Sprott's Thoughts

Resource Market Is in “Good Shape” -- Rick Rule

Rick Rule, Chairman of Sprott US Holdings Ltd. said in early March that the market looked overheated and was due for a pullback. Gold and silver had just delivered double-digit gains in a few months. Sure enough, from mid-March until early June, the precious metals gave up much of their gains.1

Since early June, resource stocks have surged higher once again.2 So the question on my mind was: Where is gold headed for the remainder of the year? Will this rally pull back?

Rick gave me his answer on July 8th:

“My prediction for the rest of the year is for gold to go higher, but in a choppy fashion. The last time that we talked, gold, silver, and a large number of resource equities had just experienced a quick run-up. At the time, I suggested that the market probably needed to ‘back-and-fill.’ Sure enough, it did.

“Now, the market’s taken another leg up. It probably needs to ‘back-and-fill’ again. This pattern will likely continue in the next 12 months. We’re going to see the market alternately lurch ahead, and then fall back and consolidate the gains. We’re going to be in a recovery – which will look relatively flat and choppy, punctuated with 10 percent declines. That is pretty much the way these markets work.

“This is good. In fact, I believe the market is in very good shape right now. Nobody has any expectations for resources, which makes it much easier for the market to surprise to the upside. It looks like we put in the bottom last July, meaning that gold and silver, along with precious metals equities markets, should generally be higher, in a sort of ‘staccato’ motif.”

I asked: “What about playing this gradual recovery? I overheard you saying that you liked the concept of ‘leverage’ a little while back. Should we look at leveraged plays now?”

“I don’t know about the short term,” said Rick, “but ‘leveraged’ plays are looking pretty attractive to me because they are so hated.”

‘Leveraged’ plays on precious metals usually refer to mines or deposits that depend on higher metals prices in order to generate returns. Today, many investors prefer to focus on projects that may prove to be money-making at current metals prices. But Rick says the aversion to leverage makes these types of opportunities more attractive:

“In my view, precious resources and precious metals markets have an up-cycle that lasts around five years. To me this means we could see much higher metals prices within the next couple of years. Right now, nobody wants to own the leveraged juniors; everybody wants to own the smaller, high-grade deposits, which are less dependent on higher metals prices. What that means is that leveraged deposits are probably cheap. I’d warn that you may not get much pleasure from owning them in the next 12 months. In the 3 or 4-year timeframe though, you could be handsomely rewarded.

“If you believe in buying low and selling high, you have to buy low when things are cheap. You buy low when nobody wants anything. Right now, we have some very leveraged deposits that are very hated. That’s because they won’t make anybody money at $1,300 gold. They need higher gold prices in order to work, but the upside potential can be high.

“Long-time followers will remember the start of the last cycle – back in 1998 to 2000. They’ll remember stocks that offered optionality, like Silver Standard, then a $1 stock on its way to $40.3 They’ll remember stocks like Allied Nevada, a $5.00 stock on its way to $45.4

“Optionality is not for the faint of heart. It’s not for people who want only a four-month trade or less. For people who are willing to speculate, though, who can afford the risk, and who have the conviction to stay with the trade for two or three years, that trade does look very attractive to me.”

If you want to learn more, Rick will be performing a live webinar tomorrow, July 9th, at 11 AM Eastern/8 AM Pacific. You’ll also hear John Embry, of Sprott Asset Management, as well as Doug Casey and Jorge Gonzaga, of Fortuna Silver. Vanessa Collette, of GoldSeek will moderate. Register here – it’s free.

1 http://www.bloomberg.com/quote/GLTR:US

2 https://www.google.com/finance?cid=9068325

3 https://www.google.com/finance?cid=664512

4 https://www.google.com/finance?cid=716059

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Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Because of significant volatility, large dealer spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.