Rick Rule: When Silver Moves, It Moves Hard — Don’t Be Late

Key Concepts

Silver's Outperformance: Silver's tendency to significantly outpace gold during precious metals bull markets, often at double the rate of gold's escalation.
Investment Demand vs. Industrial Demand: The primary driver of silver bull markets is investment demand, not industrial applications, although industrial demand provides a stable base.
Monetary Metal Characteristics: Silver retains monetary metal characteristics, serving as a store of value and an informal unit of exchange, particularly in South Asia.
Above-Ground Silver Stock: The difficulty in accurately estimating the total above-ground silver supply, which impacts its monetary value and market dynamics.
Lease Rates: High lease rates for silver indicate a near-term squeeze and a belief that silver is "out of system" but can enter the market over time.
Silver Equities: The market capitalization of quality silver equities is insufficient to absorb significant capital inflows, leading to extreme price movements.
Fundamental Drivers of Precious Metals: Anti-dollar sentiment, deteriorating US finances, and eroding Fed credibility are long-term fundamentals supporting precious metals.
Negative Real Interest Rates: Savers experiencing negative real interest rates in fiat-denominated instruments create a favorable environment for gold.
Hedonic Adjustments in CPI: The methodology used by the Bureau of Labor Statistics (BLS) to adjust for quality improvements in goods and services, which can artificially lower reported inflation rates.
Political Risk in Mining Investments: The willingness to accept political risk in certain jurisdictions for potential higher returns in mining investments.

Silver's Role in Precious Metals Bull Markets

Rick Rule emphasizes that while precious metals bull markets are generally led by gold due to fear buyers, silver begins to outpace gold substantially once the narrative is justified by gold's price momentum and generalist investors enter the market. He notes that from the point silver starts outperforming gold, its rate of escalation is at least double that of gold. This phenomenon is currently being observed, with retail physical silver dealers running out of product, indicating strong demand. While the recent velocity of silver's performance may not continue at the same pace, Rule remains positively convinced that the precious metals bull market is very much intact, albeit volatile.

Current Market Conditions and Fundamentals

Trey Reich highlights the impressive recent performance of both gold and silver, with silver up 78% year-to-date, significantly outperforming gold's 57% rise. Rick Rule is not surprised by these figures, suggesting that the metals are "playing catch-up" after years of building pressure against fiat-denominated savings products like US Treasuries. He attributes this to pent-up fundamentals dating back at least seven or eight years, particularly since 1999.

Rule identifies three key long-term fundamentals supporting precious metals:

Anti-dollar sentiment: A growing distrust in the US dollar.
Deteriorating US finances: An increasing US national debt and liabilities.
Eroding Fed credibility: A decline in confidence in the Federal Reserve's policies.

He elaborates on the deteriorating US financial situation by pointing out that US on-balance sheet liabilities relative to GDP have risen from 30% 40 years ago to 120% currently. Furthermore, the net present value of unfunded entitlement liabilities exceeds $120 trillion, a stark mismatch with the gross federal income of $5 trillion.

A critical factor making the current situation different, according to Rule, is the dawning realization by US savers of negative real interest rates. He estimates that the purchasing power of savings is declining at approximately 8% compounded annually, while instruments like the US 10-year Treasury yield only around 4.6%. This results in a real loss of 3.4% per year, making it a fundamentally unsustainable situation for gold.

Trey Reich adds a footnote on the hedonic adjustments used by the Bureau of Labor Statistics (BLS) to calculate the Consumer Price Index (CPI). He explains that these adjustments, which account for quality improvements (e.g., more powerful computers) or consumer substitution (e.g., switching from steak to pork if steak prices rise), can artificially lower the reported inflation rate.

Silver: Investment Demand as the Primary Driver

While acknowledging the solid footing of industrial demand for silver, which has increased by about a third in the last four to five years, Rule agrees with Reich that investment demand is the true catalyst for silver bull markets. He states that in his experience, the delta between buyers and sellers in the investment market is what drives significant price moves. He recalls a period when photographic demand for silver declined, yet the silver market experienced a significant spike, which he attributes solely to investment market dynamics.

Rule also points out the peculiar nature of silver supply:

Most silver is a byproduct of other metal mining (e.g., copper, zinc, lead) or from recycling.
An increasing silver price doesn't necessarily stimulate new supply in the same way that rising copper or zinc prices do. This makes it difficult to judge silver pricing solely based on industrial demand.

Silver as a Monetary Metal

Rule affirms that silver is indeed a monetary metal, though he describes it as "in drag." He explains that a monetary metal serves two functions:

Store of value: Savers believe they can transact in it and maintain purchasing power.
Unit of exchange: It can be used for transactions.

He highlights silver's role as a store of value, particularly in South Asia (Pakistan, India, Bangladesh, Sri Lanka), where a thousand years of experience with currency debasement has led people to store wealth in precious metals. For millions in South Asia, gold is too expensive, making silver their preferred choice. He notes that silver also functions as an informal unit of exchange in these regions.

The Mystery of Above-Ground Silver Stocks

A key characteristic of gold as a monetary metal is its large fixed above-ground stock relative to its flow. Approximately 216,000 tons of gold exist, with a significant portion in jewelry. Rule estimates around $15 trillion of investable gold.

In contrast, the above-ground stock of silver is one of the great mysteries. Rule admits he has been trying to estimate it for 20 years without success. He recounts the story of Warren Buffett's significant silver holdings in the past, which, combined with normal market dynamics, caused a dramatic price escalation. When the price doubled in US dollar terms, the US dollar also doubled against the rupee, leading to a flood of previously unknown silver supply from India due to a bad harvest. This event taught him the difficulty of accurately assessing above-ground supplies and timing silver bull markets.

He concludes that silver's significant price movements make being early not a problem, as "silver pays so much rent when it moves that you can easily afford to be early and you cannot afford to be late."

Dwindling Exchange Stocks and Near-Term Squeeze

Reich mentions the media's focus on dwindling stocks at the LBMA and COMEX. Rule agrees that looking solely at these exchange stocks is shortsighted, as a significant amount of silver exists in other repositories and global wealth tends to remain unnoticed. He estimates a potential six billion ounces of silver in this "out of system" category.

The conversation then shifts to the one-month lease rates for silver, which have reached unprecedented levels: 33% for the near month, 22% for the three-month, and 9% for the twelve-month. Rule describes these rates as "catastrophic" for silver shorts, as they far exceed typical equity margins and the historical lease rates that traders could afford (3-4%). This indicates a near-term squeeze and a market belief that silver "out of system" can eventually enter the market.

Potential Price Targets and Investment Strategy

Regarding price targets, Reich mentions a gold target of $17,250 by 2030. Rule believes that if the US dollar's purchasing power declines by 75% over 10 years, the nominal US dollar price of gold could triple. He reiterates that silver's escalation rate could double that of gold, suggesting a potential four-bagger for gold and an eight-bagger for silver.

However, Rule emphasizes that he holds gold primarily as savings to maintain purchasing power and silver for speculative greed. He advises caution, especially for those new to the market, as silver is inherently more volatile than gold. He notes that in past silver bull markets, 50% declines have occurred even amidst significant upside.

For individual investors, Rule suggests:

Long-term horizon (5-10 years): It's not a bad time to buy silver if underweight precious metals.
Short-term traders: May consider taking some profits.
Portfolio allocation: The amount of gold and silver to own depends on the rest of the portfolio. Those heavily invested in long-term treasuries should hedge with precious metals.
Psychological and financial preparation: Investors must be prepared for volatility to stay in the trade.

Acquiring and Building Silver Exposure

Rule discusses various ways to gain silver exposure:

Physical Possession: While some prefer holding silver personally ("midnight gardeners"), it exposes them to risks.
Segregated Storage: He recommends clients own physical silver in segregated storage with reputable dealers to avoid risks seen in the 1970s.
Custodial Services: Battle Bank offers custodial services for gold and silver and allows access to credit secured by bullion.
Silver Equities: The market capitalization of quality silver equities is small, leading to extreme price movements when generalist investors enter. He highlights that there are only about 15 "pure play" silver companies with significant market caps.

He identifies several companies with "real upside volatility" and legitimate leverage to the silver price:

Premium Silver Names (Large Cap): Pan-American Silver, First Majestic Silver, Hecla Mining, and Coeur Mining are mentioned as examples of companies with significant silver revenue and market presence.
Developing/Exploration Companies (Higher Risk/Reward):
- Wheaton Precious Metals: While no longer purely a silver company, it retains substantial silver revenues and is considered undervalued on a net present value basis.
- Pan-American Silver: Has made significant acquisitions and is generating substantial cash flow.
- Fresnillo and Buenaventura: Rule is willing to take on political risk for their project development pipelines.
- First Majestic Silver: Known for its strong investor relations and cult following.
- Hecla Mining and Coeur Mining: Offer political security and familiarity with upside leverage to silver.
- AbraPlata: Attractively priced due to its remote deposit, with predictive exploration.
- Vista Silver: Rule owns it despite rational fears of local issues.
- Silvercorp Metals: A controversial name due to a recent short report, which Rule refutes, highlighting the company's strong defense and audited reports.

Rule emphasizes that for investors who lack the experience to differentiate between good, bad, and ugly junior miners, capturing the beta in the sector (300-400% returns) from the larger, more established silver companies is often sufficient, and they don't need to chase alpha.

Silver Conference and Keynote Speaker

The discussion concludes with a promotion for a full-day silver conference hosted by Wealthon and SCP Resource Finance in Toronto on the 23rd, available in-person and virtually. Keynote speaker Eric Sprott, described as a legendary speculator and entertaining speaker, will kick off the event. Other speakers include Michael Steinman and representatives from First Majestic.