A ‘Contrarian’ Mindset Is the Secret to Successful Commodities Investing

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• Commodities investing is cyclical and volatile. According to veteran investor Rick Rule, it takes patience and a “contrarian mindset.”
• Are low interest rates a political phenomenon, and how do they contribute to both public and private debt?
• Rick joins me and Cem Karsan to share his unpopular opinions on commodities, inflation, debt and much more, including stories about his riskiest investments.

Rick Rule is a retired investor, speculator and entrepreneur with experience in financial services companies, banks, insurance companies and wealth management. He has focused, “for better or worse,” on natural resources and commodities-related businesses for nearly 50 years. 

He says he “failed formal retirement,” because he’s still working about 45 hours a week. He definitely hasn’t slowed down when it comes to big ideas — and provocative opinions.

Rick joined me and my co-host Cem Karsan for the latest Global Macro episode of Top Traders Unplugged for an irreverent yet fascinating talk about his personal investment philosophy and thoughts about everything from environmental activism to gold. 

Read on for highlights of their discussion, including Rick’s take on the commodities market, the political nature of inflation, why the U.S. national debt is a bigger issue than we think — and the ongoing battle between “spenders” and “savers.”

Don’t be a victim — be patient (and contrarian)

“Commodities, as a part of the economy, are unusually cyclical, unusually volatile and unusually capital-intensive,” says Rick. “There are other businesses — I’m thinking retail food distribution, groceries or banking — that are much more sensible businesses. They’re blocking and tackling businesses. To be successful in the commodities business, you need to be an instinctive contrarian.”

He thinks that “if you’re not a contrarian, it’s highly likely that you will be a victim.”

In true contrarian fashion, he claims that “commodities either bore you or torture you for long periods of time, and then they make up for that period of boredom and torture with spectacular returns over short periods of time.” 

Nailing the timing part is quite difficult, however. It takes patience, tenacity and the willingness to accept that large returns are rare. He is 70 years old, and he’s only seen two periods of real outperformance: the “epic bull market” of 1969-1970 to 1981, in which the value of almost every commodity increased by a factor of 10, with some commodities rocketing to 30 times their earlier value. He argues that the excesses of the 1970s market caused the commodities bear market of the 1980s and 1990s. 

The second bull market began in the year 2000 and ran through 2011, and he notes two things that happened during that second bull-market era.

“We were coming off 20 years of underinvestment in natural resources, so we had capacity constraints at the same time that we saw the economic miracle known as the urbanization of China,” he explains. “So we had a demand-pull coming into a supply crunch, and we had another great commodities boom.”

The bear market that we’ve endured in recent years (from 2012 to 2022), was a counteraction of the bull market of the previous decade. 

Commodity-centric consumption versus the ‘stuff’ of first-world life

“My suspicion now is that we’re coming into another commodities bull market, as a consequence of systemic underinvestment by society in natural resources — coupled with the ascent of humankind,” says Rick. “It’s important to understand the demographics of natural resource economies relative to other economies.”

He points out that consumer goods that have utility are not very commodity-centric.

A small product from Apple might cost $1,000, but it probably weighs between 100 grams and 300 grams. “There isn’t much stuff in it.” 

But “we all have too much stuff,” he says. “We could probably improve our utility by taking a bunch of the stuff that we have now and putting it in a landfill. But when the poorest half of humanity gets more ability to consume and more able to spend, the things that increase their lifestyles are extremely commodity-intensive.”

Can investments in commodities help lift people out of poverty?

What does that look like? Someone in an impoverished part of the world might go from being barefoot to having shoes. When they have more money, they might buy a bicycle — and then a 50cc motorcycle, and later a Toyota Hilux (available in other countries but not the U.S.). 

“They go from a modern waffle hut to cinder block with a steel roof, and they use lots more energy,” Rick adds. “We’ve done a great job, as humankind in the last 40 years, raising up the poorest of the poor, taking 2 billion people out of dire poverty.” 

That includes building the infrastructure to provide electricity to those 2 billion people, which takes a lot of energy and resources. If we are to “lift up” the remaining 1 billion people who are the “poorest of the poor” by facilitating their access to electricity, that’s also a “materially intensive” endeavor. At the same time, we’re facing production declines in a wide variety of natural resource products — the “same products that sustain our lifestyle, never mind the lifestyles of the poorest of the poor,” says Rick.

He predicts that in the next five years, “absent a synchronized global recession or depression,” we’ll experience a supply crunch in extractive industries like copper, cobalt, zinc, oil and gas due to “systemic underinvestment in exploration and productive capacity.”  

Inflation as a political phenomenon

Now for something completely different: Given Rick’s decades of investment experience, we were eager to get his take on the ongoing hot topic of inflation. 

Cem notes that periods of inflation are not just times in which funding investments is difficult to do. They tend to be times of resource scarcity — and that’s because populism usually drives the dialogue. Historically, we see more geopolitical conflict during inflationary periods, “as a result of populism being local and capitalism being international,” he explains. 

“Everybody’s scrambling over scraps and bits to make sure that they have what they need, which ultimately leads to … competition and eventually war.” 

So what does Rick think about the intersection of inflation and geopolitics?

“Well, my response will probably generate a lot of hate mail from your listeners,” Rick says. “But that’s okay. They’re your listeners, not mine. So let’s let them hate.” 

He thinks inflation is primarily a political phenomenon — because “most people around the world, including those who believe in democracy, tend to vote for free beer and a free lunch.” 

Rick recalls two quotes about politics that he paraphrases to help explain his view. The first is from H.L. Mencken: “Elections are basically advanced auctions of stolen property,” says Rick. “An election exists in the minds of most voters to extract benefits they believe they’re due while defending themselves from the extraction of their neighbors.”

Another one is a definition of politics attributed to the mid-20th-century conspiracy theorist and anti-communist crusader Myron Fagan, who said politics can be best understood by looking at the derivation of the word itself.

“‘Poli’ … from the Greek for many — and ‘tic’ from the English colloquial for a small blood-sucking insect,” Rick says.

Spenders, savers and the social safety net

We live in a deeply partisan era — and the outsize influence of politics on the finance world isn’t about to change. But insights into how political shifts affect the market are always useful for investors.

In that vein, Rick argues that low interest rates are an example of a political phenomenon, one that’s “part of a war by spenders on savers.” 

He (ostensibly a saver), notes that in most of the world, spenders are far more numerous than savers. And in a democracy, the larger class wins. 

According to Rick, the spenders are burdening future generations with $32 trillion in on-balance-sheet obligations and almost $100 trillion of unfunded liabilities, including Medicare, Medicaid and Social Security. 

“We’re servicing this debt from a budget that is itself $2 trillion annually — in deficit,” he says. But when he talks about it, “people’s eyes glaze over.”

Cem suggests a counter-argument (although admittedly a polemical one) to the budget issue. 

“It’s a fiat system, it’s not a closed system. At the end of the day, you’re not necessarily borrowing from your side. Rome taxed all of its provinces for a thousand years to pay its debts, to keep feeding its people internally and to grow.”

Prosperity, genius and the free market

Our wide-ranging conversation with Rick can’t be easily summarized, but he did offer a few more nuggets of wisdom I have to include. 

He considers himself an optimist because in America, it’s still possible to make big things happen.

“Six young geeks can commandeer a garage in Sunnyvale, California, and out pops Google or Apple or Facebook. We have been able, since the New Deal, to have a society in which our individual genius, tenacity and creativity have been able to finance our collective stupidity.” 

Rick thinks that’s a good thing. 

“Better yet, because of technology, because of the distribution of access to tools and distribution of education, that garage doesn’t have to be in Sunnyvale anymore,” he says. “It might be in Accra or Jakarta or Sao Paulo.”

Can some of that untapped creativity help save the planet? Perhaps. But wealth would be even more effective.

“As populations get more prosperous, the environment means more to them. At one level, the environment is a consumer good,” Rick explains. “You will find much more capital contribution to the environment as a consumer good in countries where material existence isn’t on the line.”

Presumably, that means putting resources into developing countries for things like access to electricity. But should that come from renewable sources — or the old standby coal, which was in unprecedented demand last year?

Rick doesn’t have the answers, but he says the decisions “need to be made in markets, not by big thinkers.”  

Put simply, he thinks capital is our best hope. 

“Markets are messy, but they work.”

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.