Written by Karen Roche of The Gold Report
With the price of gold hitting record highs and equity prices lagging behind, Bob Moriarty, founder of 321gold.com, says it's time to gather some precious metals as insurance against hyperinflation or deflation—whichever may be coming our way—and to stock up on junior resource stocks. Prudent picks, he suggests in this exclusive interview with The Gold Report, stand a good chance of yielding returns up to 500%.
Companies Mentioned: Bellhaven Copper and Gold Inc. - Colombia Crest Gold Corp. - Continental Gold Ltd. - Galway Resources Ltd. - Musgrove Minerals Corp. - Red Eagle Mining Corp. - Revolution Resources Corp. - Solvista Gold Corp. - Sunward Resources Ltd.
The Gold Report: Bob, you've told us that you avoid investments that appear to be slam-dunks because they never work out. But you're a longstanding gold enthusiast, and you hear many people talking about gold as a slam-dunk investment—and now silver as well. How do you reconcile this?
Bob Moriarty: All the attention paid to gold scares me. If you looked at gold in terms of the cost of a postage stamp or a house, gold is very expensive at $1,600/oz. Same thing is true of silver; silver got very frothy two months ago, and every idiot in the world was running around saying silver is going through the roof. We actually had a higher bullish consensus on silver on May l of this year than we did in January of 1980, and that scares me, too.
TGR: You've also expressed serious concerns about international governments and their debts underpinning the increase in the gold price. Are you still making that argument?
BM: Well, here's the key, and this is what the gold bugs totally ignore. You can die of lung cancer or a heart attack, and the end result is exactly the same. In a financial system, you can die of hyperinflation or you can die of deflation. With $600 trillion worth of derivatives in the world, the risk of deflation is enormous, and that means that gold could drop to $500/oz. It might buy 10 times as much as it does at $1,600/oz., but everybody in the gold arena believes we're going to go into hyperinflation, and that's a slam-dunk. What if we don't? What if they're wrong?
TGR: It's interesting that you bring up the need to look at the price of gold in terms of what it can buy, but if you believe in the theory that gold at $500/oz. will be able to buy 10 times more than it does today, doesn't that make gold great regardless of whether we're in a hyperinflation or a deflationary environment?
BM: Yeah, I absolutely believe that the financial system of the world will collapse—and I think lots of people have now come into this camp. Even Tim Geithner came out just a few days ago saying that we're in some really, really, bad times. I was saying that five years ago and 10 years ago, and now Mr. Geithner's finally figuring it out.
But the gold bugs need to understand that Greece could default, Italy could default, Spain could default, starting a series of cascading defaults and the banking system could close in a month. Then maybe gold isn't $10,000/oz.; maybe it's $500/oz.
TGR: Speaking of some of those European economies, on July 12 you wrote an article describing Greece as a "serial deadbeat," and said that the European Union (EU) should kick Greece out and let them sort out their own financial situation or face a revolution. But realistically, wouldn't kicking Greece out of the EU also trigger a revolution in Europe as the various banking systems begin to collapse?
BM: But they'll create a far bigger monster if they try to keep Greece in the EU. This is a case of Hobson's Choice. Hobson was an innkeeper in England back in the 18th century, and he was a lazy sod. When you went to Hobson, if you wanted a horse he would give you whatever horse was nearest the barn door. If you wanted a riding horse, you might wind up with a plow horse, and if you wanted a plow horse, you might end up with a thoroughbred.
Hobson's choice is the choice of the least bad of alternatives. One alternative is for Greece to go out on its own and sort out its own problems. Another alternative is to have Germany, Sweden, Norway and others in the EU pay for Greece's problems. Sooner or later, people will say, "Hey, wait a minute. It's Greece's problem; it's not our problem."
TGR: Isn't it both? Greece's problem, but not Greece's alone.
BM: That's true. What's going on in Europe is the most serious financial issue in world history, and once the defaults start to cascade, it will be time to head for the bunker.
Almost everybody believes that governments are all-powerful and can prevent chaos. I believe that market forces are all-powerful. If the banking system in Europe collapses, it will be a week or two before it hits the United States, but I don't think the government can do anything about it.
A two-year Greek note is paying 39% interest. When you're paying 39% interest, it means the market believes you're going to default. The United States is paying probably 0.05% for the same thing, but what nobody has taken into account is globalization means that everybody's in bed together. So, when Greece and Italy collapse, it's going to cause a collapse in the United States.
TGR: Tea Party representatives have been adamant that the U.S. doesn't need to raise its debt ceiling because we can cut our way into living within our meansâ€•a position that's resulted in a complete stalemate in Washington, D.C. while the debate continues. How do you see this playing out as the August 2 deadline approaches?
BM: They've pulled the pin on the hand grenade, and they're tossing the hand grenade back and forth. No one wants to get stuck with it when it goes off. It's totally insane. If Moody's downgrades the United States, it would double our interest rates overnight and put every bank in the United States out of business. These guys are playing a really stupid game, and playing it for political purposes. They can't even understand how dangerous it is.
But to some extent the Tea Party is right, in that we don't need to increase the debt ceiling. We need to go back to real-world economics and match what we spend to what we collect.
TGR: How can we do that by August 2?
BM: Suppose you called me up and said, "Hey, Bob, I've got a problem. I owe $5 million and I make $50,000 a year. I don't know how I can pay my bills." I'd tell you that you need to default, start all over, and match your income with what you spend. In that sense, there's no difference between a country and an individual. Under these circumstances, it's ridiculous to be talking about raising the debt ceiling. The United States hasn't paid a penny of the debt off since 1960. It simply cannot go on forever. It's going to blow up. It has to.
TGR: But wouldn't defaulting trigger that downgrading by Moody's, the rise in interest rates, and the bank failures you mentioned? We wouldn't even be able to pay the interest. If we don't raise the debt ceiling, won't our huge house of cards come tumbling down?
BM: It's going to happen no matter what we do.
TGR: So, how do you see this playing out?
BM: I think they will raise the debt ceiling. But it's a house of cards, it's going to collapse here very soon, and everybody's going to say, "Gee, why didn't somebody warn us?" The fact of the matter is that 49 other guys and I have been trying to warn people for 10 years now, and nobody's wanted to listen. People’s heads are buried in the sand because they don’t want to know.
TGR: What do you suppose this will do to the price of gold in the near term?
BM: Gold will drop off in August, as it always does, and then pick up again in September. What's really interesting to me is that gold is at the highest price it's been in history and nobody seems to care.
TGR: What do you mean by that?
BM: Well, we've got the highest price for gold that we've ever had. I was around in 1979 and 1980, and it was a big deal on the news every day. They were tracking the price of gold and the price of silver, and nowadays everybody kind of ho-hums. We're almost at $1,600 and nobody really cares.
TGR: Could the ho-hum attitude reflect the fact that it's not really a big market?
BM: I think Americans are so clueless as to what's going on financially that they don't understand how important it is. But it is important; it's a barometer. It's the canary in the coal mine and it's saying something is seriously wrong.
TGR: Do you think the fact that gold has been decoupled from currency for several decades might also make it more humdrum?
BM: Yes, that's absolutely true. Most Americans wouldn't have any idea what a U.S. gold coin is like because they've never felt one, never touched one, never bought one, never sold one. The gold markets and the silver markets are tiny markets now, but I've been saying for years you need gold and silver as an insurance policy. Certainly, anyone who reads the headlines today should realize that this is a time for an insurance policy.
TGR: Right, and as you said earlier, it's an insurance policy for either hyperinflation or deflation. It will work in either direction. Your July 11 article mentioned that the Canadian junior shares have languished relative to the price of gold. So is this also a time to get into gold equities?
BM: It probably is. If you go back to 1980, gold and silver hit their highs in January but the junior market didn't hit its high until that fall. So gold went up to $875 and then collapsed; silver went up to $50.25 and then collapsed. The stocks didn't move at all until nine months later. They roared higher when people said, "Okay, it's time to get into gold and silver." Sometimes gold and silver lead; sometimes stocks lead, but gold stocks are very cheap now compared to the metal.
TGR: Which means they'll only get cheaper if the metal continues its upward path.
BM: Obviously. With $1,600 gold, an extraordinary price, every gold mining company in the world should be making money hand over fist.
TGR: You've said the best place to find a new mine is to find an old mine. Why is that true?
BM: Mines aren't usually closed because all the ores have been mined out; they're shut down for economic reasons. Management spends too much money or busts their picks on another deposit. It's as simple as going into a known gold or silver district and using modern exploration techniques. I'm writing a piece about a company I went to visit in Colombia. The locals have been mining in the area for 400 years. It would surprise me if they have found 5% or 10% of the gold available there.
TGR: Can you share this company's name with us?
BM: It's Red Eagle Mining Corp. (TSX.V:RD ), which just went public toward the end of June. People can get into the stock today at pretty close to the same price that they came out in the Initial Public Offering (IPO), about $1.25 per share. I went; I found gold; I panned gold; I saw gold being mined. Better yet, the company has a big land position. I think it will be very successful. I think anybody in Colombia will be very successful. It's an extraordinary country.
TGR: You've said before that over the next five to 10 years that Colombia once again will be the largest gold producer in the world.
BM: Colombia was the biggest gold producer in the world for 300 years, and there's still an enormous amount of gold there.
TGR: Did you look at other companies during your visit to Colombia that you consider particularly good investment opportunities?
BM: Continental Gold Ltd. (TSX:CNL) is one; I think its mine has 1 oz. average material. Solvista Gold Corp. (TSX.V:SVV), Sunward Resources Ltd. (TSX.V:SWD), Bellhaven Copper and Gold Inc. (TSX.V:BHV), Colombia Crest Gold Corp. (TSX.V:CLB; Fkft:EAT) and Galway Resources Ltd. (TSX.V:GWY) are a few others. Some 50 companies are located in Colombia. The real issue will be how good the management is, because the gold is certainly there.
TGR: Tell us a little more about some of those companies.
BM: I really enjoyed my visit to Sunward. It's just a great company and they're doing good stuff. It's in an area with a gold-rich copper porphyry. It's not high grade, with an average of 0.53 grams, but the tonnage is enormous. Sunward could end up with 800M–1B tons, and as the size of the deposit grows, it's getting cheaper to mine. It has a 3.7 million ounce resource right now, and I expect that to double or triple by the time they finish drilling.
TGR: You said that it gets cheaper to mine as the size of the deposit grows. Is there a point in Sunward where you'll see a tipping for those economies of scale?
BM: They're there now, with enough gold to go in with bulk tonnage techniques and really get the costs down.
TGR: Going back to your comment about looking for an old mine to find a new mine, you recently wrote up a company working in a series of old Idaho mines that produced for about 40 years until 1942.
BM: When the United States entered the war after being attacked in December of 1941, the government shut down 165 mines because the men and the equipment were needed for the war effort. In fact, 100% of those deposits were economic. The one you're alluding to is Musgrove Minerals Corp. (TSX:MGS; OTCQX:MGSGF). Its mine was the biggest copper producer in the United States until the Bingham Canyon in Utah came along. It has a lot of oxide copper right at the surface.
TGR: Given that the price of copper has gone up so much over the past several years, why wasn't it put into production a decade ago?
BM: A decade ago, copper was $0.65 a pound; today it is $4 and change. There also were some management issues with the company that had the project before Musgrove. Musgrove came in and sorted out the issues, and it's very viable today. It would be viable probably at $1.50 copper.
I'm not particularly concerned about the price, because everything in life is cyclical. It takes years to develop a mine like this, so you don't care what the price of copper is on a day-to-day basis. You have to be looking at the long term.
TGR: An interesting company that appears on your website describes its approach as a focus on "generative exploration targeting under-explored gold belts." That seems contrary to your old mines, new mines proposition.
BM: Despite what that description may imply, Revolution Resources Corp. (TSX:RV; OTCQX:RVRCF) is doing exactly what we were talking about. All of the deposits that they're drilling now are prior mines that I went to see about two months ago. Revolution is indeed exploring, but it's in an area known for America's first gold rush, for the oldest silver mine in the U.S. and for the fact that it led the country in lead production for Civil War munitions.
TGR: The first gold rush?
BM: In 1848, when gold was discovered in California, the miners from the Carolinas and Georgia all headed for California. The head of the U.S. Mint in Dahlonega, Georgia tried to convince them to stick around Georgia because there was so much gold there. The phrase "Thar's gold in them thar hills" is how he put it, to persuade them to stay. The Carolina Slate Belt, which produced more gold than anywhere else in the country until 1848, may still be the most prolific mineral belt in the eastern United States. When Revolution management looked at it, they said, "These things didn't stop producing because they ran out of ore; they went out of production because of economics, and we'll go back in with modern techniques." I think Revolution is going to be a wild success.
TGR: Have you researched or analyzed any other companies in base metals or precious metals that you'd like to talk about?
BM: I don't think so. Across the board, mining stocks are so cheap that if a company passes the management test, you could have a 200%, 300%, or 500% return.
Convinced that gold and silver were at their bottoms, and wanting to give others a foundation for investing in resource stocks, Bob and Barb Moriarty brought 321gold.com to the Internet 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 pilot and O 1C/G forward air controller with more than 820 missions in Vietnam. A captain at age 22, he was the youngest naval aviator in Vietnam and one of the war's most highly decorated. He holds 14 international aviation records, and once flew an airplane through the Eiffel Tower's pillars "just for fun."
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1) Karen Roche of The Gold Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Red Eagle Mining Corp., Continental Gold Ltd., Sunward Resources. Ltd., Musgrove Minerals Corp. and Revolution Resources Corp.
3) Bob Moriarty: I personally and/or my family own shares of the following companies mentioned in this interview: Musgrove. I personally and/or my family am paid by the following companies mentioned in this interview: Sunward, Musgrove, Red Eagle and Revolution Resources.