Sprott Global Resource Investments

Sprott's Thoughts

Henry Bonner

Why Rick Rule Says ‘Anti-gold Investors Will be Destroyed’

Gold has made its way down again, to around 1,300 per ounce this month. Rick Rule, Chairman of Sprott Global Resource Investments Ltd. says that a few years out, you will be happy you stuck with gold.

For context to today’s downturn, look back at the great bull market for gold in the 1970s’.

During that time, gold rose from $35 per ounce to around $200, and then came crashing down to around $100 per ounce. Weak hands, who lacked the courage or the financial strength to hold on, sold their gold. It was a disaster for them, but a great opportunity for investors who believed in the metal. They were able to enjoy an 850% gain over the following five years. The ‘anti-gold’ investors watched as gold soared.

As Rick recently put it to King World News, “that is the kind of regret that no investor wants to live with for the rest of their lives.”

Rick believes the overall bull market will return and produce substantial returns to investors who own gold.

Today, low yields on bonds help maintain confidence in the U.S. dollar and in U.S. bonds.

As of April 16th, 10-year U.S. Treasuries yielded a paltry 2.6% in interest, which is close to historic lows. Low interest rates are a helping hand for the Feds, who have a debt burden of over $17 trillion1, and off-balance sheet liabilities – payments they will need to make, but that are not considered debt – estimated at around $70 trillion2.

Now, if you are an investor that holds a 10-year Treasury, you will make more than the officially-reported inflation numbers3. But those numbers don’t tell the whole story. For one, they leave out food and fuel. They also do not include taxes. That’s fine if you do not eat, drive, or pay taxes.

Using the pre-1980’s inflation index for inflation, we find that your cost of living is increasing at around 5% per year4. So by holding a 10-year Treasury, assuming inflation remains steady, you will be losing 2.4% in purchasing power every year for 10 years.

It won’t be long before investors begin to slow down their bond purchases, says Rick, as they see their purchasing power erode. They will look at other investments to help them avoid that guaranteed loss.

As interest rates grow, so too will the Feds’ debt problem. The more expensive it is to borrow, the more bonds they will have to issue to cover interest payments. And the more dollars the Fed will have to print to soak up the excess.

As the investment public sees rising rates and the Fed picking up the pace on money printing, it won’t be long before they dump their bonds altogether, Rick believes.

As Rick warns, ‘anti-gold’ investors may once again witness gold shining on through the resulting calamity.

1 http://blogs.wsj.com/washwire/2013/10/18/u-s-debt-jumps-to-17-076-trillion/

2 http://www.breitbart.com/Big-Government/2013/08/04/Study-U-S-Debt-Obligations-70-Trillion

3 http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

4 http://www.shadowstats.com/alternate_data/inflation-charts



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