(Kitco News) - The only way for the U.S. to escape its current debt crisis is to inflate away the value of its obligations, much like what happened in the 1970s, said Rick Rule, veteran investor and President & CEO of Rule Investment Media. This dynamic creates a bullish case for commodities like precious metals, uranium, and copper, with energy also poised to benefit under the new presidential administration.
According to Rule, the U.S. will ultimately honor its debt obligations in nominal terms but will allow inflation to erode their real value, as it did during the 1970s.
"We faced the same circumstance, although less dire, in the 1970s," Rule told Kitco News anchor Jeremy Szafron on the sidelines of the New Orleans Investment Conference. "We will honor the nominal amount of our obligations, but we'll inflate away the net present value of the obligations."
Rule highlighted the worrying scale of U.S. debt, noting that the deficit has grown by $1 trillion since just a few months ago.
"In the decade of the 1970s, the last time we faced this circumstance, the purchasing power of the U.S. dollar was reduced by 75%. Not coincidentally, during that period, the gold price went from $35 an ounce to $850 an ounce. Yes, the two events were related," Rule said. "The only way that I understand that we get ourselves out of our debt crisis is to inflate away."
While the U.S. economy appears healthy on the surface, this is mainly due to easy access to credit, stated Rule. "If you have access to credit and understand how to use the credit, this economy is spectacular," he said. However, he warned that this economic model is not sustainable and is leaving many behind.
The concept of inflating away the debt will drive up the price of gold, just as it did when the precious metal surged from $35 per ounce to $850 during that 1970-1980 period.
While gold has performed well in recent years, Rule sees it rallying further. He pointed out that the market share of precious metals in the U.S. is far below its historical average, suggesting significant potential for growth in demand.
Rule pointed out that gold as an investment and savings mechanism is ignored by 99.5% of the U.S. market. "Gold doesn't need to whip the U.S. dollar; gold doesn't need to break the Treasury market. All it has to do is revert to mean. Then, the market share in the U.S. market grows fourfold," he explained. "Can you imagine what a fourfold increase in demand for gold and gold stocks do to the gold price? I don't own gold because it might go from $2,600 to $3,000. I own it because I'm afraid it will go to $10,000."
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Rule has responded to this outlook by increasing his exposure to energy, particularly Canadian oil and gas producers. He sees potential for the sector to benefit from deregulation under the new administration, which he expects will boost production and exports of liquefied natural gas. Watch the video above for insights.
In addition, uranium has a unique appeal in the current market. Unlike other commodities, producers can secure long-term contracts with fixed prices, providing certainty and making financing easier to obtain. This, according to Rule, makes uranium companies particularly attractive investments.
Copper also has a bullish path for next year, driven by supply constraints and growing demand, especially from developing countries seeking to expand access to electricity.
"I look like the world's copper mines...passed our prime," Rule said. This looming supply shortage, combined with rising demand, could push copper prices significantly higher in the coming years unless a global recession or depression dampens demand.
For Rule's take on the junior mining sector, watch the video above.
This video is brought to you by Uranium Energy Corp and U.S. GoldMining Inc.
