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Furthermore, bear markets beget bull markets, which beget bears and so on. Referring to the 1987-to-1990 bear, he said, “Remember that kicked off a ferocious bull market, the ’92-to-’96 bull market … a tenfold bull market. The market of course went off the cliff in 1997, so there was the ’97-to-2002 bear market, a truly dismal bear market—when my net worth skyrocketed.”
That was followed by “a scorching hot bull market, the 2003-to-2006 bull market. As recently as 2008, the precipitous or psychotic break we had in 2008, was followed by a scorching-hot 2009-to-2010 bull market. Anybody see a pattern here?”
To those who think the bull will never return, Rule has two words: “supply” and “demand.”
Supply of resources was constrained by underinvestment following a 1982-to-2002 bear market, financing difficulties and “government theft.” Natural resource projects are “very efficient to steal,” he said, because they’re physically trapped in situ.
On the demand side, Rule anticipated one of Chris Berry’s points. “People are becoming slowly more free and, as a consequence, rapidly more rich…. They’re making more money, they can afford to compete with you for the resources that sustain your lifestyle.”
Chris Berry, Michael’s son, founder of House Mountain Partners and collaborator with his father in Discovery Investing, emphasized that the world’s growing middle class needs cheap, reliable energy, a fact that inspires his interest in “energy minerals” used to generate or store electricity. China, its fellow BRIC countries (Brazil, Russia and India), and others including Turkey, Indonesia, Columbia and Vietnam, all have Berry “reasonably optimistic about strategic minerals in 2013.”
Among specific investment strategies, he suggested investors watch for undervalued companies that might attract M&A suitors. He likes companies that have cash flow or will start production within two years, and those with off-take agreements. He recommended investors study a company’s balance sheet, share structure, burn rate and other financials. And he emphasized that “bigger is not better.” He’d rather see a smaller deposit with a commodity that the market actually wants.
As for specific commodities, uranium has “the brightest future,” he said. The Russia-U.S. megatons-to-megawatts program supplies America with 24 million pounds of uranium a year, half of its consumption. The program ends this year. Japan’s new government plans to re-open 50 reactors, calling for another 15 to 18 million pounds.
Major suppliers have halted exploration and expansion while waiting for a significantly higher price. The last two weeks have seen two significant takeovers, the Russian state company ARMZ getting Uranium One TSX:UUU and Denison Mines TSX:DML nabbing Fission Energy TSXV:FIS. (More on that here.)
As for lithium, it’s “definitely one to watch in 2013,” he said. And he’s “still a huge believer in graphite.”
He also likes tungsten and select rare earth elements. “When I say ‘select,’ I talk about the big five: dysprosium, neodymium, europium, terbium, scandium. These are the elements I want to look for and find in economic quantities in safe geopolitical jurisdictions.”
Other commodities he’s watching this year include water, lumber and “I really, really like silver.”
He disputes those who claim the commodities supercycle is dead. “When you’ve got four billion people who’ve got one-tenth of the quality of life that we do, and know how we live, I don’t see how that force can be stopped,” he said.
The Vancouver Resource Investment Conference continues January 21. Attendance is free with pre-registration.
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