Rick Rule on Scarce Commodities, the High Price of Gold and the Sale of Global Resources

with Anthony Wile
The Daily Bell
Nov. 08, 2010

Rick Rule is very smart, I highly recommend watching his videos on Youtube and listening to his interviews on King World News. - Chris The Daily Bell is pleased to present an exclusive interview with Rick Rule.

Introduction: Rick Rule began his career in the securities business in 1974, and has been principally involved in natural resource security investments ever since. He is a leading investor specializing in mining, energy, water, forest products and agriculture. A popular public speaker, Mr. Rule is a featured presenter at investment conferences and resource investment forums throughout the world. Rick Rule has originated and/or participated in several hundred transactions over the past 30 years, including both debt and equity in private, pre-public and public companies. These private placement activities have involved companies on six continents.

Daily Bell: Thank you again for sitting down with us.

Rick Rule: It is a pleasure.

Daily Bell: You indicated back in July that you would have a fairly major transaction in the next 2–3 weeks. What was it?

Rick Rule: We have agreed to sell Global Resource Investments and the affiliated companies to Sprott Inc., who is probably Canada's premier global resource–oriented money manager. Eric Sprott is somebody who I have known and admired for many years and everything that I have tried to do, he has managed to do seven or eight years before I did. He made the transition from a big brokerage firm to his own brokerage firm, which I did, followed by a decade. He made the transition from brokerage firm owner to money manager, which I did. But most importantly, Eric succeeded in institutionalizing himself, surrounding himself with a high-quality group of people.

So what had been a job became an investment and a business, Sprott Inc. That was the next stage in my career for a bunch of reasons. So we have agreed to a transaction where we are acquired by Sprott in an all-stock transaction. I will become the second-largest shareholder of Sprott Inc. I will be a director of a public company for the first time in my life and I'll be the second-largest client of Sprott. In other words, I will have more of my money managed by Sprott, with the exception of course of Eric himself, who has most of his money managed by the firm.

Daily Bell: Congratulations. Can you expand?

Rick Rule: Sure. If you Google Eric Sprott, you will see by reading some of the posts and references, the extraordinary value of the Sprott brand. It's interesting to note that the Sprott brand was not developed by advertising but by performance. His five-year performance, his ten-year performance, his 15-year performance – all have been excellent. The only resource manager who has spent less money on advertising than Eric, is me because our expansion has been performance-based as well, so we are really merging two performance based cultures.

Eric has grown from 40 million dollars of assets under management 10 years ago, to six-and-a-half billion dollars of assets under management today, and as I say, largely through organic growth and performance. We believe that the next major platform for the firm's growth is in the United States.

The US market is about twelve times the size of the Canadian market, in terms of investable funds, including seven trillion dollars in cash and money market fund equivalents. It's a market where the financial services industry is much less concentrated than in Canada, very, very fragmented, lower barriers to entry and in particular it's a market that is under-served in the financial community in terms of natural resources investing.

So we think it's an absolutely prime market for Sprott to come into and we think, in all humility, that we are the perfect footprint for it. We are the largest resource-oriented brokerage firm in the United States, certainly the largest with regards to micro-cap resources. We have the segregated accounts business, which is not a mutual fund business but rather a business that manages accounts for individuals. It does not co-mingle with part of a pool, which is a form of a management that is increasingly popular among high net worth American individuals. They prefer that method of asset management in increasing measure to the open-ended mutual fund format. We also have permanent assets in the form of capital pools.

An important part of the thing that has set Sprott apart from their competitors and us apart from our competitors, is that the structure of many of our products are permanent or semi-permanent, which enables us to make investments in natural resource companies for the longer term.

Many of our competitors in United States and Canada seem to have trauma holding stock over a long weekend, but in fact value is developed in these companies over time. Both Sprott and Global have proven their ability to invest in young companies, help them grow over time, and as a consequence of that make substantially larger returns than we would have had we been time constrained.

So, I think both firms' orientation and both firms product mixes are uniquely suited to each other. I guess the clincher on the transaction is that I have been attempting for two years to hire Peter Grosskopf from Cormark to come and run my business. Once again Eric beat me to the punch. When Eric hired Peter as CEO, Peter called me up and said, "Can we continue our discussions in a different format?" The answer was yes.

Daily Bell: We will follow your progress with interest. But here is a related question: Is the resource sector headed into a bubble?

Rick Rule: I think the sub-sectors of resources will be headed toward a bubble. One of the interesting things about the micro-cap resource sector is that in good markets, liquid markets, it becomes increasingly story oriented and less reality oriented. So you have these odd sector meters, which often evolve into bubbles very quickly. I think in terms of the lower-quality goals we are definitely in a bubble. We are seeing companies with 60 or 70 million dollars of market capitalization that don't have any gold.

The argument of course is that as the price of gold goes up that should have some impact on them. But I also believe that we have 10 years left in the resource super cycle; that isn't to suggest that we won't have some ugly downside volatility, not unlike the volatility we saw in 2008 or the volatility we saw in 1975, when in the midst of the greatest gold bull market of all gold lost 50% of its price over the course of a year. So, I think the secular gold bull market and secular resource bull market is very much intact but I expect that we'll see extraordinary volatility.

Daily Bell: What do you think of the Canadian regulatory outlook?

Rick Rule: Unfortunately, I am from the United States and I would suggest that the Canadian regulatory climate relative to natural resources is much more intelligent than the American regulatory environment. For one thing, Canada is still a resource economy and I can call regulatory authorities in Canada who have more than a passing familiarity with the industries that they are asked to regulate. In the United States, even many of the best-intentioned employees of the regulatory agencies don't have any background in resources so it's difficult for them to even know what the words mean, which constrains them in terms of being intelligent regulators. If you compare the Canadian regulatory environment to other natural resources markets in the American environment, I would choose Canada.

Daily Bell: Where is financial regulation headed these days, globally?

Rick Rule: I hope it doesn't go global. I hope investors around the world are allowed to choose between competing regulatory climates. I believe that money will gravitate to freedom and to the extent that freedom is allowed somewhere, some place, I think it will be rewarded. I think the American regulatory climate is particularly troubled because the market breakdown we had in '07 and '08 came to be regarded as a failure of the market, rather than a failure of regulation.

It is my belief that this turndown was really a function of regulatory capture. I think the whole too-big-to-fail concept, the promotion by many arms of the federal government of the mortgage industry and a large number of factors almost all of which were regulatory constrained, were the causes of the '07 and '08 decline. The demands from the public and legislature have been to increase the regulatory arena, which caused the problem.

The most efficient form of banking regulation would have been to abolish federal deposit insurance. If depositors had to do due diligence on the capital adequacy ratios of the people they were depositing their money with, you wouldn't have had a problem. But, the widows and orphans demand protection and there are lots of them. I am not sure ultimately they are being protected as much as swindled.

Daily Bell: Are you a fan of any part of the increased invasiveness?

Rick Rule: [Laughing.] No, I can't elaborate, I lose my sense of humor.

Daily Bell: What is the point of all the harmonizing of regulation now occurring?

Rick Rule: The point of harmonizing at the federal level in the United States and the attempt to harmonize at the federal level in Canada will be to avoid competition between regulators. The regulators would say a race to the bottom and the capitalists will say a race to freedom. I am not for harmonization but I do think it's inevitable. You will notice that harmonization is a key word among the collectives. They would like to harmonize tax rates on a worldwide basis too. I think it's a very disturbing trend.

Daily Bell: Is the stimulus working in America or Europe?

Rick Rule: I don't see any evidence that the stimulus is working. We are having one of these famous jobless recoveries. I think the stimulus may be working for some of the senior executives of some of the bigger investment banks. I think it is certainly working for politically connected construction contractors in terms of infrastructure projects. It certainly worked for the shareholders of major banks, many of which deserve to fail and certainly would have failed without the incredible liquidity they were offered. But succeeded at what cost? It seems to me that the difficulty we are in, in terms of credit markets is that we have lived collectively beyond our means.

Let's use Greece as an example. The idea is that Greece couldn't service its debts at 1 x GDP so you extend them a credit at 1.6 x GDP. It doesn't seem to me to make any sense. I am not picking on the Greeks, I live in California and our financial picture is bleaker than Greece. I am using them as an example. The idea that a group of people who are heavily indebted and don't generate enough economic utility to service their obligations can somehow be benefitted by increasing their obligations does not make sense. People have to invest, people have to produce, people have to save. But instead people would prefer to spend and that math doesn't add up.

Daily Bell: Is austerity going to help Europe?

Rick Rule: What austerity are you referring to? It seems that the people who embrace austerity to some measure are the Germans who are already in fairly good shape. The rest of Europe, I don't think, had any intention of embracing austerity. There's some suggestion that Greece is embracing austerity as a consequence of the increase in the size of their government. The Greek people have greeted this "new reality" by burning police cars and throwing stones. Is that, then, a net benefit?

...Continued