Debt Crisis Bond Market Collapse, Gold Investor Safe Haven
Commodities / Gold and Silver 2010 May 05, 2010 - 05:16 PM GMTBy: The_Gold_Report
Talking heads are waxing enthusiastic over signals that the recession is receding, but debris from the derivatives debacle won't go away without a total financial system collapse, according to 321gold.com founder Bob Moriarty in this exclusive Gold Report interview. "Nobody and nothing is going to stop it from happening. It is as absolute as the time and tides," he says. While folks are all hunkered down in their bunkers waiting for the apocalypse, though, he suggests investing any spare cash in resource stocks—a "slam dunk" now that they're cheaper than they've been in nearly a decade.
The Gold Report: Moody's has downgraded Portugal debt, and recently S&P downgraded the Greek debt to the status of junk bonds. As a result, we see an increase in gold. Can you give us your perspective on what's happening here?
Bob Moriarty: Most of the time tying news to gold going up or down is absolute rubbish, but in this situation, there probably is a link. Portugal's debt has been downgraded two notches from A+ to A-, with a negative outlook saying it could be downgraded further in the future, and as you say, Greece's debt is now junk status.
We all follow the stock market closely, but we don't realize that in absolute terms the bond market's far more important. It's 10 times bigger than the stock market. Greece is on the verge of a collapse; I've been predicting this for months. We're going to have Greece, Portugal, Ireland, England, Japan and eventually the United States. The risk now is sovereign credit default.
In the case of Greece, what happened originally was Greece wanted to get into the EU and get the benefit economically of the EU. They had a lot of debt, and used derivatives to hide it. Let me give you an example from an individual's perspective. You go down to the bank and report your $100,000 annual income. You want to borrow $50,000. The bank asks how much you owe, and you say nothing. You lease your home, your car, your airplane, your boat, so you have no debt on the books. The bank gives you the loan. But you absolutely do have obligations, and what Greece did was hide debt through the use of derivatives.
Eventually, the derivatives float to the surface and become obvious. The immovable object meets the irresistible force. Greece has a debt it cannot possibly pay, and they're trying to borrow more money. At some point, somebody says, "Look, Greece has to get their outlays in line with their income."
For years, derivatives have allowed the world to maintain a disconnect between how much they bring in and how much they spend. For the past 18 months we've been shuffling the chairs around. We're not paying any debt off. We're not writing any debt off. We're simply shifting who owes it. Taxpayers in Iceland voted against bailing the banks out, and that was a very rational vote. In the United States, every American now has an obligation of about $100,000 more now than they did 18 months ago because we've taken all these toxic assets away from the banks and put them on the backs of the taxpayers. That is actually quite insane.
There are two problems with derivatives. First, only 10 people on earth actually understand what they are. Secondly, they allow people to confuse other people, which is a function of the first part. Goldman Sachs wants an instrument where somebody who wants to bet against it gets to say, "Okay, I want you to put all this into these pieces of trash, and then you put your name on them and sell them to people who will think you're behind them." Well, that's absolutely total fraud, and I've been saying this for years.
TGR: But this isn't unique to the U.S.
BM: The fraud is a function of the derivatives market. Prostitution of the political system exists everywhere to a great extent. But politicians in the United States are as bad as they've ever been, and the corruption level is so high it's absurd. I simply can't remember what part of the Constitution allows the federal government to force people to buy health insurance. This law they just passed in Arizona? You can flat guarantee it's going to be abused. Not that I favor illegal immigration, but we're passing laws that are blatantly unconstitutional and getting away with it.
TGR: What exactly happens when the derivatives market blows up?
BM: All these government bureaucrats and guys who have had fat salaries for the past 10 years will have to lower their salaries or not have jobs at all. Tens of millions of government employees all over the world will lose their jobs. The derivatives market is going to go into a meltdown like nobody's ever dreamed of because nobody but me and the other nine guys actually understand exactly what $600 trillion dollars is. It's 10 times the size of the world economy, and it's been blowing up since June 2007 when those Bears Stearns funds went under.
TGR: Are some countries positioned to benefit?
BM: Strangely enough, everyone is in a position to benefit. We have this giant, lopsided financial system. Think of it as a rowboat with 40 people in it, all on one side of the boat so it overturns. Sometimes, the best thing is to get thrown into the water and have to climb back into the boat. Somebody says, "We went under because we were all doing the exact same stupid thing." Maybe if one guy gets on one side of the boat and the other guy gets on the other side, the boat will float.
So, okay, we let it blow up. We need the entire system to collapse and have total chaos for six months. Then somebody will say, "If we get back in the boat and one guy gets on the left and one guy gets on the right, maybe it will float."
TGR: Doesn't that downplay the collateral damage?
BM: It's what cures the problem. If you pay a guy for 99 weeks to not work, what happens to unemployment? Unemployment goes up; you do better if you're unemployed than if you're working. You make money for doing nothing. How much sense does that make? The way to get people to work is to kill the unemployment programs. They don't help people; they hurt people.
TGR: Going back to the derivatives blowing up and sovereign debt defaults.. .if we catapult forward with people rioting and revolting and all these countries in chaos, what do investors do to conserve their wealth?
BM: Be as financially conservative as you can possibly be. Don't take on additional debt; don't spend beyond your means. Very, very bad things are coming, so prepare yourself to the extent you can. Own some gold; own some silver. That's going to be some protection. But it is time to reflect on where we are; it's time to head for the bunkers. If you want to speculate on stocks because the fools on TV are telling you about green shoots; if you want to invest in real estate because you think it's hit bottom, you're risking your financial future.
TGR: Other than holding precious metals as a hedge, is there nothing to look at in the stock market?
BM: Actually—and I've said the same thing for years—resource stocks will be in demand. Even though China is about to blow up, I still believe it has to transition from an agrarian society to a consumer society, and that's where real wealth is created.
I go to the gold shows because I want a feel for what ordinary investors are thinking and saying. I met with a lot of people at PDAC (Prospectors and Developers Association of Canada) in Toronto. Americans and Canadians are quite pissed off at government. They realize government has created the problem. We can't afford the government we've got now. Everybody knows that. They just don't want to address it.
TGR: Did you sense at PDAC that regular investors felt that the market was changing for gold?
BM: And silver. PDAC was the first time I saw ordinary investors participating and asking rational investment questions. Every other gold show that I've been to for nine years was the same old very conservative investors who went through the Depression and believed in owning gold and silver. Silver companies were getting $1 an ounce in the ground for silver in 2004 and 2005; they get a nickel now with $18 silver. And nobody wants to buy silver companies. Excuse me? Something's wrong there. Now, more ordinary investors have started thinking that with silver at $18, maybe it makes some sense to invest in resource companies. Resources are a slam-dunk. Peak oil is very real. You need to be investing in well-run energy companies. We're short of water, and investing in water makes sense. And we're short of resources; so, there's an interest, especially in the last month—I'm getting two or three calls a day from gold and silver mining companies saying they want to advertise. They've been sitting on their wallets for 18 months.
TGR: If we do indeed have this blowup of the derivatives markets, doesn't the stock market crash with it?
BM: Sure. Of course, it does. You keep saying "if," but it's not a question of "if"—it's a question of "when." In the 1930s, the stock markets closed for six months or a year; no big deal. The reason you own gold and silver and the reason you've been very conservative in your debt obligations is because very bad things can happen. In 2001 you couldn't go to the bank for a year in Argentina. I think they'd give you 1% of what you had on deposit. That's going to happen again.
TGR: As you noted not long ago on your website, gold shares are historically cheap. They're basically where they were in 2001-2002; yet gold itself has gone up five- or six-fold. Why haven't gold stocks gone up with the general market when many stocks are trading at historical highs now?
BM: I have followed a ratio, and you can plot it very easily by filling it in one of the charting programs; the ratio of gold stocks to gold. That's the XAU or the HUI over gold. There used to be a band and anytime it got out of the band on the top, you had a top in gold and silver; any time it got to the lower band, you had a bottom in gold and silver. The interesting thing is that it was only a measure of psychology. It wasn't a pure measure of gold or gold stocks; it was a measure of gold compared to gold stocks. When people are very, very optimistic, they buy gold stocks, and when they are very pessimistic, they sell gold stocks.
Well, that ratio broke down in September 2008, and we are lower now than we have ever been at any period where people traded gold stocks and gold. We have been there for a year, and I think I know why. All these hedge funds that were borrowing money because of derivatives poured tens of billions of dollars into every fleabag junior resource stock in the universe and were forced to sell because of deleveraging in 2008. That money has not come back into the market, but there are some extraordinary companies.
TGR: Do tell.
BM: Okay. I wrote about Opawica Explorations Inc. (TSX.V:OPW) in Canada in late April. Their market cap is about $6 million. They have 452,000 ounces in gold resource and 118 million pounds of copper. They own almost 12 million shares in Upper Canada Gold Corporation (TSX.V:UCC), worth about $5.2 million. So I worked it out. They have $9 in gold per share; $7 in copper; they've got 9 cents of UCC per share, and the stock is selling for 11 cents.
TGR: How can that be?
BM: Markets are irrational. They go from people being too optimistic to people being too pessimistic.
TGR: Can you tell us about any other screamingly undervalued precious metals stocks?
BM: Two months ago I went to Peru to see a company called Rio Alto Mining Limited (TSX.V:RIO). It had $5 million in the bank; they just forward sold gold to raise $25 million. That $30 million will get their heap leach pad, equipment, mine and mill into production. They will be producing 50,000 ounces of gold at the end of this year, and then 100,000 ounces for the next six years. After that, they go into producing copper and gold from sulfides. They'll be paying $48 million out of cash flow to IAMGOLD Corporation (TSX:IMG;NYSE:IAG) for the deposit. So, how much does the whole thing cost them out of pocket?
TGR: Nothing, because they have it in their forward selling.
BM: Exactly. They're going to produce something like 250,000 ounces of gold in the next 40 months. They have forward sold 38,000 ounces. It costs them $400 an ounce to produce and they sell it for $689, so they make a profit. That brings in the money to bring the mill up and pay IAMGOLD out of the profits. What a fabulous deal!
TGR: Clever management.
BM: Clever management indeed! There are so many stories out there, but there used to be 20 guys like me who used to spend all their time on the road going out and visiting projects. Only half a dozen do that now, and it's very, very hard for the average investor to figure out what to invest in.
TGR: Now, you're going to the Dominican Republic? Are you visiting any interesting companies there?
BM: I am going to see Everton Resources (TSX.V:EVR;Fkft:ERV), which has a joint venture with Linear Gold Corp. (TSX:LRR), which I visited years ago. Linear owns the land surrounding Pueblo Viejo Mine—which Barrick Gold Corporation (NYSE:ABX;TSX:ABX) is putting into production now. The Pueblo Viejo deposit is one of the biggest deposits in North America, and it had been ignored for years. If you have the land around it, you probably have some very prospective land, and I never understood why Linear didn't do something with it. Now Everton is moving it forward, which I think is wonderful.
TGR: And you have some interest in some production now in Africa?
BM: It's a really interesting deposit, Gold Standard in Tanzania. It's one of the richest projects I've seen in 10 years, but it's placer. Everyone hates placer, and if you go into Toronto or Vancouver and say, you want to raise money to invest in placer, nobody's interested. So I'm doing it pretty much on my own and with some people I know from California and from Germany. We should be in production in June. We're in production on a really small scale right now, but a really big potential. We know what the gold is; it's pretty high-grade. We're pretty sure we know how to recover it, and we're pretty sure it's going to be profitable. It costs us about $2 per yard to process material, and the revenues should be anywhere from $20 to $200 per yard. We've bought our equipment so cheap that we could operate for six months to a year and turn around and sell it for our costs.
TGR: How did placer get such a bad reputation? And what did you see in placer that the markets didn't see that allowed you take advantage of this situation?
BM: You always have areas that attract scam artists, and placer is one of them. That's because placer deposits all over the world that have been known about for years and years and years. A company picks up a placer deposit and says, "We have 10 million ounces that we're going to get into production, and you should invest in us." People do because they want to believe that, but money just disappears down a black hole. Silverado Gold Mines Ltd. (OTCBB:SLGLF;Fkft:LGL), which has more than a billion shares outstanding, has been pulling that up in Alaska for 30 years. Back in 2003 or 2004, Silverado had quite an incredible market capitalization, about $60 million. They've raised tens of millions of dollars, and the money's all just disappeared.
The more projects I go to, the more cynical I tend to get. I don't believe for a minute that every scam artist in the world is in Washington or in New York City. There are tons of them in Toronto and Vancouver, too. The basic business model of most juniors is flawed. I don't believe in the exploration business model because the odds are 100-to-1.
TGR: But you still consider resources a slam-dunk.
BM: Once you've got some cash in hand and some gold or some silver bars under the bed, and you have six months' necessary resources available, you've got to put your money into something. And the resource stocks are just so cheap now; as cheap as in 2001 in terms of historic ratios. In 2001, we had $4 silver in November and $250 gold all summer. Now we have $1,150 gold, and I'd think that there would be a major gold rush.
TGR: Any final thoughts you'd like to wrap up with?
BM: We're going through some interesting times, and it's going to get more interesting. People tend to look at guys like me and Peter Schiff, and Gerald Celente and Ron Paul as Cassandras, always predicting disaster. But they forget Cassandra was always right, too. So I will reiterate. You talk about "if" we have financial collapse. I talk about "when" because no other alternative possible. Nobody and nothing is going to stop it from happening. It is as absolute as the time and tides.
Convinced that gold and silver were at a bottom and wanting to give others a foundation for investing in resource stocks, Bob and Barb Moriarty brought 321gold.com to the Internet almost 10 years ago, and later added 321energy.com to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites feature articles, editorial opinions, pricing figures and updates on the current events affecting both sectors. Before his Internet career, Bob was a Marine F-4B pilot with more than 820 missions in Vietnam. A Captain at age 22, he was one of the most highly decorated pilots in the war and the youngest aviator in Vietnam. He holds 14 international aviation records, and is the only person The Gold Report knows who a) has an entry in Wikipedia and b) once flew an airplane through the pillars of the Eiffel Tower "just for fun."
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DISCLOSURE:
1) Karen Roche, Publisher of The Gold Report, conducted this interview. She personally and/or his family own shares of the following companies mentioned in this interview: None.
2) Of the companies mentioned in the interview, the following are sponsors of The Energy Report or The Gold Report: Rio Alto Mining, IAMGOLD and Everton Resources.
3) Bob Moriarty: I personally and/or my family own shares of the following companies mentioned in this interview: Opawica, Everton and Gold Standard. I personally
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