Gold News

Gold & the US Default

"The US is bankrupt," says Bob Moriarty of "Physical gold is cheap..."

SEVEN YEARS AGO, mining-analyst Bob Moriarty and his wife, Barb, launched – a private website dedicated to precious metals and mining stock investment – because they were convinced gold and silver had about to turn higher from a significant bottom and wanted to help others understand it.

Bob travels to dozens of mining projects a year, and was one of the first analysts to write about NovaGold, Northern Dynasty, Silver Standard, Running Fox and YGC Resources among others.

In this exclusive interview with The Gold Report, Bob Moriarty foresees a short-term rally in the broader stock market but paints a bleak longer-term picture. Never one to whitewash his opinions, Bob confirms that "when my theories don't match the facts, I revise my theories..."

The Gold Report: When you talked to us in early August, you correctly predicted the market crashing in October. But we've also seen gold go lower since then. When do you think Gold Prices and the market will turn around?

Bob Moriarty, founder of In terms of the Australian Dollar, the British Pound and the Canadian Dollar, gold has been hitting new record highs, so gold still has its function as the security of last resort. We've had so much deleveraging, with giant hedge funds selling everything they could sell and the only thing left was gold. But the next move in gold is going to be a major move and it's going to be up.

TGR: When do you see that happening?

Bob Moriarty: October is always a really disastrous month for the market, but I think we've seen the bottom in the general stock market, in gold and in gold shares.

TGR: Are you saying that we're going to see physical gold, gold shares and the market all increase simultaneously?

Bob Moriarty: Correct.

TGR: At the same rate?

Bob Moriarty: I don't think so. There's been something like $3.2 trillion poured into the system. When people think back...I mean, this is an absolute disaster. We have taken the entire banking system, Fannie Mae and Freddie Mac and AIG, out of the hands of the fools on Wall Street who were running them and handed control over to the fools in Washington. That's the scariest thing I've ever heard. If Wall Street couldn't run Fannie Mae, why does Washington, DC think it can?

TGR: Given that sentiment, why would you expect the stock market to increase?

Bob Moriarty: You constantly run from one extreme to another. You have extremes of emotion on both the bull side and the bear side. If you look back to 1929, there was a giant crash at the end of October. The market recovered 50% of what it lost, but then continued down through 1932. The market goes up and it goes down. From the gold and Gold Mining point of view, the decline is entirely artificial. There are probably 100 gold juniors selling for less than the cash they have on hand. They could close the doors and you'd make a profit.

TGR: One of the things we're reading as part of the reason gold has fallen is that, amazingly enough, the US Dollar has actually been the currency of choice.

Bob Moriarty: It has been, but you have to understand why the Dollar is going up. I'll go back to my favorite figure – the $596 trillion outstanding in derivative positions. Maybe 9,000 hedge funds were operating in derivatives as if it was a giant casino and they were using Monopoly money. Once things turned south and interest rates started going up and mortgages started defaulting, they had to deleverage. This meant selling all of the positions they could and paying off the loans. But to do that, they need dollars. So it's entirely artificial.

If you look at the rise in the Dollar since September 27, it increased 12% or 13% in one month. Nobody can conduct business when the currency you use goes either up or down that much in a month's time. That's disastrous to business.

TGR: But it made a fairly rapid downturn earlier in the year. Is going back up now a correction?

Bob Moriarty: The correction is going to be that it will go back down, and I think it's going to be a catastrophic decline. Barron's had a piece recently talking about Taiwan now selling Fannie Mae and Freddie Mac bonds and Treasury bonds. If that continues or if other countries start doing it, it will be catastrophic for the Dollar. I think the United States is going to default entirely within the next nine to ten months.

Here's the situation. The US is bankrupt. As anybody who looks at our debts and obligations should be aware, sooner or later we're going to have to declare bankruptcy.

TGR: Why wouldn't we just print more money to pay our way out of it?

Bob Moriarty: If you go into a store and put down $100 bill and the guy says, "We don't take $100 bills," what do you do?

TGR: You pull out your credit card.

Bob Moriarty: What if he doesn't take your credit card? Here's the flaw and there's some really scary things going on that nobody thinks about. The US government incurred about $3.2 trillion worth of obligations in the last month and to my knowledge, not a single person asked the really simple question, "Where's the money going to come from?"

There are only three choices. You take it from the taxpayer in taxes and that's not an alternative. Or you borrow it from the Chinese and that's not an alternative. Or you print it – but you can only print it as long as people are willing to accept it. The Middle East has already started to talk about not wanting to use the US Dollar anymore in currency transactions. It's too dangerous. So we're a lot closer to a default than anybody in government wants to admit.

TGR: If we default, what's the impact on the worldwide market?

Bob Moriarty: Strangely enough, the worldwide market's going to be fine. The US can become a third-world nation. Everybody acts as if US consumers are the only consumers in the world. Well, the Chinese can consume and the Japanese can consume and the Europeans can consume. For the last 60 years, since Bretton Woods, we in the US have been able to consume by writing checks that we had no intention whatsoever of paying and the rest of the world has woken up to the fact that they're paying for our excess. We're waging a $3 trillion war in Iraq; we don't pay for it; the rest of the world does. We borrowed every cent. And will never pay it back.

TGR: If the US defaults, though, and so many of our bonds are held offshore, those then become illiquid or worth nothing. Wouldn't that have an impact on the worldwide economy?

Bob Moriarty: Yes, but it will only be a temporary thing. If your brother-in-law is a crack addict, he doesn't have a job, and his home goes into foreclosure, it's bad. But it happens. Businesses go bankrupt and countries go bankrupt. Essentially, Iceland went bankrupt a few weeks ago.

TGR: And some of the South American countries have waived their debt entirely...

Bob Moriarty: Argentina did it in 2002. They're on the verge of doing it again. Believe it or not, Kuwait is on the verge of going bankrupt. It is really bizarre. And it all goes back to derivatives being totally out of control and everyone believing that it was $596 trillion worth of value when, in fact, it was a giant shell game.

TGR: Given your prediction, how does that jibe with the stock market increasing? Are we going to rise through the next nine months until we go bankrupt or what?

Bob Moriarty: Yes. Bonds are paper assets, nothing but a promise of payment. Stocks are not paper assets; when you own a stock, you own a real percentage of a company that hopefully is doing something productive. Inflation is not prices increasing, which is what we've been led to believe for many years. Inflation is actually an increase in the money supply. When you start increasing money supply the way the US government has over the last month, it results in higher prices for real goods. So you can have this situation where the stock market is increasing in nominal terms but could actually be losing in real terms.

Governments always have two different ways to destroy their currency. They can do it through deflation, which is what we're going through right now, or they can do it through inflation. The government's doing their best to inflate the Dollar and it will go into hyper-inflation. That is just bizarre to me. An increase of $3.2 trillion in the money supply inside a month...? That's a lot.

You have to deal with a real currency under real rules and real management and provide real products to people who really intend to pay for them. When you get away from that, you create maladjustments or 'mal-investments'. There was an enormous investment in US real estate because real interest rates were actually negative. You could borrow 100% of the value of a home. Everybody in the system encouraged people to do this, so they did it. Then instead of getting rid of some of that mal-investment, the US government comes in and says, "We'll take the very worst cases of management, like Fannie Mae and Freddie Mac and AIG, and reward them for doing stupid things." Well, that doesn't make any sense; it just makes it worse. Everybody on Wall Street's still going to be getting their Christmas bonus this year, but now it's courtesy of the American taxpayer.

TGR: If you have anything left in your portfolio, how do you begin to prepare for the scenario you're laying out, a potential default by the US government?

Bob Moriarty: You stay away from US obligations entirely. A lot of people like Richard Russell [of the Dow Theory Letters] have recommended for years that in times of calamity you go for T-bills and gold. T-bills will be totally worthless someday. No fiat currency lasts forever. They're not real. I'm suggesting that the financial chaos we're in now is far worse than anybody can anticipate, even me. And a default by the US government actually would be a good thing because then we could and sit down and say, "Okay, what caused this in the first place? And secondly, what do we need to prevent it from happening again?"

The solution is quite simple. That's to go back to a Gold Standard. But if you go back to a gold standard, you have to have much less government. That would be a really good thing.

TGR: Given that we're already on a fiat currency and can print more, will our ship just go down with the presses rolling or will it extend itself longer – a slow sinking as opposed to diving straight to the bottom?

Bob Moriarty: There's a really good chance of a catastrophic failure with some of the things that are happening in the Middle East now. There could be a catastrophic freeze-up of the banking system, and they could just close the banks worldwide and say, "Okay, we'll shut everything down for two weeks and sort it out." There's a lot of pressure from France and China to fix the problem. I find it very encouraging that people are calling for a new Bretton Woods, because that is the solution – to go back and fix what Bretton Woods didn't do correctly in the first place. And that was to provide an honest gold system.

TGR: Refresh us a bit on Bretton Woods...

Bob Moriarty: In 1944, representatives of the 44 free countries in the Allies sat down to establish a financial system for economic post-war rebuilding. They met in Bretton Woods, New Hampshire. Their agreement tied the supply of US Dollars to gold, and all of the other currencies when then tied to the Dollar in fixed exchange rates. It made the Dollar literally as good as gold, so all of the other currencies were as good as gold as long as the Dollar was good.

But then we started inflating the currency because we could. We also exported our inflation to other countries. And then the Vietnam War came along and in 1971 Richard Nixon told foreign governments they could no longer exchange dollars for gold. What they should have done at Bretton Woods was to have everybody go to a gold currency – and instead of issuing pesos or francs or reals or dollars, issue units in terms of gold. That way, everybody's one bank-notes would be equal to a fixed quantity of gold, and you would have had total interchangeability among currencies.

TGR: If we could have a do-over of Bretton Woods, is there currently even enough gold anywhere to be able to tie it the world's currencies?

Bob Moriarty: Everybody makes the mistake of thinking that you need a lot of gold for a gold standard. The only thing gold does in a gold standard is give the currency discipline, but that's why it's so valuable. If you have discipline with the currency, you don't have the kind of chaos we have today. Without discipline, you end up with $596 trillion worth of derivatives and nobody in either finance or government saying, "Hey, by the way, that's a really bad idea."

TGR: If it's not tied to physical gold and we rely on people to show discipline, aren't we setting ourselves up for the same thing happening again?

Bob Moriarty: To restore confidence in the system, you have to use gold. But let me give you an idea of how out-of-control the system is today. If you took the 80 tonnes of gold that the US supposedly has on deposit in Fort Knox and West Point, that would be $200 billion worth. We have created $3.2 trillion in paper money, 16 times as much, in just the last month. That means it might take a Gold Price of $50,000 to $250,000 an ounce to actually clear the system, but we do have to clear the system. We have to go back to honest money. If you've ever played poker, and somebody sits down and pulls out a Sears credit card, he'll bet on every card because he isn't playing with real money.

TGR: And that's effectively what's been going on. So you're saying you see a rally coming in the Dow, which strangely enough we're hearing from other people, too, but it's a short-term rally.

Bob Moriarty: We're not going to go to new highs. The problem with variable-value currencies is the value of the currency changes every day. The Dow won't go to new highs in real-Dollar terms. It will go higher just because it's way oversold right now in terms of gold and gold stocks. Historically they are the cheapest they've ever been. Gold stocks are trading at the same value that they would trade if gold was $200 today.

TGR: Do you like ETFs at this point?

Bob Moriarty: Actually, I'm anti-ETF, whether gold or silver. The financial situation is so dangerous that it's no longer an issue of market risk, nor of whether they have the physical metal. It's an issue of counterparty risk; that's the danger today. Is the institution issuing the ETF going to exist if gold goes up $100 a day? Physical gold in hand, not where governments can get their hands on it, is an insurance policy. It's still working today even though Gold Bullion is cheap. Resource stocks and physical holdings are what you want as we head into hyper-inflation.

TGR: When do you see gold climbing? You say it's at the bottom now, so it could go any day.

Bob Moriarty: I believe so. It's going to surprise everybody because it's been hammered so much, but it's totally artificial. The price of gold has nothing to do with supply and demand. It's been hammered by the hedge funds closing their positions and buying dollars to pay off their loans. As soon as the hedge funds let up in their buying, the Dollar will tank and gold will go up. A lot of money sitting on the sidelines is looking for a safe place to go. When people start understanding you can buy $100 million worth of mining company for $50 million, they will start doing that.

TGR: So that's the specific catalyst? It's not that the hedge funds will stop buying, but will stop selling.

Bob Moriarty: Correct. I think they will do that. The last couple of trading days in October tend to be very positive, so it looks as if we sneaked through the worst of it. If we're not at the bottom yet, we're very close to it.

TGR: Some are speculating that the downtrend will continue through the fourth quarter as people readjust for 2008 results.

Bob Moriarty: The reason there are horse races is everybody has opinions. I'm not giving you fact. I didn't walk down a mountain with it. It isn't carved on tablets. It's my opinion and I could be wrong and I've been wrong in the past. Just not very wrong. And not very often.

TGR: When we talked a few months ago, looking forward to see what sectors would emerge or survive, you indicated energy and focused specifically on oil. What do you think today, and where do renewables and alternative energy fit in?

Bob Moriarty: Alternative energy is viable. I had mentioned oil only because our entire system is based around oil. Like natural resources or gold or silver or metals, any energy investment should be safe for the future. Peak oil is very real and the Chinese are expanding like crazy and using more energy all the time. Natural gas is good, coal is good, nuclear is good. Renewables, unfortunately, are a 3% solution. Wind power's another 3% solution. It's never going to be anything but a 3% solution. Guys like Boone Pickens can spend millions encouraging people to invest in wind power, but our current infrastructure will not support it. It's not just a question of investing in the wind power; you have to invest in the infrastructure as well and nobody ever wants to talk about that.

TGR: Where's a comfortable range for oil?

Bob Moriarty: Somewhere in the $80 to $110 range. But that will be increasing because peak oil is, in fact, very real. Oil production peaked in May of 2005 and peak oil also means peak food.

TGR: So you'd say this is a time to hunker down?

Bob Moriarty: Yes, but I would also like to say there are some very encouraging things. The Fourth Turning, written about 10 years ago, actually forecast this chaos that's coming. And the fellow's point of the book was that better times are coming. You go to absolutely insane extremes – which I think everybody can agree we have – and then you go back to sanity. Even during the Depression, families came closer together because they had time for each other. They may have not had money to do things they were doing before, but it did bring the families closer together. Money is the journey; not the destination.

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