“There is a continuum of price escalation that has repeated over time to time,” Rick Rule of Sprott said in a recent webinar.
With the world in turmoil due to COVID-19, many investors have been wondering about gold’s price activity and whether gold stocks are a good investment during this time.
In a webinar hosted last week by Grit Capital, Sprott’s (TSX:SII,OTC Pink:SPOXF) Rick Rule shared his thoughts on those and other topics.
During his slot, he explained why he finds precious metals compelling right now, what he thinks about gold’s performance and when he thinks gold stocks will move. Read on to learn what he said.
Precious metals are attractive for 3 reasons
Rule began his session by laying out three reasons he believes the precious metals macro, especially gold, is attractive right now.
“The first is quantitative easing, which I refer to as counterfeiting,” he told listeners. “That is to say that the policy response to the crisis we’re in is really a function of debasing the currency, printing new currency units with nothing behind them.”
Next on his list were debt and the deficit in the US. “In the US, between on-balance-sheet liabilities and off-balance-sheet liabilities, we’re at US$120 trillion and in fact gaining, while at the same time the deficit that is the budget that we would use to liquidate those debts is increasing too,” Rule explained.
Finally, he pointed to the current zero interest rate environment. In Rule’s opinion, society is effectively being decapitalized at the same time as compensation is being lowered for those who save in fiat currencies, particularly the US dollar.
He argued that while gold and silver have many price drivers, the most important is faith (or lack thereof) in the ongoing purchasing power of the US dollar and US dollar-denominated instruments.
“I would suggest that faith is under attack from quantitative easing, which is to say (from) the debasement of the dollar, (as well as) from the debt … and also from the interest rate that is paid to savers to subsidize themselves from the two prior risks,” he said.
Gold has performed as it should in a crisis
Moving on, Rule touched on gold’s recent price activity, saying that the yellow metal has performed as he would expect during a crisis situation.
“Many people have written or called Sprott asking why in the immediate aftermath of the crisis gold didn’t move. That’s because in a liquidity crisis, all assets that have a bid sell off,” he said.
“Gold fulfilled its role in that it had a bid, and when people needed to raise liquidity, gold was there to sell and there were buyers for it.”
He continued, saying that historically it’s not crises that make the gold price go up, but rather the policy response to crises — “particularly the three things that we’ve talked about: quantitative easing, that is the debasement of the currency, deteriorating balance sheets and, of course, artificially low interest rates.”
What does it all mean for gold stocks?
With those elements in place, the gold price has started to move, and to wrap up his talk, Rule shed light on what the current circumstances mean for gold stocks.
“Historically, gold moves first and then silver moves later. Historically too, in the immediate aftermath of a currency crisis, all stocks sell off, including gold stocks, and we have seen that,” he said. “If we look at prior recoveries from oversold bottoms in precious metals markets, what we note is that the move up in the gold stocks is delayed, often for six or eight months after the move in the commodity.”
While that might sound disheartening, Rule explained that this happens because “gold stocks are stocks.”
In other words, “A higher gold price has to translate into the earnings statements and the balance sheets of the gold-mining companies before the gold-mining complex begins to move.”
Rule also pointed out that there is a specific order that stocks generally move in — first the best of the best, then the best of the rest. Junior producers are next and finally explorers. “Which is to say that there is a continuum of price escalation that has repeated over time to time,” he said.
As a side note, Rule noted that just as gold stocks follow gold, silver and silver stocks tend to follow gold and gold stocks. Because silver stocks are relatively rare, and because silver often has more upside than gold, silver stocks could end up performing very well for those willing to speculate.
Market participants should note those patterns and allocate capital according to their needs.
“With regards to tactics, notice the extraordinary beta in the market, be part of the market,” said Rule. “Adjust the risk that you take with your portfolio to your own parameters, and remember that stock selection really, really matters.”
He recommended looking at fundamentals, cautioning, “It is not true that if the gold price goes up, all gold stocks come up. Many gold explorers don’t have any gold, they’re looking for it. And if the price of something that you don’t have any of goes up, it doesn’t necessarily mean that your stock goes up.”
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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.