Rick Rule: “Scary Times Are Upon Us – Capitulation Is Beginning in This Market”
Is the recent market sell-off good for gold?
How will it affect the precious metals and natural resource sector?
Rick Rule, Chairman of Sprott US Holdings Inc., believes that a sell-off in the months ahead might signal the end of the resource bear market.
“The capitulation we’ve been talking about for a couple of years is beginning to occur,” Rick warns.
“I suspect that this capitulation will be over by the end of October. And it could get much worse before then. The point is – any ‘junk’ you have left, sell it if you can.”
Fear is returning to the broad market, says Rick, and it will affect resource stocks too.
“Volatility had been eerily quiescent over the last 2 or 3 years,” says Rick. “The VIX was consistently between 10 and 15,1 which meant that there was very little fear in the market.
“With the VIX back up to 30 this week, we can safely say that fear is back in the market.”
What to Do Now?
“Scary times are upon us – capitulation is beginning in this market. It’s going to be terrifying. But based on similar experiences in the past, I believe it could mark the end of the bear market for the resource and precious metals sector,” says Rick.
Prepare to take advantage of a bottom in natural resources and precious metals stocks over the coming months.
“Hold lots of cash,” he suggests. “Cash gives you the means and the courage to take advantage of poor market conditions and the mistakes of others.
“I will also keep cash available for ‘issuer capitulation,’ which tends to occur after the resource market sees investors drop out. Junior resource companies seek to raise money through private placements and are willing to accept terms that are more favorable to new investors, because they no longer believe that an imminent recovery will take share prices higher.
“If you don’t want to wait for ‘capitulation’ – or you aren’t able to take part in private placements -- then you can still find oversold, high-quality names, where you can enter at an attractive price,” Rick believes.
A “Make it or Break It” Time for Gold
Gold, as a store of value in times of uncertainty, will have a chance to sink or swim. We should be getting close to the “make it or break it” moment for gold, says Rick.
“Fed Chairman Janet Yellen has broadcast her intention to raise interest rates, and this is setting up a critical situation for the US dollar and gold,” says Rick. “I think that an increase of interest rates by 0.25% is ‘baked into the cake’ – everyone is expecting it.
“So a 0.25% rate hike would not generate any particular change in the US dollar, bonds, or the stock market.”
A further rise in interest rates, however, would be a surprise, Rick believes.
“If she manages to follow up with a second rate hike, it would be very bullish for the US dollar,” says Rick. “It would be good for bonds and large-cap stocks.
“It would say that the US economy is back.”
Rick believes that a second rate hike has only a “dim probability” though. In Rick’s view, it’s more likely that the Fed will back away from raising rates. It might even announce a new quantitative easing program. The Fed would begin to purchase bonds in order to keep yields low and “goose” the stock market higher.
“If the Fed cancels a rate hike or announced ‘QE4,’ it would damage the US dollar. It would be good for gold and precious metals,” says Rick.
Would this boost gold stocks? Not necessarily.
Rick reminds that “in the near term, gold stocks might decline along with the broad stock market – even if gold rises or holds steady. In the 1987 crash, gold stocks fell when the broad stock market crashed.”
What about Commodities and Natural Resources?
Rick warns that most commodities are linked to real economic growth – and right now, it’s not looking promising.
“Oil and gas, minerals used in energy and agriculture, and base metals are seeing weak demand globally,” he explains.
Past quantitative easing and stimulus programs are part of the problem behind weak demand for commodities.
“When you lower interest rates, you bring demand ‘forward.’ We encourage people to spend today, through borrowing, rather than save and spend later.
“But we’ve been launching programs to stimulate present demand since 1998. That’s how we responded the Asian crises and the housing bust. We’ve stolen demand from the future.
“How much more liquidity can Yellen pump into the banking system? How much more demand can she take from the future when we’ve already been doing that for 15 years?”
Stimulus programs are likely to become less effective going forward, Rick believes, which doesn’t bode well for most commodity prices in the near term. But it could be very good for gold.
Watch for Rick’s follow-up discussion of the current market volatility, coming soon. E-mail us at firstname.lastname@example.org to hear Rick answer your question during this call.
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