Note: This is not financial advice. I’m not a financial advisor and I’m wrong 100% of the time. Investments are risky and nothing mentioned here should be considered financial advice. Invest at your own risk.
Rick Rule and the contrarian investor…
Rick Rule is a self-made billionaire. He’s all over the youtubes with interviews. I’ve probably listened to about 40-50 of his interviews and he might be one of the smartest people on the planet. I cannot seem to find his educational background – which is the point of writing this post.
I’ve listened to hundreds of people over the years and read dozens of textbooks on economics, finance, etc. I’m not a trader. I’m not an accountant. I’m not a certified financial planner. I’m someone with some gray matter rattling around that wants to make a few bucks. You do not need a Wharton MBA to make millions – ask Richard Branson. You don’t need a Harvard degree to make billions – ask Bill Gates and Mark Zuckerberg who went to Harvard but didn’t graduate, let alone go on to grad school.
What you find by listening to everyone is that generally speaking, no one has a clue what’s going to happen. I mean, some people get a lot right, but they get at least a little wrong. When I want to seek financial advice, I stay away from the theorists and….follow the money. What lessons can you learn from the Rick Rules of the world? Did he follow some 1965 investment model, or was he able to strike gold, so to speak?
Rick Rule talks about how he made an ass ton on uranium in 2007….
He mentioned he was “5 years early”, which was to say he was wrong until he was right. He saw uranium was selling for $8 a pound and it took $50 to make a pound of uranium. He said, “either prices have to go up, or the lights will go out”. He also says, “the answer to low prices…is low prices”. Here’s where some book knowledge helps with the supply/demand.
When prices are low, those companies that are not efficient or solvent are the first to exit the market. Many times going into a recession you’d like to take a peak at the company’s books and look at their debt and a few quick financial ratios. Larger companies can sustain losses in order to produce goods in order to capture market share. Smaller companies that are up to their eyeballs in debt will have problems.
Over time, more and more companies would bow out of a sector. Eventually, so few companies are making a product that prices will go up by demand – and not enough companies to satisfy the demand. More time goes on and prices go up and up and some companies come back in to the sector – perhaps this time with new ways of doing things.
The economy is like a breathing lung. It inhales and exhales. It gets overbought and oversold. But – relative to what? I’ll get back to that in a minute.
What Rick Rule was able to see, as he puts it, was basic arithmetic. He bought up tons early and it took 5 years…but the price shot to $148 per pound. He said that even the worst of the junior miners had a 22-fold return on investment.
22-fold for the worst??? How do I get in on that action? So this is the type of thing I’ve looked for. Finding items that are severely undervalued for whatever reason. That’s me. I think if you want to invest at a 2% return every year for 10 years, go ahead. I don’t have that kind of patience. That’s me. You do you.
A few people in my life have thought big and have been handsomely rewarded. One had a bright idea and invented YouTube. Another was really good with fantasy football and turned his ability to predict things into a nice lifestyle for him and his family. Rick Rule is also a contrarian. He doesn’t listen to the masses.
My two friends from high school did well for themselves – but neither had a PhD nor graduate degree. Some of the lessons I can learn from them is to think big. Trust your instincts. Do you. Everyone else can sit on the sidelines and watch.
So what I plan on doing should not be what you plan on doing. You need to speak to a financial advisor and do what is right for you and your family.
As I mentioned, I’ve listened to a LOT of people over the last 6 months. I have a paper degree which gives me the ability to at least follow along with 95% of it. I’ve recently listened to some Eugene Fama – and looked him up. Smart guy, but he’s not worth a billion dollars. These guys are awesome to listen to. I got caught in listening to a lot of Milton Friedman last night. But they aren’t going to make you rich by listening to them. You need dozens of inputs if not more.
What I’m seeing right now, for me, is a situation with gold and silver that is going to pay off pretty decently down the road. But Rick Rule also had a saying. He had no idea WHEN it was going to happen – only that it was INEVITABLE. If you take the uranium example, he said that it was not possible for the lights to just “go off”. What they happened was it took time for mines to come online to service all of the demand. Eventually, the prices went way back down. He knew $8 per pound was not sustainable. That…it MUST go up. He did not have a PhD in economics. He was able to apply a lot of common sense to the situation – but there was also a lot of risk because there was not a “When”.
Side note. The same thing is happening with uranium again and many see a crunch in 2022-2023. Recently, uranium prices have begun to move up. Cameco, the largest producer of uranium, closed their Cigar Lake mine for 3 months. Supply started to tighten and many of the mines around the world are closed. With oil prices very low and the Japanese using natural gas as a stopgap until their nuclear reactors come back online, it seems prices may spike a little for the next few weeks but return to normal when mines get back up and running. The “pop” will happen in 1-2 years (or sooner) when the Japanese reactors come back online. Lots of the miners have been run out of the business over the years and it takes years to spin projects up. The BIG difference from 2007 is that Kazakhstan has some supply “in situ” they can spin up. They still see a crunch, but not getting to $148 per pound.
So – I have a couple of things I’m looking at now with gold, silver, oil. I am looking down the road maybe 12-18 months to dip my toes in the uranium space if I do decent on some of what I’m looking at.
The setup…
Right now, the fed is printing money. It’s been helicopter drops for a few weeks now. A few hundred billion there, a few trillion there. Most people have no clue how currency is created at the fed, and the cycle of how the dollar is created with debt and destroyed when paid off. Many people just see “free money”. Well…it has to get paid off, somehow.
Maybe. Kind of. Sort of.
I have spoken about Mike Maloney here, and one of my facebook friends made some mention of “is that the guy who”…and went into some speculative thing I am not going to mention here. Nothing crazy – but I posted a video of him presenting information and the immediate response was to go after the message bearer and not disagree with the information presented. This is the world we live in today – where it is very difficult to have a cup of coffee with someone and discuss big ideas because people are so intent on going after the messenger. I digress…
Mike Maloney has done some wonderful work in a topic I never thought I’d learn about. “The history of money”. This is pretty powerful stuff. One thing he talked about was…wealth cycles. He discusses asset classes – and this is where my friend brought up Fama. What little I saw of him was a man that I’d love to drink a beer or 5 with and discuss the world – but he seems to be a wickedly smart economist with models and not necessarily the chops to make a billion or two like Rick Rule. Mike Maloney has taken what he has learned from all kinds of people over the years and made a small fortune in gold and silver.
What Fama’s model seemed to lack was a control. He said that “if you mean by a recession is price goes down, that happens every now and then”. What Mike Maloney presented was mapping the Dow to gold. It shows when the markets are overvalued or undervalued as related to gold.
This shows you pretty much when to move things from the Dow to gold, and when to move from gold to the Dow.
So – what seemed to be missing from Fama’s talk was a control group. Maloney then was able to see that the RELATIVE value of one thing to another can present arbitrage opportunities over generations.
The first picture here was if you PRICED THE DOW IN GOLD. Take a look at how 1929 and 2000 pop out. At the bottom of those items, you’d buy stocks with gold (gold to cash to stocks). At the top of them, you’d cash out your stocks and buy gold.
This only goes up to 2010 because he did this lecture in 2016 when he was warning of another bubble coming. In all fairness, the spike would not be as sharp for 2020 because gold is not nearly as cheap as it was in 2000. The point of this is that it shows you periods in history where gold was severely undervalued as an asset class relative to the stock market.
Meaning – if all stocks are saturated and have 90x P/E ratios, there may not be any hidden jewels out there for growth. This is when stocks become overbought and bubbles happen.
Most of the time when you talk to anyone in the finance world about gold, you get mocked or laughed at. Yes – stocks and derivatives can make you SERIOUS cash. But just like above, there are times where there’s no VALUE in buying stocks that are all about to contract.
How can you see it coming? Pretty much every analyst out there in fall of 2019 all mentioned how we were overbought. This wasn’t really the news. The news was everyone kept pumping money into the market.
This time around – something interesting happened. Gold started making a move in 2019. Do you remember this whole funny business with the overnights and the repos in September? That day is when all of this started unfolding. We were all warned about that inverted yield curve. Well – the fed lowered interest rates and began injecting currency into the economy. Gold started moving from $1100 or so last year as big money started sniffing problems.
These people knew something was up.
With the “wealth cycles” video – Maloney’s concept was that you can build generational wealth by moving your currency between asset classes at opportune times.
Take a look at the below chart.
The “big picture” concept here is not to hold stocks for 90 years. Or gold. The concept is to move currency between asset classes based off of their performance relative to each other – but this is more easily measured in gold. Whenever I talk about any form of previous metals to financial people, they all stick up their nose and say the dow outperforms precious metals. Yes. Sort of – but the chart above shows you a clear arbitrage opportunity.
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If you look at those ratios above, it shows the peaks at 20, 25, and 45x. If you bought a LOT of gold at the peak of 45x, you’d be very, very rich man by moving that to stocks in 2011. You would then ride the dow to epic proportions and look for a peak and that is when gold is undervalued relative to the dow. When you see that ride up, buy stocks, When that peak turns over, I’d sell the gold for equities. So – I got into precious metals recently when that peak was at the top, and I plan on riding it down. That ratio goes down with higher metal prices and lower dow prices.
At one point gold was 1270 in 2019 with a peak of around 29,000 last year. That gives you 22.8 as a ratio, which is on pace with the first 2 arbitrage examples that have peaks. Right now it’s at 10.58 and if you look at the charts, it suggests the ratio might go as low as 5 if not lower. This could be 15,000 dow and $3,000 gold to give you 5. This might be the second bottom in 1-4 months. ALL STOCKS may get punished again, even the mining stocks. What you saw recently was gold (GLD) was hit, gold, every mining stock – and almost all of them rebounded in a few weeks because gold itself is up for the year. If a double bottom happens – EVERYTHING will be hit, but I’d feel these have a relatively short recovery time – especially if gold is at $3,000 and it is very profitable. I am thinking about what that might be like when the 2nd qtr profits hit and JCPenney is in the tank but Barrick Gold is at record profits.
Just how long until wall st then connects those dots and institutional money flocks to these stocks and metals????
When that happens is when the common person starts getting interested in metals and the price will shoot up even higher. Those that can’t afford gold move to silver. This is where I feel the 3rd qtr/4th qtr will be very, very good to silver. Silver’s market total is $44 billion with 3 billion or so ounces above ground. This means there’s about enough for each person on the planet to buy 2 ounces of silver. What if 1 out of 100 people wanted to buy silver? That means each one of those people can buy about 200 ounces. At current rates, that’s $3,000. I could see this happening – but that consumes all of the above ground silver. If there’s a mad rush for silver in the second half of this year, are you going to let yours go for $15? While spot “says” $15 now, in reality it’s being sold at $23-$25. Spot market hasn’t caught up with investment demand at the moment. Keith Neumeyer, CEO of First Majestic Silver – said he’s not selling any silver for less than $17 per ounce. He’s the second largest silver miner.
So – at $15, there’s a LOT of upward pressure on silver. I lumped in silver with gold because they both move with these crises. First is gold. In times of uncertainty, the ultimate money and wealth preservation tool is gold. This preserves wealth in tough times. But – so does silver, albeit in a more volatile situation. “Poor man’s gold” – in India and China – people buy silver AND gold as jewelry in times of bounty to have savings for when times get tough. They have been doing this for thousands of years. This has been their form of wealth preservation – not paper currency.
One of my readers pointed out that silver is an industrial commodity and any forecast that does not count this is inaccurate. This is partially true. Yes – silver investment is about 200 mln ounces per year where industrial takes up a good deal of the rest. Maybe 600 mln ounces. Investment is skyrocketing right now, and I could see this going to 250-300 mln ounces this year. Possibly. But with the industrial component, you’re talking about electronics and solar panels. Silver is the best conductor and as such – it is being used in more and more industries. I want the readers to not to confuse silver with other base metals like copper, iron, etc. Those have HEAVY industrial uses in cars, buildings, and other building materials like bridges. With this – THAT demand will crater. Most of silver’s production is a byproduct of the base metal production.
So while silver’s demand might go from 600 mln down to 500 mln. Maybe. But think of the supply being cut. Maybe the tap is shut off from base metal production? I think the supply side of metals mining might have more of an impact than silver’s demand in industry.
Additionally – Neumeyer said that electric cars use 1-5kg of silver. While there are 3 million electric cars on the road today, there is estimated to be 125-150 million in the next 10 years. With Ford and GM in a lot of trouble, 8 years behind Tesla in technology, and have mounts of debt – Tesla is poised to take MUCH more of their market share in the next 5 years. With Tesla also doing…solar roofs…there is a HUGE upside possibility of a LOT more tesla’s being built in the next 5 years. If you look at Tesla’s stock – it got hammered just like every other stock, but wow – people flocked back to it.
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The whole thing starts with an investment in 1920 or so and ends 100 years later with $15 million in gold. Let’s go into that quick…
I’m condensing the steps, but for example, if you were to buy a house in 1920 and sell it another time for gold, then trade the gold in for housing, then gold, then housing – the concept is to sell one asset class at the peak of its value for an undervalued asset class.
This was what I royally got right in 2000, but screwed up in 2007.
In 2000, I bought a condo in a perfect location – King of Prussia, PA. In the “dot com” boom, I lived along what was called “Philicon Valley” outside of Philly. I bought the condo for $61,900 and sold it 2 years later, in cash, in 2 days, for $95,000. Five years later, it sold for $150,000. However – the dow was really high in 2000. If you had taken $x of your money from the dow at its peak and bought that house in 2000, then sold it at the peak in 2008, you would have gotten about 2.5x in cash. Had you then taken that cash and avoided the market, and put it into gold, you would have then had 3 times that in 3 years. Or, 6x from 2000. Had you taken that money in 2011 at the peak of the gold market and put it into the dow and rode that out until 2019, you’d be looking at another 3x. The market was overbought in 2019, and had you put that into gold….
In 2 years, you may have 2-3 more x. This would give you a possibility for 54x in 21 years.
Started at $61,900. Could have ended 2022 with $3.3 million. I chose wrong 🙂
So – the concept here is not that I plan on being the smartest wall st guy that ever lived. I want to learn from my mistakes and do better this time around. I want to be able to transfer whatever crumbs I have to higher performing asset classes – relative to each other, not the dollar. So maybe I invest in the metals for another 12-24 months, and when the charts tell me to move it to equities (or real estate), I do it. Right now – there’s a possible housing bubble about to pop. Maybe in 12-18 months, the prices of these metals skyrocket and this can be transferred to cash to then buy depressed properties. Maybe when a property bubble is forming again in 5-10 years, maybe you sell the property then and buy metals. And on and on.
You just need to understand which one of the asset classes is underperforming relative to one another.
In 2007, at the peak of the housing market, I bought a house in a not so great location at a price my realtor warned was a little high. I talked them $20k down from their price and he still warned it was 10k too high. While I did good with the proceeds from my house sale in 2000 – I bought in 2007 at a time when there was virtually no supply, and the supply that was there was over priced. Had I waited 2 more years, I probably could have gotten the same house for half the cost. THESE are lessons you learn about asset classes.
So what am I doing now? I feel gold is severely undervalued versus house and Dow prices. Furthermore – silver is even more undervalued than gold.
This is the history of the gold to silver ratio. In the history of mankind, this was about 15:1. 15 ounces of silver could buy 1 ounce of gold. In the last 100 years or so, we normally see this at 30-40:1, and the last 25 years or so more like 45-50:1. Three weeks ago, it hit 124:1.
What you notice about this is two major dips – in 1980 and 2011. In 1980, silver hit (adjusted for inflation) about $150 per ounce. In 2011, it hit about $50 per ounce. It briefly had a small dip in 2016 when it hit $21 per ounce. If you look at the charts above – you see 1980 and 2011 was at the same time gold should be exchange for the dow. This is how silver moves with gold. The precious metals asset class moves together, in a way.
There are some items creating the perfect storm here.
The big thing I’m seeing on youtube with all of the financial stuff I watch is talk about a depression. “25 million unemployed!”. Truth is, the mass unemployment will be temporary. What makes this far different from the great depression is this:
Remember how I talked about Milton Friedman above? He discusses the big issue with the great depression was monetary policy. Back then, the dollar was pegged to gold. You couldn’t just print money in your Fed basement. That lack of liquidity more or less broke the system – the VELOCITY of currency STOPPED. Those that had it, wouldn’t spend it. This had cascading effects where banks could not lend. Credit froze.
With the 1929 crash, you had a “dead cat bounce” recovery – and then it falling off of a cliff. Many right now feel we are at the peak of the dead cat bounce and we are about to fall off a cliff. WHAT IS DIFFERENT is the Fed learned from that lesson and promised “infinite liquidity”. What this means, to me, is that we will most likely have some significant pullback in equities yet. I heard this a few days ago and it sounds like what I was thinking…
A “W shaped” recovery. This has a double bottom. This is very similar to the 1921 recession I wrote about a few weeks ago…
Why a W and not another cliff?
The big thing here is printing mad amount of cash. Remember what I said about the “velocity of currency”? This is a big Keynesian concept but it definitely applies here. If your velocity of currency STOPs, you will get that second cliff you saw in 1929. So right now the fed got out their printing presses and keyboards and are creating currency and getting it to people to pay their bills ASAP.
This reduces defaults, keeps the court systems from overflowing, and keeps property owners continuing to get income on their investments.
If they can print currency until people get back to work, what you will have is:
- terrible 2nd qtr numbers, bankruptcies, and layoffs. This is where the next drop comes in to play. And – at the same time, gold and silver equities will have record profits.
- A recovery with a lot more people getting back to work and the fed continuing to prop things up. We are already $4.5-6 trillion in on this.
Now – some companies should fail. I just saw something where JC Penney is filing for bankruptcy. Many companies that were already loaded with debt and having shitty sales…will go away. Those jobs will be lost, but many of those stores had closed long before this COVID issue. This is just the death knell those companies. However – there are going to be lots of jobs available when the re-opens happen.
Will we still see unemployment? Yes. But nowhere near 25 million people. Maybe 4-6 million for a few months and then down to 2-4 million.
Big picture…please
The fed has to print money. There’s really no other choice. But what this does is debase your currency. The 10 years are in the shitter. There’s a real problem with the bond market coming. Real problem.
Remember what I said about moving assets at the peak of the stock market?
Watch gold and silver. Big money has already started moving to gold. Gold is finding a lot of support around $1750 these days, with the high of $1900 in 2011. At the relative bottom of this ratio a few weeks ago, you would see 10.58. This tells me one of two things – gold has to get much higher before a recovery or the dow has to get much lower.
Silver usually moves 3-6 months after gold. Both gold and silver paper spot prices got smashed a few weeks ago, but gold has recovered fully and then some and silver is trailing.
To complicate everything, you have supply issues with the COMEX, the miners getting shut down, and the refineries/mints being shut down. The feds are watching for spoofing issues with paper prices.
But I also mentioned “debasing the currency”. This is a fancy way of saying that inflation is coming. Big time. Metals are how you protect against inflation.
For example, let’s say 1 ounce of gold is worth $1750 today. If gold goes to $4,000 per ounce, it’s not a speculative “investment”. What that’s basically telling you is that your currency is worth less than it used to be and it takes more of your currency to buy 1 ounce.
Now – you don’t hold that gold forever. Maybe 18-60 months out, gold prices have peaked at $4,300. Maybe stocks are really low priced. Maybe housing prices deflated a lot or were stagnant. You buy the house or rental unit at low price when gold is then overvalued. Had you just held the stocks, they would have dipped down and finally recovered. But of you took that stock money at the peak and bought gold, when you go back 4-5 years later you would be able to buy 2-4x the stocks.
So….buying “gold” here for me is mostly exposure to precious metals. How do you get exposure?
- Physical – if silver goes from $15 to $30, that is usually a hedge against inflation. You are keeping your wealth. With physical, you are not looking for the 22x return that Rick Rule got. You can have this at your house (not really recommended) or vault it.
- Stocks (mining) – mining stocks can be risky. There are big ones that have been around for awhile. Here’s the interesting thing. If a company makes $100 million in profit when silver is $15 per ounce and it costs them $14 to produce it, when silver hits $20, $30, $50, $100 per ounce starts to really show how you can benefit from mining equities. There are the big companies and the juniors. The juniors are far more risky.
- Stocks (exploration) – Many of the big companies don’t have 7 years to build out mines, get permits. They want products ready to go. There are exploration companies out there that make bank.
- Stocks (streaming) – these are companies out there that lend money to miners. In return, they get to buy silver/gold from them at reduced prices forever. These companies take the risks of lending money to miners, but then have the great reward of making money forever. I’m researching these more and more. They are very lightweight in staffing and are more credit-based types of organizations. This is what Rick Rule is getting involved in. So – you lend out money to junior gold miners. You have a contract that states for all future mining activities, you can buy 100,000 ounces per year at $400 per ounce. This is a good deal for miners, and if the price shoots the moon – this profit is split by the miners and streaming companies.
- Stocks (ETFs – miners) – I personally don’t like these terribly much but I have some interest in things like GDX and GDXJ to get exposure to a cross section of mining stocks. I don’t like the idea of trying to pick which 150 of the 2000 junior gold miners will be here next year. I let the GDXJ people do all of that research for me.
- Vaulting services – I personally like OneGold, but you can also use Mike Maloney’s GoldSilver.com to have some physical stored there.
- Stocks (derivatives) – be careful with these. My buddy pointed out NUGT and JNUG to me. Both of these recently did a reverse split, which makes it look like the price suddenly went higher.
- Stocks (ETFs – physical) – for silver, you have popular SLV and SIVR. Both have vaults of silver, but SIVR has lower maintenance costs than SLV. For gold, you have GLD and BAR where BAR has a lower maintenance cost.
With respect to precious metals – I definitely see some interesting price action happening in the next 2-6 weeks with the COMEX. Some feel there may be a form of short squeeze coming.
All in all – my HOPE is that the fiscal policy guys who are running the show somehow pull this shit off and the recovery is already in progress. Something I’m concerned about is if a lot of this funny money being printed winds up in stocks and artificially inflates the stock market higher.
Meaning – the dow may say 27,000 but in reality inflation has hit so bad due to the trillions entering our economy that the spending power decreased.
Mike Maloney also talks about the Weimar republic and how hyper inflation eventually happened.
What I’d like to do is maybe get a few bucks out of metals in the next few years, then when I feel they are overvalued against the stock market – convert them back into equities or properties. I do have properties now, and it would be nice to pay them off and use that income to buy equities.
Every month, here’s what I will look at:
- Gold to dow ratio. This will reveal the peaks and when the change is happening.
- Gold to home price ratio (for your area). This may be a telling sign where your home prices may be at a peak. Maybe you don’t sell at this point because they bring in cash – but the low ratios might signal where you can trade in gold for cash for real estate to buy at the low points.
Gold price to real estate price:
What this shows you is when you need the LEAST amount of gold to purchase real estate.
So – for example, if I took 96 ounces of gold in 2012, I could buy a median priced house in my zip code. You could turn around and then sell that house in 2015 and get 155 ounces back. That 155 ounces relative to the dow is not performing, so you convert that to cash and invest in the dow.
What happens if there’s another downturn?
Maybe gold goes up to 2100 and the RE median price drops to 17500?
This shows a good opportunity to buy a house with gold to cash. If gold goes to $3000…..
- Stocks may be cheap relative to gold
- Real estate may be cheap relative to gold.
When the financial guys laugh about investing in gold or silver – think of these ratios. What might be of issue for you is to understand the median property values for YOUR area, as the values in my area might not be the same as yours. This is where you might also be able to look in your region and do some numbers. You might find “gold” in a neighboring city with ultra-depressed property values because a meat packing plant that hired 5,000 workers went out of business.
Maloney points out that if you invested in the stock market in 1929, and with inflation, if you held those stocks to today, you’d have a 5% return on your investment in 90 years. However, if you played the ratios – you’d have taken a tiny amount of investment and turned that into $15 million.
Within that, you have the gold to silver ratio. So these also can present an arbitrage scenario.
The same concept is at play. If the ratio is under 50, you mostly buy gold. When the ratio gets to 80 or 90 to one, you cash in your gold for silver and buy silver. When it goes back to 40:1, cash in the silver for gold.
This is the concept of building wealth for generations. Not a get rich quick scheme.
So – the concept of what I’m trying to do is to find the underperforming asset class, no matter what it is, and invest in it.
What is mentioned above is not financial advice – but showing you what I’m planning to do with MY assets. Your performance and risk tolerances may vary, and you should discuss your financial future with a licensed financial advisor and not listen to some idiot on the internet. This is written for entertainment purposes only.
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