Rick Rule: Absolutely. And first of all, gold is only in all-time highs in nominal terms. In real terms, against the U.S. dollar at least, gold is not at all-time highs. And people need to understand that when they think about where gold might go. The second thing is, with regards to the underperformance of the gold price, it's worth noting that the buying of gold is not widespread. You are not seeing retail buying of gold except in China and India. The gold purchases that you're seeing are central bank purchases. And those central bank purchases are really looking for an asset that could be a medium of exchange outside the U.S. dollar. It's the weaponization of the dollar, rather than the fear of inflation, that is the driver of gold itself. These gold buyers, central banks, are not buyers traditionally of gold equities, or equities at all, for that matter. So it makes perfect sense... to say that the gold bull market and the market in gold stocks thus far is disconnected because while the buyer has a need for gold to circumvent the U.S. dollar, the buyer doesn't have a need for gold stocks.
But there's a second reason that I think is worth discovering and that is the chronic underperformance of gold mining companies as businesses for the last 50 or 60 years. Lucijan, if you were as old as I, which I can tell you're not, you would remember the decade of the 1970s when the gold price went from $35 to $850, the best bull market for gold stocks probably in recorded history. The hangover from that, if you will, is that the gold stocks the most in that bull market were the ones that exhibited the most leverage to gold. And the most leveraged companies, ironically, are the most marginal. If you're a high cost producer and the gold prices goes up, your margin increases faster, ironically, than a more efficient producer. When the investor, which they have now for the last... 50, 60 years, looked at gold investments, they looked for the most leverage, which is to say the most marginal. And the industry became very very marginal.
If you look back to the decade 2000 to 2010, the gold price in U.S. dollars was up more than seven-fold and yet free cash flow per share among the XAU [PHLX Gold and Silver Sector Index] in the U.S. declined! It took real skill to screw up a market where the selling price of your product increased seven-fold and you reduced free cash flow per share.
So the expectations that the investment community has around gold mining companies are extraordinarily low. From my point of view, that's good news. It's good news because I don't have much competition on the bid for gold mining stocks. And I would suggest to you that some investor expectations have become more rational. I would suggest that most of the management teams that presided over the destruction of capital in the period 2000 to 2010 have been allowed to pursue other employment opportunities.
So I think that the gold industry is held in ill-repute, ironically, right at the beginning of its renaissance and I regard this as a particular opportunity.
~ Rick Rule, interview with Lucijan Valkovic, 7:20 mark, March 28, 2024
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