What one of the world's best commodity investors is thinking now...

Editor in Chief's note: Regular Digest readers know Stansberry & Associates founder Porter Stansberry personally writes our Friday edition. Porter planned to write today's piece, but was held up by an urgent, nonserious medical issue. In place of Porter's missive, we have something special for you...

In today's edition, we're featuring an interview our financial news "aggregator" site, The Daily Crux, just conducted with legendary investor Rick Rule.

Rick is the founder of Global Resource Investments, now a member of the Sprott Group of companies. We consider him to be the "E.F Hutton" of natural resource investment. When Rick speaks, we listen. When he shares his thoughts and investment outlook in an interview, we read it... three times. You can read his latest thoughts in this advanced "sneak peak" of the Crux's Sunday interview...

The Daily Crux: Rick, we've seen some incredible moves in commodities over the past few weeks. What's going on here?

Rick Rule: Well, I think we've entered a period of volatility the likes of which most investors – even those who have been doing this as long as I have – have never seen.

I expect we'll see the VIX – the volatility index – stuck above 30 for extended periods of time. Commodities markets are already extremely volatile and risky in their own right, and take place in emerging and frontier markets on the fringes of liquidity. So these effects will only be magnified.

On the bullish side, it is an absolute truism that emerging markets are slowly becoming freer at the same time the Western markets are becoming less free. So wealth is increasing for the first time in a couple generations in places like the People's Republic of China, India, Mali, and Brazil.

Here in the West, when folks earn more money, they might buy an iPad or an iPod and load it up with 1,000 songs... There's no commodity intensity there.

But when folks in emerging markets earn more money, the things that they want to buy – that add the most utility to their lives – are commodities dense. The first thing they might do is increase their family's caloric intake from 1,500 or 1,600 calories a day to 2,500 or 2,600 calories a day. They might replace a thatch hut with one made of cinder block and a tin roof. They may upgrade from walking to a bicycle, or from a bicycle to a motor bike.

The point is that demand for commodities per capita in emerging and frontier markets is increasing very rapidly, and that's spread over billions of capitas. So the underlying demand for commodities is undergoing an undeniable secular change.

There are 2 or 3 billion people in the world who aspire to your standard of living and increasingly have the means to compete with you for some of it... for much of the commodities.

On the other hand, the bear case is that world markets – particularly Western markets – are heavily over-indebted. And there are structural problems in the world's banking systems. There are going to be big credit contractions – and commodities businesses can't exist without project finance and credit – at the same time the major markets are experiencing both credit volatility and perception volatility.

So you are going to see corrections, market failures, and credit failures in resource markets – debt, equities, and commodities – at the same time you see very strong underlying demand for commodities in emerging markets.

You can think of it as two great weather systems colliding... one positive and one negative. When two big systems collide, of course you get some extremely turbulent and stormy weather. So that's exactly what you should expect over the next two or three years in the commodity sector.

For those people who have an understanding of value and have the courage and the capital to take advantage of the sharp down moves and the sense to monetize some of the sharp up moves, these will probably be the best speculative times in a generation. But there will be enormous transfers of wealth from the people who play the game poorly to the people who play the game well, and those who play the game poorly aren't going to like it at all.

Crux: You mentioned China as one of the drivers of the bull case... But do you see a downturn in China playing a role in the bear case as well? Will a slowdown there cause commodity demand to dry up?

Rule: I think demand from China may well hit a hiatus. I'm no China expert, but my understanding is that the balance sheets in Chinese banks are extremely opaque. There is a suggestion that the special purpose vehicles set up by some of the Chinese regional and municipal governments have the same "sound" financial structure that WorldCom or Enron had, and an awful lot of credit has been consumed in speculative real estate development that, in certain forms, has far exceeded demand.

The other side of China, however – even though it's a communist country – is that there is no social safety net. As a consequence of that fact, workers in China save... otherwise they would starve. The personal savings rate in China is 30% or 40% of total incomes. The surplus capital thus far has been in some measure allocated by the center, which is always dangerous. But what's healthy in China is the fact that there is both societal and political pressure to save and invest, as opposed to consume.

China is a bit of a wild card. There is the risk of centralized political and social control and the consequent misallocation of capital, which I suspect has been happening and will continue to happen. On the other hand, you have incredible mobilization of capital as a consequence of individual savings and the hard work and tenacity of Chinese people.

Perhaps the most important variable is the understanding on the part of the political elite that they need to continue to deliver growth and increase opportunity for the Chinese citizenry. They're terrified of political and social discord, which will inevitably result if they fail.

So whether you agree with it or not, the central authorities are spending massive amounts of money on infrastructure. And while I'm no fan of centrally directed economies, one must note the economic growth that was stimulated in the United States with such initiatives as the expansion of electric power to rural areas and the development of the interstate highway system.

Those same types of efforts are underway on a massive scale in both India and China now. In the near term, of course, those big infrastructure spends are bullish for resources, because things like asphalt and concrete and copper get consumed as a consequence of building out transportation and electrical infrastructure. At the same time, they stimulate regional economic growth, and greatly increased demands for things like oil to produce the gasoline that gets used on the highways, and natural gas, coal, and uranium to meet the increased demand for power as a consequence of rural electrification.

So I think Chinese commodity demand is likely to be constrained, perhaps significantly, in the next 18 months as a consequence of them sorting out the opaque balance sheets of their banks, and dealing with the consequence of real estate overdevelopment.

But in the longer term, I think Chinese demand – like other emerging markets generally – will do well because people are becoming a little freer, and hence, a lot richer.

Crux: After the big moves of the past couple weeks, I'm sure readers are interested in your thoughts on gold and silver. What do you expect from precious metals going forward?

Rule: Well, I have to say I'm not a traditional gold bug, but I do subscribe to the thesis that most gold bugs describe... namely, the bankruptcy of fiat currency.

It's important to remember that gold and silver are denominated for trading purposes in U.S. dollars. In a period where the denominator is declining fairly rapidly, the numerator becomes less relevant. So I think that the nominal prices of gold and silver will trend higher. Of course, they won't do it in a straightforward way.

I also think it's also safe to say that the easy money in those trades has been made. They went from being distinctly out of favor in the 1990 to 2002 timeframe, to being somewhat more in favor.

So I don't think that their rise will be as rapid as it's been in the past, but I think it will be consistent simply as a consequence of the decline in the purchasing power of fiat currency.

One thing that adds value to any commodity is scarcity, and it's very difficult to say that the euro or the dollar or any of the fiat lies that we use as currency trading units, are becoming scarcer. They're becoming much, much, more plentiful.

The process we've seen a great deal of recently – by which the government issues debt, which it then buys itself – is described politically as quantitative easing. But the traditional phrase for that activity was counterfeiting.

It's my own belief, and I think this has been explained well by a couple of your editors, that quantitative easing isn't actually about providing liquidity and stimulus for the economy. It's about the fact that they otherwise couldn't sell this stuff to the people. It truly is counterfeiting, from my point of view.

One of the jokes I've made at conferences for years and years is that the U.S. dollar is probably the worst currency in the world, except for all the others. So what I see happening in the currency business is really a race to the bottom.

For many years, places like Switzerland and the United States were losing that race. But we Americans, in particular, are extremely competitive. And we've decided at long last that we're going to win every race, including the debasement race. Of course, the Europeans are stout competition in that regard.

Unfortunately, as a consequence of this, I think one must be bullish on gold and silver for the intermediate term. That isn't to say of course that they couldn't fall significantly from their current prices.

In the 1970 to 1981 bull market in gold – when the gold price went from $35 an ounce to $850 an ounce – I was early in my career and very involved in the markets.

In the midst of that gold bull market, in 1975, the gold price fell by half. Of course, it didn't stay down, but the fact is people who were overleveraged and didn't have the cash or courage to hold on could go broke on the right side of the trade in the biggest commodity bull market in history.

That's a sobering lesson. Is there some law written by God, or nature, or Congress – depending on who you believe in – that the price of gold can't fall from $1,600 to $900? None whatsoever. What you need to consider in the context of that price action is, why did it happen? What caused the volatility and what are the likely outcomes?

People who were shaken out of gold in 1975, after the price fell from roughly $200 an ounce to $100 an ounce, missed out on a move from 1976 to 1981 from $100 to $850 an ounce. Like I said... there are very sobering lessons there.

Despite the volatility, I must say that I'm bullish on gold and silver over the intermediate term, merely as a consequence of the fact that they're denominated in fiat currencies, which can be counterfeited. I intend to...

Final note: As regular Daily Crux readers know, we publish Crux interviews (which have featured top minds like Jim Rogers, Marc Faber, Steve Sjuggerud, and Doug Casey) on Sunday. Digest readers are receiving this interview in advance.

You can read the rest of the interview – and learn what Rick is doing in the gold and silver sector – by signing up for The Daily Crux. Along with access to the free Rick Rule interview, you'll receive regular Daily Crux e-mails, which provide readers with the day's most important financial insight and news. Again, it's absolutely free with zero obligation. You can sign up here.