Sprott Global’s chairman shares his thoughts.
This article originally appeared on Sprotts Thoughts and is republished here by permission.
On March 18, Rick Rule, chairman of Sprott Global Resource Investments Ltd., answered the most important questions on natural resources and precious metals today. Rick has recently warned investors not to become too bullish too soon—there will be more pullbacks and sell-offs ahead, he says.
Where is gold headed in the next one to five years?
“I believe that the gold price bottomed in 2013,” Rick begins. “Between 2011 and 2013, traders drove the gold price down, unwinding leveraged bets on gold. For most of that period, there were forced sellers and not much buying.
“In the middle part of 2013, we saw a stalemate between exhausted sellers and buyers. As the forced selling by leveraged traders passed, gold began to find a bid, taking the price higher so far in 2014.
“The gold price rally will not necessarily continue through 2014. But as an investor with an outlook of three-to-five years, I believe ownership of gold will be critical to maintaining your wealth in the next few years.”
Are institutions intentionally driving down prices by shorting the metals?
“The situation is different depending on the metal you are talking about,” says Rick. “In platinum and palladium, for instance, there are almost no short-sellers of the metals.
“On the gold side, traders are now covering their short positions, which could indicate that downwards momentum has subsided.”
Was there a concerted effort to drive down the metals? “I believe that any potential manipulation is disappearing,” said Rick. “The banks’ and other major institutions’ ability to manipulate metals prices is under increasing regulatory scrutiny.”
How long will the Fed keep interest rates low?
“As long as they can get away with it,” says Rick. “Suppressed interest rates take money from savers, who receive an artificially low return, and rewards spenders with the ability to borrow more at lower rates.
“Because spenders outnumber savers, elections and political powers tend to favor low-interest-rate policies like the current ZIRP [zero-interest-rate policy] in the United States.”
So far, a weak recovery has prevented low interest rates from causing high inflation, he adds.
“We are in a very strange situation—a jobless recovery with little new investment in production. The demand for capital has been muted as a result, which has prevented easy money from translating into greater inflation.
“Because the economy remains anemic, interest rates could stay low for the next two or three years. But markets always win in the end. Eventually, I would expect inflation and higher interest rates to arise.”
Will there be a “meltdown” in the metals sector before a new bull market takes off?
“I don’t think that we will see another move down like the one from 2011 to 2013, where gold dropped 30 percent and mining stocks fell by over 50 percent. But this is still the most volatile sector in the world. Just as gold went up by over 1,000 in only a few months, we could see it return to around 1,150 at some point before the year is over.
“In fact, I believe the market will mostly move sideways over the next 18 months with intermittent rallies and subsequent sell-offs. Once this period is passed, we could see a major bull market truly take off.”