Bob Moriarty: Gold is Safe Haven for Looming Crash

Bob Moriarty, founder of 321gold.com, gives us his no-holds-barred opinions on where the economy is headed, the demise of the dollar, and which mining companies are worth taking a look at. Bob travels to dozens of mining projects a year. He was one of the first analysts to write about NovaGold, Northern Dynasty, Silver Standard, Running Fox and YGC Resources among others.

Bob and his wife, Barb, convinced gold/silver were at a bottom in 2001, started 321gold.com, one of the first websites devoted to teaching readers what they need to know about investing in resource stocks. Bob and Barb now operate two resource sites, 321Gold.com and 321energy.com, where up to 100,000 people a day visit. Prior to his Internet career, Bob was a Marine F-4B pilot at the age of 20 and a veteran of over 820 missions in Viet Nam. Becoming a Captain in the Marines at 22, he was one of the most highly decorated pilots in the war.

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 U.S. 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?

RM: Gold.

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’ (Kinross Gold Corporation (NYSE: KGC) proposed acquisition of Aurelian Resources Inc. [TSX: ARU]? 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 (NYSE: PBR), the Brazilian national oil company, looks very good to me. It should be a very safe investment.

TGR: What’s your view on the ETFs?

RM: My view is totally contrary to most of the people in the gold sector. I think the ETFs are the most wonderful thing in the universe. They give everybody the opportunity to buy into a position—and it’s not just silver ETFs—it’s any kind of ETF, whatever it is that you believe you can buy, you can buy here.

Here’s what’s important to understand; there are no shares behind the S&P and the Dow ETFs. They are totally fictional investments, but their purpose is to set price in the same way of commodities. You know, actually, you have to trade commodities back and forth; you don’t have to deliver commodities; you don’t have to grow commodities. They have a commodities exchange because the real purpose of the commodities exchange is to set price.

So, the gold ETF is very good. If you want to buy some gold. . .bang, you buy the ETF. Years ago we had coin stores in every town; now it’s actually very hard to buy physical gold or silver. It’s very easy for anyone to buy a gold or silver ETF. In that aspect, the ETF is wonderful.

As far as actually being able to deliver gold, I don’t think it makes any difference any more than it does the ability to deliver Dow stocks. It’s a pricing mechanism, and from that point of view it’s a very good thing.

That said, 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 (AMEX: CEF)?

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?

RM: The gold ETF (GLD) 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. (AMEX: EXK), 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. (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.

Comments

[cjwirth:]

Gold is not a safe haven. As the world goes into recession, the demand for gold in jewelry and the manufacture of electronics will decline. As the recession worsens, some gold investors (especially retirees) will sell their gold to get needed cash. Gold has little intrinsic value. The bubble of gold investment will burst as soon as the price drops and people realize that the price of gold can fluctuate greatly. Declining confidence will kill the price of gold. Here is how the recession will happen:

According to energy investment banker Matthew Simmons, global oil production is now declining, from 74 million barrels per day to 60 million barrels per day by 2015. During the same time demand will increase 14%.

This is equivalent to a 33% drop in 7 years. No one can reverse this trend, nor can we conserve our way out of this catastrophe. Because the demand for oil is so high, it will always be higher than production; thus the depletion rate will continue until all recoverable oil is extracted.

Alternatives will not even begin to fill the gap. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment.

We are facing the collapse of the highways that depend on diesel trucks for maintenance of bridges, cleaning culverts to avoid road washouts, snow plowing, roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, transformers, steel for pylons, and high tension cables, all from far away. With the highways out, there will be no food coming in from "outside," and without the power grid virtually nothing works, including home heating, pumping of gasoline and diesel, airports, communications, and automated systems.

This is documented in a free 48 page report that can be downloaded, website posted, distributed, and emailed: www.peakoilassociates....

I used to live in NH, but moved to a sustainable place. Anyone interested in relocating to a nice, pretty, sustainable area with a good climate and good soil? clifford dot wirth at yahoo dot com or give me a phone call which operates here as my old USA-NH number 603-668-4207.

2008 Aug 10 08:53 AM

[John Pseudonym:]

Sounds like Bob has a lot of his money invested in Gold and needs a good rally to get out with his head still on his shoulders.

2008 Aug 10 10:05 AM

[deuxsous:]

Both CEF and ASA are, for US investors, "passive foreign investment companies" (PFIC) and require one to make formal "elections" on a special form to the IRS of one of several choices of how to be taxed. All of the choices are, in my opinion, unfavorable compared to normal US investment taxation. Making no formal election also has adverse results.

In my opinion, and I am only a private investors and NOT an attorney nor an accountant, it would be preferable for most US investors to own CEF and ASA only in tax-deferred retirement fundds such as IRAs, 401Ks, etc.

Here is an explanation of the tax treatment of PFICs which ASA has published at its website:

www.asaltd.com/Tools/L...

2008 Aug 10 10:53 AM

[jhm47:]

I can remember atomic bomb drills that we had in our schools. We had to put our heads under our desks, in case of a nuclear attack. Some people built bomb shelters in their own homes. Then, recently, we had the y2k scare, where all computers would shut down, and the world as we know it would cease to exist. Recently, we had the bird flu to worry about. Now, the big catastrophic event is the peak oil crisis.

I have some precious metals, I have some land that could sustain us in the worst case scenario, but most important of all, a great family, and faith in the people of our great country (not the politicians). We have, and will continue to be the greatest country in the world. Yes, we have some problems, but the American ingenuity will prevail. God Bless America!

2008 Aug 10 12:38 PM

[John Cordes:]

Doom doom, gloom gloom, fall out shelters and canned food. Gold gold good old gold, this story is old. Peak oil and unfertile soil, dust bowls and soup bowls. FDIC bankrupt, greenback is worthless, buy your guns and stow the water. I know Smith & Wesson, oh yea never mind, the stock market won't exist. See you after the apocalypse. Blah blah blah.

2008 Aug 10 12:42 PM

[ussmls7:]

The only thing in golds way is ,the Cartels control over Central Bankers! PMs take downs are a must for these elites to remain unknow to the world, if Gold breaks out,they have to take more chances, no matter if it causes harm to all in their path! This started back early in our Nations history, & they got it done, by useing a Congress, like they are today! Ron Paul said it best,most in congress are clueless to monetary policey,or care less", just look at the feds actions,giving the Naked Short Sellers time to retreat,before the so-called CFTC would look into this (as JP Morgan put it,This is normal practice with Wall Street I-Banks)to protect F&FMay from this practice that Bear Sterns was not! It seems that the creation of the Federal Reseve has run its course in destroying the USA & all that got sucked into their Web of Debt. So many talking heads, have made a case for the dollar, who can you believe? Non of them, because write downs have yet to be seen,the FDIC is only 1 big bank failure from the need for a Fed bailout themself,Iran is still up in the air,Russia is taking bold moves, not only in drilling for Oil & NG in the Artic,but dropping bombs on defenceless people, hitting at Pipelines to the West, Does this worrie holders of physical PMs, I dont think so,it means the printing presses will be putting more dollars onto the world stage, & we all know what that does, so the green will not be the big light in that tunnel,is inflation X100 !

2008 Aug 10 12:59 PM

[ZardozZ:]

The Yin and the Yang --- you need both sides of the extreme to produce the tension that makes the entire system work. Hey.... let's talk Elliott Wave Theory. Are we 5 legs up and 3 legs down or was it the other way around ??

2008 Aug 10 01:12 PM

[otbricki:]

You can't eat gold. If you want a hedge against economic collapse the survivalists have it right.

BUT all this talk is nonsense. We are already seeing higher energy costs bring massive reserves like Canada's oil sands into production. People talk about the inelasticity of oil demand but COMPLETELY ignore the elastic nature of fossil fuel reserves.

There is enough petrocarbon in the ground in North America to supply US energy consumption at current rates for at least 3000 years. You just won't get it for $1 gal equivalent.

2008 Aug 10 06:19 PM

[blochie:]

The doomsday scenario of the first poster "cjwirth" gave me a good chuckle. He claims "The bubble of gold investment will burst as soon as the price drops and people realize that the price of gold can fluctuate greatly.
Hey CJ? EVERYONE who owns gold ALREADY KNOWS the price of gold fluctuates greatly. The statement "gold has little intrinsic value" isn't going to find agreement anywhere. And to claim that the US highway system is about to completely fail and shut down is, well.. I've wasted enough time on this already. Buy and hold some gold and silver and of course diversify your investments in other areas (like energy and alternative energy) as well.

2008 Aug 10 07:39 PM

[Tom Szabo:]

Given all the gold detractors that still appear to dispense their "can't eat Gold" wisdom in these forums, I'd say the bull market in the Midas metal has a ways to go. Well, guess what, you CAN eat gold (as many a Vietnamese or Cambodian refuge found out the hard way when they had to literally eat their entire wealth--I'm talking about gold jewelry--in order to hide it as they fled their countries in rickety boats launched into the ocean).

2008 Aug 10 11:41 PM

[Rene Cohrt:]

On earth the only sure thing is death. Money and liquidity in the hands of central banks, I do believe, dissapear with time.

For 40 years I have believed in and preferred gold and silver, nevertheless you can lose "money", value in these two instruments,but you will never be bereft all value.

2008 Aug 11 05:33 AM

[Chuck:]

About this section...

"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. "

It's not because of the value of the American Dollar that they would not trade in the bills printed before 2000, but because of all the counterfit bills based on those printed paper money representations.
Anyone who's traveled to Africa "Knows" to only take new bills with you if you're bringing Cash. My daughter teaches in central Africa in the summer and even she knows to only bring bills printed in the last few years when she get's her emergency money from the bank for the trip.

It's not the value of American money, it's the risk of having some of it being Counterfit. Most any travel site will tell you that before you head off to Europe, Africa, the Orient or the Middle East.

That said... I do have shares in GLD and SLW.

2008 Aug 11 08:35 AM

[Leif Peterson:]

You would probably be a fool not to buy gold right now. With regard to technicals -- look at the MACD and ultimate oscillator of GLD. The on balance volume (OBV) is not at a 1-year low, however, (probably because you will never see gold at extreme oversold levels). For fundamentals, you really don't have to do any homework. As an alternative, if you start playing the S&P500- or DJIA-associated equities, or BRIC-type plays, you will likely get burned.

2008 Aug 11 09:14 AM

[ussmls7:]

No MSM on bank & credit unions failures last Friday,but 82 yr old man jumped to his death over his Fed closer! Gov web sites are putting out less info, as more SHTF, also to much Geopolictical, but less coverage, China has that covered up! Time to relax & fact find! Banking Cartels are as active in the markets as ever ! Inflation is gaining,as jobs are disapearing.

2008 Aug 11 09:17 AM

[calbh:]

Hey Blochie, lighten up on CJWirth. I don't know or pretend to know what is going to happen. I do know that I would rather own some gold than not to own some gold. Having lived through a hurricane, and listening to my 94 year old grandmother tell me about the Great Depression, I also believe that it truly pays to prepare for the worst, and hope for the best. Preparing for the worst includes having enough gold and dollars in reserve for each member of your family. I also know that having water and food on hand is a must, as well as a generator for emergencies. Do not scoff at nor disregard other peoples input, you should simply take anything you can from their input because it may help you at some point. I am in sales, and I talk to many people over the course of a day. I can tell you that the "hair on the back of the neck" is standing up for a number of people even before the sub-prime mess. Most intelligent people agree that the numerous problems that we have are leading us down a path of self-destruction. I too am optimistic that people will wake up and begin to work towards solutions so that our children will not have to deal with these messes. To fix these problems will require input from many people, and also it will take people to add to and build on other peoples ideas. New Orleans should have taught everyone to prepare and not wait for the government to save you. Last time I looked, the government has not radically changed the way that it does business, so I am not believing that gold is not a viable hedge against dollar depreciation. I do agree with you that diversity in your investments is very wise. I also agree that when the herd mentality seems to be driving people to the cities...one should be a contrarian!

2008 Aug 11 10:48 AM

[The Angries...:]

Demand for gold will NOT go down due to a recession/depression. If companies start to go under, p/e ratios get too out of wack, or the fiat currencies of the world go into a downward spiral, investors will pull out of stocks and bonds. The question then becomes, where do the investors turn to invest? I say that they will go where they know that they won't totally lose their ass, which means hard PHYSICAL assets.

I have to say this about the dollar because I haven't read hardly anything about this anywhere.... Congress usually tries to pass twelve appropriations bills every year. They often fail to do this, but they always pass at least a couple. After all, that is how government programs are funded. BUT THIS YEAR, none have been passed because the jackass we call our president has promised to veto any bill over $930 billion (Bush is so thrifty). The retarded Dems want to spend even more than that, and because they control Congress now, they are just going to wait for a Democratic president or enough votes to overide a veto. THE POINT HERE is that BIG BIG BIG government spending is likely in store for the U.S., which will lead to massive inflation. Good luck with your dollar related assets when this happens.

I recommend diversifying your portfolio. Buy guns, ammo, food, silver (OMG is it cheap now or what?), and beer.

2008 Aug 12 02:03 AM

[UncleBill:]

As Thomas Paine said" These are the times that try men's souls".Physical possession of one's needs for life are allways a smart moves. Most people believe in 3 fallacies:
1. I will allways be healthy
2. I will allways have this job or a better paying one
3. Someone else is looking out for my financial well being

2008 Aug 13 09:28 PM