Dramatic daily moves in the U.S. dollar, gold prices and the larger markets are pointing to a global banking collapse that will send resource prices higher in 2016, according to 321gold.com founder Bob Moriarty. In this interview with The Gold Report, he shares his insights on how mining equities will react and five names he is watching.
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.
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 (NYSE:DB), 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 (OTCPK:GLNCY) 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. (NYSE:SUN) 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. (NASDAQ:AMZN) 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.
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: Are you focusing on producing companies?
BM: Let me break this down. You have the majors, Barrick Gold Corp. (NYSE:ABX), Newmont Mining Corp. (NYSE:NEM), Goldcorp Inc. (NYSE:GG) 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 (NYSEARCA: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 (OTCQX:MISVF) or Silvercorp (SVM). If it can make money at $14/oz silver, what's the danger?
Here's one example: NOVAGOLD (NYSEMKT:NG) 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. (NYSE:AG). You're buying really excellent management.
TGR: 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.
This interview was conducted by Karen Roche of The Gold Report.
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.
1) Karen Roche conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as president. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
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3) Bob Moriarty: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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