting to pay attention the investors are starting to pay attention think through nuovo gold I mean I can't tell you that I am attracted to the exploration thesis necessarily but I am attracted to the fact that a legitimate geologists telling admittedly a big story can attain a billion-dollar market capitalization without a drill hole it's for that reason tika by the way that the Kryptos won't won't replace gold we still have magic in the business but the more important part of the more important part of that lesson is that as a consequence of coming back into an exploration market and as a consequence of performance by the industry as a whole I think we're in a stealth exploration market and I think those of you who pay attention to exploration with very high quality people and particularly with the prospect generators will have a surprisingly good year in 2018 2019 ladies and gentlemen as I say you suffer through the pain may you enjoy the game don't waste this bull market thank you [Applause] you

24 thoughts on “Don't Confuse a Bull Market for Brains – Rick Rule (Sprott US Holdings, Inc.)”

  1. I'll 2nd that. I found out the hard way that all the people I thought were geniuses during a bull market. Didn't look so good when the tide went out.

  2. What a dumb opening comment. So bitcoin is bad because a stock that says it mines bitcoin is overvalued. You are a idiot.

  3. Rule's an intelligent guy, his experience, wisdom & faith in gold reasures me it will be the best store of value-currencies…

  4. Can''t wait until we have 10,000 different cryptos. How would you value the stuff? You can't convert one monetary system for an unlimited number of others.

  5. A crypto asset will remove gold from the history books as money, and leave it as Jewelery, a worship metal, and future nano material/electrical contact, etc.. These needs for the pretty metal will make it stable $420./OZ in ruffly todays dollar value. The mining industry has about 3 years tops of $1200. to $1500./OZ price, so Rick Rules advice to stick with only the 7 footers is right on. As to when gold will stabilize too the low 400's: about 5 years to see golds bottom and 10 to see it stabilize in low 400's, pretty unbelievable huh? Well., all I can say is mark my words. https://plus.google.com/u/0/115372275668075364660

  6. Something tells me this guy has soo much money he couldn't give a sht less if gold goes to moon or Mars

  7. Something tells me this guy has soo much money he couldn't give a sht less if gold goes to moon or Mars

  8. Hey Rick, you're a fucking con artist just like your buddy Eric Sprott. In addition to pumping and dumping all kinds of precious metals penny stocks you've been pumping other crap with Katusa, another con man.

  9. The governments plan to pay for ss, medicare, medicad was for he citizens to die before or shortly after 60ish.

  10. I'm not a big fan of Rick as I find him a bit smug. But I always listen to him and I always learn something new.

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