Rick Rule: Gold Is Beginning to Lose Less Badly Against the US Dollar

by Henry Bonner, Sprott Money

At around $1,230 per ounce as of February 6, 2015, gold is slightly positive with a 0.4% increase over 12 months. The positive number comes thanks to an up-move in gold in January 2015, which took gold briefly above $1,300 on January 22nd.1

Why has gold stopped falling in the last 12-month period? And will it continue to hold above its lows?

In Sprott US Chairman Rick Rule’s latest call (available here), he explained why, if the ‘recovery’ narrative is real, he will be entering precious metals and commodities more aggressively.

While commodity prices have been weak, and oil prices in particular dropping off over the last three quarters, the general US stock market has performed well. The S&P 500 returned around 20% over the last 12 months.2

This reflects bullishness on the US economy overall, and if it’s justified, we should see “higher wages, higher auto sales, increasing sales of durable consumer goods, and, importantly, increasing capital investment in American industry.” Higher production of durable goods, more housing starts and automobile purchases should boost demand for commodities like copper or iron ore, which have been weak over the last several years.

Precious metals should also rise in a recovery scenario because “demand pull inflation (from increased spending) tends to raise prices faster than any single other factor,” says Rick.

With that in mind, the oil price decline could help the global economy.

“Households and businesses have more money left over to spend, which should be a good boost to the economies of many countries,” said Rick. It’s especially good for large mining companies, he explained, because energy is one of their main input costs. Still, it’s not likely to matter on its own for most mining stocks, which are much more dependent on the prices of the metals they produce.

Overall, the oil price drop should be good for investors in precious and base metals. The likelihood that an oil price slump could precipitate a global economic crisis is low, says Rick. “There’s been speculation that the amount of oil field debt outstanding (estimated at around $500 billion for the US3) could precipitate another debt crisis, similar to 2008. The energy sector only constitutes 2 or 3% of the US economy, so even if a third of outstanding oil debt is impaired, it’s not the stuff of a global economic crisis like housing prices were.”

Absent a real economic recovery, what does the future look like for gold?

Rick says that important moves in gold originate from deep changes in the global monetary and financial system.

Too many investors, he warns, focus on headlines such as the Swiss Franc’s departure from the Euro peg, or crises in the Middle East.

Instead, gold’s performance will depend on the outcome of its ongoing ‘war’ with the US dollar for the faith of investors and savers worldwide. In a recent interview with Sprott’s Tekoa Da Silva, Rick said:

“From my point of view, we’re simply locked in a war with the U.S. 10 year note. If the dollar strengthens, it weakens gold. If the dollar weakens it strengthens gold.”

You can see the US dollar hegemony from the fact that interest rates are so low; the 10-year US Treasury pays around 1.8% per year4 as of February 6.

Now, the official inflation rate actually dropped substantially in 2014 to 0.8% annualized, thanks in part to cheaper gas prices – so perhaps 1.8% doesn’t seem so bad. Still, leaving food and fuel aside, the official inflation rate was 1.6%.5And as of early 2010 the interest rate on 10-year Treasuries was around twice as high.6This tells you the power of the US dollar – represented by the US Treasury — right now.

Over the last few years, gold has simply been losing the war against the US dollar, says Rick. Now gold’s price is stabilizing, but Rick noted in his recent call that gold’s struggle against the US dollar is uphill, and that the dollar still has a strong upper hand:

“The dollar remains the predominant world currency, and I think it will remain so for many years to come. It’s just that over the last 12 months, gold has been losing less badly against the dollar.”

1, 2 Bloomberg

3 http://www.forbes.com/sites/christopherhelman/2014/12/19/who-will-get-caught-when-the-oil-debt-bubble-pops/

4 Bloomberg


6 http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2010

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