A conversation with Doug Casey and Rick Rule, Part II
April 30, 2004
Gold is still under pressure from dollar-strength but this
week it was blindsided when the People’s Bank of China (the Chinese
central bank) announced its plan to raise banks’ reserve requirement
from six percent to seven percent. That means the central bank is tightening
money supply, which could result in slower economic growth. China is an
important consumer of raw materials and many analysts have argued that
Chinese demand is behind the rise in commodity and precious metals prices.
I’ve been expecting a hiccup in China’s economic
growth for a while -- it’s a topic I have discussed at several recent
conferences -- but cannot claim to have anticipated this turn of events.
I do however anticipate that US economic growth will falter with higher
domestic interest rates, which I believe are unavoidable given the size
of the government’s budget deficit. I also expect to see China’s
economy slow down as a result.
I know that many analysts believe China’s growth is
becoming self-sustaining due to growing internal demand. I was in China
not long ago and I, too, am impressed with the country’s internal
growth prospects. But China has a serious banking problem -- too many
non-performing loans -- and sustainable growth in the country is unlikely
until that problem has been addressed. This week’s move by the People’s
Bank of China is the first attempt at doing just that. Don’t be
surprised to see China’s growth slow down for a while, even though
it doesn’t change the fact that China is likely to rule the world
by the end of the century.
Because I do not believe the worst is behind for the US
economy, and because I anticipate problems in China (and in many other
parts of the world for that matter), I am not very bullish on base metals
and other commodities. But because gold is money, and I think we are going
to face uncertainty in that realm, I am still very bullish on gold.
However, gold is likely to remain under pressure in the
short term, as higher US interest rates boost the dollar. At some point
though, higher US interest rates will start impacting US economic growth
and at that point gold will resume its upward trend, and we’ll see
the largest increase in the gold price yet.
In the meantime, let’s continue with the conversation
I had with Rick Rule (founder of Global Resource Investments in California)
and Doug Casey (Editor of the International Speculator newsletter) a few
Last week we heard that Doug is a super-bull, and that he
is using this downturn in gold and gold related stocks to buy more. This
week we get to hear what Rick is thinking. Keep in mind though, that Rick’s
comments were made on April 8th, when gold was still trading at $420 an
ounce. The comments in brackets are mine.
Paul: “Rick, where do you think we are in the market?”
Rick: “I agree with about two thirds of what Doug
said (see last week’s column) and I have seldom disagreed with Doug
about the big picture. Although some of what he said is somewhat problematic
from my point of view. But let’s focus, to begin with, on what we
“It is true that gold and mineral commodities are
coming out of a twenty-year bear market. However, they never fell as much
as they should have, given that the industry was enormously over-capitalized
in the late Seventies and early Eighties. That over-capitalization bred
monumental inefficiencies, inefficiencies that had to be worked out of
the system. One of the reasons the industry lived on capital, of course,
is because it generated no wealth, and therefore had to live on capital.
It’s one of the reasons why commodities and commodity-stocks fell
“Wall Street, including ourselves, asked gold companies,
in particular, to exhibit an interesting investment trait called leverage
to gold. You exhibit leverage by being marginal (i.e. operate with high
production costs). We asked the industry to be marginal and they succeeded
beyond our wildest expectations. Marginality, of course, is not one of
the investment attributes that one would normally aim for. And those of
us who asked the industry to be marginal got what we deserved.
“Now, with regard to the parallels to the decade of
the Seventies, I agree with Doug’s thesis that we are more likely
than not in a commodities super-cycle. Unfortunately for people who are
too long in gold stocks right now, the place that I suspect we are in
the 1970s continuum is 1975, which is where we went over a precipice.
“I don’t think, as an example, that we are in
a gold bull market right now; I think we are in a dollar bear market.
And I think that the dollar is going to have a fairly substantial bear
market rally. My supposition being that whomever wins the presidential
election will take whatever bad news he has to take in the first year
of his term, making us sick as opposed to making us well, which he will
attempt to do over time. That is a long-established American political
tradition. And I think that either the President, or the market, takes
US interest rates up 150 or 200 basis points, which makes the dollar substantially
stronger, which makes gold in the near term substantially weaker.
“Having done that, the US economy two hundred basis
points higher becomes sort of an interesting specter of credit collapse,
and I think after we have seen interest rates go up 150 or 200 basis points,
we see the Fed really put the pedal to the metal with regards to money
and credit creation. And I suspect that at that time we go into a gold
“I define a gold bull market as a market where gold
moves not only in relation to the US dollar, but rather in relation to
all fiat currencies, which I would expect begins in the 2006 timeframe.
So, good news in the longer-term, bad news in the short-term.
“When I say bad news it would not surprise me, although
I am not saying this is going to happen, but it wouldn’t surprise
me to see gold at $325 an ounce. It would not surprise me to see the XAU
at 70. From my point of view, not comfortable, but not catastrophic. From
the point of view of most of the players in this market, whose expectations
are perfection, and perfection next week, it would be unpleasant indeed.
“One of the difficulties I have in the market today
is that the mania Doug describes as seeing in the tertiary part of the
market I think we are seeing right now. I know Doug was there in 1980
and 1981, and knows what a full-blown mania looks like, but I would suspect
that the valuations we are seeing today (remember this was several weeks
ago) involve at least hyper-stupidity if not mania. We have companies
whose chief attributes are that they are losing two million dollars a
month, and sporting six or seven hundred million dollar market capitalizations.
I have told Doug on several occasions that I would be willing to lose
that kind of money for him for a substantially smaller capital contribution.
“My actions are somewhat more cautious than others
whom Doug would refer to as the cognoscenti. I am writing more pink tickets
(selling) than white tickets (buying) in the middle range of the gold
market and I have been using some of the proceeds to buy the very large
cap, very liquid gold stocks in case I’m wrong. What I want is the
ability to play the game up but set tight trailing stops (again, remember
this conversation took place several weeks ago).
“Irrespective of commodity prices, I see us coming
into a very, very, very interesting exploration cycle, for all of the
reasons that Doug mentioned. For many years there has been, by historical
standards, not very much money spent on exploration. The money that has
been spent, has by and large been spent foolishly, by foolish people,
for market reasons as opposed to exploration reasons.
“In the context of the human resources available for
exploration, Doug makes the good point that, were I a geologist, at age
fifty one, I would be on the young end of the spectrum, which means that
the intellectual capital, and the physical capital in the industry, in
human terms, is going away. Mining companies, in the last twenty years,
have been run largely by financial professionals rather than exploration
professionals and when times got tough, which in their context was most
of the last twenty years, what they regarded as fixed costs and necessary
expenditures involved things like executive salaries, headquarters’
expenses and equipment necessary for production, and they regarded exploration
as a variable expense. Exploration got sacrificed to every other altar
for the last twenty years. Many of these company executives are now coming
to the realization that their companies are in liquidation by virtue of
the fact that every day you mine, your business gets smaller, and there’s
nothing in the exploration pipeline to feed the hungry mills.
“So I find myself in the odd position of concentrating
my own portfolio in what is allegedly the lowest risk part of the spectrum,
which is the large cap, very liquid senior producers, which I own for
insurance purposes, and the riskiest:, exploration stocks. I guess the
real riskiest are idiotic drill hole plays, which I tend to avoid at all
costs. Instead I focus on prospect generators, which are exploration companies
capable of generating good projects for further development by joint-venture
partners. I think that the exploration stocks, in terms of generating
value as opposed to making market plays, are the only place in this context
where actual economic value can be created. So I am buying them and the
Well, there you have it. Both Doug Casey and Rick Rule are
buyers, albeit for somewhat different reasons and with a somewhat different
take on the market. Both of these gentlemen are outstanding speculators,
and both generated their wealth doing precisely what they are talking
about doing right now.
Doug is a self-proclaimed super-bull. He is buying gold
related stocks with a long-term view that we are in a secular gold bull
market, similar to what occurred in the Seventies, and he believes there
remains significant upside in the gold price.
Rick thinks that, in spite of the fact that we may be in
a secular gold bull market, we are in the midst of a counter-cyclical
gold bear market. But he recognizes that the mining industry, with gold
in particular, is facing a severe problem of not having enough competent
exploration geologists to ensure the industry does not self-liquidate.
For this reason Rick is buying exploration companies capable of coming
up with good exploration projects, which, if successful, make them takeover
candidates for the larger mining companies.
If you’re interested in Doug’s newsletter please
visit his website at www.internationalspeculator.com
and if you’re interested in what Rick had to say I suggest you call
his brokerage firm in California. Talk to Steve Todoruk; he’s not
only a broker, he also happens to be a geologist and is intimately familiar
with the junior exploration sector, having run his own public exploration
company in the past. I use Global Resource Investments for all my own
trading and can therefore recommend them with first-hand knowledge of
their expertise. The number to reach Steve at is 800-477-7853 or 760-943-3939.
I will be in London at the Global Mining Forum this
week (May 4th and 5th). If you are unable to attend, consider New York
in June (see the sidebar for details).
Paul van Eeden
Paul van Eeden works primarily to find investments for his
own portfolio and shares his investment ideas with subscribers to his weekly
investment publication. For more information please visit his website (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
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