Broker sets the rule on resources Lifelong contrarian sees boom days for gold, water By Thom Calandra, CBS.MarketWatch.com Last Update: 11:33 AM ET Aug 14, 2002 SAN FRANCISCO (CBS.MW) -- Rick Rule makes much of the fact that his Global Resource Investments is the only U.S.-based brokerage to employ an exploration geologist and mineral exploration analyst.
In the good days for minerals and metals, in particular gold, geologists more often than not were found in the offices of U.S. brokers and mutual funds, assisting analysts and portfolio managers with their view of fledgling companies' speculative mining assays.
The decline of precious metals through the middle and late 1990s saw an end to those commodities-related positions on Wall Street, just as the end of the technology boom has hastened the departure of Internet and software analysts.
"It will be a (commodities) sell signal when our peers attempt to employ exploration geologists," says Rule, who puts himself firmly in the school of lifelong contrarian investor. His tiny shop of brokers and analysts sticks closely to a diet of 70 companies, all of them in mining, energy, water utilities, forest products and agriculture.
Rule is well known among those who follow precious metals. The founder of 12-year-old Global Resource Investments near San Diego is a popular speaker on the gold circuit. Rule is associate editor of Jim Blanchard's Gold Newsletter. Financial newsletter writers dedicated to gold, silver, diamonds and natural resources, among them Bob Bishop, Doug Casey and Adrian Day, often find themselves turning to the research from Rule's small brokerage, which handles assets of about $300 million.
Rule, at the age of 49, has seen natural resources boom and bust more times than he can count. His view is that investors, if they are to create and keep new wealth through the thick and thin of up and down cycles, must be prepared for a lifelong commitment to the school of contrarian thinking.
The challenge, says Rule, is sticking to the game plan, which almost always runs counter to the stampede of Wall Street's herd mentality.
"Mining goes through periods of times when the average industry commodity price is lower than the average cost, so the industry is losing money," Rule tells me. "At times like that, the conventional brokerage businesses issue general 'sell' recommendations. But really, it is setting the stage for a pretty spectacular recovery -- because you either have no more commodity, which creates a shortage, or the price goes up."
Rule, who has been following natural resources such as water, timber, uranium and energy since the mid-1970s, puts himself firmly in the camp of gold believer. The precious metal, shaking off a miserable summer, is approaching $320 an ounce in the spot market -- about $10 below its high for the year.
"I am very much of the view that the 20-year bear market in gold coincides with the 20-year bull market in the dollar," he says from his Carlsbad, Calif., office. "Gold will come to supersede the dollar as the reserve currency of choice among central banks."
Gold this year has kept its head above the $300 level for the first extended span since October 1999. Gold mining companies through May were the best stock-market gainers around the world. Gold-based mutual funds until recently were also top of the charts.
Rule sees central banks, long sellers of bullion as they replaced their gold reserves with paper assets, giving gold its just deserts. "I am of the belief that if the dollar continues to soften and gold continues to strengthen, most central bankers, who are anti-contrarian, will go out and buy gold," he says.
In the financial press, central banks around the world are said to be eyeing gold's 10 percent rally this year as a chance to dump more of the metal. So in this regard, Rule again shows that he goes against the grain of popular thinking.
Rule and his firm, Global Resources, recommend mining stocks, many of them small exploration companies. But he is also a holder of actual gold bars. "I buy physical gold as catastrophe insurance," he says. "At the age of 85, I hope to God I don't need it. I buy it not out of greed, but out of fear."
Rule counts Chris Thompson, the executive who helped turn South Africa's Gold Fields Ltd. (GFI) into one of the world's largest gold producers, as a former business associate. Thompson is the new chairman of the World Gold Council, a trade group for the industry. Thompson and the World Gold Council are developing a security that can be traded as a gold proxy in the stock market.
"I think that Chris Thompson will make a difference personally to the gold price," says Rule. "What he did at Gold Fields was miraculous, taking an ossified corporate culture and transforming it, so the World Gold Council will be a piece of cake."
Rule's current recommendations in the gold arena include Repadre Capital Corp. (RPD), a Toronto-traded company that benefits from royalties on gold-producing properties. "We were attracted to Repadre at $7 Canadian, not $8," he says. "I'd look at the stock again at $7." Repadre shares Wednesday were selling for $7.50 Canadian, down from a high of $9.25 in June.
Rule also says Barrick Gold (ABX), world's second biggest gold producer, is perhaps the only major producer whose stock is attractive at current levels. Pure gold investors are wary of the Canadian company because of its long history of hedging gold through the use of derivative contracts, Rule said.
Barrick in its most recent reported quarter reduced its so-called variable price sales contracts and call options -- all of them hedging devices that help the company boost the price at which it sells gold -- to 3.1 million ounces from 6.1 million ounces.
"Despite its hedges, Barrick Gold has the best organic growth of any of the majors. Because Barrick has gotten more than $100 over the spot price, they have been able to pay premium prices for assets and still fare well," he says. Barrick bought one of the oldest U.S. mining companies, Homestake Mining, in 2001.
"I think you will see Barrick reduce its hedges because as gold rises, that is an economically less rewarding strategy. The de-hedging of Barrick and their cash margins make them the least overpriced of the majors," Rule says. Unhedged producers such as Gold Fields have trounced their hedging counterparts in the stock market.
Rule sees large investors slowly becoming enamored of gold. In recent days, Julian Robertson, who once led one of the world's largest hedge fund companies, Tiger Management, says he is buying gold mining shares.
Rule also sees a water crisis ahead for the western United States. "As someone who lives in California, I know water will make the electricity crisis seem like nothing. It will be a huge news item at some point." He likes shares of San Jose Water Corp. (SJW). "SJW actually owns and controls the water they use," he says.
