Gold Cheap At $1230, Why Wait Untill it Hits $10,000?
Commodities / Gold and Silver 2010 Jul 02, 2010 - 11:09 AM GMTBy: The_Gold_Report
Economic rebound? Not with 22% unemployment. Banking reform legislation? Loaded with pork. Bankrupt nations? Rock-solid, lead-pipe cinch. "We need to start all over," says the inimitable Bob Moriarty in this exclusive Gold Report interview. "And in the end, we will." Meanwhile, he's keeping an eye out for the few-and-far-between juniors that manage to get things exactly right.
The Gold Report: Just in time for President Obama to meet with the leaders of the G20 nations in Vancouver over the last weekend in June, Congress finalized a sweeping bill to overhaul the banking system. These reforms are touted as the most ambitious rewrite of financials since the Great Depression. What impact will this legislation have on protecting us against another financial meltdown similar to 2008?
Bob Moriarty: Not a person I know, including myself, can actually say one thing of significance about this bill because no one actually understands what it says and what it does. Congress is voting for bills, while they have no clue as to what's in them. Senator Dodd from Connecticut says, "Well, we'll have to see what the effect of the bill will be." Well, I'd like my representatives in Washington to understand the effect of a bill in advance of writing the damn thing. It's going to be another bill totally loaded with pork, totally out of control. Accomplishing nothing.
Actually, what we need is another Glass-Steagall Act. We need to take banks back to being banks instead of casinos underwritten by the United States government and with their losses paid by taxpayers. If they actually reported their assets, you'd see every bank in the U.S. underwater financially.
The biggest of the big banks are doing something called High Frequency Trading. Basically, they are getting data a half second before the rest of the market and they are front-running their own customers. HFT is 70% of the market trading and it's stealing. Congress didn't even address the issue. Because they have been bought and paid for by Wall Street and the biggest of the banks. It's all corrupt and nothing is going to get fixed until we demand an honest monetary system.
Banks are supposed to be conservative. When I go down to the bank and deposit a check, I want to know that money is going to be there a week from now. I don't want those guys flying to Vegas shooting dice with my money. That's what they're doing. We are at a pivot point in world history. The people in Greece understand they're being screwed by government. The Greek government made all these promises they can't possibly keep. People in the U.S. are waking up to the fact that we're $150 trillion in debt and we only have $50 trillion in assets in the U.S.
We need to go back to Economics 101. We need to put people to work doing real things rather than make-work. We need to get government off the backs of taxpayers. We need to declare bankruptcy. We need to reduce the size of government. We need a lot less government and we need to start all over. And in the end, we will. Individuals around the world understand that we are at a turning point in world financial history. Governments don't.
TGR: You mentioned Greece. China came in and bought a bunch of its debt, helping bail them out. The government is also doing some massive restructuring and cutting.
BM: Have you ever seen the guys playing the shell game in New York? Shuffling the three walnuts and there's supposed to be a pea under one of them? This is a shell game. Nobody is addressing the issue; there's more debt in the world than money. It's simple. It cannot be paid. It makes no difference who's on the hook for it. There's not enough money in the world to pay down the debt. Greece is bankrupt. Spain is bankrupt. Italy is bankrupt. Ireland is bankrupt. The UK is bankrupt. The U.S. is bankrupt. Japan is really bankrupt. Those are the issues we need to address—the issues for which governments are giving lip service. They're just as effective at solving this financial disaster as they are the Gulf of Mexico oil spill.
TGR: Is this a house of cards? Where finally one nation declares bankruptcy and others follow suit?
BM: Of course. This is an instant replay of 1931. An Austrian bank went bankrupt and, when it did, it took everybody else down. You can think about it as a circle with say 10 people in it. One guy has $1 million and loans it to the next person. He loans it to the next person. He loans it to the next person, and on and on. The last guy in line is a crack addict who goes out and blows the money. When he defaults, how many people lose a million dollars?
TGR: Nine others.
BM: Exactly. So we have this incredibly leveraged system that cannot possibly pay the debts down. When Greece or Spain goes, there's going to be a cascading default and everybody is going to go. This is not a "prediction." It's a rock-solid, lead-pipe cinch. There's no other possible alternative.
TGR: Where will the first card fall?
BM: It's really hard to tell. A whole flock of black swans is circling and we aren't exactly certain which one will land first. But who cares who defaults first? They're all going to go in the end. I think 20 states in the U.S. are functionally bankrupt right now and are very near the point they tip over the cliff.
TGR: Some people say we've seen a rebound from the depths of the recession. Others are talking about a double-dip recession. Where do you stand on that?
BM: There was no rebound. You can't have a rebound with 22% unemployment. In my entire life we have never had 22% unemployment. There was the appearance of fewer problems, which was total fiction. We're in a depression.
You have to get to where government revenues equal government spending. Nobody wants to do it, but we'll do it in the end because believe it or not the law of supply and demand does work. Economics 101 does work. Governments fight it tooth and nail, but you have to balance your books sooner or later.
TGR: Are we looking at decades of depressions while we transition from overspending to balanced budgets?
BM: It didn't take very long in Iceland. The government will get very attentive when there are riots in the United States. When people understand their life savings have been destroyed, their pensions are gone and their jobs have all been exported to China, they're going to be furious. Guys like Peter Schiff and Gerald Celente and I have been calling for it for years. When Americans understand how big a mess we've got down in the Gulf and the government isn't doing anything about it, they will be furious.
TGR: The Gulf of Mexico—that's obviously a situation that's nowhere near under control.
BM: That's an understatement. I went through flight training in Pensacola 45 years ago. It had the most beautiful 15-mile-long beach of gorgeous white sand. It's covered with tar balls now. There is nothing you can do about it. It doesn't make any sense to even clean it up, because nobody's done anything about the spill.
TGR: What can be done?
BM: That's where it really gets scary. Probably the best guy I know, the real expert in the business, is Matt Simmons. He says we need to do what the Russians did—go in and nuke it in the hopes that'll seal the wellbore and it will stop leaking. Unfortunately, there's a 40% probability that it won't work; and if we pop off a nuke, we'll have something that goes on for 10 years and we'll be going four feet deep in tar balls in England. This is beyond stupid. This is truly catastrophic.
TGR: Was it stupid? Was it cutting corners? Was it just bound to happen at some point with deepwater drilling?
BM: They were on the edge of the envelope, they were cutting corners and there was greed and stupidity involved. The impotence of government is just laid out for everybody to see.
This is not just environmentally catastrophic. They may have to evacuate New Orleans, Pensacola, Tampa. What happens if they decided to evacuate Tampa? The U.S. would go into a third-world country literally overnight.
We're talking about 100,000 barrels of oil a day. That's 4.2 million gallons. It's serious and it's out of control. The knock-on effect to the economy? If we were in great shape financially this would cause a depression. BP doesn't have the resources to pay for this.
TGR: What about the impact on future drilling?
BM: That's a really interesting question because, obviously, we need more regulation—some effective regulation. We didn't have it. In this situation, everybody involved was guilty. There will be far more rules on offshore drilling in the future and it will drive the cost of energy up.
TGR: That sounds odd coming from you. Normally you're sort of an anarchist and oppose regulations. You're anti-government—you call government impotent, useless and stupid. But in this case, if we'd had better regulations this wouldn't have happened.
BM: If you want to live in a country with no government regulation, move to Zimbabwe. Government regulation is appropriate in some situations. But it has to be efficient. We are at an end of empire. It couldn't possibly be any clearer—we are losing three and a half wars. We want to go nuke Iran, which is not the enemy of anybody, under the theory that they have nuclear weapons when 16 U.S. government agencies agree they don't. It's end of empire.
We are in a state of entropy. Entropy is when something physical degrades into a state of chaos. A tropical depression hitting Grand Cayman could turn into a hurricane in the Gulf of Mexico. We could be raining oil on Louisiana, Mississippi and Florida in a week. We could kill everything—all the crops, all the trees, all the fish in a half a dozen states in a week. If we don't do it this week, we'll do it next week or the week after. Oil, literally, is raining on Florida already.
TGR: Will this be the rallying cry to really usher in an era of alternative energies?
BM: Alternative energies are a 3% solution. We have too many people. Look at the curve of energy production and the curve of the population growth. They're identical. Sooner or later, we're going to run out of cheap energy. In fact, we're there.
TGR: Let's shift to some more solid ground—gold. In our last interview, when you were talking about juniors, you said, "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 New York City. There are tons of them in Toronto and in Vancouver, too. The basic business model of most juniors is flawed." Can you explain what about it is flawed?
BM: The most common business model is to raise a lot of money, spend it, raise a lot more money, spend it, raise a lot more money and spend it. If you don't run out of people willing to invest, eventually you'll have 1 Moz., 2 Moz. or 50 Moz. of gold and sell out to a major.
TGR: Doesn't sound so bad.
BM: The problem is that 2,000 juniors believe they're going to do this; there have been maybe 15 or 20 deals in the last five years. Mathematically, the odds are about 100-to-1. If the business model is to develop a resource, raise money to put it into production and put it into production at a profit, that's a business model that works.
But 60% or 70% of these companies exist for the benefit of management. People with no experience whatsoever go in raise a bunch of money and have a good time with it. They have no intention or ability to actually produce anything at a profit. There is so much demand for resources, and the price for resources is so high it's created the illusion that a lot of these guys who have no sense, no cents and no experience in running companies can succeed. They only succeed in running these companies right into the ground.
An ideal environment would be a company that pays its president or CEO say, $100,000 a year with a boatload of options—not a quarter million dollars a year plus unlimited expense accounts plus a boatload of options, where they make out no matter how much money they destroy for others.
TGR: So when you invest in juniors, you choose from among the 40% that have decent people trying to do something effective.
BM: Here's the deal. The mistake most people make, myself included, is focusing on the projects. It's easy to do, because you can see good ones, so-so ones and bad ones. The most money you'll lose is on the very best projects because you start to believe that nobody could screw up such a great project. But they can and they do.
TGR: So you say investors need to focus more on management.
BM: 100%. That's the only thing I've learned in the last 10 years. You have to go in and ask, "Is there any chance whatsoever that these guys actually will succeed?"
TGR: If your only focus on is management, why fly around to all these sites instead of just hanging out in Vancouver, Toronto and New York?
BM: Because I want to see these people in their environment, and I want to see what they're doing. I want to see if they have any chance of actually accomplishing something. I get to see some really good management teams and some really good projects, too.
TGR: In a recent 321Gold report, you wrote what a great pleasure it is on your site visits "to see those companies that get it exactly right. They are few and far between." Can you tell us what some of these companies are getting exactly right, and what makes them stand out?
BM: A company that gets it exactly right is a 1-in-100 company. When I first started dealing with NovaGold Resources Inc. (NYSE.A:NG;TSX.V:NG), it was just making incredible progress back when no one else was doing anything. But NovaGold had five people then. The company still has some extraordinary projects but they got bigger and fatter. They probably have hundreds of people working for them now. It's really easy for a five-man company to get it exactly right, and NovaGold had it exactly right for a long time. It's really hard for a 200- or 300-man company to get it exactly right.
TGR: Who would you say is getting it exactly right nowadays?
BM: One example is Premium Exploration Inc. (TSX.V:PEM). Del Steiner, who runs the company, comes from Idaho. He spent 50 years thinking about creating something to exploit this one district, and he's pretty much controlling the whole district now. There's more damn gold there than I've ever seen in one particular area. We drove for about 20 miles and saw indications of placer workings. The mountains on both sides were loaded with gold. He has a really good team. They're being very conservative with their money. They're coming up with extraordinary results. It's so far under the radarscope, it's absolutely amazing; over time he will get credit.
TGR: Any others you see that have it exactly right?
BM: Rio Alto Mining Limited (TSX.V:RIO;BVL:RIO;DB:Fkft:MS2;A0MSLE) is close. I really like this company. They have the ability, if they do it right—and again, this is a work in progress—to pick up a 10 Moz. gold deposit essentially for free. They did a better job of taking advantage of the 2008 crash than anybody else I know. They negotiated really fabulous terms. If they actually do what they say they're going to do, they're going to make a lot of money for their shareholders. They're about $0.65 to $0.70 a share now. I know they turned down $2 in February because I was the one who took the offer to them.
TGR: How quickly can they make up that $2?
BM: Very quickly. They're starting work on pads now. They've got the money to get into production, and should be in production in December. If they don't screw it up, they'll do very well.
TGR: Who else comes to mind?
BM: Another company that is in a little bit earlier-stage work-in-progress than Rio Alto is Kiska Metals Corporation (TSX.V:KSK). It has some potential for being one of those companies to get it exactly right. Kiska has a big district in Alaska that probably has the potential of a Northern Dynasty Minerals Ltd. (NYSE.A:NAK; TSX:NDM). I'm going to go see them in mid-July. Kiska is very cheap and management appears to be very good. Kennecott Exploration Inc.—a subsidiary of Rio Tinto Ltd. (LSE:RIO; NYSE:RTP; AUS:RIO)—has back-in rights to the Island Mountain Discovery in Kiska's Whistler Project. If Kennecott exercises these rights, it would be financially very lucrative for Kiska. If they don't, it would remove the uncertainty. Investors hate uncertainty. It doesn't matter if Kennecott backs in or not, there is uncertainty.
TGR: They're just finishing some assays on that?
BM: Yeah. They have a major program underway. And again, they've tied up an entire district. It's going to be a very big, high-grade project.
TGR: How does Kiska's property compare to the district that Del Steiner's tied up in Idaho?
BM: Kiska has the potential of being a NovaGold or a Northern Dynasty with up to 40 Moz. of gold. Del Steiner's is a lot smaller. Del's might be 5 Moz., but he has the ability to put it into production really cheaply. He has to do a lot of things right to get it going, but it should be a very profitable. It's a nice size district with lots of potential.
TGR: What about costs for Kiska?
BM: Kiska's is going to be an expensive project; it will be one of those projects that costs $1 billion to get into production. I don't remember for sure, but I think NovaGold spent $9 million just on its earn-in and has easily spent $50M–$100M at Donlin Creek. It's like Northern Dynasty, where hundreds of millions of dollars have been spent. When you're dealing resources worth between $10 billion and $30 billion, you have to spend the money in exploration.
TGR: That should be an interesting trip for you. Are there other companies that are getting it close if not exactly right?
BM: I simply do not understand the market right now. It's brutal and very difficult to make money. Stock goes up, they release good results and the stock get hammered and cut by two-thirds. That's happened to Evolving Gold Corp. (TSX.V:EVG; Fkft:EV7), Revett Minerals, Inc. (TSX:RVM;OTCBB:RVMIF) and Richfield Ventures Corp. (TSX.V:RVC), which has a big project in northern BC, where they've come up with some extraordinary drill results. Richfield is very cheap now, and their results have been very good.
Revett is another company that's very close to getting it exactly right. It's a small but potentially very profitable company, with excellent management and a really good work force. They understand exactly what they're doing, have things under control. They're awaiting a judicial decision on their Troy property in Montana, where they anticipate annual production of 1.4 Moz. of silver and 12.6 million pounds (Mlbs.) copper concentrate. If they get that into production, they would be a major.
TGR: Speaking of silver. . .what's your view of silver vis-à-vis gold as we face a deeper depression, oil rain and the financial devastation you see on the horizon?
BM: Funny you should ask. I know of no other commodity where the experts—and I use the word "experts" in big quotation marks—are so full of crap. They've been touting the stuff for 10 years, talking about some shortage of silver, saying silver is going to go 10x faster than gold. It's never happened and they've never changed their tune.
Silver is a commodity. It is not money. Gold is money, as well as being a commodity. Silver will go up relative to everything else only when it becomes a monetary metal. My belief, my opinion, is that we will go back to a silver and gold standard. When we do, silver will go up relative to gold. But these guys who say silver will go from 70:1 to 16:1 have always been wrong and always will be wrong. Silver's not going to change relative to gold until something changes in supply and demand. That something is using silver as money.
TGR: Your investments are primarily in gold and platinum?
BM: Pretty much gold. Platinum's a really tough area. Interestingly enough, Del Steiner has a platinum project in Montana, near Stillwater. I would love to see that advanced. Really big potential there.
TGR: In terms of price points, can he develop that project at current platinum prices?
BM: Oh, yeah. $1,500 or $1,600 platinum is a lot of money. $1,230 gold is a lot of money. $19 silver is a lot of money. For all the guys who are running around saying, "Oh it's a catastrophe. It's controlled," those are pretty good prices. Anybody with a silver, platinum or gold deposit who can't make money at these prices is running a scam. I'm serious. If you can't make money at $1,230 gold what are you doing? Wait until it hits $10,000?
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 and O-1 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 Naval Aviator in Vietnam. He holds 14 international aviation records, and once flew an airplane through the Eiffel Tower's pillars "just for fun."
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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Crocodile, Evolving Gold, Alderon, Rodinia, Strathmore and Timmins.
3) Peter Grandich: I personally and/or my family own shares of the following companies mentioned in this interview: Evolving Gold, Silver Quest Resources and Alderon. I personally and/or my family am paid by the following companies mentioned in this interview: All.
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