Insight From the World's Top Commodity Investor

Rick Rule: There's going to be a very interesting tug of war. On the lower side will be, I think, rapidly declining developed-nations demand. Meaning recession in the United States and Western Europe. And on the other side is going to be, I think, steadier emerging-market demand than many people think. Simply because the developing countries' balance sheets are better than we are accustomed to.

I think the very sharp moves down in commodity prices are over. I think that those sharp moves down were not a reflection of fabrication in consumer markets. But rather, [they were] a function of financial players that were involved in the new carry trade involving low U.S. dollar interest rates where people were going long commodity, short the U.S. dollar; a trade that worked for a year and unwound very, very, very aggressively.

So I think the sharp down move that we've been through is in some part over. I think it's likely to be replaced in the base metals by a grinding move lower. It probably will not be particularly deep but maybe four to six months longer in duration.

PS: Which metal has the most favorable supply/demand characteristics right now?

RR: Boy, that's hard. I would say uranium. You know the uranium market – the uranium equities market – has fallen extremely hard. And I was a real uranium bear.

PS: So was I.

RR: I would say we are a year away from being able to consolidate the uranium space. You know, forget about the 500 juniors that tried. Take a look at the eight or nine that succeeded.

I'm a real, real, real energy bull. I think the oil price in particular goes not merely higher, but substantially high in the five-year term. What people are missing in particular in the oil market is that most of the world's export crude isn't controlled by oil companies. It's controlled by national oil companies.

And it's extremely important for people to understand this. These national oil companies, at least to a substantial degree, are not reinvesting enough money in the oil company to maintain their current production, never mind to grow their current production. That's very, very, very important. National oil companies in places like Iran, Venezuela, Mexico, and Indonesia are diverting cash flow from their domestic oil and gas industry to social expenditure. In fact, some of the diversion is used to lower energy prices. So they're encouraging domestic demand at the same time that they're reducing future supply.

What's important about the four countries I have named is in the three- to five-year timeframe, those countries will not be exporters. And currently, they supply about 25% of the world's export energy. If you take 25% of the world's export energy off export markets, with export demand growing at a reduced rate of 1.5% compounded per annum for five years, it's absolutely stupid what can happen to the oil price.

I won't even venture a guess, but I don't believe that if all four of those countries started spending money now to increase production that they could undo the harm that they've done by the spending constraints that they've imposed on their domestic industry in the last three years.

PS: That all makes sense to me. I don't know what side of the fence you come down on in terms of "Peak Oil" but I think a lot of the evidence for Peak Oil has been actually created by the mal-investment of the state oil companies.

RR: I think that's absolutely true. I think Peak Oil – at least from my point of view at age 55 – is an economic rather than a geological function. You'll notice gasoline prices are falling and storage numbers are rising. And the politicians are sort of flummoxed as to how that happened. Well, it happened because markets worked. People could afford less of it at $4, than they could at $1. And you know, from an economic point of view, this makes sense. From an economic point of view, Peak Oil is a function of price in the near term, not geology.

PS: In regards to oil prices, over five years, I can see your point. But, in the short term, I think the carnage is going to get a lot worse. What happens to the oil-sands companies, for example, if they have to shut down production because the cost of oil falls below their cost of production?

RR: They'll get murdered.

PS: Thank you so much for spending time us...

RR: Always a pleasure.