Is it time to get out of gold stocks? That was a question posed to Rick Rule, the President of Sprott US, during a recent interview. Rule also gave his criteria for finding the best gold companies and why the money flowing into the gold sector isn’t following the traditional rules.
He was asked about gold stocks. To this, Rule said that out of all the publicly listed junior mining companies, only a few are viable. He says now is the time to exhibit “extreme caution.”
“Out of 1500 junior listings worldwide, only probably only 200 or 300 are viable. Many of those viables ones have become a little less viable simply as a consequence of their market capitalization. And amazingly, many of the non-viable ones have gotten financed. So this is the time to exhibit caution,” said Rule.
While he doesn’t say to exit the sector, he does believe it is overbought in the near term.
“I’m not saying to exit the sector, what I’m saying is in terms of the whole sector, the easy money has been made. That doesn’t mean that the big money isn’t in front of us in individual issues, it just means it’s time to exhibit substantially more caution than we’ve had to exhibit over the last 12 months. I think that the sector is near-term overbought.”
Gold Stocks a Good Investment?
Even with gold prices moving back below $2,000 an ounce, he says there are three reasons why gold is still a good investment. He also believes none of them will change anytime soon.
“As we’ve discussed before, the wind is in precious metal’s sails. Quantitative easing, debt and deficits, artificially low interest rates, all of these are good for gold and none of them are likely to change. So the gold price in my view goes higher, perhaps sharply higher.”
What has Rule worried is the “flow of funds” into the sector isn’t following the traditional rules.
“In prior gold bull markets in my career, the equities gold bull markets followed predictable patterns. The biggest and best companies, the highest margin companies, the most liquid companies moved first. So the Barrick (Gold), the Franco (Nevada), the Wheaton (Precious Metals), the Agnico (Eagle Mines) move first. Then the second tier, what I call “the best of the rest” move. Then after that the single-asset companies, that were perceived as riskier because they only had one source of income, moved. Then the advanced development companies would move, then the advanced exploration companies would move, then the juniors would move. What happened this time was the leadership went right straight from the best-of-the-best to the juniors. I’ve never seen this happen before. So the flow-of-funds didn’t cascade down the quality trail that way it traditionally has.”
What Can Profit
Rule says he’s been taking profits on some of his junior mining investments, and moving up the “quality trail” to larger gold producers. This, he believes, could generate “eye-popping” profits in the next few years.
“I’ve been rotating capital out of some of the juniors, taking profits where I’ve thought profits had been given to me too easily, and moving up the quality trail. In addition, with new money, and there’s lots of new money in the sector, when someone comes to me to establish a gold portfolio, somebody that is new to the sector from a different industry, I’m putting that money in the best of the best. I’m hoping they participate in the beta without trying to generate alpha by owning smaller names. If we take the gold price, or the silver price as high as I think it might go in the two or three-year timeframe, the amount of money you’ll make in the best of the best stocks, I think, could be eye-popping.”
Considerations in Choosing a Gold Company
Finally, when pressed to reveal a few of his criteria for selecting a gold company, Rule provided some invaluable insights.
“I like operating margin, I like very, very, very high margin companies. I like Tier One deposits, more than 5 million ounces, producing more than 400,000 ounces a year. I’m less fussy about jurisdiction than many of my peers. I’m reasonably comfortable in Russia, I’ve made a lot of money in Congo, I’ll never say I’m comfortable, but I really care about people. So if you give me a Pierre Lasonde, if you give me a Randy Smallwood (President of Wheaton Precious Metals), if you give me a Mark Bristow (CEO of Barrick Gold), Sean Boyd (CEO at Agnico-Eagle), I become a lot more comfortable. What you find with these Tier One deposits, by the way, in the best-of-the-best, these Tier One deposits, well all deposits, give you surprises. But Tier One deposits always give you good surprises. Tier Three deposits usually give you bad surprises. At 67, in my declining years, I would prefer good surprises.”