Issue link: http://resourceworld.uberflip.com/i/832998
J U N E / J U L Y 2 0 1 7 www.resourceworld.com 7 happens. Nobody bothers to conserve. In fact they find other ways to utilize the material because it is so cheap and the util- ity to consumers is so high. And with the existing producers losing money on every unit of production they make, they're in no hurry to increase production and, hence, losses. The conse- quence of that increasing demand with decreasing supply is that commodity prices rise. We're in a commodity situation right now where the industry average selling price of the commodity is less than the median cost of production, meaning that the industry as a whole is losing money on every unit of production that they're producing. This is, despite the fact that it's currently painful, a wonderfully bullish sign for the future. RW: How would you characterize the prevailing investor senti- ment with regard to mining stocks? RR: The prevailing investor side of it is almost always wrong. When mining stocks have done well for two or three years, peo- ple are drawn like moths to light because of the very success that the sector has enjoyed, but it's illusionary because the cure in a market for high prices is high prices. So people become bullish in a sector after its produced positive returns for three or four years, right at the point in time when the bull run is almost over. People are discouraged from the sector in periods like we're in now where we've seen several years of vicious bear markets where people are afraid and they miss the sector just as it's about to turn. You'll notice that as an example, 2015 was a horrific year for gold and a horrific year for gold stocks. This set up year 2016 where virtually all gold stocks doubled. Once again, the cure for low prices is low prices; the cure for high prices is high prices. RW: With a negative geopolitical event, gold often spikes and then falls back. With the heightened geopolitical tensions regard- ing North Korea and the possibility of a chain reaction of bad geopolitical events that could potentially keep gold prices rising, is it even possible to anticipate the future gold price? RR: I think if you look at the real determinant of the gold price over the last 40 years, it's been the popularity or lack of popular- ity of the US dollar and, in particular, the US 10-year treasury. People use geopolitical events as a narrative to justify what they were going to do anyway. It seems to me that the most effective determinant of the gold price since 1980 has been the negative cor- relation between the US 10-year treasury and the price of gold. I think that's the most important thing. I believe that the US 10-year treasury, having been in a 35-year bull market, is either at the end of that bull market or at the beginning of a bear market. If you believe, like I do, that gold trades inversely to the US 10-year trea- sury, with the US 10-year treasury at the end of a bull market or the beginning of a bear market, that would suggest to me, the gold price is at the end of a bear market or at the beginning of a bull market. I'm quite bullish about the gold business. RW: What kind of an effect has the Trump administration had on the price of gold, if any? RR: Virtually none. Trump has been an extremely polarizing person and Trump himself is an important narrative but he hasn't had very much impact on the market for US 10-year treasuries. My own suggestion is that the rest of the world that holds Trump in disfavour has been irrelevant in the sense that the US dollar continues to do well against other currencies, not because of the strengths of the US economy and certainly not because Trump is held in high favour in other places, but simply because other countries' currencies and economies are in even worse shape than our own. Our mutual friend, Doug Casey, refers to the dollar as a "I owe you nothing" and he refers to the euro as a "who owes you nothing." It's my belief that the strength of the dollar has noth- ing to do with Trump at all. It has to do with the weaknesses of competing currencies. RW: Continuing with gold, the US Mint reports sales of Gold Eagle coins is down 67% from last year. Bloomberg reports that gold exports to China from Switzerland almost doubled to 46.4 tonnes in March, up from 23.6 tonnes in February. Gold buying in India is also ramping up. Is this another example of interest in gold moving from West to East and why is this happening? RR: I think what's happened is that China and India, at least in the official sense or reported sense, were nonentities in the gold business 10 or 15 years ago and they have moved to being impor- tant entities. The second part of the equation though, or really the first in the context of your question, is that physical coin sales have been a less dominant means of participating in the physical gold market in the last 15 years, relevant to the ETF (exchange trade funds). The ETF, GLD [NYSE], has seen positive net forma- tion in the last six months, and I think what you're seeing, is the ETF beginning to steal market share in the US market from physical sales, while in India and China, the official sector associated with individuals being able to legally own gold and silver has increased the attractiveness of those investment vehicles in those countries. RW: Newsletter writer Brien Lundin thinks 2017 will be the "peak gold" year and then global production will decline. What is your take on peak gold? RR: I sort of agree with Brien. I think the pattern of new discoveries has slowed up. Certainly, the cost of capital for non- investment grade gold mining companies has gone up and is a consequence of the new Basel three banking regulations and I "There's no business that I know of that is as cyclical as natural resources. Anybody who's been in the business for 20 years will understand this boom and bust nature; first of all – commodity prices and then, the prices of equities that are tied to com- modities. " Rick Rule