June 27, 2013 | By Tekoa Da Silva
Following this week’s stunning and repeated collapse in gold and mining equities, I had the chance to reconnect with legendary resource financier and investor, Rick Rule, Chairman of Sprott US Holdings.
It was a fascinating conversation as Rick indicated that he’s now seeing capitulation on behalf of institutional investors, once again creating the “spectacular set of circumstances” which catapulted Sprott Asset Management, “from [being] a $10 million manager to a $10 billion dollar manager.”
Speaking toward what he’s seeing from the institutional investor community, Rick said, “This is the fourth time in my career that I’ve seen capitulation selling, and it get’s ugly and spasmodic…Last week I was on the East Coast of the United States visiting very large institutional investors, and the level of indecision I saw was absolutely classic of the period right before capitulation—and this week, right on schedule, we’re getting it. [It's] truly ugly, but it’s the kind of cleansing the market needs.”
In terms of how long this capitulation period might last, Rick said, “I think we’re going to see [continued] washout selling this summer—absolute capitulation selling, and then you’re going to have a sideways tail in the equities, as both the buyers and sellers [become] exhausted…But this is the beginning of the end, [as] I believe the precious metals themselves (as bullion) are oversold, and we might be due for a technical rebound. [However] it could sell-off again, as it’s not uncommon to see a double bottom.”
Pointing toward an historical precedent of this tough market on gold, Rick explained that, “Past is often prologue…[for example] in the period from 1970-1975 gold advanced six-fold…and suddenly over nine months [went] from $200 to $100. Investors who didn’t have the courage to survive a 50% cyclical decline in a secular bull market…missed the move in gold from $100 to $850, an eight fold move over six short years, and the move in equities was even greater. That’s a really instructive lesson.”
When asked about the significance of 50%-75% declines in mining equities in recent weeks, Rick said, “This is the way markets work. It’s bear markets that cause bull markets, and the inverse reaction is really a function of…the depth and severity of this down market cycle. The fact that maybe 700 juniors will go away over the next 12 months—sets the stage for a truly spectacular recovery.”
With respect to how spectacular that recovery might be, Rick said, “In the 1998-2000 time-frame…the capital that we allocated at market bottoms, over [the next] 5 to 7 years…generated 20 to 1 returns…[So] small focused investors, who are willing to allocate capital now, and have a two, three, five year time frame—can expect spectacular returns—if they do the work.”
As a final story on building wealth during the bottoms of horrifying bear markets, Rick commented that, “I was talking with Eric this morning on the phone, and what he reinforced to me was that he built Sprott from a ten million dollar manager to a ten billion dollar manager, by the aggressive deployment of capital at times like these. Eric has always said, ‘Don’t be afraid to be right’. That’s where we are right now…This is the time when the ’A’ players go to war.”
This interview, conducted with one of the world’s greatest performing natural resource financiers, may mark an absolutely historic time. It is required listening for serious investors and market students.
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Tekoa Da Silva
Bull Market Thinking