(Interviewed by Louis James, Editor, International Speculator)

L: So, we've talked about how you make money in these markets – can you tell us where are you looking to make money these days? Are you bullish on energy, bullish on gold, bearish on something – where are you focusing your efforts these days, Rick?

Rick: I am bullish on gold. I am very bullish on energy. I am near-term – meaning twelve months – bearish on base metals and industrial minerals.

When I say I'm bullish on gold, I'm bullish, probably in the way that you and Doug are: bearish on social promises, and as a consequence, bearish on currencies. I suspect that in the near term gold will do well, because it doesn't go down. Then gold will start to do well because people will perceive it as going up, rather than merely holding its own in terms of purchasing power.

I came of age in investing in the '70s – a great gold bull market. Beginning about 1978, when gold began its hyperbolic rise, it was going up from both greed and fear buyers. I'm a fear buyer of gold; I buy it as catastrophe insurance. What happened at the beginning of 1978 is that the fear buyers would buy it, creating momentum that caused the greed buyers to step in. The uptick then reinforced the fear of the fear buyers, and there was this sort of stereo buying in gold that caused a true hysteria, taking the gold price from $400 to the $850 blow-off. It wouldn't surprise me to see the same set of circumstances take place in the next two or three years.

Certainly, gold's strength in the last six weeks is a partial consequence of events in Greece. I don't think the events in Greece – and I suspect you don't either – are a one-off. Bill Bonner has noted that the metrics of the Greek economy relative to their debt are reminiscent of those of the United States; and yet the U.S. dollar seems to be regarded as a safe-haven currency, as people focus on the trouble in Greece.

I live in California, and the fiscal situation in the state of California is insane. Truly, truly insane.

L: I heard somewhere that if you added state budgets to the federal budget, debt-to-GDP of the U.S. is something like 160% – worse than Greece.

Rick: And I don't think that these circumstances are restricted to Europe or the United States; I think that we have a crisis of expectation around the world, really, in terms of the collective ability to address various concerns. I think that democracies tend to live well beyond their means; and I suspect that will mean that the currencies they use will continue to be debased. So I suspect we're going to see a revolving series of crises that will play into gold's hands.

There's something else very important for people to understand: gold is a store of wealth and a medium of exchange that has no constituency for devaluation.

Consider the United States dollar: it'll go lower, but the United States is still the largest consumer of goods and services in the world. The Chinese have made it very clear that tying their currency to our currency is a development strategy – they're trying to provide employment for their people by selling stuff to us. If the yuan doesn't appreciate, then the other four principle Asian currencies can't appreciate relative to the dollar. If none of those currencies appreciate, neither can the euro; because Europe would become a dumping ground for goods that were diverted from America, and the Europeans would lose their access to U.S. markets. Most of the developing nations' currencies are caught in the same sort of vortex.

What's interesting then is that every national government has some incentive to devalue – to protect their own domestic economy and employment.

Gold has no similar constituency for devaluation. That's an important reason why I'm attracted to gold, going forward.

L: You subscribe to the "race to the bottom" concept.

Rick: I do. In two ways. There's a race to the bottom that's a natural consequence of a society's living beyond its means. There's also a race to the bottom in consequence of currency devaluation to protect domestic employment, in the competitive global market.

L: One question we get a lot from readers on this is, "Suppose you're right and governments inflate/devalue, and gold responds accordingly – what if they confiscate it? Or what if they control the price again?"

Rick: I think that's a real risk. I would hope that… [chuckles] I don't know how to say this politely; I guess I can't. Well, I would hope that the state is stupid enough to act like a rattlesnake, and rattle long and hard before it strikes. That would give people enough time, for example, to get out of the gold ETF. I also know that it's not illegal, for now, for American citizens to hold gold outside the U.S. I'm not encouraging these shadowy offshore accounts, but there are perfectly legitimate, legal ways to open accounts offshore that are completely in compliance. And that's something that somebody might want to do if for some reason they didn't trust the U.S. government.

L: I can't imagine why they might not… Okay, so, for the same reasons we're bullish for gold – trouble in the global economy, etc. – we're short-term bearish on industrial metals. But those same concerns also tend to push down energy prices. Why do you have a different view of base metals than energy?

Rick: For a couple reasons. First, emerging markets are becoming slowly more free, and as a consequence, more rich. Energy consumption grows faster than other consumption in those markets.

Second, I think that energy supply on a global basis, going forward, is much more constrained than is commonly believed to be the case. The driver in energy – retail consumption of energy worldwide – is oil. Contrary to most investors' beliefs, most export crude in the world is not produced by major international oil corporations, but by national oil companies. There is an inescapable truth regarding oil production by government-controlled oil companies in many countries: they have diverted too much of their free cash flow away from sustaining capital investments and energy production and to politically popular domestic government spending programs.

For example, Mexico subsidizes the prices of gasoline and kerosene – and tortillas. And that subsidy is – paradoxically – increasing demand while constraining supply due to the diversions of working capital. These capital diversions in Mexico, and in other places, like Venezuela, have been so severe and so longstanding that I believe we'll have absolutely irreversible declines in production within a five- to-ten-year time frame. That would be true even if the host governments start reinvesting today.

L: Not likely. Hard to get elected canceling subsidies.

Rick: As a consequence of that, I believe that Mexico, Venezuela, Ecuador, Peru, Indonesia, and perhaps even Iran will have very dramatic declines in the availability of export crude that they can sell on the world market. It's my supposition that between 20-25% of export crude supplies on a global basis are at severe risk in the next five years. If you take the International Energy Agency's expectation that worldwide import demand is increasing 1.4% compounded per year, then juxtapose that with a 20% decline in supply, you have an amazing potential impact on the price of oil.

Thinking the unthinkable – some sort of military intervention in Iran, for example, which would constrict the supply of export crude through the Straits of Hormuz – it isn't impossible to talk about oil prices that are three or four, maybe even five times current prices, for relatively extended periods of time. Certainly I suspect that five years out, in real terms, oil prices will be at least double current prices. And oil is the roof for many other energy prices.

From a consumer's point of view, I have a very negative outlook on energy. But from a speculator's point of view, seeing a certainty of increasingly constrained energy supplies over the next five years is positive – it's a trend to bet on.

L: Okay, but you specified a twelve-month short-term bearish outlook on base metals. Now you're talking longer-term on this energy scenario. Are you saying that you would just treat short-term weakness on energy as buying opportunities? But if so, why not the same for industrial metals? The world is still going to need copper, nickel, iron, and so forth.

Rick: Yes. I absolutely would buy on near-term weakness in energy speculations. But I have a less negative view on base metals supply, looking out five years. I don't think we have the same supply shortfalls baked into the cake in base metals.

L: There's a lot of supply constraint. There's been supply destruction as a result of the crash of 2008 – projects put on hold or not started up on schedule. A lot of governments are sharpening their knives to take a bigger ounce of flesh out of the mining companies – those "greedy miners." There's reason to be concerned about the supply in metals, too.

Rick: I think if you look out a decade, you're very, very right. The credit market conditions that we're in right now are bullish for base metals prices, but differently constrain supply. While there's lots of liquidity in the market for short-term borrowers, the ability to obtain project finance – particularly non-recourse project finance – for large base metals projects is still very, very constrained. So even assuming all other factors are successful for base metals development, for projects of this sort it's very hard to get the capital needed to build the mines.

The second point you bring out is very useful for the discussion with regards to commodities-based businesses, and that is that in a bull market like we're in right now, the tendency for host countries to try and steal a bigger and bigger and bigger piece of the pie comes to the fore. Witness the Australian government's recent decision to greatly increase the tax on extractive industries in Australia. Australia was viewed as one of the safest countries in the world for miners, politically. In the context of effect, taxation is really partial retroactive nationalization. From the point of view of iron or coal miners, the place is becoming Australiastan.