Gold Silver Worlds: We attended a conference call with Rick Rule (founder and chairman of Sprott Global Resource Investments Ltd.) in which he shared his view on the ongoing developments in the resource and precious metals markets. In this article, we summarize the most relevant ideas related to precious metals.
A lot is ongoing in the precious metals markets. In terms of price action, the mid-April crash was the most shocking event that raised a lot of questions among investors. According to Rick Rule, the crash will likely be followed by more capitulation selling in bullion and miners. It will give way to the summer doldrums until sellers are exhausted. After that, a relief rally (at least a temporary one) is likely.
For now, a couple of trends are noteworthy in the precious metals market.
- More capitulation selling should be expected. This type of selling reaches “crescendos” from time to time, like in mid-April and earlier this week.
- We have not seen “market bifurcation” in the resource market yet. That is the situation in which the better stocks are going up while weak stocks move lower. Lately, the weakest miners have gone sideways; one should expect that those stocks will go to zero.
- The divergence between the precious metals futures market and the cash market (i.e. the physical market) suggests that we the metal is moving from weak to strong hands. Weak hands are mainly central banks in the West and momentum based institutional buyers (for instance, hedge funds). Strong hands are central banks in frontier and Eastern markets and retail investors who are buying bullion for cash. That trend should be considered as a very bullish sign.
- The capital financial drought is still ongoing. The issuers are unable or unwilling to raise capital. Rick Rule is certain “this dam will break.”
Gold in a bear or bull market?
Is the gold bull market still intact, or did we enter a bear market? That is undoubtedly the most important question which is top of mind of precious metals investors.
The cabal from large banks and so-called economic experts has never been louder proclaiming the gold bull market has completely run its course. That message has been magnified by mainstream media which prefer to bring half truths and defend the generally accepted ideas from the establishment.
The question should be answered in an unbiased way. Investors should not rely on the establishment and mainsteam media as they ususally do not offer an unbiased view. By contrast, successful investors like Rick Rule can help with focusing on the relevant facts. The following checklist which contains ten key questions provides meaningful help. Investors should answer those in a neutral way before making any conclusion.
- Is the financial crisis in the Western world over?
- Have the G20 countries balanced their budget?
- Did the commercial banks manage to become solvent?
- Are interest rates positive or negative?
- Is a global competitive devaluation to increase exports still ongoing?
- Is the European periphery still financially challenged?
- Do the Asian countries still have a cultural affinity with precious metals?
- Which are the US budgetary issues and solutions?
- Are the derivatives from large banks still a problem for economies and client portfolio’s?
- Can liquidity solve the issue of insolvency?
Rick Rule his answers to those questions suggest that the situation in precious metals has remained unchanged. Only the nature of the narrative has changed significantly. The set of circumstances that drove gold to $1900 and silver to $49 have not changed; only the perception of the facts has changed. From that point of view the most acceptable conclusion is that we are not at the end of the bull market. It is much more likely that we are in a cyclical decline in a secular bull market.
It is wise to take a look at those questions during the next capitulation selling.
Rick Rule points to the fact that resource markets are cyclical in nature. Dramatic sell offs have occurred once every two decades, more specifically in 1974 and in 1992. The next one could be imminent. Those sell offs have proven to be once in a lifetime opportunities to significantly increase investors’ wealth. However, this applies only to investors who are willing to do their homework and pick the best companies. Have you done your homework?
This article is brought to you courtesy of Gold Silver Worlds.
Related: SPDR Gold Trust ETF (NYSEARCA:GLD), iShares Silver Trust ETF (NYSEARCA:SLV).