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Investors Where to Find Cover When Black Swans Swarm

Commodities / Gold & Silver 2009 May 23, 2009 - 07:13 AM GMT

By: The_Gold_Report

Commodities

Best Financial Markets Analysis ArticleBy nature, Black Swans are rare and typically solitary. Defined two years ago by Nassim Nicholas Taleb in The Black Swan: The Impact of the Highly Improbable, Black Swans personify events that share three features: they come as a surprise, they have major impact, and they are later rationalized by hindsight as if they had been predictable. They aren’t necessarily bad and seldom appear in flocks, but as 321gold.com founder Bob Moriarty sees it, those darkening the horizon these days serve as harbingers of escalating chaos in financial markets. This particular breed isn’t exactly unpredictable—the automobile industry giants’ troubles are clear enough, for example—but it’s especially dangerous. What’s an investor to do? In this environment, Bob urges an ultra-conservative approach, and as in past interviews, he advises investing in tangibles (“preferably producing resource stocks”) after serious due diligence.


The Gold Report: How do you see the overall market these days?

Bob Moriarty: Investors need to understand fully the concept of Black Swans and of entropy. Entropy is the state of total chaos. Basically, all of life and all of physics goes from a state of stability into increasing chaos. It’s very, very hard to predict exactly what’s going to happen in the near future—the next six months to a year—because so many potential Black Swans are on the horizon. Let me list some of them.

Chrysler has gone broke now, GM is going to go broke in weeks, Chrysler just dropped 700 dealerships, GM is going to drop 2,600 total. They’re dropping 1,100 now. All of this is adding enormously to the unemployment rate. The automobile industry is the financial backbone of the United States and it’s going to have a substantial impact.

But basically the government’s solution to any problem is to do more of whatever they’re doing. The entire problem was caused by government in the first place. We need to go back to more savings and to real jobs. We need be exporting goods rather than pieces of paper. We need to develop a manufacturing economy. Unfortunately we’re nowhere near that. We need less government, not more.

The government’s taking exactly the wrong approach, slapping Band-Aids on very real problems. The American taxpayers have pumped $16 billion into GM and, while we need to rebuild manufacturing, that money is not going for factories in the United States. It’s going for factories in China and Mexico. When the American people find out that the $16 billion is going to build factories in Mexico and China, they’re going to be upset.

TGR: What are some other Black Swans? What would have our readers be on alert for?

BM: They’re fairly unpredictable and the range is enormous. The bond market is on the verge of a crash. It’s gone from $142 in December to $122 and the only thing that’s propping it up is the Fed coming in and buying bonds periodically. When they run out of money, bonds are going to tumble and interest rates are going to go up. Even Obama said we’re headed for trouble with a low dollar and much higher interest rates.

The dollar’s on the verge of a collapse. We have the geopolitical situation in the Middle East. Israel seems intent on attacking Iran and we really need to solve that. The Middle East could easily start World War III.

TGR: What do you see happening in the markets?

BM: There has to be a lot of deleveraging. We could easily run into a situation like last fall. We have not come to the bottom of the stock market in any way, shape or form. The Bank for International Settlements (BIS), released derivatives numbers on May 19 and although it reports that the total notional amount of over-the-counter derivatives contracts outstanding fell a bit from the previous numbers, there’s close to $600 trillion in derivatives outstanding. Nobody knows what is behind those bets. We could have forced selling in the stock market.

TGR: Are gold stocks in a good position, though?

BM: Forced selling could take the gold stocks with it. Gold stocks are low by historical standards; but if you get into forced deleveraging, you could get into a situation where people just dump everything. The stock market’s going to continue down. It’s nowhere near bottom. Housing is going to continue down and as I say, the government’s doing exactly the wrong thing. They need to encourage savings; they need to reward savers. They need to encourage business to do smart things. People went out and bought houses they couldn’t afford, the banks made loans they couldn’t afford. It shouldn’t be on the back of the taxpayers to pay for that, but it is.

TGR: According to the BIS, outstanding credit default swaps have contracted. Does that surprise you?

BM: Not really, particularly with the credit default swaps. They don’t make any sense at all. They are like casinos taking bets on their own demise. Why would a casino bet that it’s going to fail? That’s what a credit default swap is—getting into a situation where a lot of people have a vested interest in seeing it fail. A lot of GM bondholders would be better off in bankruptcy court than they would with GM continuing operations. So there’s some really dangerous stuff. The credit boom of the last 40 years has set up enormous instability. We need to wipe out all the bad debt, we need to start over, and that’s what the government refuses to do.

TGR: Is this unique to the U.S. government? Or are other governments, such as those in Europe and Asia, doing the same thing?

BM: Absolutely. Everybody’s doing it. We’re just doing it in far greater numbers. The United States government is in debt to the tune of $60 trillion. We are bankrupt in every way you can measure it. I’ll give you a perfect example. I was talking to the president of a mining company that I wrote up about six months ago and asked how he was doing. He said, “We can’t get our drill permit. We drilled last year and these guys are dawdling with the drill permit. We’ve got the equipment on site and we’ve got the people and we can’t get them to sign off on the drill permit.” I said, “They’ll get around to it sooner or later.” He said, “That isn’t the worst of it. Immigrations won’t let our chief geologist through Customs. He’s been in the United States 200 times. They said, ‘You need some more paperwork.’”

We need less government. We need government to get out of the way of the people who are trying to drill, out of the way of people who are trying to build mines, and out of the way of people who are trying to come to the United States and create wealth.

TGR: What’s an investor to do? It sounds like we’re worried about total financial collapse, we’re looking at the general financial markets going down, we’re looking at major countries going bankrupt. How do you play this market?

BM: It’s a time to be very, very, very, very, very conservative. When you have a bubble—and this has happened in every bubble in history—it takes a generation for that bubble to clean itself up. Real estate is over for a generation. The stock market is over for a generation. We’re probably going to have another bubble and for all I know it could be gold and silver. The government is just pumping money into the system. At some point, it has to result in hyperinflation and destruction of the dollar and probably of the United States.

It’s a time to be ultra conservative. It’s a bad time to be buying real estate, a bad time to be investing in the general stock market. An investor must—and I repeat the word MUST (in big capital letters)—have some gold and some silver for immediate expenses in case of a total collapse of the system. The only safe investment I personally can think of is to invest in resource stocks and preferably producing resource stocks, producing gold and silver resource companies.

TGR: Are you limiting it to precious metals? What about other resources?

BM: As I’ve said in the past, you need to invest in things. If currencies around the world are going to fail, you want to own things—energy and the other commodities, copper, lead, zinc, nickel, platinum. The prices have gotten hammered so bad that the number of mines shut down has actually been greater than the reduction in demand. So copper is as much in shortage today as it was a year ago. Natural gas, oil—everybody can stop producing everything and that will create some tremendous opportunities, but this is not a time to be taking financial risks. It’s a time to be ultra-conservative.

TGR: And part of your definition of ultra conservatism is to own physical gold and silver and also producing or near-term producing gold and silver companies. You have also mentioned energy. A few weeks ago you wrote that now is the time to buy CBM Asia Development Corp. (TSX.V:TCF) (OTCBB:CBMDF).

BM: I was in Indonesia, where they have a big coal basin that they’ll be drilling in a month or two for coal bed methane. This is an example of how investing is quite simple. You have to be a contrarian. Everybody wants to see gold go up 20 days in a row and on the 21st day they think it’s finally safe to buy. Likewise, the stock market goes down 20 days in a row and on the 21st day they think it’s finally safe to sell. They always end up buying at the absolute high and selling at the absolute low. They do it because we are by nature a crowd animal. We want to swim in schools; to do what everybody else is doing. If you’re going to be a successful investor, you have to do exactly the opposite. You want to buy things when nobody wants to touch them with a 10-foot pole.

So, I would not suggest people buy energy hoping $147 oil goes to $200 a barrel. But natural gas got down to about $3.60 and almost every rig in the world has been shut down. That’s exactly the time you want to invest in it. We know peak oil is real and that we need energy even if we’re in a massive depression. We know we need food and food is an analog of energy. CBM is drilling in Indonesia and will know a month from now where they stand. That’s exactly the time you want to invest.

TGR: If we’re going to be crashing at the end of this year or next year, why would we wait 15 years to get into the general stock market? Why not in late 2010?

BM: The absolute low in the 1929 crash came in July of 1932, but it took until 1954 for the stock market to get back to where it was in 1929. The market moved nowhere for 25 years.

When everybody hates stocks, that’s when you want to get in. Right now we’re going to crash. We’ve got the biggest suckers rally in history going on. We’ve got record short selling by insiders. They’re the people who know the best and the market’s already started down. If you look at the charts since the first of May, it’s an accident waiting to happen. I like markets like energy; everybody hates energy now. That’s a wonderful market to be in.

TGR: We’re talking about May being a good time to ‘sell and go away’ except for the resource stocks. So if I look at various portfolios, what would you recommend at an aggregate level should be the allocation of an investor’s portfolio right now?

BM: That’s a really good question. Back in 1998 or 1999 I read something about investing the same percentage of your assets in gold and silver that you give the probability of a financial collapse. If you think there’s a 10% chance of financial collapse, you should put 10% of your assets into gold and silver. So we put 100% of our assets into gold and silver and that’s where we’ve stood ever since.

TGR: If we get a Black Swan and the market falls off another cliff—looking at an S&P of $450—won’t it take these stocks with it again?

BM: I don’t think so. Everybody has forgotten that gold did exactly what it was supposed to. Gold went from $1,030 an ounce in March of last year to $770 or $780. But while gold was going down 30%, everything else was going down 50% or 60% or 70%. What you’ve got is an enormous number of paper assets that actually have no real value and the system is going to shake itself out until we understand what things are worth.

In a little while, I’ll tell you about a company that was selling for 3½ cents a share in November. The stock had dropped 95% in five months. It took enormous courage to go in and buy that stock, but they have real assets. The people who invested have had a 900% return already.

There’s going to be an enormous transfer of wealth. I don’t care if my gold stocks go down next week because I’m not in it for next week. I’m not going to be selling stuff next week. If it got cut in half, I wouldn’t sell it. I’m in it for the long term and the day-to-day fluctuations are relatively meaningless.

TGR: Shall we go to some of those investment ideas that you want our readers to know about?

BM: Good idea. My favorite gold producer today is ATW Gold Corp. (TSX.V:ATW). They are an advertiser and we own a lot of shares. Obviously, I’m biased, but I’ve known and followed these guys for three or four years. They have two mines in Australia, Burnakura and Gullewa. They’ve got a big drill program going on at Gullewa right now. They’re actually in production at Burnakura. They were picking up $50 million worth of mine and mill for $3 or $4 million. The purchases were brilliant. They pumped a lot of money into the ground. They built up the resource. They’re producing gold now. They’ll be cash flow positive in a matter of weeks. They’ll have the second mine in production, and should be doing about 100,000 ounces a year production in a year to 18 months.

TGR: And that stock has done well.

BM: It has. It went down to about 25 cents a share in October, November, December. It’s about 70 cents a share now. But it has a very young management, very good people and I think it will be good. What I want to tell people is the thing that’s important is these are just the stocks I know. There are dozens and dozens and dozens of really great stories out there, but it’s the time to figure out are these people going to mine something or are they just mining investors? I would like half of the juniors in business today to go totally out of business because over the last five years they have taken in tens of millions of dollars and blown it with absolutely nothing to show for it. Those are good companies to sell, not to own.

TGR: What are some of the other stocks you know that you like?

BM: The company I was telling you about, whose stock has produced a 900% return since November, is Avion Resources Corp. (TSX.V:AVR). Avion has a property in Mali that they bought from Nevsun. Ten years ago, Nevsun had a market cap of $700 million, all based on this asset in Mali. Nevsun pumped in $170 million developing a resource. It got about a million ounces of gold outlined and built the mine, but they just couldn’t operate it profitably. I went there and I was quite impressed with the mine and the mill. I was very impressed with the people.

Nevsun sold it to Avion for $20 million a year ago. It got really interesting because Avion needed to pump $20 or $30 million into drilling and getting the mill back into commission and they needed the money in October, November, and December. Of course, you couldn’t steal money at that time, so they actually sold part of the deposit to Dynamite and ended up doing a merger with Dynamite. There are about 200 million shares outstanding on the stock, and it’s about 37 cents today. They will be producing 70,000 to 75,000 ounces this year and in 18 months should be producing 200,000 ounces a year. This is going to be the next mid-tier. Other than the fact that the number of shares is a little unwieldy, it’s an absolutely wonderful story nobody knows anything about.

TGR: What’s the political risk there?

BM: Pretty close to zero. Mali does a deal on every deposit. The government has a 20% carried interest and they have a 6% NSR, so they have a vested interest in seeing that they produce as much gold as possible. Believe it or not, Mali is the third biggest producer of gold in Africa. South Africa has to be number one and Tanzania probably would be number two. But Mali has a number of mines. It’s a very undeveloped country. There’s very little there in the way of infrastructure, but gold provides a substantial amount of revenue to the government. So politically I think there’s zero risk.

TGR: Any other companies that you would suggest our readers look at?

BM: The Mexican silver companies. If you’re a silver bug, Mexico has the biggest silver mine in the world down at Fresnillo, which produced about 30 million ounces a year. There are a whole bunch of companies— First Majestic Silver Corp. (TSX:FR) (PK SHEET:FRMSF), Endeavour Silver Corp. (TSX:EDR) (NYSE.A:EXK), Great Panther Resources (TSX:GPR)—probably 10 or 15 really good stories in Mexico. I don’t think you could go wrong. Mexico had very little mining going from the time of the Revolution. From about 1910 until 1995, it was pretty much closed to outside investors. It’s opened up now. It’s far safer politically than the United States is and less bureaucratic than most areas in Canada, so it’s a very attractive place to invest.

TGR: What’s the latest with Pediment Gold Corp. (TSX:PEZ) (OTCBB:PEZGF) (FSE:P5E)? They were going to do an offering and then pulled back. What’s the story there?

BM: They weren’t able to raise as much money as they wanted to. They didn’t have to do the financing. I personally am glad that they didn’t do the financing because they didn’t need the money. They have enough to get into production in the Baja. They have a really good guy who used to run Castle Gold, who’s now in charge of getting San Antonio into production. I’d like to see a year or 18 months from now them getting into production. I haven’t heard much lately, but the last time I talked to them about two months ago everything was moving forward.

TGR: Any updates on Castle Gold Corporation (TSX.V:CSG)?

BM: Castle is still progressing. It has enormous potential, both at the Castle Mine and San Jose. Castle Gold could be a real sleeper.

TGR: It’s had a heck of a move since last fall, almost at a 52-week high.

BM: It’s a really good story, but I would like readers to understand is that there are dozens and dozens and dozens of good stories. Avion is very funny because here’s a 3½-cent stock; you’d think these are going out of business, but they picked up a million ounces of gold for $20 million. How can you beat that? There’s dozens of good stories. If somebody will do a little work and think for themselves, there’s an opportunity to make money like they never even dreamed of before.

TGR: And Timmins Gold Corp. (TSX.V:TMM)? Is that another example of that play in Mexico you were talking about?

BM: Timmins is very good. Its gold mine in Hermosillo is fairly close to getting into production. It needs to raise a little bit more money, but is moving full speed ahead and six months from now they’ll be in production. It’s another good story, good expansion capability.

TGR: So six months, that short. Great. And Fortuna Silver Mines Inc. (TSX.V:FVI)?

BM: Fortuna is near Oaxaca and also has a silver-lead-zinc mine in Peru that’s doing very well, which they’re getting no credit for whatsoever. They are building another silver mine and a mill near Oaxaca, with extremely high-grade silver. Fortuna is one of those companies that didn’t do a very good job telling their story, but they did a fabulous job of creating a story. Now they’re being a little more aggressive about telling their story. Fortuna is still really cheap.

TGR: Any U.S. companies? How about Evolving Gold (TSX.V:EVG)?

BM: That’s a good one. Evolving Gold has just about as good a story as anybody I know. Rattlesnake Hills in Wyoming is the next potential Cripple Creek or Livengood. Rattlesnake Hills certainly has a potential—potential in big quotation marks—of 10 million ounces. In fact, it’s Evolving Gold that’s having the issues with the drill permit and getting the geologist in. The government in the United States has forgotten that their job is not to get in the way of business, but to make business possible.

If you like really big potential plays, International Tower Hill Mines Ltd. (TSX.V:ITH) (NYSE.A:THM) in Alaska is absolutely another home run. They’ve outlined 10 million ounces of gold at Livengood.

Both Evolving Gold and International Tower Hill are great stories and big, big ounces. They have similar size deposits.

TGR: Any other companies come to mind that you think readers should be looking at?

BM: There are dozens and dozens and dozens of good companies. If you do some due diligence and go in and look at it, you will find some companies that are extraordinarily cheap.

Convinced that gold and silver were at a bottom eight years ago and wanting to give others a foundation for investing in resource stocks, Bob and Barb Moriarty brought 321gold.com to the Internet almost nine years ago. According to a recent web traffic report, the site gets more than 1.8 million hits per month. The Moriartys have added a second resource site, 321energy.com, to the family as well, covering oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Its hits exceed a quarter million monthly. 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 with more than 820 missions in Vietnam. A Captain at age 22, he was one of the most highly decorated pilots in the war.

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Comments

roberto
23 May 09, 19:15
RE: Investors Where to Find Cover When Black Swans Swarm

"We need less government. We need government to get out of the way of the people who are trying to drill, out of the way of people who are trying to build mines, and out of the way of people who are trying to come to the United States and create wealth."

Way wrong - We need to stop immigration into the US for at least 10 years; stabalize our economy; reduce government spending on social welfare programs for non-citizens. Then our coutry has a chance to regain prosperity.


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