Rick
Rule believes the resources sector is experiencing a cyclical decline
within a secular bull market and views gold as both "catastrophe
insurance" and an investment vehicle. An interview with The Gold Report.
Posted: Sunday , 25 Nov 2012
SAN FRANCISCO (The Gold Report) -
The Gold Report: Rick, you believe the natural resources sector is experiencing a cyclical decline in a secular bull market similar to the 1970s. Is that true for other sectors as well?
Rick Rule: I learned the hard way not to assume that my success in the natural resource business was transferable to other sectors, so I am going to stick with resources.
However, there are parallels with the gold market. In the 1970s, we had a spectacular resource market, in particular for gold. Its price soared from $35/ounce (oz) to $850/oz. By 1975, in the middle of that secular bull market, gold had fallen to $100/oz. Those who sold at the bottom missed an 800% move in six years.
It is important to understand that in cyclical markets like resources, declines in secular markets are to be expected. From my point of view, you need to understand cyclical declines for what they are—sales.
TGR: Is it fair to think that the prices of natural resources will bounce back as they did in 1970s, when the recession was much shorter and not as global?
RR: That depends on the resource. For gold, the answer is yes because the parallels between the 1970s and today are striking.
The U.S. dollar has stayed fairly strong, not because of the strength of the economy but as a function of the dollar's liquidity. As the U.S. dollar appreciates relative to frontier and emerging market currencies, we are causing very real inflation in places like India, Vietnam and South Africa.
In the U.S. however, we are seeing inflation in two places: in the liabilities that we are leaving for our heirs and in a tremendous bond bubble. The prices of U.S. Treasury securities, the inverse function of the yields, suggest that we are in the biggest economic bubble in history.
When the U.S. went through the economic turmoil of the 1970s, we went into it with a much stronger national balance sheet than we have today. Then, we had the ability to capitalize our reconstruction while we serviced our debts. I am not sure we have that ability anymore. Our federal on-balance sheet and off-balance sheet liabilities, relative to our ability to service those obligations, are much lower. The alternative is to inflate our obligations away, which would be good for bullion.
Finally, in a demographic sense, our needs will continue to outpace our means. In the 1970s, you and I were coming into our productive years. Today, you and I are at the opposite end of our productive years, no matter how much we want to forestall it. The demographic implications of that are profound. If a country cannot produce its way out of its deficit, it has to default. More>>
