Rick Rule is renowned as the ultimate resource contrarian, having reaped incredible profits by investing in uranium and gold miners when they were “truly, truly on sale” far ahead of their inevitable boom cycles.

Here, in a second interview with Arash Adnani, he thoroughly outlines the numbers behind his prediction for another uranium bull market on the horizon, the importance of taking a long view on the resource, and gives his detailed outlook on his other favourite metal: gold.

Video Transcript

Arash Adnani:
We have our good friend and great supporter of Private Placements Rick Rule from Sprott here with us. Rick, thanks for joining me. We want to get right into it as we always like to do. It's been a crazy week for gold. We'll touch on that later on, but first we want to touch on uranium a little bit and for kind of the non, let's say uranium investors, those who aren't familiar with the uranium story. Can you give us Rick Rule's take on the, let's say uranium investment thesis, the long-term fundamentals and why you think it's a good play?

Rick Rule:
Sure. You've touched on one of my favorite topics. As you know, the uranium business has been extremely good to me over time. Emphasize over time, anybody who gets in the uranium business needs to be a contrarian and they need to have reasonable timeframes. It's unlikely that anything's going to change by the next long weekend, but when things change in the uranium business, they really truly change. Uranium bull markets when they come are the most dramatic natural resource bull markets that I've experienced in a 45 year career. Let's talk about what and why. The first thing is to participate in uranium markets, one must absolutely be a contrarian. It isn't just that uranium markets haven't really performed since 2006, so it isn't just that people are bored of them because of their performance. It's also because of the vast population in the investment universe hates uranium. When you talk about uranium to many people, they don't think about the fact that it contributes 15 or 16% of base load power supply in the U.S. They don't think about facts.

Rick Rule:
They think about Hiroshima, Nagasaki, Three Mile Island, Fukushima. If you're a contrarian, the fact that an investment is nevermind, unloved, but actively hated, means that you have found an attractive investment theme. Warren Buffet famously says that you get rich by buying straw hats in winter. You buy things that are out of favor. There is nothing in the world more out of favor than uranium. This is a commodity and these are companies that are truly, truly on sale. Now, why would they ever recover if their particular attributes involve explosions, pollution? All of the stuff you read about with regards to uranium.

Rick Rule:
The truth is that relative to other forms of energy, uranium is remarkably safe, if you don't use it to blow up other people, If you use it to generate electricity, safe enough that uranium is a substantial component of baseload, not variable, but baseload power worldwide, including in rich countries. There is a suggestion in the press that only people who can't afford any other form of energy go to uranium, but in what is ostensibly the richest country in the world, the United States, uranium still contributes 15 or 16% of baseload power. Importantly, this is baseload power that generates no carbon. Despite what many people think, uranium is a completely viable fuel with regards to the environmental concerns that people have and are expressing in the market today.

Rick Rule:
But in addition to that, the economics are extraordinarily compelling - the arithmetic around the economics. So let's go through that. The International Energy Agency suggests that the fully loaded cost to produce a pound of uranium, not the cash costs, but the fully loaded costs, including cost of capital, project development, all those sorts of things. Between 55 and $60 a pound, and right now the spot market price of the stuff is 24 or $25 a pound. The contract price is a little higher. Suffice to say at spot, the industry loses 25 a pound. Now pretty obviously this can't go on. So the thesis that people have to ask themselves as investors is pretty simple. Since uranium provides 15 or 16% of the U.S. base load power, there's only two choices. Five or six years from now, the price of uranium has to be at least high enough to justify the industry's cost of capital. In fact, it has to happen sooner in order to prevent supply disruption or the lights go out.

Rick Rule:
If people believe that five or six years from now in the United States when they hit a wall switch and the lights are going to come on, they believe in 55 or $60 uranium. And 55 or $60 uranium, which in itself, by the way, is an interesting speculation where you’d buy uranium could generate a much larger increase in the share prices of uranium equities. The catch is that we don't know when the price will improve and so we don't know when the equity prices associated with the uranium business will improve. What I know personally as a speculator is that in anticipation of the last uranium bull market, which occurred all the way back in the year 2000, 20 years ago, I was two or three years early and I had my faith tested. When you're that early, you run the risk of being in fact wrong in addition to the fact that it's psychologically challenging, it's also financially challenging.

Rick Rule:
What you find however, is that when the uranium price does move, the very small number of viable uranium companies available to investment means that an incredible amount of outside capital is siphoned into very, very few silos and the share prices go up almost exponentially. I'm not saying that that's going to occur this time, but certainly if we had an echo of the last bull market, a shadow of the last bull market, given the very small number of juniors available, but the very high quality nature of some of the juniors that are available, one would expect that when the uranium price rises, you'll note, I use the word when, not if. When the uranium price goes up the stocks would be very responsive. The second thing that your more sophisticated listeners, your private placement listeners need to know about the uranium stocks is that there are a substantial number of very high net worth and ultra high net worth natural resource investors that remember the last uranium bull market.

And I think what that means is that when the uranium price gives them a hint of hope, in other words, it doesn't have to go to 50 it has to go to 32 or 33 it has to threaten to go to 50. The flood of capital into the micro cap uranium stocks from people like myself who participated in the last uranium bull market means that unlike in other commodities, the stocks will lead the metal. You follow where I'm going with this? The anticipation, or rather the memory, of the last bull market is so extraordinary that the response of sophisticated high net worth and ultra high net worth investors in the sector, I think, pardon the pun, will be explosive.

Arash Adnani:
And just as a point of reference, the last bull market, we're talking about, we're talking about 2007 where we had $140 pound uranium. Right now, I don't think anyone's even thinking or suggesting that's what we're talking about here. Like you said, 50 or $60 pound uranium is a hell of a start and a great way to move the markets. From a timing standpoint, what are some of these potential catalysts that can actually move this market and get some excitement going from let's say, outside of the uranium fan club?

Rick Rule:
Arash the most important catalyst is already in place. Many people don't realize this, but the world has been on a tear building nuclear power plants in the last five, six, seven years. Yes, we've shut some plants down too, but the plants that we've shut down are 40 year old, 45 year old plants that used a fairly small amount of uranium, say a quarter million pounds a year. They're being replaced with great big plants built primarily in China that burn a million pounds a year. Worldwide demand for uranium now is greater than worldwide demand was before Fukushima. Many people don't get that.

Rick Rule:
The big catalyst of course would be increasing the pace of Japanese restarts, which we have not seen and probably in the very near term we will not see as a consequence of an economic slowdown related to the Corona virus. But the truth is, the political constituency, Japan Inc. the Japanese governments and the big companies in Japan believe in energy security and the amount of fuel, the amount of electricity generated by a small amount of fuel means that in terms of energy security, the only alternative that the Japanese have is uranium. You can't store enough coal, you can't store enough liquefied natural gas. You certainly can't store enough rain to power Japan in a way that gives them the energy security that they want.

The second catalyst that's in place for uranium has been a real conversion in the last two years of the responsible economically oriented constituency in the environmental community to understand that with regards to climate change and with regards to carbon, that the ability to generate economic base load power while generating no carbon means that nuclear power is a critical part of the world's energy mix. Bill Gates, the world's leading philanthropists right now go so far as to say that the key to managing climate is nuclear power. So there is a groundswell of support for conversion to nuclear energy among constituencies that have never been friendly to uranium in the past. Supporting this has been a real increase in technologies around efficient nuclear generation and smaller, more modular in some cases even floating plants that can address power needs in communities that the nuclear power industry has never been able to service before. The truth is that the catalysts are in place, but these catalysts play out over time.

Arash Adnani:
I was going to say it sounds like, like you said, it's not a question of if, it's when. I mean it's like discount shopping right now, right? You can start from the very top as far as top producers and work your way down and there's price lashes all over. So you would think, okay, let's start putting together a nice portfolio of uranium stocks but what could go wrong, I guess is what I'm saying. Is it just a question of how long can you wait it out? How can you wait for things to move?

Rick Rule:
Yeah, the risk is not with the uranium industry or the uranium stocks. Although stock selection is always important. The risk is the psyche of the buyer, of the Uranian buyer. The truth is that human psychology works against human investment performance. We all have time preferences and we act as though our time preferences matter. But the truth is the market doesn't care about our preferences. Our bank account doesn't care about our preferences. The stocks don't care about our preferences. I'm an investment manager, I don't give a damn about your preferences either as a matter of fact.

It isn't so much what we want as what we can have. And interestingly, price action thereof validates a narrative, which is to say as a sector becomes more and more highly valued, that is arithmetically less attractive because you're buying the same unit of economics for a higher price. It becomes more attractive. Think about this. You buy a stock for $1. Nothing changes with the company. Maybe there's a newsletter writeup. The stock goes from $1 to $2 with nothing changing at the company. While you like the fact that the stock went from $1 to $2, arithmetically it's precisely half as attractive.

Rick Rule:
What happens with people is that price action justifies the narrative. In the last uranium bull market, when the price of uranium went from $8 a pound to $20 a pound, that is almost doubled. There was interest, but no stampede into the sector. The price of uranium still had to go up because it was estimated at that point in time that the worldwide median cost of production was $30 a pound. So although the price had reacted a bit, nobody cared. When the price went to $50 a pound, that is when price didn't have to go up any more, the price action in uranium justified the narrative. And precisely when the industry outlook didn't have to get better, the uptake by investors became insane because the narrative was justified by the price action.

Rick Rule:
In this circumstance, the market that we're looking at in uranium now, I think that the upside is probably less extraordinary because I don't think it's likely that the price of uranium goes from $25 a pound to $200 a pound. In other words, I don't believe in terms of the upside that the past is prologue. What I do think is that the memory of the last bull market is strong enough in investor's minds that less price incentive is going to be needed to justify the narrative. In other words, the reaction will come sooner once the catalyst is in place.

Arash Adnani:
But as you said the psychology component of it is a big hurdle to get over.

Rick Rule:
But it's not a hurdle for the industry to get over. Each individual investor must get over it for himself or herself. I watch speculators in this context and they make the same mistake again and again and again. A hot commodity, let's say lithium or let's say cobalt or let's say vanadium. A small market that goes up in price, which is to say a one that doesn't have to go up anymore because of already went up, attracts all of the attention and when people crowd into a company that failed in gold and failed in marijuana and failed in crypto and re-brands itself as a lithium company, when the investor loses money in that the investor tends to blame lithium rather than himself or herself and the truth is that the biggest speculative risk in the world is conveniently located. Arash it’s to the left of your right ear and to the right of your left ear. If you can find yourself over time to arithmetic and do you speculate on things where the answer to the unanswered question begins with when. When will the price go up?

Not if the price will go up. You have asked yourself a good set of questions. If you turn down the opportunity to ask yourself one question, it's because you think your time preference matters. And it has been proven to me over 45 years, if you believe in God that God doesn't care about your time preference, if you believe in markets that markets don't care about your time preference, but the truth is the only one who cares about your time preferences you and you're not going to buy the stock from you.

Arash Adnani:
Well, I was laughing when you talked about the lithium example. The last time we had a bull market in uranium, we had companies contact us or a name change for their website and mobile design overnight going from other metals to uranium. 

It was a true reactionary environment, but let's switch topics now to talk about gold real quick. I believe we're at $1,648 right now for gold price. It's been a hell of a week. Now, usually when we find ourselves in this situation, there's a lot of noise. All of a sudden there's gold pundits coming from all over the place and everyone's an expert on the topic. Can you give us your take on where we're at, where we're going, and whether the fundamental support that's this rapid rise and rally that we've had so far

Rick Rule:
Love to, let's try and put it in context. My great friend Steve Sugarman who is a keynote speaker every year at the Sprott Vancouver Natural Resources Investment Symposium teaches his 90,000 subscribers that in terms of market timing, what you do is you find a sector that is out of favor, unloved, but in an uptrend, and in uptrend for a reason that you can understand. Gold is there outside of the gold community, particularly younger investors who haven't been around for prior gold bull markets, can't spell gold despite the fact that it's a four letter word. It is unknown. Gold traditionally has traded contra to the bond market. In particular, the U.S. government bond market and the U.S. government bond market has been any 35 year bull market, meaning the unloved describes gold relative to the bond. When bonds do poorly, gold does well. When bonds do well, gold does poorly. So we know that we're unknown and we know that were unloved. What we also know is that the gold price in the last five years has advanced from circa 10,050 to 1,600 plus. In other words, unknown, unloved, but in an uptrend.

Rick Rule:
So in a macro sense, in a market sense, that's what we're talking about. Now let's talk about why. Gold for 2000 years has been not just money, not just a medium of exchange, but unique in that it's simultaneously a medium of exchange and a store of value. Fiat currencies have been mediums of exchange, but in truth, they're government dreams printed on a piece of paper. They're not stores of value, they're merely mediums of exchange. That's why cultures that have been through cultural trauma, Jews whose ancestors went through the Holocaust, Palestinians, South Asians, Vietnamese boat people don't have to be told about the gold thesis. They understand it very well, but in less catastrophic terms, gold does well. When faith in other financial assets, particularly fiat currencies more particularly the U.S. dollar, which is the world's reserve currency, and more particularly than that, the U.S. dollar expressed by the U.S. 10 year treasury, which is the world's benchmark security.

Rick Rule:
When investors faith in the ongoing purchasing power of capital stored in U.S. 10 year treasuries begins to get shaken. The gold price does well. It's extremely unusual that we find ourselves in the circumstance that we find ourselves in now, which is where both the U.S. dollar and gold do well simultaneously and I see that personally is extremely bullish. The U.S. dollar I think is doing well, not so much as a consequence of extraordinary strength in the U.S. economy, but rather because the competing currencies be they the yen, the yuan, or the euro are doing so poorly. Doug Casey goes so far as to call the U.S. dollar, the prettiest mare at the slaughterhouse. I'm not that apocalyptic, but we have a situation where gold and the dollar are doing well simultaneously. We had that same circumstance in 2000 which kicked off a gold bull market that took gold from $250 an ounce to $1,500 an ounce over the course of the last decade.

Rick Rule:
Remember as we said, that gold trades contra to the bond, the U.S. 10 year treasury has been in a 35 year bull market. The interest rate of course varies inversely with the capital value of the bond. The bond troughed, which is to say the interest rate peaked in 1982 above 15% interest. Now that same number is about 1.5 meaning that the interest yield on the U.S. 10 year treasury has fallen by 90% over 35 years. Interestingly, we're at a place now where the interest on the 10 year bond is less than the CPI stated rate of inflation, which means that for the first time in history, maybe the U.S. government is telling you the truth in their promise. If you give them money for 10 years, they will give you back less than you gave them. Jim Grant calls this return free risk. Return free risk is the competition that gold faces.

Rick Rule:
Now we've already decided that in terms of the proposition of the U.S. 10 year treasury, it's a guaranteed loser. That's the yield side of the equation. Let's look at the risk side of the equation. The risk side of the equation is pretty obvious. It's debt in societies worldwide, but particularly in the U.S. Balance sheet debt, be it consumer debt, corporate debt, unfunded pension liabilities or government debt, federal, state, and local is at levels that if they don't scare everybody ought to scare everybody. The best statistics I have are for U.S. government debt and that's probably the right place to start because they have the obligation to service these bonds are golds competition on balance sheet liabilities. That is money that the U.S. government owes bond holders. $22 trillion. That's a T, that's 12 zeros off balance sheet liabilities, which are promises that we've made to each other.

Rick Rule:
Your viewers should look at me. I'm 67 years old. I'm an off balance sheet liability. I'm an old guy who gets social security, Medicare, all that kind of stuff. $100 trillion plus. So if you own the U.S. 10 year treasury, you are part of a pool of claims against the wealth of the United States. That totals $120 trillion. How might these obligations be satisfied? Well, of course from the national income, which is taxes and fees, less expenditures. The problem is last year that number was $1.4 trillion negative. This year it's going to be $2 trillion negative. So when your subscribers, particularly your younger subscribers think about gold, they have to ask themselves the arithmetic question, how do you add a column of negative numbers, which is this deficit and come up with a positive sum sufficient to retire the debt? The answer of course, is that you can't, there's no kind of math taught either in my epoch or in your epoch that can allow you to add a column of negative numbers and come up with a positive sum.

Rick Rule:
The debt is unserviceable, which is great for gold. You either inflate away the net present value of the obligation. In other words, you devalue the dollar and revalue gold, or else you have some sort of default reset which breeds instability and lack of faith in the system, which is good for gold. Irrespective of what policy choices are left to the government, the risks of not having gold in your portfolio are substantially greater than the risks including the time risk of having gold. So when you at the gold business, the gold investment business, what you see is that the sector dynamics are in place, unloved, under owned, but in an uptrend and the reasons for that are also clear debt deficits and the fact that gold trades contra particularly to the U.S. 10 year treasury. The U.S. 10 year treasury after a 35 year bull market I would suspect is either at the end of that bull market or close to the end of that bull market, which is to say by contrast that gold is at the beginning or into its own bull market.

Rick Rule:
In any circumstance, people who ignore reasonable allocation to gold are making a mistake. Now there's going to be some types of investors who ought merely to be in bullion because they want to own gold for traditional purposes. You're Persian, it's part of your culture to have gold and you don't have gold to make a bunch of money. You have gold to not lose money, to have some liquidity when you need it so that if the circumstance goes bad, you can't be taken advantage of.

Other people can afford to be a little more aggressive. They can afford to invest in the best. The highest quality gold companies. The high quality gold companies in bull markets have tended to outperform gold about two to one. People who are interested in low priced stock, Private Placements, that is to say speculators operate in a very different risk spectrum, but later on in a gold bull market, intelligence speculations turn out to be probably the only way to achieve alpha in a market where the beta itself is pretty attractive. So irrespective of whether your motivations with your money are insurance, which is bullion investment, which is the best of the best senior producers or speculation, which is to say the juniors and more particularly the Private Placements, you need an allocation of gold and silver probably because although the situation probably isn't absolute certain, it is so much more likely than not to occur that the risks of not having an allocation are much greater than the risks of an allocation.

Arash Adnani:
So the perfect storm of unloved, under owned and on an uptake we're living in it right now. And I remember the last time we talked, which was late last year, it was the earlier days of this current run that we're on and it's sustained and hasn't done so in a aggressive way, which would scare you off to think it's unsustainable. It's going at a nice steady pace. And hopefully we can touch base again in a few weeks and see where we're at.

Rick Rule:
You know, the fact that it's going at this pace is extremely attractive to me. You see an asset class where in Canadian parlance in deference to your nationality, when the chart is what you all call a hockey stick chart, you need to understand that the backside of that hockey stick is just as steep as the front side of the hockey stick chart. This bull market that we're in now is much, much healthier. Climbing a wall of worry, backing and filling, advancing, retreating, advancing, retreating, higher highs, higher lows, slow and steady. This is exactly what you want to see as an investor.

Arash Adnani:
Rick, thanks for your time. For viewers that are interested in learning more and contacting you guys and Sprott, is there anything as far as papers, research, documents, good stuff like that that you guys can share with them and help them to educate themselves on?

Rick Rule:
Three things I want to do Arash. Any of your viewers who are interested, if they email me personally, the email address is [email protected], I will do three things for them. I will send them a 100 year commodity chart which will show the commodity index as being at 100 year lows. We didn't talk about broad commodities but we can some other time. I will send them the Barron's gold mining index chart that I talked to you about a 45 year chart that shows that gold equities are under owned, unloved, but in an uptrend and we'll show you graphically the potential upsides that have existed if the eight prior recoveries from oversold bottoms repeat.

Probably most importantly in terms of individual speculators application. If your subscribers will send to me in the text of their email, not as an attachment, in the text, the names and symbols of the natural resource companies that they own, I will rank those companies one to 10, one being best, 10 being worst and comment where I think my comments are appropriate on the companies and send them back. They should not be confused with investment advice. I'm ranking the companies, not the companies ability for the speculator, but the truth is that you will get as a consequence of that, the combined knowledge of the 180 investment professionals that work for Sprott and manage or administer about $15 billion in the space. It doesn't mean we're always right, but I suspect with our research budget we have a better chance of being right than any of our competitors.

Arash Adnani:
Well, that's a hell of an offer. I'm going to take advantage of that myself and email you.

Rick Rule:
I look forward to it.

Arash Adnani:
The three giveaways, yeah. Rick, thanks so much for your time. We should definitely try to do this again soon and see where we're at and hopefully this gold market stays strong and steady like we said and we like.

Rick Rule:
I'm tempted to say no fears on the later score. I look forward to seeing you when I do at the very latest, of course, a plug, at the Sprott Vancouver natural resources investment symposium taking place this July.

Arash Adnani:
Yes sir. We look forward to it. It's one of the better shows of the year, and you've got access to the top management teams and thought leaders in the space.

Rick Rule:
In fact, the best show of the year. But I'll forgive the slip of tongue.

Arash Adnani:
We'll give you that.

Rick Rule:
All right, thank you.

Arash Adnani:
Thanks Rick. Appreciate it.

Rick Rule:
Pleasure.