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Gold Last. Cash First

Gold will be the last man standing in the wipe-out Bob Moriarty sees ahead...
 
The RAPID and massive response when the Swiss unpegged the Franc from the Euro will ripple across the hedge fund, brokerage and financial systems, reckons Bob Moriarty of precious metals analysis and stock site 321gold.com.
 
Gold, Moriarty believes, will be the last man standing, as he explains in this interview with The Gold Report...
 
The Gold Report: The Swiss National Bank surprised the world by unpegging the Franc from the Euro. You wrote that you suspect this will be identified as the beginning of the end and that when the derivatives market blows up, it will take down billions of Dollars in hedge funds. Is this the beginning of the end of derivatives and hedge funds or the beginning of the end of something bigger? 
 
Bob Moriarty: The beginning of the end of something bigger. With the Swiss Franc tied to the Euro, as the Dollar went up, the Euro went down. This required Switzerland to buy more Euros to protect its currency. Switzerland ended up owning nearly as many Euros as the country's annual GDP. The Swiss National Bank got out before the European Central Bank (ECB) could increase its quantitative easing (QE).
 
The real key is the size of the movement. The best record that I've seen indicates a 38% move in the Swiss Franc against the Euro in 12 minutes. A move that big has never happened before in history. 
 
TGR: Was the size of the movement driven by a kneejerk reaction to the surprise announcement? Later on, it settled out to something lower.
 
Bob Moriarty: The Bank for International Settlements showed $3.954 trillion in Swiss derivatives. Somebody was long $4 trillion and somebody was short $4 trillion. As soon as the announcement was made, computer trading kicked in and blew out all of the positions that were short the Swiss Franc. Essentially, a trillion Dollars disappeared in 12 minutes.
 
Compare that to the 3.25% rise in the US Dollar Index on Jan. 22 and 23. That's a $5.3 trillion day in the currency markets. $1.5 trillion of value disappeared on those two days. These moves are unparalleled in financial history. The swings are getting bigger and far more dangerous. 
 
TGR: Did those Swiss Franc trading losses of $1 trillion disappear from hedge funds or was a broader group of people involved? Does it affect economies or just the wealthy banks?
 
Bob Moriarty: They are all interconnected. The hedge funds borrowed money from a bank and the bank borrowed money from other banks. In the end, this will set up a series of cascading defaults that will take down the entire system. The $700 trillion in derivatives will crater the world's financial system.
 
For example, commodities firm A has a $100 million bet that the Swiss Franc is going up. Firm B has a $100m bet that the Swiss is going down. Firm B would have been wiped out by computerized trading. Firm B would go bankrupt because it hadn't anticipated a currency move that big. Meanwhile, the guy at Firm A who's smiling because he just made $30m on his Swiss Franc bet goes bankrupt too, because Firm A's money has just been tied up for the next year with the bankruptcy of the trading firm that was holding margin from both funds. Not only did Firm A not get paid the $30m, its $5m in margin has gone into financial limbo for 6 to 12 months. 
 
These enormous wings will bring the financial system down at some point.
 
TGR: How many more swings of this caliber are needed to start the beginning of the end? Are we on a downward trend? 
 
Bob Moriarty: They've been going on since June of 2007 when the Bear Stearns hedge funds cratered. Since then, it's been one small swing after another small one, after a medium-sized one, after a small one. This is the first really big swing. 
 
All of this is tied in to the Dollar and to the change in the value of oil. These things are interrelated. I compare it to a fine 17-jewel watch. When one part breaks, the whole thing breaks.
 
TGR: Despite these big currency swings, we haven't seen much impact on the banking system. When will that happen?
 
Bob Moriarty: We have seen an impact. When Mario Draghi, president of the ECB, increased QE in Europe to €1.1 trillion, it was a direct response to the currency swings. Japan did QE. Canada dropped the value of its currency two cents in one day. You could see it in the US Dollar, too. It looks to me as if the Dollar has topped. If it has, that will have a big impact. All of these things are interrelated.
 
TGR: What does a drop in the Dollar mean for the price of commodities priced in Dollars, such as oil and gold?
 
Bob Moriarty: It should mean prices go up. But we have the highest bull consensus in recorded history on the Dollar Index. Everybody's betting on the Dollar going up. When it turns, they get wiped out.
 
TGR: How fast will that happen? After all, the US economy is growing; people are choosing a flight to safety into the US Dollar. Will the US market remain strong through 2015 as this all unravels or are we at that cautionary stage where people pull out and hold their cash?
 
Bob Moriarty: I'm looking at the chart right now. The Dollar Index went from 92.5 to 95.5 in two days. That hasn't happened in my lifetime. 
 
Currencies are failing. Everybody's in a rush to the bottom and the US Dollar is just the cleanest dirty shirt. The fact that the Dollar has been going up so much is not a sign of financial health; it's a sign of financial disease. Things go down faster than they go up. Everyone who bet on the Dollar and on the S&P 500 is going to end up reversing their positions. 
 
The really big Kahuna is the bond market. When the bond market goes, things will get real interesting. 
 
TGR: What happens when the bond market fails?
 
Bob Moriarty: When the bond market fails, everything fails. The 30-year Treasury is paying something like 2.75%. That does not reflect a real rate of return after inflation. 
 
The bond markets never last. It doesn't make any difference whose bonds they are, they're never going to be paid off. There will be defaults, probably starting in Greece and cascading throughout the entire system. 
 
TGR: What does that mean for the Eurozone? Will Greece have to leave the European Union?
 
Bob Moriarty: Yes, and that would be a good thing. The Greeks are serial bankrupts. An economic union makes all the sense in the world, but a currency union does not. There is no difference between the Greeks printing a million Euros in currency or printing a million Euros in bonds. That was a fatal flaw of the system right from the get-go. The Greeks have been borrowing money at the same rate as the Germans. The piper is still playing, but you've got to pay.
 
TGR: What impact will this have on gold? The gold price jumped up the week of the Swiss announcement, but seems to have stalled. Why isn't gold appreciating?
 
Bob Moriarty: Gold is always the last man standing. John Exter, an economist who worked for the Fed and major banks during the 1960s, had a triangle of resources. He put gold at the very top. When everything else crashed, gold would hold its value. 
 
We forget that in four weeks, gold has gone up $120 per ounce. It's the start of a new bull market. The gold market is healthy. If gold is down today, it's no big deal. Markets go up and markets go down. 
 
TGR: I'm just looking at Exter's chart now, in its inverted form, because we're talking about it going down. It shows derivatives, non-monetary commodities, private business and real estate as being the next areas to depreciate or crash. Then come Muni bonds, securitized debt and listed stocks. Should non-monetary commodities, private businesses and real estate be the next signal?
 
Bob Moriarty: Yes. The US real estate market has been puffed up by QE. It was hedge funds and speculators who benefited. The higher real estate market was actually a bad sign because it didn't benefit people who actually wanted to live in real houses. 
 
Canada never had a real estate correction and prices there are beyond stupid. Canada's crash will be worse than it was in the US China is slowing down, too. 
 
For most of the base metals – nickel, lead, copper, iron, coal – the worrying bull market is over. Zinc is probably going to go up – there is a shortage of production – so it's okay, but the base metals, iron and coal are probably not good places to be.
 
TGR: In your article "The Next Big Thing in Silver", you wrote that silver production is determined not only by the price of silver, but also by the price of lead, zinc and copper, because most silver is produced as a byproduct of mining those metals. Given what you just said, should we expect a silver shortage?
 
Bob Moriarty: People have been predicting a silver shortage for the last 30 years and it's never happened. There are billions of ounces of silver aboveground, which factors into it. 
 
What impacts mining more than anything else is the cost of energy and the cost of iron. When those go down, even though the price of silver or gold stays steady, the reduced costs puts producers in a better financial condition. Miners will be in better condition over the next year because of lower energy costs and the drop in the price of iron.
 
TGR: Valentine's Day is coming up, and as Frank Holmes likes to say, gold is the love trade. Which gold companies should investors love right now?
 
Bob Moriarty: There are some exceptional stories among the well-managed, mid-tier gold and silver companies. Managements have cut out a lot of fat. The prices are the lowest relative to the price of gold and silver in history. The mid-tiers will recover first, followed by the juniors.
 
TGR: Do you have any other sweet nothings to share with our Valentine's Day readers? 
 
Bob Moriarty: The financial system seems to be blowing up day after day after day. You have to stand back and ask yourself, is this normal or is this a sign of something dangerous? I believe it's a sign of something dangerous. People need to be especially conservative.
 
TGR: Do you mean conservative in investing in resources or conservative in holding a large proportion of cash?
 
Bob Moriarty: Strangely enough, cash would be a good investment. Gold is the last thing to go, but cash is the second-to-last thing that goes. 
 
The stock market is due for a correction. The Dollar is due for a correction. The bond market is exceptionally dangerous. 
 
TGR: Any last tips on how to find the company of your dreams to invest in?
 
Bob Moriarty: There's no indicator more valuable than the salary of the CEO. The CEO's salary should reflect the real condition of the market. Anybody who invests in any gold or silver junior can go to SEDAR, look at the company's financial report and see what the CEO makes. If it's out of line, don't invest in the company. 
 
I don't expect the CEO of a major to get paid $700,000 a year. But if the CEO of 123 Gold R Us is making $700,000, his only interest is keeping enough money in the treasury to pay his salary. His interest is not in the welfare of the shareholders.
 
TGR: Love your advice and your insights, Bob. Thank you.

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