If you’ve been following me for a while, you know that I do not invest only in emerging market real estate. For example, I’ve been quite heavily involved in uranium, oil, and precious metals for the past few years.
People who are familiar with commodities investing have most likely heard of Rick Rule, one of the most famous investors and speculator in the space.
I was very happy to have him on my channel. We discussed the usual topics of precious metals, uranium, and oil, but also his investments in international real estate and a new bank he is launching.
Uniquely, this bank will offer loans to US people for international real estate investments, as well as loans to US and non-US clients with physical precious metals as collateral.
I signed up to the waiting list and will see how things develop with this bank. It sure sounds quite interesting.
Free offer from Rick Rule
Free analysis from someone who is more qualified and experienced than 99% of us – why not? 🙂
To a World of Opportunities,
The Wandering Investor
If you want to discuss your internationalization and diversification plans, book a consulting session* or send me an email.
Transcript of “Rick Rule on International Real Estate, Gold, Uranium and his new Bank”
LADISLAS MAURICE: Hello, everyone. Ladislas Maurice from thewanderinginvestor.com. So today, I’m really excited to have Rick Rule on the show. Rick, how are you?
RICK RULE: I’m doing very well, thank you. And thank you for allowing me the opportunity for this conversation.
Who is Rick Rule?
LADISLAS MAURICE: Fantastic. So for those of you who aren’t aware, so Rick Rule is a famous investor and speculator in the resources space. So can you give us a little bit of background, just your one-minute background info, please?
RICK RULE: Sure. I’m a 70-year-old investor and speculator. We can discuss the difference later. I started investing in natural resources at the ripe old age of 21, in 1974. And I have been primarily involved in natural resources and, latterly, conventional financial services investing ever since. I define natural resources relatively broadly, to include mining, oil and gas, other forms of energy, agriculture, timberland, water, some forms of real estate. And I’ve done that really on a consistent basis since 1974. I’ve built several financial services businesses, wealth managers, asset managers, insurance companies, and banks, around a broad natural resources theme.
And the consequence of that is that I’ve become a reasonably good investor in financial services businesses as well as natural resource businesses. And I continue to have an investment and speculative practice around both. I formed a business that became known as Sprott US Holdings, part of the Sprott Group SII on the New York Stock Exchange. I am now resigned from Sprott, although I am still their largest shareholder, and I serve on their board of directors and will continue to do so for about five more weeks. I resigned at the AGM this year.
Rick Rule’s take on Gold
LADISLAS MAURICE: Great. So thank you, Rick. So we’ll be discussing precious metals, uranium, some base metals, and then, finally, as well, a new bank that Rick Rule is opening that’ll be open to both US people and to some non-US people as well. So that’s quite interesting. So Rick, look, you’re well known in the whole gold space, you’ve been a gold bull for many, many years, ever since I followed you, you’ve always been positive about gold. Now, are you positive just long term, or are you positive short to medium term as well? So I’m talking here both physical and also mining.
RICK RULE: I should qualify what you just said. I have been a holder of gold for my whole adult life. I’ve been a holder of gold because I believe that physical gold is an insurance product. And even during those periods of time when I thought that gold was at least fully priced, I held it, because it allowed me to sleep nights and stay calm. There are greater challenges to my calm now than there have been at any period for the last 40 years. And so my holdings of physical gold has increased because it takes more of it to keep me calm. I have been both bullish and bearish as the circumstance dictated with regards to the gold stocks.
The difference between saving, investing, speculating
The gold mining industry has been plagued by underperforming managements for a very long time, virtually my whole adult life. And there have been circumstances, as an example, the period 2008 to 2011, by the way, an epic bull market that I mostly sat out, because the capital allocation that my industry was experiencing was distasteful to me. The gold mining industry now, if you look at from the valuation metric of net present value of future cash flows at current gold prices relative to the enterprise values, are as inexpensive as they have ever been. And given that I think that the gold price and the silver price both rise, and that the shares of mining companies relative to current gold prices are as inexpensive as they have ever been, I’m attracted to the sector. Attraction in three ways, as an insurance holder, which is to say owning physical bullion, as an investor in the five or six best gold mining companies in the world, and as a speculator in some of the rest.
As to timeframe, I would suggest to you that, globally, investors are still more confident than I. And I think the perception of the risks that we fail are arithmetic. And I think the perception of those risks are dampened by coming off of 40 years of fairly benign economic climate. So I suspect that the things that motivate me as an investor are very different than the things that motivate other investors. And it wouldn’t surprise me if the broader investor response to physical gold, to the biggest gold miners, and to the speculative gold miners lags, which is to say, I don’t know if somebody is going to be happy about gold mining stock investments in 2023 or 2024. For reasons that we can discuss later in the interview, I consider this phenomenon to be an inevitability, but it may or may not be imminent, I don’t know.
It’s odd, I think, that now that I’m 70 years of age, with less time remaining on Earth, I’ve become much more patient. [laughs] When I was in my early twenties, I wanted things to occur before the next long weekend. And I thought, charmingly, that my wishes had something to do with reality. What I’ve learned, now that I have less time on Earth, is that I am either patient or I become poor. And so I’ve become quite patient. Where I have made serious amounts of money, it’s required four or five or six years compounding works and markets work, too. But I’ve learned, sadly, that there is a very large difference between an inevitable and imminent. And once I mastered that, my investment performance increased markedly.
LADISLAS MAURICE: Interesting, thank you. And I think what you say about the difference between saving, investing, and speculating is extremely important. Because too many people think, “Oh, I want to invest,” and then they go and buy some junior gold mining stocks with a market cap of $20 million. That’s never an investment. That’s a pure speculation. So people just need to be extremely clear and honest with themselves in terms of what their true objectives are when they decide to buy something. So you broke it down perfectly.
So someone who wants to invest in gold or speculating gold, there are multiple ways to go about it. And really, you need to be clear and honest with yourself, because that’s the issue, because you see too many people who are just not honest with themselves. They’re doing things and they’re trying to justify to themselves that they’re making an investment whilst, in reality, they’re making a speculation. Or, they go buy a bunch of physical gold, and they expect it to go to $10,000 an ounce in like six months. You don’t speculate on physical gold. It’s a form of savings. So this breakdown is very, very helpful for people. Thank you. What about silver?
Rick Rule’s take on Silver
RICK RULE: My experience has been, and I’m not sure I know why, but my experience has been that silver is a late cycle mover. I think the precious metals bull markets are kicked off by fear buyers, and fear buyers buy gold because it’s insurance. I think that once the precious metals narrative has been validated by increasing gold prices, that the greed buyers, the momentum buyers move into the silver space. It’s more volatile. It has a lower unit cost, so speculators in places like Brazil, Bangladesh, India can participate. But what I’ve noticed is that while silver moves later, it moves further and faster. And so in my experience, while precious metals bull markets are led by gold, the most dramatic upsides for the speculators occur in the silver sector.
The most speculative upside of all is in the silver equities, because the universe of reasonable speculations in the silver equities is so small, the market capitalization is so small that when the generalist investor succumbs to the precious metals narrative, and begins to move into the silver space, the silver space isn’t big enough to handle it. My friend, Doug Casey, describes the phenomenon as trying to siphon Hoover Dam through a garden hose. There just isn’t enough market capitalization in the silver mining space to accommodate the money that comes into it.
And ironically, as the price of silver and silver equities rise, despite the fact that they’re less attractive on an absolute basis, that price rise validates the narrative. And as the price goes up, it becomes [laughs] more attractive to people who haven’t studied history or economics.
LADISLAS MAURICE: So essentially, you see silver as more of a speculation than an investment?
RICK RULE: Yes, sir.
LADISLAS MAURICE: Cool. Clear.
RICK RULE: By the way, I love to speculate.
LADISLAS MAURICE: [laughs]
RICK RULE: I don’t consider speculation to be a bad word. I joke that all the money that I now invest prudently and conservatively I made by speculating wildly, so. [laughs]
The fear trade, and Rick’s second passport
LADISLAS MAURICE: I think the point you make about precious metals bull markets being driven by fear buyers is an insight that people should really take time to understand. I think investors out there in the world, so people who follow me typically invest in a lot of international real estate, in emerging markets equities, they get second passports, second residencies, etc. And many of them feel that gold is a bit old-fashioned, it doesn’t move fast enough. They don’t feel like that they’re doing something that’s active enough. And I think people should ask themselves–
RICK RULE: I’m empathetic with them. I was that way as a young person myself. What I found is that my desires for certainty and speed were understandable, but they detracted from my investment performance. And over time, I decided that investment performance was more important than psychological satisfaction. I would suggest that people who are impatient want to know the unknowable. And I think that, ironically, that impatience is a waste of time. Much of the rest of what you talked about is simple and practical. I, myself, have a second passport. I hope I never have to utilize it. But I have the second passport for the same reason I own gold. I believe that if you have the ability to insure against a contingency, however improbable, where the penalty that you would pay for failure is very high, that, if you can afford it, you buy that insurance. And to me, a second passport is that form of insurance, and gold is, too.
LADISLAS MAURICE: Yeah, good point. And to go back to the point earlier, people need to ask themselves, do they believe that we’re entering into a macro environment in which there will be more fear? Yes or No. If you believe that there will be more fear in the years ahead, with all the uncertainty, chances are gold should do relatively well. I think this is a thesis that people should take into account, do we live in a world where fear will increase and where trust is decreasing in society, and just generally in the world, in situations like this, historically, gold has done relatively well. So personally, I’m long a fair amount, actually a very decent amount of physical gold. It’s not a speculation, to Rick’s point, it helps me sleep well at night. And I do believe that people are going to be scared of whatever’s going to happen, but there’s going to be a lot of fear. And I know that I have this insurance policy. So very, very important. Thank you.
Rick Rule’s take on Uranium
So Rick, you’re also well known in the whole space for having made a lot of money in uranium in the previous cycle. So you made a killing in Paladin. So can you just give us a one-minute breakdown of your speculation in Paladin last cycle? Because I think it says a lot about speculation and also understanding your investments and not being shaken out by volatility. I think there are a lot of learnings from that one. Obviously, we’re not promising that people are going to make the same returns this cycle round. And then what your thoughts are on the uranium space right now, where we stand, because we were very excited about two years ago, the last year has been very mediocre, to say the least. Quite disappointing. Do you feel that maybe we reached the top or are things going to come back? What are your thoughts?
RICK RULE: That’s a long question. But it is instructive. If you’re a natural resource investor, because of the cyclicality and the capital-intensive nature of the industry, you are either a contrarian or you are going to be a victim. Those are your two choices. You need to invest and speculate in sectors that are out of favor, hopefully, decidedly out of favor. And when the price of the commodity and the shares rise, you need to remember that these aren’t self-fulfilling prophecies, that markets work. So when something’s unpopular, you have to buy it, and when it becomes popular, you have to sell it. And those are both very, very, very difficult lessons, disciplines, ones that, by the way, in my twenties [laughs] I didn’t employ.
Uranium was perhaps the ultimate contrarian investment. It had been in a bear market for 20 years, going all the way back to Three Mile Island. What that meant was that investment interest in uranium was nonexistent. The chart of the commodity itself or those few companies that remained looked like the electrocardiogram of a corpse, people were bored of it. But in addition to that, people were afraid of it. When you talked about investing or speculating in uranium, certain members of the audience would suggest that you are profiting from Chernobyl, Hiroshima, Nagasaki, and Three Mile Island. Now, perversely, if you’re a contrarian, that’s the best possible sign. Because you know that you have absolutely no competition whatsoever. The entry point wasn’t cheap, it was free.
On a global basis, we were producing uranium at a total cost of about $30 a pound. And we were selling it for $8 a pound. [laughs] The industry was losing in excess of $20 a pound and doing it 150 million times a year. That belied the fact that uranium was and is the cheapest source of baseload power, particularly non-carbon generating power in the world. And either the price of uranium had to go up to the point where the uranium industry was earning this cost of capital, or even in rich markets, like the United States, the lights were going to go out. I thought it was more likely that the price was going to go up than the lights were going to go out. Unfortunately, I came to this conclusion for myself four years early.
There’s a joke that an 8% discount four years early isn’t early, it’s wrong, on a discounted net present value basis, it’s wrong. But if you go back to the point in time where I made that investment, there were only five uranium juniors in the world that had survived a 20-year bear market. There were only 15 management teams in the world that were capable of running a uranium company, and there was no competition for the stocks. I thought that the uranium price could go from $10 to $30. I was wrong. It went from $10 to $145. The worst performing of the uranium juniors, the five uranium juniors that I owned, went trough to peak 22 times. I’m not trying to say, by the way, that I bought all my stock at the bottom or sold all my stock at the top, that didn’t happen. But the truth is, there was a hell of a lot of money to make in the middle.
The most instructive was Paladin. Paladin was a little Australian penny dreadful, run by an amazing man named John Borshoff. At the time I entered the stock, it had a 2 million Australian dollar market cap. And its principal asset base was a database compiled by the West German government at a cost of a billion dollars that they gave Mr. Borshoff as a severance benefit when they laid him off, because they didn’t care about uranium anymore. I led a private placement at 10 cents a share. And I was rewarded for my genius by watching the stock go from 10 cents to 11 cents, 11 cents to 12 cents, back to 11, 10, 9, 8, 7, 6, 5, 4, 3, 2, 1. 10 cents to a penny. If you have a 90% embedded loss in a position, you don’t have a hold, you have a buy or you have a sell. You were either wrong, in which case you salvage those few pennies you have left, or you were right, in which case, you buy a lot of stock.
I reassessed the situation, I decided I was right, the market was wrong. I bought a bunch more stock, sadly, not at a penny, at a penny and a half and two pennies, and three pennies, and four pennies. And within five or six years of that market bottom at a penny, the stock was $10 bid. Now, I’m not going to suggest to you that I held my whole position and sold at $10. That didn’t happen, either. If you own stock at an average of a dime, and my average became lower, when you see $1 bid, you sell enough stock that you have recouped your capital and paid your capital gains tax, if any. And when you think that the price of uranium can go to $30, and it’s $60 bid, which is to say it doesn’t have to go up, ultimately it will go down, you begin to sell the rest, which I did.
The instructive part, I think, of the lesson is that a stock is more attractive at penny than it was at 10 cents if everything else stayed the same. What other people might call a bear market, an intelligent speculator calls a sale. And goods on sale are good. [laughs] You need the psychological staying power to be right. You need the honesty to admit that you’re either right or wrong. And when the price action that you’ve enjoyed justifies the narrative, which is to say when you start feeling smart, you need to begin to think about selling. As we said, at the bottom of the market, there were five uranium juniors worldwide, and 12 or 15 management teams that were capable of running uranium junior. That means that the probability that your junior had a good management team was a function of dividing the number of teams available, which is to say 15 by the aspirants, by the issuers, which is to say 5. So the probability that your team was well run was 100%.
At the top of the cycle, there were 500 companies purporting to be in the uranium business. But the number of company management teams hadn’t changed. So the probability that your junior was well run was a function, again, of dividing the number of management teams, 15, by the number of aspiring issuers, which is to say, 500. The probability that your uranium junior was run by somebody who, 10 years previously, could spell uranium was very close to zero. When the investment was at its most popular, it was its most lethal. And when the investment was totally unpopular, hated, there was virtually no way to lose money.
LADISLAS MAURICE: So where do we stand now in the uranium market?
RICK RULE: It’s not as attractive as it was in 1998. It’s just more attractive than almost anything else on the landscape. Let’s look at it arithmetically. No, let’s look at the narrative, first. The world needs more of all forms of energy, even the energy that economically probably doesn’t work, wind and solar. As a group of people, over 45 years, we’ve invested almost $5 trillion in alternative energy. And we’ve reduced the market share of conventional energy fossil fuels from 82% all the way down to 81%. The $5 trillion investment has reduced the market share of conventional energy by 1%, over 45 years. What this means is that we’re going to need all kinds of energy going forward.
Many people don’t realize that a billion people on Earth have no access to electricity. Another 2 billion people on Earth only have access to intermittent or unaffordable electricity. We’ve done a great job as a species increasing the material wellbeing of the bottom half of humanity, economic half of humanity, over the last 40 years, but we have a lot more work to do, which means that investment in all forms of electricity and all forms of electrical distribution and utilization are going to increase with the increasing concern about carbon loading. So I’m not going to get into a debate about global warming, I’m only going to say that I believe that we should pump less crap into the atmosphere into the ocean. That uranium has been and will continue to be an important component in the world’s energy mix, an increasingly important component.
Now let’s look at the arithmetic. The industry, on a fully-loaded basis, including prior-year write-downs, social rents, which is a fancy way of saying tax, and cost of capital means that the total cost to produce a pound of uranium, importantly, pricing back unsuccessful efforts that were written off balance sheets, approaches $60 a pound. So the industry makes this stuff for $60 and they sell it for $50. They lose 10 bucks a pound 130 million times a year. Either the price of uranium goes up to the point where the industry earns its cost of capital, or the lights go out. That’s the equation.
For those listeners that you have who believe that, six or seven years from now, the lights are going to go out, you shouldn’t own uranium. If you believe, however, the lights will stay on or that their Tesla will start, you need to consider uranium, because the price has to go up. And it has to go up more than $60 to $60. Because right now, we have a deficit of about 50 million pounds a year consumption over production. And to bring new mines in production requires an incentive price that’s closer to 75 US dollars. And demand for uranium is increasing.
So you have a circumstance where, over time, I can’t tell you when, the price has to go from $50 a pound to $75 a pound. If you look at the uranium juniors now, in particular, they’re very fully priced at $50 a pound, but they don’t discount $75 a pound. The increase in margin that they enjoy on the delta between 50 and 75 is extraordinary. And that 75, at least in nominal dollar terms, is inevitable, while it may or may not be imminent.
I don’t know what more I can say other than that the price of admission, in the last two years, which is to say the market capitalizations of the stocks, the junior stocks at least, has fallen by 25% or 30%. The fact that an asset class which is attractive has become cheaper, most people think is a problem. It’s weird the way people invest. Somebody who goes to buy a winter coat may spend three hours researching that winter coat. And if they go to a mall expecting to pay $400 for that coat, and the coat is marked down to $195, they’re ecstatic because they have product knowledge. That same person who goes to invest in a financial asset may or may not have the ability to assess the asset, at least not as well as they do a coat.
And so they may spend five minutes on an investment decision allocating $100,000. And at the same time, if they go to the same shopping mall, and they see the price at $4 a share marked down to $2 a share, which is to say the same asset is half price, they think it’s bad, not good. If people bought uranium stocks the same way they buy coats, they would have much better performance. But for some reason, they don’t do it. I try to be on the other side of that trade.
LADISLAS MAURICE: Yeah, if I wasn’t so knee-deep in uranium, and I’ve been very into uranium for over three-and-a-half years, I would be buying more now, seeing how negative the sentiment is around uranium. Yeah, some of these juniors they’re saying we’re down 20%, 25%. A lot of them it’s, yeah, close to more like 40%. Paladin is down 40%.
RICK RULE: It’s important to know that there are 70 or so uranium juniors. And I believe that 11 of them have reasonably attractive theses. It’s important that people understand that for the uranium juniors that don’t have any uranium resources, if the price of something that you don’t have any of goes up, it doesn’t matter to you. [laughs] They have to have uranium in some form more tangible than as the name of a company on a share certificate. And so some qualitative and quantitative capabilities are necessarily incorporated in the speculative process.
Rick Rule’s take on Oil
LADISLAS MAURICE: So Rick, are there any other sectors that you find interesting these days?
RICK RULE: Yes, fossil fuels. The easy move in the oil market took place during the COVID times when the price of oil was below 20 US dollars a barrel and the fully loaded cost to produce a barrel of oil worldwide was $60. It was pretty clear that the oil price had to triple or that no one’s cars would start. That’s over. But in the oil business, you still have a business that’s priced as though the oil business was going to go out of business in six or seven years. I suspect that peak oil demand occurs in 2050 or 2055, which means that the terminal values that you assign oil investors are the necessity of, considering terminal values, is 35 years away.
On a global basis, the oil industry is underinvesting about a billion dollars a day in terms of sustaining capital investments. And if you don’t make those sustaining capital investments, your ability to produce at current levels declines. Which means, ironically, that the big thinkers in the world, the people who are responsible for declining investments in oil and gas, which is to say President Biden, Trudeau, you know, the big thinkers of the world, are, ironically, responsible for keeping the price up. So investing in companies that are maintaining sufficient sustaining capital investments while simultaneously sharing their record-high free cash flows with investors continue to be very, very, very good investments.
The subset which attracts me the most are natural gas producers in North America. Natural gas prices in North America have been falling very, very, very rapidly, from about $10 a million British thermal units down to $2 per million British thermal units. The arbitrage between liquefied natural gas cargoes in Japan, which sell for $8 a million British thermal units, and Europe, $7 per million British thermal units, and Texas, $2 per million British thermal units are such that investments in the infrastructure necessary to ship North American gas to global markets are increasing at the same time that the value delta between oil, which is priced at $5 or $6 million per million British thermal units, and gas, priced at $2, is huge. That arbitrage will necessarily close. It might not close in 2023, it might not close in 2024, but close it certainly will.
So if I had to tell your audience to look at something, I would say look at the oil industry. If you have no investments in the oil industry, go with the biggest and the best. Go with Exxon. Great capital allocator, making great sustaining capital investments, making great new project investments, but also buying back stock and paying a very generous dividend. If you can afford to take a little more risk on an arbitrage basis, you don’t need to go into the penny dreadfuls in the gas stocks, you can buy the best. You can buy Devon, you can buy Equitable, in Canada, you can buy Tourmaline, you can buy Peyto, you can buy Birchcliff. This is another circumstance where the outcome is inevitable even while it may not be eminent. And it has the advantage of being highly unpopular.
LADISLAS MAURICE: Yeah, people need to stomach volatility though for natural gas. [laughs]
RICK RULE: People need to stomach volatility to live.
LADISLAS MAURICE: Sure.
RICK RULE: If you had a different appraiser coming by with a different point of view, looking at your house every day, your house would fluctuate in value by 15% a day. You don’t feel the volatility because you don’t have good price information. If you deny the existence of volatility, you necessarily disarm yourself as an investor and speculator. The problem isn’t the volatility, the problem is your response to the volatility. The error is conveniently located to the left of your right ear and to the right of your left ear. Volatility is a tool, not a risk.
Rick Rule’s International Real Estate investments
LADISLAS MAURICE: Thank you, Rick. So very few people know that you have made international real estate investments in the past. So you’re really known as the resource guy. But can you just share a few words on some of these real estate investments you made? And I think you mentioned Chile, mentioned New Zealand, a few other jurisdictions. Some key learnings you got from that?
RICK RULE: I’ve certainly been an agricultural and timberland investor in many countries in the world. And that’s treated me, on balance, pretty well. I’m not trying to say that [laughs] every single investment or speculation worked, that would be an abject lie. I’ve also enjoyed living internationally. My wife and I own a wonderful farm on the beach in New Zealand, 1,200-acre farm with two miles of ocean frontage on the North Island, where, until the Kiwi government became xenophobic, we enjoyed an almost idyllic circumstance. We bought that farm in 1990 when confidence in New Zealand was so low that even properties with two miles of ocean front were no bid, when the New Zealand dollar in US dollar equivalents was at 44 cents. That situation corrected itself at the same time that the New Zealand government decided to snatch defeat from the jaws of victory. And so we sold.
The same thing really happened in Vancouver, we owned a wonderful condo in Vancouver for years. I love Vancouver, I went to university there, I started my business career there. There was a point in time when Canadian society was welcomed foreigners. That society decided in their wisdom that foreigners, in particular Chinese foreigners, this is a racist, not merely a xenophobic response, but a racist response, the Canadians decided to tax foreign owners at what is now 8% a year in terms of property tax. I’ve done enough foreign investment to know that the first time a society tells you that they don’t want you, you’re well-advised to listen. So when the Canadian said, “Yankee, go home,” I said, “Yeah. Okay, I’m gone.” I’ve experienced, in my life, the fact that risks are often lowest when the perception of risk is the highest.
And so as an example, in New Zealand, at one point in time, the price of fiber, the price of standing inventories of timber, living trees, was so low that you could buy timber land with a 20-year-old forest, which is to say a currently un-harvestable forest, you could buy that land for the raw land price less the cost of removing the trees to convert it to dairy, which is to say the trees had a net present value that was subzero. I decided, at some point in time, that the fiber price would go to the point where the trees had some value. And that it would take 10 years at any figure for the trees to be mature enough that you could harvest them. In my case, it was simply a matter of buying these forests and be willing to wait 10 years for the trees to have economic value, harvest them, sell them, and then, if I wanted, sell the raw land, which I was able to do.
Similarly, many, many, many years ago, I saw that the Chileans could land finished, admittedly fairly low-quality Chardonnay, in San Francisco for less money than I could pick Chardonnay grapes in Monterey or Napa. That told me that Chilean agricultural land was really truly stupidly cheap. That and South African agricultural land, it turned out to be very much the case.
LADISLAS MAURICE: You invested in South African agricultural land?
RICK RULE: Yes, sir.
LADISLAS MAURICE: Nice. [laughs] That is the ultimate contrarian play.
RICK RULE: Oh, it was absolutely a no-brainer at a certain point in time. The whole area to the southwest of Paarl, all the way to the coast, was available for sort of $2,000 a hectare. Good agricultural labor was available for $15 a day, whereas we were paying $15 an hour in California. Water was abundant. The soils were, while not as good as Napa, certainly good enough that I could see that for a wide variety of crops, but in particular, olives and wine grapes, that that was the lowest-priced high quality agricultural land in the world. And the consequence of that is that I had gotten a way.
Now, I didn’t stick around that one as long as I might otherwise have. That opportunity came to the attention of a lot of investors, particularly, South African investors. And the consequence of that is that I was taken out of that investment, well, in pleasant fashion, without having recognized the whole thesis.
LADISLAS MAURICE: Cool. Very interesting. Are you still active in international real estate?
RICK RULE: I’m not. I, for once in my life, actually got the timing right on the sell side. About three years ago, it was very clear to me that interest rates on a global basis were going to go up. And what that meant was that the capitalized value of my rents, my distributions, were going to go down, you know, a 6% yield became less attractive in a lower interest rate environment at the same time that my cost of capital, which is to say my long-term financing costs were going to go up. For 40 years, that delta went the other way. For 40 years, my return on capital employed went up as interest rates went down, and my cost of capital went down.
My thesis was that a contracting delta was a lot less fun than an expanding delta, and that the wind wasn’t in my sails anymore. That being a real estate investor, required enough knowledge that I had to be able to add value, I had to be able to out-compete other investors in terms of adding value to real estate, which I wasn’t able to do. When the wind was no longer in my sails, knowing that I was more of an opportunist than an operator, I had to sell those opportunities to people who are better at creating value than I. By the way, I did the same thing in the United States. I had a passive developed real estate portfolio in the United States that I put in place in 1990, 1991, 1992, 1993.
And really, beginning five or six years ago, the cap rates looked to me and, more importantly, to the people I was in partners with that manage these assets, as being probably unsustainably high, at the same time that the buildings that we had bought in new condition in 1990, and 1991 were 30, 35 years old. And it was very clear to me that a tourist like me, somebody who didn’t have experience adding value in developed real estate, needed to get out of the way [laughs] to give those assets to people who are better at operating the assets than I was.
LADISLAS MAURICE: I completely understand you. That’s why, for the past few years, I’ve been focusing on cash markets, where there isn’t a lot of leverage in the system at all, so interest rate changes just do not have an impact on the housing market, so the downside is a lot lower. So this has been my focus, cash markets with high cash flow properties.
RICK RULE: Yeah.
Rick Rule’s latest bank: Battle Bank with mortgages on non-US property and loans against previous metals holdings.
LADISLAS MAURICE: Yeah. Cool. And also, few people know that Rick has had six banks throughout his life, created and then flipped and then sold. And now you’re starting bank number seven. So can you talk to us about this?
RICK RULE: Yeah. I should say that, in every circumstance, they weren’t my banks. I assist people in starting and capitalizing banks. I provided, later in my life, like now adult supervision. I’ve benefited from being part of seven wonderful teams in banking. Our most recent effort begun in 1998 with EverBank, which was hugely successful. We took a bank, a concept bank, an online bank with no branches, that served several niches in the market, and we took it from zero to $28 billion in AUM. Took it public on the New York Stock Exchange and ultimately sold it to TIAA-CREF.
We succeeded because we understood that for a literate crowd, a sophisticated crowd, that the branch was redundant, that a cell phone was a better branch than a branch. And that by reducing our non-interest expense by not having branches by over a percent that we could pay the highest interest rates on deposit in the market, which we did, highly successful. At the same time, we invented a deposit product. Americans, at that point in time, had their choice of savings in US dollars, US dollars, or US dollars. And we instituted CD products in Mexican pesos, in Canadian dollars, in New Zealand dollars, in euros. And the consequence of that is that we had $8 billion in deposits that other banks didn’t have access to, and we developed a customer base of 250,000 customers because, unlike other banks, we decided to service customer needs.
We’re doing that again. We’re entrepreneurs. It’s the same team that built Battle Bank. We all tried to retire, we all failed. And we are, to coin a phrase, battling for better banking. We aren’t going to have 14 deposit products, we’re going to have one, a high-yield account paying at least in the top quartile, but probably in the top decile of interest rates among competing products. And if you want to write checks on it, that’s fine. No problem. You want to just save in it, that’s fine. We will have CD deposits denominated in a whole bunch of different currencies. If you’re a first generation immigrant, and you need to have a savings deposit in Hong Kong dollars, or Canadian dollars, or Mexican pesos, or euros, great. We’ll do that for you. In addition to that–
LADISLAS MAURICE: What’s the name of the bank?
RICK RULE: Pardon?
LADISLAS MAURICE: What’s the name of the bank?
RICK RULE: Pardon? Battle Bank.
LADISLAS MAURICE: Battle Bank?
RICK RULE: B-A-T-T-L-E.
LADISLAS MAURICE: Okay.
RICK RULE: We will allow people to, in their IRAs, establish checkbook IRAs so that they can own rental real estate that they operate themselves in their IRA. You can own a duplex, a triplex, a fourplex in your own town in your IRA. And you can operate yourself. This is completely legal. The banks don’t believe that your IRA is yours. [laughs] We do. We will, in the right set of circumstances, we will loan, if there’s good title and title insurance, against non-US real estate. So if you want to buy a house in Cafayate, Argentina, at La Estancia, if you want to buy a house at Rancho Santana in Nicaragua, if you want to buy a condo in Costa Brava, and you are a US-domiciled person, we will, in the right set of circumstances, lend you that money.
LADISLAS MAURICE: Cool. So this is really big. Because a lot of my US clients, Americans are used to leverage when they buy real estate. And one of their biggest shocks is, when they venture overseas, is that most of these markets, at least in the markets where I operate, emerging markets are cash markets. So this sort of service that you’re providing, where people could have access to leverage to then invest overseas is quite unique and, potentially, very, very helpful. So this is great.
RICK RULE: Understand that these are US dollar loans.
LADISLAS MAURICE: Yes, yeah, currency risk.
RICK RULE: If you’re in Croatia, I’m not going to loan you money in Croatian currency–
LADISLAS MAURICE: Yeah.
RICK RULE: it’s going to be in US dollars. Understand, too, that it needs to be a market that has at least some fashion of the rule of law and title insurance.
LADISLAS MAURICE: Yeah. And liquidity.
RICK RULE: I’m not going to take title risk.
LADISLAS MAURICE: Yeah.
RICK RULE: Understand, too, that the loans to value are going to be lower than they are in the US. There’s an active secondary mortgage market in the US where I can originate a mortgage and sell it. If I originate a mortgage in Nicaragua, [laughs] I own it.
LADISLAS MAURICE: [laughs]
RICK RULE: The loans to value are going to reflect the fact that this is a market that’s a volatile market, and I need to operate a prudent bank on behalf of my depositors.
LADISLAS MAURICE: For sure, for sure.
RICK RULE: I’ve been engaged as a lender, privately in foreign markets, for 35 years. I really, really, really like this business.
LADISLAS MAURICE: Because originally you were a credit risk analyst, right, when you first started?
RICK RULE: My education, certainly, as a credit analyst. As soon as I achieved sufficient net worth, decided to practice that skill on my own behalf, rather than on behalf of a financial supermarket.
LADISLAS MAURICE: Cool. And so this bank, Battle Bank, will it be open to non-US people as well?
RICK RULE: Subject to US law, which is to say we are governed by the FDIC, by the Fed, by the Office of the Comptroller of Currency. So certainly, Canadians, Eurozone people, Brits, Swedish people, Hong Kong people, Aussies, Kiwis, that kind of stuff, yeah.
LADISLAS MAURICE: OECD?
RICK RULE: Yeah. It’s unlikely that an Afghani, or a Russian, it’s unlikely that we would be able to offer services to those depositors yet.
LADISLAS MAURICE: Cool. But this is really interesting. I mean, we just had this, that I found out about this when we were having a little chat before the recording. I’ll definitely look into it. I’ll do a bit of my due diligence, try to understand how it works. But this is, what you’re offering here is very interesting. So how, because I mean, there are a lot of banks out there, and a lot of us are worried about safety, return of capital than return on capital. So how are you going to ensure or minimize risk for your depositors?
RICK RULE: Well, first of all, the big thinkers in the US describe a bank that has a 7% equity slice, which is to say equity is 7% of total assets, as being well capitalized. [laughs] I think 10 is a better number than 7. There needs to be some equity between the depositor and the borrower. Bankers, too, because they’ve been through 40 benign years of economic climate, have been lulled into a sense of, I was going to say security, but I’m going to say stupidity. A lot of banks consider themselves to be experts in 200 industries. I think, to understand collateral values, you have to stick to what you know really well. Our bank will make loans against physical gold and silver. We know those assets well. [laughs] We will make loans on foreign property where we think that the loan to value ratio is in our favor, because there’s no competitors in that space.
LADISLAS MAURICE: So wait, let me cut you here. So will there be an option for me? So let’s say, I open a bank account with you guys. I wire money. Can I buy physical gold that you guys store and then you can lend against that even as a non-US person?
RICK RULE: Yes, you can. But more importantly, you don’t have to buy the gold through us. If you bought the gold through another bullion dealer, if that gold is stored in segregated storage, not buried in your backyard, stored in segregated storage at Brinks or Loomis, at an audited facility in your own name, not an unallocated, in other words, where the gold is yours, we will lend against it. You don’t have to store it with us. You don’t have to buy it through us.
If you’ve bought a million dollars’ worth of gold through Sprott Money in Canada, and that gold is at ViaMat in Singapore, or Brinks in Toronto, or Loomis in Denver, you sign a UCC agreement, Uniform Commercial Code agreement, making us the senior secured creditor on that gold, and we will lend against it. It’s your gold, it stays in your account. If you sell it, we get paid first. [laughs] You know? If you get rid of our collateral, you get rid of our loan. You know what, I have to jump off. I have another call one minute ago.
LADISLAS MAURICE: Okay, sorry. So–
RICK RULE: Let me make my offer, if I may.
LADISLAS MAURICE: Sure.
RICK RULE: I love conversations like these to the extent that your listeners care about what I have to say about natural resources. The best way to find out is to go to ruleinvestmentmedia.com and list your natural resource portfolio. Please, no crypto, please, no pot stocks. I’ll rank the individual companies in your portfolio 1 to 10. If you care about a better bank, if you are uncomfortable with your current banking relationships, or think they could be improved, in the question and comment section that you see on the rankings database at ruleinvestmentmedia.com, simply write “bank” and we will put you on the information lists so that when the government gives us our charter that you can do business with us as a borrower, as a depositor, perhaps as both. Once again, Rule Investment Media, in the question and comment section, “bank”.
LADISLAS MAURICE: Fantastic. Rick, thank you very much for your time.
RICK RULE: Pleasure.
LADISLAS MAURICE: Really appreciate it.
RICK RULE: Pleasure. Thank you for the opportunity.
LADISLAS MAURICE: Cheers.