Too Many Miners, Not Enough Gold
If a gold miner doesn't have a production story, all he's got is moose pasture...
BOB MORIARTY, the founder of 321gold.com, gives his no-holds-barred opinions to The Gold Report on where the economy is headed, the demise of the Dollar, the outlook for Gold, and which mining companies are worth taking a look at...
TGR: Where do you see the markets going between now and the end of the year?
RM: My opinion is that we're headed for a major crash. I think the market will top in August and we will have a repeat of 1929. I believe in 1929 the very top was on September 5th. It declined into October and then crashed at the end of October. We are going to have a market crash between now and October. Reality is setting in; the smart money is bailing out of stocks.
TGR: Well, that's pretty dramatic. How do you view gold playing out in the same time period?
RM: First of all, Gold is the ultimate money. It's portable; it's divisible; it's rare; and it's transferable. It's the only asset that has no obligation whatsoever to anyone. If you pick up a $100 bill, you may think of it as an asset, but it's actually a liability on the government. Gold has no liabilities; it is the safest of safe havens; it's been that way for 5,000 years, and in my opinion, it's going to be that way for the next three, five or twenty years.
TGR: Do you want to put a number on where you see gold going in October?
RM: That's a trap that everybody falls into, and it's a bad question. When you're talking about the price of gold, you're talking about two commodities – gold and the dollar.
Now, everybody thinks that Gold has run up from $251, but it actually hasn't gone up; the dollar's gone down. So, the real question should be how much of a crash do you think there could be in the dollar. So, the real answer is there is no limit to where the price of gold can go because there's no limit to how low the dollar can go; the United States is bankrupt.
TGR: What about base metals?
RM: Base metals are going through a correction; copper hasn't declined that much, but lead and zinc and nickel have all gotten creamed. That's perfectly normal. China has spent probably billions of dollars on the Olympics. I think there will be a slowdown there that will last 18 months but it's no big deal.
TGR: So, it's a slowdown...are you saying it's not going to be a "crash" as in the US markets?
RM: Here's what's interesting. China actually has been producing things they've been sending to us. If the United States goes into a depression, it's still quite possible for the Chinese to consume. But you've got to consider that between 1830 and 1900, when the United States created all of its real wealth, there were three major depressions. Depressions are no big deal; they last 18 months and then you start all over.
TGR: So, do you have money in banks right now?
RM: The only money I keep in banks is the money I need to pay this month's bills. I wouldn't keep a dime in a bank; the FDIC is more highly leveraged than Fannie Mae and Freddie Mac, and they're both broke. When Washington Mutual goes under, and surely they will, it will bankrupt the FDIC.
TGR: Can you speculate what will be the next reserve currency?
TGR: So you think the world's going to go back to the Gold Standard?
RM: It's going to go back to a Gold Standard but not because anybody wants to, not because of any vested interest on the part of any governments. It's going to go back to a Gold Standard because there's no other choice.
I was in Tanzania recently, and I walked into a bank, and I wanted to convert about $3,000 into shillings because I was going out into the field, and I needed to pay some miners. They handed about two-thirds of my money back to me, and they told me they wouldn't exchange it because the bills were made prior to 2000.
Now, that's the first time in my life that's ever happened to me, and it was a real shock. But when the entire banking system of the world freezes up and you can no longer get your money that is going to happen. And when people can no longer use credit cards and when people can no longer use bills, because nobody knows what the value is because it's changing so much every day, they're going to go to gold. They're going to go to gold for the same reason they have for 5,000 years. It's the only reliable alternative.
TGR: Will silver also play a role in terms of currency?
RM: When you have a Gold Standard, the primary metal in currency is actually silver. That's the thing that could make silver $50 an ounce. There's no shortage of silver. All these guys running around saying there's some kind of shortage of silver, and they never get enough and it's the most valuable commodity in the world – it's all nonsense. But when we go back to the gold standard, we will need a lot more silver.
TGR: Will there be any other precious metals that will operate as a currency like Gold and silver?
RM: Not operating as a currency, but remaining a store of value – the commercial need for platinum, palladium, and rhodium is still extremely high. They're very valuable metals in a technological society, so they will go up probably more than silver and gold.
TGR: And why do you see silver as being a primary currency?
RM: Because you can trade it. If you can imagine, next week we go on a pseudo-gold standard because nobody accepts money. You go to fill your car up and you give the guy an ounce of gold. What's he going to give you your change in?
TGR: OK, interesting. Let's talk about some of the juniors. What do you make of Kinross Gold Corp's proposed acquisition of Aurelian Resources Inc.? Do you think that's going to be the beginning of more of these junior non-producers being picked up at these two-year low prices?
RM: Absolutely. The majors have consumed their young and recognize that they have a 10-year reserve life right now, and they don't have anything after that. So, they have to go out and buy reserves, and that's just a start.
There are a lot of juniors that are on the ropes now. Now, Aurelian happens to be a really good company in a really good project in a bad country, but there are lots of juniors that are in trouble.
There are too many juniors. Rick Rule has done a really wonderful piece that's on your site, and ours. And he's absolutely correct; there's too many juniors out there, too many guys who think they can run mining companies.
TGR: Is that why you think failure is an option in the junior market?
RM: That's a very important part; I can think of 10 or 15 companies on the verge of bankruptcy. And somebody will recognize they have very real assets, and go and snap them up cheap.
TGR: You indicated in an article that we probably hit the bottom in gold shares in late July (July 25), and the reason for that is that investors favor metal over mining shares more than any point in time the last five years, and this is the mark of the bottom. Can you explain that a bit more?
RM: Here's the real key – all investing is psychological in nature. When people are the most optimistic, that's a top. When they're the most pessimistic, that's a bottom. So, if you can ever measure pure psychology, you can pick tops and bottoms fairly accurately. When you have something as bizarre as last Friday being the very most pessimistic period in five years, it's also probably – and I use the term probably – the best time to buy.
TGR: You say you're projecting that the market is going to crash, so somehow I can't reconcile this...
RM: Homestake declined about 21% from the crash in late October 1929 through the end of that year, but through the entire decade of the 1930s Homestake was the highest gaining stock on the New York Stock Exchange. So, it's entirely possible the market could crash and gold stocks go up. At some point in time, people are going to recognize the precious metals stocks, not all metal stocks, are the safest place to be.
TGR: You also indicated that you wanted to be focusing on production stories.
RM: At these prices ($855 gold), if a guy doesn't have a production story, he's got moose pasture.
TGR: Do you have some stocks that you would feel comfortable recommending readers own through this next time period, assuming that there's going to be a crash?
RM: I do, but I'd rather not pretend I'm guru, which I'm not. There are lots of really wonderful stories out there. If a guy is about to go into production or has just gone into production, the numbers are out there. You can do some research; there's 50, 100 or 200 really good stories. You could pretty much throw darts.
Rick Rule is absolutely correct; the period up ahead is going to be as easy to pick stocks as it was back in 2002, 2003 and 2004.
TGR: Are there any particular resource sectors that are more intriguing at this time?
RM: I think energy is pretty much a slam-dunk, depression or no depression. We have passed peak oil; it was May of 2005. It's not a theory; you can go look at a production and say, "Okay, show me the production for the last 20 years," and it peaked in 2005. It went down in 2006, it went down in 2007, and it's going down in 2008.
We can look forward to higher energy prices the rest of our lives. So, for a good oilfield services company, a good junior, a good country, Petrobras, the Brazilian national oil company, looks very good to me. It should be a very safe investment.
I think the real crisis financially is in derivatives. There are $596 trillion dollars in over-the-counter derivatives. That's 10 times the world's GDP. That's an enormous amount of paper assets that people believe they own. I think they are going to find out they don't really own. The paper assets are simply going to evaporate.
TGR: Are you familiar with Central Fund of Canada?
RM: Yes, what they do is they hold physical silver and physical Gold. What I really like about them, depending on the premium, is that you get a feel for how optimistic people are. Now, since the ETFs, the premium or the discount has decreased, but when it's selling for 10, 12 or 15% premium, it tells you people are pretty optimistic.
TGR: Aren't ETFs taxed like a commodity so there are no capital gains for US citizens?
RM: The Gold ETF is taxed as a short-term gain even if it's held long-term. I think that's very foolish. It's a fictional trade. Governments always hate gold and silver because it competes with their paper money. So, they come up with these absurd tax rules, and, of course, tax structure is important when you're doing any investment.
TGR: But I think, if I am not mistaken, Central Funds is actually taxed like a stock, so if you do hold it for 12 months, you do get the capital gains.
RM: You could be right; I mean I can neither say that you're right or wrong. It would be a good issue to look into.
TGR: Can you give us a couple of stocks that you are personally invested in that you like?
RM: I like stocks best when they're cheap, and a stock changes depending on its price. As of today, ATW Venture Corp. (TSX.V:ATW), which has two really fabulous gold mines in Australia, is selling for 60 cents; the stock was selling for 60 cents before they did their first deal. Arian Silver Corp. (TSX-V: AGQ), which I wrote it up, was 14.5 cents on Friday; it's 18 cents now; 131 million shares outstanding. They should have around 200 million ounces of silver.
So, you're buying a stock at pennies. Any of the actual producing silver or near producing silver stocks – Great Panther Resources Limited (TSX: GPR), Endeavour Silver Corp. (EDR:TSX, EJD:DBFrankfurt, EXK:AMEX), Minco Silver Corp. (TSX: MSV) – they are all really good stories.
TGR: What do you think of the royalty companies like Royal Gold, Inc. (Nasdaq: RGLD), Franco-Nevada Corporation (TSX:FNV), or Vista Gold Corp. (TSX & AMEX: VGZ)?
RM: Franco-Nevada was the best gold mining stock in the world 10 years ago, and the new Franco-Nevada is run by the same people. So, it's probably the best royalty company you will ever see. Any time you're buying a stock, you're not buying a stock; the facts about the numbers and the deposits and the production costs – they're all meaningless. What you're really doing is you're buying the people. And Pierre Lassonde, who is chairman at Franco, he's brilliant.
TGR: Bob, do you have any final comments?
RM: We are going to go into or we're in the greatest transfer of wealth in world history. Everybody has a choice right now; they can either be rich five years from now or they can be poor five years from now. It's entirely voluntary, and it depends on the decisions they make today.