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Future Money Trends: Let's move to the junior resource space. We're at the Cambridge House
investment conference. The juniors have been doing great this year. I mean some of the
good juniors, at least I would call them good juniors, they're up like 50% in the last month.
Is this what a bottom looks like? Rick Rule: Well we talked, I don't know if
you remember this, but the last time you interviewed me we talked about specifically this. And
I said that I thought we were in a market bifurcation period, where the best 20-25%
of the juniors would start heading up. Not on big volume, but simply because they caught
bids. If you look at the year 2013, the first half of 2013 or at least the first third,
looked if you were to graph it, very much like the topographic map of a ski hill. A
steeply descending line from the upper left, to the lower right. The middle part of the
year began to graph like the electro-cardiogram of a corpse. Flat lined, where the sellers
were exhausted and the buyers were exhausted. Beginning in perhaps September or October,
the bare issuers began to catch bids. Not big bids, but the sellers were exhausted.
The down trend was buyer exhaustion. The flat trend was buyer and seller exhaustion. The
up trend is seller exhaustion. So we're in the market now where I say the market is bifurcated.
It's too early for me to say that we've really put in a bottom for two reasons. One reason
is that the bottom 50-60% of the issuers, the true penny dreadfuls, have an intrinsic
value of zero. And it would be poetic to see them achieve their intrinsic value in mass.
That would be a wonderful thing from my point of view. The second thing is that we have
not yet seen issuer capitulation. The last bare market, the 1998-2003 bare market, bottomed
in July of 2000. And the thing that caused it to bottom was that the better issuers,
the Lukas Lundin, the Ross Beaty's, The Bob Dickenson's said, “OK, we get it. We can't
survive, what we have to do is raise the money we have to raise, irrespective of delusion
to shareholders who came in three years ago, and grow our businesses.” When people stop
saying, “I have a $4 stock, I have a $0.40 stock, I can't raise money because I'm at
$0.40,” and they say, “if we don't raise money, we don't grow, we're going to die,”
that's when a bottom is put in. If we see issuer capitulation in conjunction with bifurcation
than we will be where we were in 2000. And for intelligent stock-pickers, the second
half of 2000, all of 2001, all of 2002, were the finest times on the planet.
Future Money Trends: Could this be happening, could this be bad timing for the juniors or
people? Because if the DOW is, let's say the DOW starts to meltdown. Maybe we're in a correction
or maybe it really is going to meltdown, does that effect a market? Because I guess the
whole time you've been investing, the general market has been in a bull market but you have
the resource cycle. Well now, we might be entering a bear market.
Future Money Trends: Two answers to that question. First of all, stocks are stocks.
And if there's a major market decline, which reduces liquidity and reduces the animal spirits,
that will be bad for the sector. Let's get that one out of the way. It seems like, with
the general market, when it's good it hurts junior stocks because it sucks capital out
of them. When the market is bad it hurts junior stocks because it sucks capital out of them.
I think as an investor, what I have learned that I need to do, over 61 years of life and
40 years in the business, is worry about what I can control. I can't control the major market,
but I can control how I allocate my capital among juniors. You will notice in 2012, which
nobody would describe as a generous market, that there are companies like Sirius in Australia
that went 12 for 1. Reservoir Capital, in this market, went $0.26 to $6. Your advertiser,
Fission, did well. Africa Oil went from $0.80 to $12. We are not in a market that ignores
good performance. We are in a market that's starved for performance. And the reason why
this down-cycle has been so ugly is because we were so stupid and generous in the up-cycle.
As we come out of this cycle, it will be discovery and performance that will lead us out of the
cycle, irrespective of what happens with the DOW.
Future Money Trends: With gold and silver, most people here actually buy the physical
precious metals. Gold went up in January and silver was just kind of stuck. Any thoughts
on the silver market and gold market?
Rick Rule: Sure, the silver market has historically followed the gold market. Gold is regarded
as a safe-haven investment, a beta investment. Silver is regarded as a speculative vehicle,
an alpha investment. People have come in to the gold market this year because they were
afraid of stuff. When gold moves, the ethicacy of the precious metals trade is available
to people, the momentum chasers, the alpha chasers will come back into the market, and
they'll bid up silver too. Future Money Trends: On the uranium sector,
I've talked about this with you every single time. It's still $35 spot, people are buying
uranium stocks but you had the Russian treaty ending, so a lot of people thought that it
was going to go up. What are your thoughts on uranium right now?
Rick Rule: I think the Russia treaty ending is a non-entity. What it means is that re-processed
uranium will be sold by Russians, not by Americans. The reactor doesn't care if it's Russian wrapped
uranium or American wrapped uranium. So I think that's a non-issue. There are two things
that you have to think about in uranium, only two. One is that according to Camico, who
should know, the world's largest uranium producer, it costs the industry worldwide on a fully
loaded basis, $70 a pound to make uranium, including their cost to capital. So you make
the stuff for $70 a pound, you sell it for $35 a pound. You lose $35 a pound, and being
miners you try to make it up on volume. That doesn't work. Either the price of uranium
goes up, or the lights go out. In a rich country like the United States, where we have many
energy sources, uranium, nuclear power, generates 16-17% of the electricity consumed. If the
price does not go up, the lights will go out. Now, which do you think is more likely?
Future Money Trends: Uranium is going to go up.
Rick Rule: That's the first question you have to ask yourself. The second question
is this, we had reached equilibrium pricing in uranium at $80 or $85 a pound, and then
one event– Fukushima happened. When Fukushima happened it took all of the Japanese reactors
offline, and taking those reactors offline took 20-25,000,000 pounds of annual demands
out of a 200,000,000 pound market. At the same time that it increased supply, because
some of their reactors sold inventory that they had, that they weren't going to use selling
electricity, in to the market to generate cash. I don't know what that number is, but
let's assume it was 10,000,000 pounds. So let's assume that you have an imbalance 200,000,000
pound market, where you reduce demand by 25,000,000 pounds and you increase supply by 10,000,000
pounds. A 35,000,000 pound supply-demand imbalance in a 200,000,000 pound market. Normally in
markets like that a 3-4% swing in supply or demand can increase or decrease prices by
10-15%. What we need to think about, having answered the question that price needs to
go up to sustain production, is when do we use up that big lump of supply that came in
to the market as a consequence of Fukushima. And I don't know the answer to that.
Future Money Trends: It's interesting because so many people talk about how silver and gold
are upside down right now, but uranium is seriously upside down.
Rick Rule: Way upside down. So is zinc. Way upside down.
Future Money Trends: In your history of investing, this is pretty much a guaranteed thing right
now?
Rick Rule: This is a great question, especially for a young person like you to ask. Because
in the course of my career, when I have confined myself to asking investment questions where
the answer begin with when? I have done better than asking myself questions where the question
begins with if? In the gold business, you can say if this happens, and if this happens,
and if this happens, then the gold price goes up. That isn't the question you ask yourself
with uranium. It's a when question. Because if the question doesn't occur, the lights
go out. "When" questions make you more certain money over time than "if" questions. People
object to the fact that they have imprecise answers. But in no way, shape, or form, is
a when answer ever more imprecise than an if answer.
Future Money Trends: Is patience one of the best things that you've learned over time?
Because it seems like people got in the gold trade, but they're just not patient.
Rick Rule: I think four attributes. Curiosity is extremely important. If you come in to
this business simply to make money, if you're not fascinated by the business, and are not
willing to do the sort of esoteric work around the trade, you're going to screw up the trade.
Patience is certainly important. Discipline is really important. Don't do this thing intuitively,
do it empirically, its very important. And then patience. Importantly, Warren Buffet
teaches at many points in time in the market there's nothing to do. And what you have to
discipline yourself to do when there's nothing to do, is nothing. And nothing is very hard
to do. Nothing is particularly hard to do in bull markets, where all of your recent
experiences have been success. Bull markets breed aggression, aggression breeds overpriced
opportunity, and overpriced opportunity isn't opportunity, it's risk. Having the ability
to do nothing in a market top, a test by the way that I have repeatedly failed, is a very
important test. And then there's that fifth attribute that you need in times like these,
aggression.
Future Money Trends: Your recent experience has been nothing but pain.
Rick Rule: Well, my recent experience has been...
Future Money Trends: I'm saying in general here.
Rick Rule: Well, absolutely. Part of discipline is the fact that you need to be able to do
nothing at market tops, and you need to be able to put the pedal to the metal when every
body is in retreat. Future Money Trends: Great interview, thank
you so much Rick. I appreciate it. Rick Rule: Always a pleasure, thank you for
great questions.