Rick Rule, of Sprott Asset Management, and Alasdair Macleod of the GoldMoney Foundation, talk about the role of gold bullion as a financial insurance and how to invest in gold mining stocks. They also discuss the current state of the global financial system.
With regards to the current fall in precious metal prices, Rule points out that even extreme cyclical variations are to be expected in a secular bull market. He illustrates this point by bringing to mind how the gold price declined by 50% in 1975 before making its greatest gains soon thereafter. Both men agree that gold bullion should not be bought to make money, but as insurance as part of a long-term wealth preservation strategy. When investing in mining equities Rule points out that he makes his decisions on a net present value foundation, and not based on expectations of future metal prices.
Rule explains that he views global macro questions from a credit analyst’s point of view, and contrasts assets and income streams against liabilities in countries just like he would with companies. By his analysis, most countries do not have sustainable business models. He also does not believe official inflation statistics and points out that things like food, fuel and taxes are very much underrepresented in official price indices.
Rick and Alasdair also talk about the deleterious effects of artificially low interest rates that discourage savings and therefore impede economic progress. Rule believes that citizens’ confidence in governments and central banks will deteriorate sharply. The distortions caused by these institutions’ policies will lead to an even bigger crisis down the road.
Rule would not lend the US government money, given the horrific state of its balance sheet, and cannot see why the run to the US dollar and treasury bonds is considered a “risk-off” trade. That said, a liquidity crisis in the banking system can cause big volatility in the gold market, as we have in small-part witnessed in recent weeks and months.
This podcast was recorded on May 16 2012 at the Hard Assets Investment Conference in New York.