By Peter Kennedy
Mining financier Rick Rule says the outlook for gold and precious metal equities remains bright in spite of a market sell-off last week that sparked a sharp drop in the price of the yellow metal. He also likes the long- term prospects for uranium and says some Canadian energy stocks are just too cheap to ignore.
Speaking to Resource World on the eve of the U.S. election that at the time of writing had not produced a winner, the Sprott U.S. Holdings CEO said the gold sector remains in the early stages of a multi-year bull market.
He says the likelihood that investors could face days of uncertainty as they wait for the U.S. election result does not change the outlook for gold, following a selloff last week that sent the yellow metal tumbling to US$1,868.20 an ounce – down 9% from a peak of US$2,070.05 in August 2020.
On Wednesday November 4, gold had recovered some ground to trade at US$1,908.67.
“In baseball parlance, we are in a third inning of a game that likely goes to extra innings,” he said during a Skype interview. But he said that in addition to being cyclical, precious metal stocks are volatile, and when broad indexes fall, as they did last week, it can be unnerving to people who are not psychologically prepared to stay the course.
A highly successful resource investor who has financed numerous exploration and mining companies over a 45-year career, Rule is recognized as an astute analyst and stock picker. Prior to the COVID-19 pandemic he was also a sought-after speaker on the mining investment conference circuit.
Rule attributes the recent volatility in gold prices and gold stocks to a collision between a macro circumstance, which he says remains extremely positive for gold, and that many people feel confident that governments around the world can stickhandle the impact of the COVID-19 pandemic.
“There is also the fact that precious metals and precious metals stocks, after several false starts, have come so far so fast that I think a breather is at hand,” he said.
Rule said anyone thinking of investing in the gold sector should avail themselves of a long-term gold equities index chart (he uses the Barron’s Gold Mining Index) to examine the anatomy of prior bull markets.
He has been around long enough to recall that between 1970 and 1981, for example, the price of gold ran from US$35 an ounce to US$850 – a sign that bull markets can run for over a decade.
Rule said his optimistic view on the outlook for gold is based on the policy response of governments around the world to the COVID pandemic, including rising government debt and artificially low interest rates, which he said are incredibly bullish for gold and gold stock.
While the Sprott CEO was interviewed before about 24 hours before U.S. voters were due to vote, he said it is a situation that doesn’t change no matter who wins the race to the White House.
“With regards to the U.S. election, I think that either candidate will be good for gold,” he said. “I don’t see a dime’s worth of difference between the two in terms of their economic policy, which is to say they both favour quantitative easing. They both favour increased spending, and they are both willing to borrow as much as they are able to borrow, in order to accomplish that goal.”
However, he conceded that a broad-based Democratic victory (which seemed on likely when this article was written) might be damaging in the near term to equity markets and precious metal equities.
That’s because the Democratic Party’s economic platform goes beyond quantitative easing and negative interest rates to include things like wealth tax, an increased personal income tax, securities transfer taxes and higher capital gains taxes.
However, he said precious metal stocks would likely rebound more quickly than other equity classes because of the policy response governments to COVID-19.
As a result, he said investors in “the best of the best” gold stocks like Franco Nevada Mining Corp., Wheaton Precious Metals Corp. and Barrick Gold Corp. can invest with impunity
By contrast, he said speculators who might concern themselves with volatility or who might trade volatility need to be a bit more cautious.
As he usually does, Rule advises speculators to be mindful that of the 1,500 or so junior companies worldwide that purport to be mining related, all but roughly 250 are valueless, “which is to say they have no value whatsoever,” he said.
As a result, he said investors need to do their homework and put the focus management teams with a previous track record of success.
“It means that if [you are aiming for] the speculative profits that you are going to need to justify the risk, you need to work hard on stock selection and sector selection,” he said. “If you don’t do anything else, focus on backing serially successful teams.”
Looking ahead, Rule said he continues in the believe that the performance of the global economy is going to be weak. He therefore is not particularly bullish on the outlook for industrial materials such as copper and nickel and zinc.
However, he said stocks in certain sectors are so cheap that they can hardly be ignored. “Oil and gas is one,” he said.
This is partly due to calls for action on climate change by environmental activists such as Greta Thunberg, which has convinced some investors to bail out of the oil and gas sector. “The fact that your Prime Minister doesn’t like oil either has made oil perversely a four-letter word in Canada,” Rule said
“I think the oil and gas sector (he likes the best of the best of that sector) is substantially underpriced and I think irrespective of Greta’s preference, or your Prime Minister’s preference, that sector should do well over the next two or three years, and should do very, very well over five or six years.”
In the oil and gas sector his preference is for Canadian companies as he takes the view that they are more depressed and offer more relative value.
Rule said he is also convinced that uranium stocks will do well at some point in the future, but isn’t sure when.
“Whether people like it or not, [uranium] provides the cleanest base load power in the world and the world is going to need more energy of all sorts, not just solar and wind,” he said. “I think that uranium will do well as a consequence of that.”
Meanwhile, when asked to name some of his favourite investment jurisdiction, he said Australia is currently at the top of the list. That’s because of the stable governments, favourable geology and the fact that there is no hold period on shares sold in private placement deals. “So for a lot of reasons my speculative portfolio is geared to Australia,” he said.