Transcription
[music] Well, joining us here again on Stopbox, we're very grateful for his time, Rick Ru. Welcome back, Rick.
It was December at the uh Resourcing Tomorrow show that we last spoke. That was a while ago. A lot has happened in that time as well, but welcome back. How are you?
>> Uh, thank you. I enjoy these conversations. So, thank you for having me back. And it has indeed been a long time.
>> It has. It has. And so much has changed because I remember our conversations there. I think I'd just come back from the Swiss Mining Institute in Zurich and I'd got a very bullish vibe about the sector and we were talking about that uh in London and then lo and behold I was back at that same conference in March and the mood was very different um because of, of course, the situation with, with Iran. I do want to talk about that in a moment but, but first of all, you've just finished, you just completed your, your Rule symposium and from what I hear, it's um, it's been one of the busiest yet. So, just talk us through what, what it was like on the floor. How busy was it and what was the vibe that um, you were getting?
>> Well, in terms of busy, it was sold out. Uh, we had no more space. Not that we didn't want to let more people in, but doing so would have put us in uh, probably severe uh, contravention of fire marshall occupancy law. So, we were completely sold out. Uh, the livestream, of course, uh, wasn't sold out because we have as much capacity there as we're prepared to buy bandwidth. But the truth is that we had well over 3,000 paid attendees between live and livestream. So, it was quite an attractive forum. Uh, unlike many events on a global basis, people have to pay to attend my event. Uh, that tends to focus them.
>> The, the people that show up aren't there as tourists. They aren't there for entertainment purposes. They're there to work and it shows. Uh, we had [clears throat] 68 public company exhibitors and six service providers there. All of whom were vetted by us in particular. No public company could exhibit on our floor if they weren't owned in the conference sponsors' accounts. So, in addition to the fact that we had an involved audience, we had involved presenters. Uh, I need to say, uh, this conference is now 31 years old. It started in 1995 in Vancouver, British Columbia. And this was the first year that I came away from the conference thinking that the conference itself had lived up to its potential. In particular, the fact that 75% of the attendees are regular participants in the Rule classroom, uh, a free service that we offer that now reaches 24,000 subscribers. Uh, and the vast majority of those had completed the courses like Introduction to Natural Resource Investing. Uh, so they arrived at the conference very, very, very prepared to assimilate the material that they received. Similarly, uh, before the conference, I personally interviewed every one of the exhibitors and most of the speakers at the conference. Those interviews were and are posted at the Rule Investment Media YouTube channel. What that meant was that the attendees had had 75 interviews before the conference so that they could allocate their time and attention at the conference more efficiently and it showed. Uh, it, as I say, in 31 years, this is the first year that I came away thinking, what we've done with the conference is forge a community. Uh, and, uh, it was very gratifying.
>> Good, excellent. That's very good to hear. Were there any um, key themes that you that you picked up where people talking bullishly about the sector or particular commodities, just to get a sense [clears throat] of what people worried? You know, it's nice to know what people are thinking.
>> If you have a conference with the surname Rule affixed to it, if you ask the attendees by and large, was there a bullish theme? That's the equivalent of walking into an evangelical church in the US South and asking the choir if they believe in God. Uh, what was useful, I think, was the level of preparedness. In other words, the bullishness exhibited at the conference was, I think, a function of a considered approach to natural resource investing. It's one thing, by the way, a stupid thing to be bullish on silver, as an example, in a hyperbolic up-chart like you see in January.
>> It's a much different thing to be bullish on silver after a 50% decline. Uh, my greatest fear for this conference occurred in January of last year, pardon me, uh, December of last year and January of this year when I had some nervousness about standing on the dis at my own conference and saying, "We're going to show you a bunch of wonderful companies and none of them are cheap." The decline that you have seen, uh, in the XAU, the decline that you've seen in the resource equity in, uh, e, uh, uh, indexes meant that the long-term bullishness that we feel both for precious metals and for natural resources, uh, was represented in an environment with reasonable and occasionally cheap share prices. Uh, I think the conference succeeded, uh, literally because preparation met opportunity.
>> Good. Excellent. That's, that's very, very good to hear. So, I recall back when we spoke in, in December, uh, we were quite bullish, but I think gold had actually pulled back a bit and I think I asked you, yeah, is this a bear market now or something like that? But you said, no, it's simply a bull market needing to, need to take, take a breather, really. And you did make a very good point saying that, um, it won't be stair steps to heaven. I think you said the easy money has been made and the bull market is very much alive in the early innings, but it's, it won't be stair steps to heaven. You will need patience, uh, and tenacity. And, um, who could have predicted, of course, the, um, the Iran war, which of course threw a big sort of spanner, I think you would say, wrench, um, in, in the works. So, I mean, can I get your opinion on, um, on that situation? We will talk about oil as [laughter] well, because, uh, it's every day, it's different, right? But what do you think, um, the Iran situation has, um, has done for global equity markets and particularly with, with commodities?
>> The war, uh, and [clears throat] the consequent increase in energy prices acted like a tax on the world economy and taxes of any kind from any source are bad. We took liquidity out of the markets. It's important to understand that the full impact of that liquidity, uh, reduction hasn't been felt in global markets. So, it will continue to be felt. I expect, but do not know because I'm not an economist, that to the extent that we have, uh, a tax-induced economic slowdown, that the ultimate response by government will be artificial liquidity and lower interest rates. I don't think that that will occur in the next three or four months. I think the next three or four months, you will see stable, at least US interest rates. The consequence of that [clears throat] is that you will see a relatively strong US dollar and you'll see tempered quotes in anything that's quoted in US dollars. That would include gold, uh, natural resource commodities, and other currencies like the pound, the euro, and the Canadian dollar. I suspect you're going to see relative US dollar strength for three or four months. And so, I think as a consequence of that, that you're going to see a muted response in precious metals, in commodities, and in producers' equities. Longer term, the circumstance that we discussed last September is very much intact. Uh, very, very, very much intact. My suspicion, as we stated earlier, uh, will be that the slowdown that's a consequence of the oil tax, uh, will lead governments, including my own government, the US government, uh, to introduce artificial liquidity and artificially low interest rates, which will ultimately, perhaps in 2027, uh, weaken the, and hence...
>> Okay.
>> ...strengthen the quote in everything denominated in dollars.
>> Okay. So that might suggest then, um, that investors in this sector do have a bit of a, a breathing, um, space at the moment, a bit of time to take stock and, um, yeah, position, maybe particularly in, in what is the, the summer over here. Well, in, in North America as well, of course, as in Europe, where typically, uh, liquidity dries up anyway. So, is it quite good timing, do you think, to sort of just take a bit of stock and, uh, and do some research and start positioning for, for sort of the, the, the, the, the sort of Q4 of this year?
>> I think it depends on who you are. Uh, I suspect that some of the people who listen to my podcast and yours are overpositioned in gold and natural resources. Uh, I talked to a couple of people at the conference whose portfolio was effectively 100% gold.
>> Okay.
>> Which is silly.
>> Um... yeah. Oh, yeah.
>> Those people need, at the very least, to rebalance. Now, the truth is that the audience who listens to your podcast, uh, or the audience attracted to Rule Investment Media are not indicative of the portfolios of humankind as a whole. In my country, I can't speak to Great Britain, but in my country, the market share of precious metals and precious metals related securities relative to other classes of savings and investment assets is about half of 1%. Which is to say, precious metals and precious metals related assets comprise less than half of 1% of total savings and investment assets in the United States. That's down from a four-decade mean of 2%. Uh, my suspicion is that over the next 5 years, the market share at least reverts to mean and perhaps overshoots. That would result, uh, in the largest savings and investment market in the world. 23% of total savings and investment assets worldwide are in the United States. Uh, that four-fold increase. Well, I'll leave it to your audience's imagination as to what that might do to price if that circumstance is attractive to people. Uh, yes, they should be using the price weakness now to position, uh, for the next 3 to 5 years. There are other listeners of yours who are not investors or savers. They're traders.
>> They're momentum-oriented. Uh, price levels relative to future price levels are much less important to them than momentum, rhetoric, and narrative. Uh, I don't know how to talk to that audience. So, they'll have to seek their own counsel.
>> Okay. Okay. No, our audience is very much, yeah, in the commodity space, a lot, sort of smaller end of the, the market generally. I would say the, the AIMs, let's say, of, I know you're not a massive fan of the AIM market, but, yeah, that's where the high risk and potentially high reward and high loss, uh, comes from. So, thank you for that. You, you did mention earlier about artificial liquidity. I just want to talk a little bit about the situation that governments find themselves in here and where you think we are. I think in, in December, we talked about, I just said the word stagflation and you just smiled and nodded. So, we're in agreement that it's a stagflationary environment, um, probably for, for quite a while, but they're in quite a bit of a, a pickle, aren't they? I think because there's so much debt, the interest rates can't really go up too much because then they can't pay their debt, but they also have to go up a little bit to control inflation. So, I think does it go in like a bit of a, a cycle where the rates go up a little bit but not too much, and then more liquidity is generated that's bought by the banks to basically pay the interest that's due on, on, on current debt to have, you know, quantitative easing, basically. But both of these things effectively lead to inflation, right? So, that the headline number of whatever it is, 2 or 3% is, is definitely not what is happening. It's, it's, I've heard it's more of a 10% and you only have to look on the street, people complaining about how expensive things are. So, yeah, just can you give me your opinion on that, please? Just what you think about the situation that governments find themselves in and what that means for a stagflationary environment or just a macro environment.
>> Uh, if it didn't impact all of us, uh, I would be delighted with the quote pickle that they're in. Uh, that's British understatement. They and we, from a fiscal point of view, are screwed. Um, because of arithmetic, simple arithmetic. I don't want to attempt to cite the British numbers because I don't know them. But in my country, we're an eyelash away from $40 trillion in on-balance sheet debt. To put that in perspective, that's 20% higher than the gross output of the US economy, than the GDP. And that isn't the big problem. The big problem is that the net present value of unfunded entitlement liabilities in the US, Medicare, Medicaid, Social Security, federal pensions, military pensions, that kind of thing, is estimated by the Congressional Budget Office to be $120 trillion. Now, you add those two numbers, $40 trillion and $120 trillion, you come up with a truly gargantuan number, $160 trillion. And these aren't numbers conjured up by some cranky old libertarian. They're the numbers that emanate from the enemy itself. Uh, an arm of that same enemy, the Internal Revenue Service, suggests, and it's their business to know, that the private net worth of all Americans combined is $175 trillion. So, take what we're worth, $175 trillion, minus what we owe, $160 trillion, and the delta is $15 trillion, a distressingly small fraction of the debt. But of course, it gets worse. The on-balance sheet liabilities of the US government are increasing to the tune of $2 trillion annually and by themselves would erase the delta between what we have and what we owe...
>> ...in what, seven years.
>> ...except that, uh, the increase in unfunded entitlement problems is increasing at another $2 trillion a year, which is to say the delta, $15 trillion, is diminishing by $4 trillion a year. Now, there are people who say, well, the government has other assets, uh, outside their cattle, which is to say outside the citizenry. I can't see myself as a US bondholder going up to President Trump and saying, "I'm going to surrender these bonds and you're going to give me Yosemite National Park or you're going to give me my own battleship." You know, in this circumstance, as a lender, you need to understand that your debtor is armed.
>> Uh, what is the way out?
>> M.
>> Traditionally, uh, in my country, we've been exposed to a liquidity crisis every 10 or 15 years. The causes vary. But Buffett himself said, if you aren't prepared for equity market declines of 50% or more over an 18-month period, you shouldn't be in equities. That's the predictability of this. Traditionally, our government and yours has reacted to liquidity crises, uh, by artificially stimulating the economy. Artificial liquidity. We did it in 2008. Uh, the difference, the critical difference was, in 2008, the national debt as a percentage of gross domestic product was 33%. Now it's 120%. We have less capability to push on the string and people need to understand that. Is the reckoning going to occur next week? Almost certainly not. Is a reckoning going to occur? Almost certainly.
>> But the question would then be, what, what does a reckoning look like? What actually would happen?
>> Um, I'm not smart enough to tell you. Uh, I am smart enough to prepare myself, uh, to become, in the words of Nasim Taleb, anti-fragile.
>> Right.
>> I prepare by spending less than I earn. Now, for me, that's simple.
>> Uh, because I'm an old kermudgeon and I don't spend much, and, uh, because I failed to retire, so I earn a lot. Uh, I save in gold. I maintain liquidity in several currencies, but primarily the US dollar because that's the currency I live in. Uh, and I invest in things I understand. Uh, I have no fear of missing out. I don't, as an example, invest in things like Nvidia, despite the fact that it's done well, because I can't spell it. Uh, I don't know what it is actually that they do for a living and I don't know how to analyze it.
>> M.
>> The consequence of that is that my own portfolio is a portfolio that I know well enough that I wouldn't panic if it declined in price.
>> Okay.
>> Provided that it didn't decline in value.
>> Yeah. Okay. So, it's good old-fashioned hedging and, and, and knowing your book, basically.
>> Uh, beyond hedging, I stay within my circle of competence. Uh, and I would urge others to do the same.
>> Mhm. Thank you very much, Rick. Um, I do want to talk about banks in a moment because you did say, um, to me back in December that you perhaps were willing to deploy in banks, but we'll finish at the end and talk about your, your Battle Bank and how things are going. I do want to talk about oil because again, it was in December that you said, um, the oil was so cheap, you don't have to come too far down the, the value chain to find value and you actually named, um, Exxon as a good, as a good example. Um, and I think you said, yeah, oil is sort of, um, uh, you, you worked out, um, sort of, uh, these companies that were selling at a sort of 40% discount to your estimate of their, their NPV and that's at $60 US, uh, per barrel and you said you think we'd see $85 per barrel. Well, today it sits at $80 per barrel, but of course, it went as high as 120. And it's extremely volatile, isn't it? Um, with the war ending and the war not ending and then the war ending again and then the war not ending again. There's no way you can trade that successfully, I don't think, unless you're on the inner circle. Give me your sense of, of oil. Um, do you ignore the noise and, and focus on the signal? I, I suppose you do and I suppose you've still got a, a general bull, a general view that, um, is underpriced and maybe the 85 is, is a good benchmark. What, what do you think?
>> The interview that we did, you and I, in September presupposed a shortage that would occur in 2029. I wasn't pressing up, pressing enough to understand that the world would be dumb enough to have a war in the meantime. Uh, but the war was useful in the sense that it shows us how inelastic demand is for oil as a function of price.
>> Uh, we had a contrived shortage. Uh, and by the way, we didn't have an actual shortage. The oil price went from $55 to $115 US, uh, as a consequence of the threat of shortage. Uh, with the exception of countries like say, Sri Lanka and Pakistan, that didn't have enough money to have sufficient reserves. The rest of the world never experienced an oil shortage. They experienced the threat of a shortage. My belief is that by late 2029, uh, or mid-2030, probably at the latest, uh, we expect we will find ourselves in a structural shortage, not war-related, but rather related to the industries deferring well over now a billion dollars US a day in sustaining capital. Uh, we will by 2029 likely be $3 trillion in arrears in sustaining capital investment and what that will mean, that is that our production capabilities have declined in the face of continually increasing demand for oil.
>> Mhm.
>> The investment community has believed that peak oil demand will occur in 2030. Uh, this is the stuff of Justin Trudeau and Angela Merkel and, uh, uh, what's her name? The physicist. Uh, Greta Thunberg, uh, famous high school dropout physicist. The truth is that peak oil demand, uh, likely won't occur in my lifetime. In fact, likely won't occur in your lifetime. And the structural shortage that will occur, I believe, by 2029 or 2030 won't be relieved until we have made up the sustaining capital deficit, the $3 trillion in spending, which will not occur overnight. The point of all this is that the lesson from the war is what one can expect in nominal pricing for oil in the face of, uh, supply shortfalls. The diff, the difference is that this next supply shortfall is structural. It can't be settled by an armistice. Your audience needs to, needs to decide whether or not they are prepared to hold oil stocks through the volatility that the volatility that will occur from 2026 to say, 2030. For me, uh, owning companies where [clears throat] the answer to repricing begins with the word "when," not "if," exposes me to a very good question.
>> And how do you know, or how have you worked out there's going to be a structural deficit? You talked about sustaining capital. Is that calculations that you've done yourself, research that you've done yourself?
>> Yes. Uh, I have been, for my own account, in a very small way. I'm no rival to Exxon or BP. Uh, but I have, in my own account, and, uh, on my own, invested directly into oil and gas operations since the 1980s. Uh, I've been a student of oil and gas equity since the 1970s. And the necessary consequence in a capital-intensive industry of skimping on sustaining capital and new project, uh, uh, investment is that in the out years, you are able to produce less. Uh, ironically, the city and Wall Street, uh, favors oil companies that themselves favor return of capital to shareholders rather than making sustaining capital investments. We need to understand that that return of capital to shareholders is cannibalizing the ability to do so in the future. One needs to decide whether they want to be paid now, a little, or paid later, a lot. Uh, despite the fact that I'm 73 years of age, I would still personally be prepared to pay to be paid later, a lot, as opposed to being paid now, a little. In the case of something like Exxon, you can have your cake and eat it too. They generate so much cash...
>> ...that they can pay a decent dividend. They can retire equity when it's cheap and they can make sustaining capital and new project investments.
>> Okay. Excellent. Thank you, Rick. Let's just finish off with banks then. We'll talk about your Battle Bank and came to get an idea of how things are going there. But you also did mention that you're willing to deploy potentially in banks. So, are they still on your radar? Have you deployed? Are you still looking for opportunities to invest in banks?
>> Yeah, I'm starting to do that in a way that's probably not appropriate for British investors. Uh, there's a community banking sector in the United States. About 4,000 community banks. About 3,000 of them are junk. Uh, but a thousand of them aren't junk. They serve their local community well. They know their local community well. They know the local businesses well. They can never, ever compete with Chase or Bank of America, and Chase and Bank of America can never compete with them in their own neighborhood. These are some of them businesses that consistently earn 10 or 12% post-tax, which is to say, after-tax, uh, and are selling at 60 or 70% of book. That suggests that, uh, an investor can buy a business with a wonderful knowledge moat around it, uh, earning, in effect, based on his or her purchase price, 14 or 15% post-tax compounded, uh, which is stupidly attractive. Um, and so I have been doing that. The difficulty is many of these banks trade by appointment. Uh, if you decide you want to buy stock, uh, you post your indication of interest with whoever the market maker might be and you wait, uh, until someone is willing to sell. Uh, waiting at age 73 is something I've become fairly good at. Uh, so it suits me.
>> Of course, I'm more comfortable with this because I've been in the banking business for a long time, including building my own banks. Uh, the consequence of that is that I know how to understand a bank balance sheet and a bank income statement. Many investors have not taken the time to understand banking or for that matter, any other industry, and they would be well advised to steer clear, uh, of any sector they don't understand.
>> Okay. Absolutely. So, so Battle Bank then, Rick, how, how are things going? I know we talked a bit about that in the past. I think the, the general, uh, idea behind Battle Bank is, um, physical, um, people can send their physical, uh, precious metals to, to, um, to be held in custody and, and then you can effectively loan, loan out on that. So, how are things going, uh, with Battle Bank and also, I'm quite keen to know if you're going to be launching over in the UK or Europe anytime soon.
>> Things are going very well. Uh, and I would describe our mandate as a bit broader than that. Uh, I would describe Battle Bank as a community bank, but one where community is defined by aspiration and value. Uh, we don't, with one exception, have any branches. We opened by buying a small bank, and we have a branch that we serve well in a little tiny community called Oopsy, uh, up on the Canadian border. But the truth is, like our last bank, EverBank, Battle Bank is, uh, an internet-based bank. Your phone, your computer is our branch. And that's a, that's a huge advantage. We lose the branch banking expense. So, what do we do differently? Well, the first is that rather than having 15 savings products designed mostly to confuse the consumer, we have one primary savings deposit, uh, a high-yield money market fund that you can write checks against. There is, in the United States, $3 trillion on deposit with banks where the depositors aren't getting paid interest. This is madness. True madness. Um, we believe in this bank, like our prior bank, in treating our depositors fairly, which is one of the reasons why we have grown so quickly.
>> Uh, we also allow our depositors to bank in many currencies. Most US banks give you the choice of US dollars, US dollars, and US dollars. Uh, our society is such that there are many first-generation business people in the United States. They need to bank in Canadian dollars, in US dollars, or Australian dollars, in US dollars, or Great British pounds, in US dollars. There are also many people in the United States who have decided that they would like to save in more than one currency as a consequence of currency volatility. And we give those people an option, their option. Finally, as you have suggested, our community bank is based around a community that believes in and saves in gold, silver, platinum, and palladium. We will buy gold for you, sell your gold on the market if need be. We will store your gold if you would like us to, but importantly, we will allow you to have to access the capital that you have tied up in your metals holdings. If you deposit that gold, silver, platinum, or palladium with us as credit, we will establish a credit line so that you can, uh, borrow that money if you need be, if you need to, in response to any opportunity that you come across. It's important to note that you don't have to borrow against the metal. You don't have to pay us interest if you don't need the money, but you have the availability of the credit collateralized by your stack to say, buy a rental property at a distressed price in your neighborhood, buy a franchise which you operate if that suits you.
>> Uh, really, for any legitimate purpose. Uh, there is, in the United States, well over $30 billion in privately held bullion in third-party storage that is a stagnant asset. People are afraid to sell it, first of all, because they like it, but also because they don't want to pay the capital gains tax. But the consequence of having so much of their capital tied up in metal is that they have to let other opportunities go.
>> Mhm. Absolutely.
>> As to the, as to the other question, uh, it took us between two and three years, uh, to domesticate, uh, our prior bank, EverBank, uh, in the Commonwealth and in the EU. [clears throat] We would expect that it will take a little longer this time because the regulatory processes in all of those jurisdictions have become more cumbersome since the year 2000 when we, uh, established our, or attempted to establish our, our last bank in these markets. And [clears throat] finally, as to how the question, how the bank is going now that we're finally open, the regulatory process to open was very, very, very long. I'm delighted to say that in the 10 or 11 weeks we've been open, that we've attracted almost $130,000, $130 million in dollar deposits, uh, and almost $90 million in metal deposits. So, in answer to your question, >> uh, we are growing very rapidly. We actually constrained the growth in the first eight weeks that we were open. We had a waitlist of 23,000 people.
>> And you have one chance to make a good first impression.
>> So, we were inviting about 250 people a day from a 23,000-person waitlist, >> to join the bank, >> so that we wouldn't stress our human resources too badly, so that we could manage the onboarding of people and manage the transfer of gold from say, their backyard [laughter] to our storage facility intelligently.
>> Uh, we can do that now. So, we have unrestricted entry to the bank finally.
>> Excellent. Good. Well, it sounds like it's going very well and there's a bit of a path there to, uh, yeah, to the European markets there. There was just one question that came to mind when talking about, um, sort of borrowing against the capital. What, what's the ratio? Is it direct one to one, or is there some sort of leverage with, with the deposit of gold versus what, um, you give liquidity to?
>> Think a conventional margin loan. Uh, we will establish a credit, well, we will give you a credit line, uh, equal to 75% of the then value of the loan. We will loan you 50% of the then value. Uh, if the gold price declines, the metals price declines, uh, and you have a worse than 75% loan to value, we'll give you three days to cure. >> So, think, think a conventional margin loan.
>> Okay. Excellent. Good. Well, thank you very much for joining us and for your time, as always, Rick. Um, yeah, take care. Hope things go well with Battle Bank and let's, let's catch up, uh, in a month or two.
>> I, I look forward to it. In the interim, uh, should your listeners be interested in my work? Uh, I can personalize it for them for free. Any of your listeners who go to my website, ruleinvestmentmedia.com, can list the natural resource stocks that they own, and I personally, for free, will rank them and return the rankings by email. The rankings are 1 to 10, one being best, 10 being worst, and I comment on individual issues should I believe that my comments have value. Please, by the way, no crypto, no tech stocks, no pot stocks. Leave a 73-year-old to do what he does well.
>> Excellent. Thank you, as always, Rick Rule, for joining us today.
>> A.
>> Pleasure. Thank you.
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