By Remy Blaire
Experience can be a great teacher with many difficult lessons to impart. The marketplace has its seasons that bring both expected and abnormal patterns. Sprott U.S. Holdings Inc.’s President and CEO, Rick Rule, spoke to veteran investor and market economist, Doug Casey. Rick and Doug offer colorful insights into a variety of intriguing topics that will leave you with as many questions as answers.
With decades of experience in the commodity markets it can be an easier feat to weather the storms and bask in the rays of the golden ages. Doug says it is inevitable that the “bad times turn into the good,” and cyclicality comes with the territory. As Rick and Doug reflect on the past 35 years they discuss whether we are at “the beginning of a bull market in commodities” or not.
Many a stamp litter the passports of these two investing heavyweights, but they ponder the simple things in life and contemplate the technological shifts that are changing the way global businesses function and how this affects the mining industry. A discussion on the future of cobalt is peppered with commentary on the “other green” – cannabis. A candid chat between Rick and Doug would not be complete without the latest buzz on cryptocurrencies and why digital can be more practical than bartering “luxury watches and Pumas.”
Rick Rule: It’s delightful to visit with you again. You moved out of the United States and we talk far too seldom. How are you and where are you?
Doug Casey: At the moment, I’m in the backward little socialist country of Uruguay. It’s quiet, pleasant, peaceful, but it is headed downhill slowly. I like it out here in the country. So I go back and forth between Uruguay near Punta del Este and Argentina—either in Buenos Aires or Cafayate.
Rick: And how much time are you spending in the States these days?
Doug: Just the northern summers Rick. I’m usually in Aspen where it is beautiful. I’ve still got some friends there. But you know what I find is that no matter where you go, there you are. And I wind up doing the same things. I could be in the middle of the Congo and I’d be fine as long as the internet worked. That’s the kind of place the world has become now. It’s very integrated.
Rick: I’d like to get started on your reflection of the markets. If I remember correctly, one of the first things that we talked about way back in 1987 was the whole concept of cyclicality and the fact that the bad times ushered in the good times. Perhaps, you could just riff on that theme with your thirty-five years of experience.
Doug: That’s a very interesting question that actually deserves a book. One of my main interests is history. If I look at the U.S. there has been a lot of cyclicality in American history: up and down, prosperity, depression. But the way I see it, American civilization has been headed downhill since the early 1970s.
It’s true that technologies continue to improve. Individuals try to save and try to produce more than they consume. Save the difference. That’s good. But there are some real problems out there.
I think the answer you want and people want to hear is based on what’s going to happen to the market. Idiotically, you and I both specialized in resource stocks. And once again, looking at it from a long-term point of view, the longest bear market in history is the decline in commodity prices. It has been going on for 10,000 years. Commodity prices have constantly gone down relative to value of human labor for instance.
But where are we right now in early 2018? I think we’re at the very beginning of a really big bull market. And I say that for a number of reasons. So even though I’m gloomy on a lot of things, I think that we have an excellent chance of making a real killing in the next few years in commodities. It’s nearly the only part of any financial market (including bonds and real estate) that’s cheap and that’s where we are. So I think we’re going to be rewarded.
Rick: At the beginning of your riff, Doug, you talked about the fact that commodity prices have been falling in real terms for a very long time. And I would argue that that is one of the reasons why they should do well. They’re one of the few sectors in terms of human endeavor where technology continues to add value over time. And in my experience, if the cost of an input into a finished product falls, in particular relative to the total value of the product, there’s a lot of room for the price to increase (at least) in four or five-year timeframes. Do you buy that line of thinking?
Doug: Yeah, I do buy that, Rick. Actually, there are a couple of technological considerations and technology is our friend: a friend of the average man, a friend of everybody really. But I think technology is going to overturn a lot of things in the mining industry within our lifetimes. I mean they actually are getting serious about mining the asteroid. That’s finally happening.
Nanotechnology is actually advancing and it’s going to have a real effect on what grade of ore you can mine and so forth. In the meantime, these stupid governments all over the world are making it harder and harder to put in a mine and they’re raising taxes on everything, increasing regulation on everything which is going to inhibit production. But if you put the right company on the right commodity, it’s so very bullish.
Rick: I have to say in the near term, like yourself, I am pretty bullish. It has become encouraging just in the last three or four years. Some of the lessons, some of the bad behavior that our industry exhibited five or six years ago resulted in so much carnage. Now I’m hearing on the conference calls, the mining management teams referring to things like ‘efficient capital allocation’ and ‘returns on capital employed’ rather than trying to exhibit growth for growth’s sake or being leveraged to the commodity’s prices. It would seem that for the first time in my career in the mining business that some mining company management teams are actually trying to operate these things as businesses. Any comments?
Doug: I absolutely agree with you. It’s a wonderful thing from an economic point of view to see that these guys aren’t sloppy rich and buying thousands of bottles of wine at shareholder’s expense – flying first class and throwing ridiculous parties. They always do at the top of a bull market. So that’s a very good thing and it’s a further indication that we’re actually pretty close to the bottom of a bear market, which is the time to buy.
Rick: Let’s return to technology for a second, Doug. I’m interested in your take as to the assertion that bitcoin and the evolution of cryptocurrencies are affecting the market for gold (in the near term) or that they are a rival, a substitute/medium of exchange as stores of values. Do you think there’s room for bitcoin as an example and gold? Do you think they are mutually exclusive, mutually reinforcing?
Doug: I think they’re mutually reinforcing. First of all you can use anything for money. Value is subjective. And a lot of people say that all these cryptocurrencies are scams. In today’s world dollars and pounds and euros are just fiat currencies, figments of some government’s imagination. And three quarters of the world’s people have to use totally bogus currencies like watches and Pumas. Those people are going to start using bitcoin as a transfer mechanism to get capital out of their countries – especially in Africa – as they invade Europe by the tens of millions.
So no, I don’t think this cryptocurrency thing is going to go away, but it has turned into a bubble. Over the last year, the cryptos have been very, very good to me but I’m not really involved in them right now. It’s too bubbly. I mean like most of the markets in the world. I’d just rather step aside.
Rick: I’d like to move on to another thing that interests me and think will interest you. And that is at the convergence of technology and materials. I was into it about six months ago with some people at Tesla that I found to be absolutely fascinating. It was actually picked up in later conversations I had with some folks at Toyota. And that concerned some of these new materials or newish materials that are absolutely crucial in the new economy. The one that came to mind in this discussion was cobalt. My counterparties at Tesla said to me that they could easily justify two or three times the current price (for cobalt) because of its utility if the supply increased.
I use this to the proposition that scarcity creates price movements. But in their case, they said that there was security of supply and that the utility of the commodity was so high that they would develop new fabrication uses for it. In your experience in minerals economics, have you ever seen material before…where you get to increase the price only if you can increase the supply? Or is this a new phenomenon to you?
Doug: Yeah, that’s a very interesting question, Rick. Let me start off by saying if I was Tesla, I wouldn’t be worrying about that as much as I’d be worrying about the fact that you’ve got every other auto company in the world, gigantic companies that make millions of millions of cars a year and they’re all talking about the same thing about cobalt. And I guess there’s just not enough cobalt being mined for them to put the technologies into action.
It’s a little bit of a chicken and egg type of thing. And as you know, most of the cobalt in the world is a byproduct of other metals: copper, nickel, what have you. We’re going to need more of those things too. I’m just bullish on metals at this point generally. But I’m not terribly bullish on Tesla, which makes me feel bad because I’m very sympathetic to Elon Musk. He is clearly a genius but he may be overreaching at this point.
Rick: I agree with you on almost every aspect of what you just said. It’s interesting to me, this whole phenomenon – that you find a commodity where the utility is so high. The additional fabrication uses can be developed almost without regard to the price of the commodity if the supply is sufficient.
I had this discussion with our mutual friend, Ross Beaty. Ross’s ultimate response was to begin a joint venture with Sprott in the cobalt business. Ross is a very brave guy and being involved in the business with Ross in any circumstance is a lot of fun. But for somebody like Ross to take the lead from some Chinese investor, he had to go into the cobalt space. This has really sort of opened my eyes to a few things.
I remember – six or seven years, being fairly critical of the rare earth elements craze, thinking that rare earth elements weren’t particularly rare. And in fact, that as the price rose markets would work and its supply would come on and the price would crash. I’m beginning to rethink that now in the sense that the technological applications of some of the rare earth elements may be so important that if we could assure technologies of supply, that they would use the rare earth elements and things like cobalt and industrial materials in more and more fabrication applications.
I’m still struggling through this which is why I ask you the questions so that you can debug my foolishness with regards to markets working in the near term.
Doug: You know Rick, one of the problems with doing an interview with you is that we tend to agree on just about everything that’s important. In fact, I can’t think of anything really to disagree on. But yes, I agree with you on that.
So there are 17 supposedly rare earth elements of actinides, lanthanides – that crazy place on the periodic table. And they’re not hard to get but they’re dilute and not profitable to mine. They’re messy. The market is going to solve the problem. I don’t have any doubt about that.
The interesting thing is that it looks like China controls about 80 or 90% of the world’s production. So that monopoly will be broken. I don’t worry about these things.
Rick: Let’s move on to other markets.
Doug: What I’m doing is I’m looking for you or somebody to come up with a magic little company that has a nice deposit of something – of some element that nobody has ever heard of but everybody needs in their cell phones and it could be a hundred-to-one shot. I don’t know which one it is or if it exists.
Rick: Well, mercifully Doug, you and I have had a couple of hundred-to-one shots and they didn’t involve really particularly obscure metals. They just had to do with the fact that both you and I have been willing to believe over time that markets work. And that commodities that are really, really, really deeply out of favor, commodities where the selling price is substantially below the industry average (cost of production), where the commodity will be needed again in the future, then the commodities will do well.
I’m thinking of one that will immediately bring a smile to your face. Paladin (Energy), where we enjoyed a $0.10 to $10 move. I’m reminded once again, this sort of déjà vu that markets work. Where do you see us in the uranium cycle?
Doug: Pretty close to the bottom. Coming off the bottom as a matter of fact. All of those fundamentals that have been around – they were actually very much around 20 years ago at the last bear market and they’re there again. It’s amazing! Twenty years goes like a second on a stopwatch. But I guess there’s a whole group of people out there that weren’t interested in the market or certainly not in uranium 20 years ago. They’re still not interested now.
So I think uranium is an excellent place to be. Unlike cobalt, it’s easy to get into a good uranium company today. There are a lot of little cobalt companies that have popped up like poison mushrooms after a rainstorm since people have been talking about cobalt. I don’t know how many of them have any prospects that are mining the stuff.
Rick: Yeah, it’s interesting how that works. The narrative sort of follows the money, doesn’t it? One of the things that amuses me is the proliferation of cannabis issuers in Vancouver. I am delighted to see the City of Vancouver finally focusing on an investment area that they have deep experience in. You will note that for the last 20 years, there was due diligence taking place on almost every street corner in downtown Vancouver on marijuana. And to see them move into an investment theme that they actually understand is heartening.
Doug: You’re right. But you know what? I really think that this whole cannabis thing is going to have legs for a lot of different reasons. Hemp – which is the THC free form of the pot plant – it’s going to make better paper than wood pulp, which is (actually other than selling real estate) the major industry here in Uruguay where I am at the moment. So that’s one thing…making paper which can be made into cloth.
In Aspen, where I spend the northern summers, a dozen pot stores in that tiny little town are now grossing more than the liquor stores in town. So I think that’s indicative.
Rick: Let’s move on to what we’re supposed to be talking about: investments and resources. Are there any particular sectors, either commodity sectors or issuer or explorer sectors, that are particularly interesting to you in 2018? Any sort of opportunities that stick out more than the other?
Doug: Looking at all the sectors of the market, what is cheap? Here we are, the US stock market has been going up, up, up, for like 7, 8 years now. The longest and one of the steepest bull markets in history has been mainly driven by the creation of new Federal Reserve notes. So there’s nothing that’s cheap anymore with a few exceptions. Shipping stocks are cheap. They’re down like 90, 95% peak. Offshore oil service stocks are also off about the same amount. I think they are very interesting.
And the other thing that I can think of as cheap and these are the only things that are cheap as far as I can tell, are little junior mining companies. It’s a crapshoot, besides. But I think that the central banks are going to create yet another bubble. And the bubble is going to be in commodities in general, gold in particular and especially these little exploration stocks.
It could be like what we saw back in the ‘70s and the ‘80s when the market goes 10-for-1 on some of these stocks to 100-to-1. You’re not supposed to say things like that when you’re talking in a place where retail investors can listen. But it happens. And I think it’s going to happen again.