Rick Rule: This Could be the Next Hot Commodity | Summary and Q&A

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July 30, 2017
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Investing News
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Rick Rule: This Could be the Next Hot Commodity

TL;DR

The dominance of the GDXJ ETF in the gold sector is causing a shift in investor behavior, with speculators now seeking companies outside the ETF. Gold prices may have a muted upside, but history suggests a strong dollar could lead to a surge. Beyond gold, investors should educate themselves about battery metals, specifically lithium and cobalt, by reading annual reports of industry experts. While lithium supply may catch up with demand, cobalt remains constrained by limited supply and geopolitical risk.

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Questions & Answers

Q: What is the unique aspect of the GDXJ ETF's dominance in the gold sector?

The GDXJ ETF has become so large that it determines the direction of the gold sector, causing investors to rely on it instead of individual stocks. This has shifted volumes from stocks to the ETF.

Q: How can investors identify companies outside the GDXJ ETF that could be potential strategic acquisitions?

Investors should first look at the largest holdings of the GDXJ ETF to identify companies. By studying those companies' operations and finding similar successful producers or advanced exploration stage properties, investors can narrow down potential acquisition targets.

Q: What are the key factors to consider when looking at gold's performance in the next half of the year?

The market currently seems complacent, and gold traditionally moves in accordance with fear. While any upside in gold may be limited, history suggests that a strong dollar could lead to a surge in gold prices.

Q: What are Rick Rule's thoughts on Fed rate hikes?

Rick Rule believes that the economy can accommodate Fed rate hikes and that artificially low interest rates penalize savers and productive individuals. He hopes for less interest rate distortion in the economy.

Q: How can investors educate themselves about battery metals such as lithium and cobalt?

Investors should read the annual reports of existing battery metal producers to gain insights from industry experts. This helps to avoid misinformation and get a better understanding of the supply-demand dynamics in these sectors.

Q: What is the current situation with lithium and cobalt markets?

The four largest lithium producers believe that there is an oversupply of lithium, with demand overwhelming processing capabilities. On the other hand, exploration companies often claim there is a shortage. For cobalt, demand is constrained by supply, and fabrication demand is limited due to fears of future scarcity.

Q: Are there any geopolitical risks associated with investing in cobalt?

Yes, the main sources of economic concentrations of cobalt are Russia and the Congo. While many investors prefer to find cobalt in more favorable locations, the reality is that investing in these geopolitically challenging regions may offer better opportunities.

Q: What commodity might be the next big thing after lithium and cobalt?

Rick Rule suggests that cobalt will continue to be an important commodity. Over the past 40 years, commodities with assured ongoing demand and selling prices lower than production costs have performed well. Copper and nickel also fit this description, ensuring their relevance in the long run.

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.

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