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Rick Rule continues:

“Predictably, the selloff in the euro, as a result of this potential rating downgrade, has been good for the dollar and in the near-term has caused gold to selloff.  I think what it really calls into play is the fact that at least in terms of Western developed nations, on a global basis we continue to be in a solvency crisis, a liquidity crisis and a currency crisis.

It makes perfect sense, given the action we have seen lately, that when the euro sells off that the so-called flight to quality is to the US dollar.  The question that your readers need to ask themselves is, although the dollar is stronger than the euro, is the dollar itself a reputable store of value?

Now you will also note that US taxpayers are asked to take on European bank risk too.  In other words, our printing presses are going to be run to save the European banks.  The question becomes, okay, you don’t want to hold your savings in euros, do you want to hold them in dollars?  Or do you want to look to an asset that isn’t simultaneously somebody’s else’s liability?  In other words, gold.”

When asked about Stephen Leeb’s comments earlier on KWN that all of this will lead to much more money printing, Rule responded, “That is my view, although I would have to give Stephen the nod between the two of us, being an economist.  What I really am is a credit analyst and I don’t see any of these societies that I would be particularly anxious to lend to....

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“It’s obvious that there is going to be some turmoil on a go-forward basis because our societies are over-encumbered.  So the question becomes how do we default?  I think we will take the easy way out and print and inflation will be the answer, rather than deflation.  It’s obvious that there is going to have to be some sort of debt reduction.”

When asked if his firm is taking advantage of tax loss selling in miners, Rule stated, “Yeah, we have been.  You know one of the few things that is unfortunate becoming as big as we’ve become is that some of the little, tiny tax loss selling candidates don’t work for us anymore.  The markets won’t hold what we propose to buy.

But certainly you can go up the quality trail and look at somewhat bigger companies.  What’s of interest to me is that although the gold quote has continued to do pretty well, these stocks have not done well.  They are cheap relative to gold.  I read an interesting piece today out of Stifel Nicolaus today that talked about the fact that the juniors, at a 10% discount to free cash flow, are pricing in $1,300 gold.  That’s a fairly interesting statistic.

If you do it a different way, that is pricing gold at spot, they are selling at really substantial discounts to net asset value.  I think in a lot of cases those prices are not going to hold because you are going to look past institutional buyers and retail buyers to trade buyers.  Meaning that there’s going to be takeovers in the space in 2012, which will make it a very lively market place indeed.”

© 2011 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

Eric King

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