The Gold Report: Last year at this time we talked about the
Swiss decoupling the franc from the euro. Greece was a dark cloud over
everything. Now, Europe is not really in the news anymore. China dominates
the financial headlines. The Middle East is still a powder keg, and a looming
U.S. presidential election has turned into a media circus. What should
investors be focusing in on right now?
Bob Moriarty: The world is changing faster than I've ever seen
before. The Dow Jones Japan Stock Index (JPDOW), the S&P 500, the NYSE
Arca Gold BUGS Index (HUI) and the value of the U.S. dollar are moving
dramatically every day. One day recently, the dollar was up 2%. That
represents a $106 billion ($106B) loss to whoever was on the other side of
the trade. A few days later it was down 1%. This is the world's reserve
currency. It is not supposed to fluctuate like that. It's a cannon loose on a
ship in a storm. It's tearing the ship apart and nobody realizes it. We have
changes going on whose magnitude is awesome.
NYSE Arca Gold
BUGS Index, S&P 500 and Dow Jones Japan Index One-Year Chart
TGR: Is the volatility of the U.S. dollar a reflection of the
currencies it is being measured against?
BM: Volatility is increasing across the board. You may think that
if the dollar goes up 2% one day, it's no big deal if it goes down 2% the
next day. But hedge funds or investors getting margin calls are wiped out.
That can destroy $200B worth of assets in one particular market in two or
three days. The asset destruction has never occurred before in history and
the ramifications are very serious.
TGR: Is that really asset destruction? Isn't it just currency
traders losing money?
BM: It doesn't make any difference who loses it. When the banks
lose, it results in the middle class being destroyed. People get very angry
and they want a solution, which leads to rioting such as what we are seeing
in Greece. We're going to have this asset destruction all over the world.
When the banks collapse we could have the first worldwide revolution.
Deutsche Bank, for instance, has $65 trillion ($65T) in derivatives. In
February 2002, the total worth of derivatives in the world was about $100T.
Now, one single bank has $65T in derivatives. It almost certainly is going to
collapse. When it does, it's going to bring down the entire banking system.
TGR: Do you see this as a repeat of 2009 or a build-up of an
entirely new bubble?
BM: It's the same thing. It's derivatives, and it's $65 trillion,
not $65 billion. The number is so big that it pretty much guarantees the
system has to fail, and nobody wants to talk about it. You don't hear a lot
of discussion about derivatives in reality because most people don't know
what they are. But a quarter-point change in the interest rate would be
enough to cause total collapse. We have painted ourselves into a corner
financially, and there is no way out. We have to have a collapse, not because
anybody wants to but because governments have done so many foolish things.
You cannot spend your way to prosperity.
TGR: Last time, the banks were bailed out. What do you see
happening this time?
BM: They're going to collapse. The governments, the Federal Reserve
and the European Union have all used every tool that they have. There are no
more bullets left. It's going to collapse. They should have let that happen
in 2008. It wouldn't have been the end of the world. We would've just had to
clean up the banking system. What we're doing is playing hot potato. All
those bad mortgages just got transferred to the backs of the taxpayers.
They're never going to get paid off. They are bad debts. The world is awash
in debt, and we need to reset the system.
TGR: What would a collapse look like to the average person on the
street?
BM: When an individual or a company or a country has spent more
money than what can possibly be paid back, bankruptcy is a good alternative.
It offers a chance to restart. Governments don't want to admit they are
bankrupt, so they pretend they are in good shape by printing a bunch of
money, taking bad assets from banks and transferring them to the Federal
Reserve. Well, they are still bad assets that you can't do anything with.
TGR: So how does a country declare bankruptcy? What implications
does that have?
BM: It defaults on its bonds. Argentina, Venezuela and Greece are
in the process right now. The danger in Europe is that all of the economies
are intertwined. That's why Deutsche Bank is so dangerous; it is in bed with
thousands of other banks. So when it goes bankrupt, it's going to take the
entire system with it.
TGR: In this scenario, what happens to the general economies in
Europe, U.S. and Asia?
BM: Economies will stop, and that's exactly what is happening right
now. The Baltic Dry Index is down 50% in a month and a half. The world has
stopped entirely, and nobody noticed, but they will very shortly.
TGR: If no one is noticing it now, what event will open people's
eyes?
BM: There are so many different news events-China crashing, the
yuan devaluation, Japan crashing, Deutsche Bank going under, Glencore
International Plc (GLEN:LSE) going under, the Baltic Dry Index going below
300. These are all catastrophic if you look at them individually, and then
you realize that every single day you can go to CNN or the Drudge Report and
see more examples. Monumental changes are taking place four, five or six
standard deviations from the norm. Soon, we'll hit critical mass and no one
will be able to deny it.
TGR: What will be the impact on precious metals?
BM: I think a return to the gold standard is the only possible
solution. People don't understand the gold standard. You don't need gold for
a gold standard. The only thing that gold does is give discipline. If you
have discipline, you don't need gold. But we obviously have no discipline.
TGR: How does gold get valued in a situation where the currencies
are collapsing? How would you make the transition?
BM: When you talk about the price of gold today in dollars, you're
also talking about the dollar. If you price gold in yuan, the Japanese yen,
euros or Canadian dollars, it's different because you're always talking about
two commodities.
My belief is that all worldwide currencies are going to collapse totally
and we're going to go back to a gram-based gold standard. Quite bluntly, gold
will have to be valued to buy the same thing two years from now that it
bought 2,000 years ago. A lot of people come up with stupid numbers like gold
going to $153,000/ounce ($153/Koz). But if gold went to $153/Koz or silver
went to $500/oz, that's not a comment on gold or silver. It's a comment on
the currency that it's being quoted in.
TGR: If we are in a situation where the banking systems are
collapsing and all economies will come to a standstill, what's going to drive
commodities up?
BM: You just don't stop using oil, copper or iron. The demand will
still be there. But the price has gone so far past what is rational that it's
like a rubber band. It's going to spring back up. Commodities always turn
when people expect them not to turn because everybody is already invested.
The price of oil is simply absurd. It's the biggest industry on earth, and
everybody acts as if we don't need the stuff anymore.
TGR: Are investors better off buying the actual commodities or the
companies producing those commodities?
BM: So many equities are just crazy in their prices now. A major
like Sunoco Inc. (SUN:NYSE) pays a 10% dividend. How much risk is there in
something like Sunoco? But the price is half what it was a year ago.
Meanwhile, you have situations like Amazon.com Inc. (AMZN:NASDAQ) selling at
900 times earnings. It's absurd. Sunoco is going to survive. There are
probably 50 other foreign stocks doing the same thing.
TGR: Are you expecting the commodities in the short term to also
decrease in share price or are they at the bottom and they'll just be the
first to rebound?
BM: They have already collapsed. The equities behind the precious
metals and energy companies have already collapsed 94% from their highs. Minco Silver
Corp. (MSV:TSX) is another example. It is selling at $0.43/share, and it
has $1/share in cash. Now, how much is a dollar bill worth? I would argue
that it's worth more than $0.43 under any circumstances. There are some
really overpriced stocks, but there are a lot of underpriced stocks around at
the same time.
TGR: Have the resource companies with uneconomic projects been
cleaned off the books yet or are there still a lot of walking dead companies
on the Toronto Stock Exchange?
BM: They've been collapsing left and right, and there are dozens of
stocks being quoted for under a penny. There are still some zombie companies,
but a lot of companies have simply disappeared.
TGR: What are the guidelines you look at for your investments?
BM: Let me give you an example. Silvercorp
Metals Inc. (SVM:TSX; SVM:NYSE) was one of the great gainers in the 2002
and 2008 stock market. On a split basis, it went as high as $45/share. You
could buy Silvercorp two weeks ago at $0.60/share, and I think it was
$0.85/share last week. Even with $14/oz silver, Silvercorp is making money.
It has $66 million ($66M) in the bank and at one point it had a $14M
enterprise value. That's one of 50 or 100 stocks in production and making
money that I think are bound to go a lot higher. I was buying shares at $0.63
about 10 days ago and thrilled to do it.
TGR: Are you focusing on producing companies?
BM: Let me break this down. You have the majors, Barrick Gold Corp.
(ABX:TSX; ABX:NYSE), Newmont Mining Corp. (NEM:NYSE), Goldcorp Inc. (G:TSX;
GG:NYSE) and their equivalent. You have the midtier, and you have the penny
dreadfuls. The majors never move very much even in good markets. Yes, Barrick
will go up, but Barrick is not going up 500%. A lot of midtiers are in
production and profitable, even at today's prices. They are going to go up
500%, 600%, 700%, 800%, 1,000%. Then you have the penny dreadfuls. They are
like rolling dice in Las Vegas. They are going to up 10, 20, 30, sometimes
50-fold. The danger now is that half of the penny dreadfuls are going to
penny dreadful heaven, so you are taking a big risk. The penny dreadfuls will
go up the most, but they're not going to go up soon. The midtiers will go up
first. There could be an interesting return.
TGR: What are the midtiers that are particularly attractive to you?
BM: Any of them in the Market Vectors Junior Gold Miners ETF (GDXJ)
or the Philadelphia Gold and Silver Sector Index (XAU) or the NYSE Arca BUGS
Index (HUI). The ones that have $50M-1B market value are going to be the most
interesting. That's where the first, and safest, return is going to be. You'd
have to have aliens landing in New York City tomorrow to lose money on Minco
Silver or Silvercorp. If it can make money at $14/oz silver, what's the
danger?
Here's one example: NOVAGOLD (NG:TSX; NG:NYSE.MKT) went from $0.09/share in
2001 to $1/share six months later when nobody wanted to own resource stocks.
It went up 1,000%, and then it went on to go up 20 times higher again. It
went up 20,000%. The person running NOVAGOLD, the chairman of the board, is
Thomas Kaplan from New York. He's one of the brightest guys in the industry.
It's like investing in First Majestic Silver Corp. (FR:TSX; AG:NYSE;
FMV:FSE). You're buying really excellent management.
TGR: What is another example?
BM: Because the midtier production companies have gone down so
much, Almaden
Minerals Ltd. (AMM:TSX; AAU:NYSE), which has the Tuligtic project in
Mexico, is one of my all-time favorites. I just love the management of
Almaden, and it spun off all of its other projects into another company, Almadex
Minerals Inc. (AMX:TSX.V). Rather than invest in a crapshoot, we should
be investing in companies with solid projects, solid management and money in
the bank, like Almaden.
TGR: Are there other management teams out there that you would
recommend?
BM: Novo Resources Corp. (NVO:TSX.V; NSRPF:OTCQX) would
absolutely be one of them. I just love Quinton Hennigh and love what he's
doing in Australia. But there are some great, great companies out there now.
These things are going to change literally overnight. I am expecting a bit of
a gold correction after the upward moves at the beginning of the year, but
when the market starts up again, a lot more people will be getting on board.
TGR: That is a great primer on the prospects for precious metals.
What would be the impact of a banking collapse and resource resurgence on
energy prices?
BM: I expect the same rebound in oil and all other commodities
that's occurring in the Philadelphia Gold and Silver Sector Index and NYSE
Arca BUGS Index right now. Commodities in general as measured by the
Commodity Research Bureau are the lowest they've been in 5,000 years. Oil is
the cheapest relative to gold that it's ever been. But rather than have gold
go down, I see the commodities and oil exploding higher.
TGR: How high can oil go in a slowing global economy?
BM: I think the real correct price of oil would probably be in the
$60-70/barrel ($60-70/bbl) range. It is irrational at $120/bbl, and it is
equally irrational at $26/bbl. There is an economic value to oil, and it's a
lot higher than $26, and it's a lot lower than $120. The economies of the oil
producing countries-Saudi Arabia, Iran, Iraq, Kuwait, Venezuela-are dependent
on a higher price of oil.
TGR: We were speaking of bankruptcy earlier; U.S. Presidential
Candidate Donald Trump is an expert at bankruptcy. Would he be an expert at
trying to figure out how to work with a bankrupt country?
BM: Trump is certainly an expert in bankruptcy. We've gotten so far
into the warfare state, our entire economy is based on government dumping
money into the military industrial complex, and we can't afford that. Every
one of these fools-and I include Trump and Ted Cruz, Ben Carson and Hillary
Clinton-is a joke. The fact that these are the top candidates for the highest
office is a measure of the decline and beginning of the fall of an empire.
TGR: Why aren't we getting more qualified people or more intellects
running for this job?
BM: Because the entire system is rigged. It is a state of failure.
Our justice system doesn't work. Our education system doesn't work. Our
healthcare system doesn't work. Our financial system doesn't work. Thus, you
get a falling empire. I'm not a doom and gloomer. I'm actually the most
positive person you could ever talk to because whatever happens, when we get
through it, we're going to have some real leaders float to the top.
TGR: Back to investing. You are pessimistic in the sense that you
see the collapse is happening, but you're optimistic on the changes it's
going to bring. How do investors protect themselves through this collapse and
make it through to the other side?
BM: It's time to be very conservative. It's time to invest in the
stocks for widows and orphans. That used to be the Nifty 50. It used to be
bank stocks, AT&T, ITT. But now, it's going to be resources. The
resources have collapsed. They will go back up, and they will be a safe place
to be. But the general stock market is in a bear market. The dollar is in a
bear market. Resources are going to go into a bull market.
TGR: Bob, I always appreciate your time.
Bob and Barb Moriarty brought 321gold.com
to the Internet almost 14 years ago. They 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
current events affecting both sectors. Previously, Moriarty was a Marine F-4B
and O-1 pilot with more than 820 missions in Vietnam. He holds 14
international aviation records.
