Rick Rule: What Could Be the Next Hot Commodity?

TL;DR

Rick Rule identifies cobalt as a potentially important commodity while explaining that lithium’s constraint is processing capacity, not resource supply. He also discusses how the GDXJ ETF shapes junior gold stocks, why investors may examine companies outside the index, and how gold could respond to dollar weakness. Read on for his practical research approach and commodity market outlook.

Transcript

I'm Charlotte McLoud with the investing News Network and here today with me is Rick rule president and CEO of Sprat us Holdings thank you for joining me today pleasure Charlotte thank you for having me so today we're here at the Sprat natural resource Symposium in your talk earlier today you went over a few reasons why this bull market is a little ... Read More

Key Insights

• "an ETF which is supposed to reflect the direction of the sector has become so dominant that it determines the direction of the sector" (0:42)
• "gold normally Moves In accordance with fear so my suspicion is that any upside that we have in Gold will be fairly muted" (3:40)
• "it would seem that the economy can accommodate Fed rate hikes so my hope is that they do hike the rate" (4:39)
• "educating yourself about battery Metals really probably begins with reading the annual reports of existing battery metal producers" (5:32)
• "there's not a supply problem with the commodity itself but rather a processing problem which the industry will address at these lithium prices in due time" (6:21)

Questions & Answers

Q: What is unusual about the GDXJ ETF’s influence on the gold sector?

Rick Rule says the GDXJ ETF has become so dominant that it determines the sector’s direction instead of merely reflecting it. Investors increasingly use the ETF to capture volatility, which takes trading volume away from individual stocks.

Q: Why does Rick Rule say the GDXJ is no longer truly a junior stock index?

The index requires enough size and liquidity for inclusion. Rule says its median company has a $4.8 billion market capitalization, while many companies elsewhere in the sector have market capitalizations below one hundred billion.

Q: Why might investors examine gold companies outside the GDXJ ETF?

Companies outside the ETF can have a higher cost of capital and lower share prices. Rule suggests identifying businesses that could become strategic acquisitions for companies already included in the index.

Q: How can investors identify possible gold takeover targets?

Investors can start with the largest GDXJ holdings and study their operations. They can then look for successful producers or advanced exploration properties in compatible locations, such as Ghana or Mali, that could provide a strategic fit.

Q: What is Rick Rule’s gold outlook for the next half of the year?

He expects any upside to be fairly muted because the market appears complacent and gold normally moves with fear. He also notes that gold rose alongside a strong US dollar in 1975 and 2001, followed by strong gold performance when the dollar rolled over, but he does not know whether that pattern will repeat.

Q: What does Rick Rule think about Fed rate hikes?

Rule believes the economy can accommodate Fed rate hikes and hopes rates continue rising. He argues that artificially low interest rates penalize savers and productive people for the benefit of spenders while creating interest-rate distortion.

Q: How should investors research lithium, cobalt and other battery metals?

Rule recommends reading annual reports from existing battery-metal producers because they provide the views of industry experts. He specifically mentions Glencore and Vale for cobalt and SQM for lithium.

Q: Is lithium supply actually in shortage?

According to Rule, the four large lithium producers believe lithium resources are in oversupply. They see rapid demand growth overwhelming processing capacity, so the issue is processing rather than an insufficient supply of the commodity itself.

Summary & Key Takeaways

• The GDXJ ETF has become so dominant in the gold sector that it determines the sector's direction, causing investors to focus more on the ETF than individual stocks.

• Investors should look for companies outside the ETF that have a higher cost of capital and lower share prices for potential strategic acquisitions.

• Gold prices may not see significant upside due to the current complacent market, but a strong dollar could create an interesting coincidence for gold's performance.