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Bob Moriarty: Investors Act on Contrarian Thinking

Commodities / Gold & Silver 2009 Mar 24, 2009 - 03:35 PM GMT

By: The_Gold_Report

Commodities Best Financial Markets Analysis ArticleAlways challenging, always controversial and always the contrarian, founder Bob Moriarty always can be counted on for a few takeaway nuggets when he chats with The Gold Report . In this interview, his third with us over the past 12 months, Bob cautions against confusing investment savvy with ego-satisfaction, suggests taking time for due diligence instead of looking to gurus, and—of course—recommends a contrarian strategy. He also offers a few tips for investors who want the biggest “bounce for the ounce” and shares some thoughts about a few “brilliant” mining projects he recently visited in Mexico.

The Gold Report: Gold is under pressure, the dollar is coming down, and we recently had a week [March 9-13] that saw the Dow rise 9% and the S&P 500 jump 10.7%. Is this a buying opportunity? Another re-test?

Bob Moriarty: I think this is a real good time for an education. If you ignore everything you read and everything you know about investing, and invest only on contrarian thinking, you will be more profitable than if you do anything else. As of the beginning of the month, the bullish consensus on gold was about 80%; the bullish consensus on the dollar was something above 70%, and the bullish consensus on the Dow and the S&P was in the neighborhood of 14% or 16%. Those are near-record levels.

As bad as things are—and they are going to get worse—the market goes up and the market goes down. You never want to confuse investing with stroking your own ego. I love gold; I hate the dollar. I hate the stock market, too, but sometimes you have to look at opportunities. That mid-month rally in the Dow was very predictable because it was way oversold. The crash in the dollar was very predictable, too, because it was way overbought. A 10% decline in gold also was very predictable. So ignoring your feelings, if you invest on a consensus, whatever the market is doing, you want to do exactly the opposite.

TGR: A lot of newsletter writers and analysts expect the market to have another major correction this spring. If our readers want to pick up some gold stocks, should they wait for this next market downturn?

BM: I don't think so. Gold stocks are a very good buy now. If you look at the charts of the XAU or the XUI over gold, gold stocks are still extraordinarily cheap in terms of historical activity.

TGR: You had said the consensus on gold to be bullish is 80%, but we're seeing a contraction. So is it contrarian to buy now? Shouldn't we avoid it because everyone's saying it's bullish?

BM: Gold is always a good buy when people start talking about how low it's going to go. But to an extent, buying now is a really good move because it's an anti-dollar investment. I like corrections; I think corrections are wonderful.

TGR: How much correction would you expect to see in gold? (By the time this piece was posted, the gold correcting ended.)

BM: I don't think you can put a number on it. But when people are talking about what a rotten investment gold is, that's a good time to buy.

TGR: Even Jim Cramer (Mad Money) says that now is a good time to buy gold.

BM: Cramer recommends everything. One day he's saying, “Buy this,” and the next day he's saying, “Sell this.” It has nothing to do with anything. He's a trend follower, not a trend leader. The very best book on investing ever, Extraordinary Proper Delusions & the Madness of Crowds , was written around 1860, and it gives you about 30 stories of the insanity of mob behavior. I saw it in real estate two or three years ago; literally everybody I knew was talking about how to make money in real estate. When that happens with gold, when you go to a cocktail party and everybody is talking about gold, you want to get out completely.

TGR: So if they're starting to talk about gold at cocktail parties, it's time to get out?

BM: Yes. That's trouble. That's time to stand sideways. I own gold and I don't worry if gold goes down $100 or $200. I don't give a rat's ass about what the mob is doing. I know what the future is. Do you have any idea of how much money the United States government has committed to all of these bailouts? The number will shock you. It's about $11.6 trillion. We spent our way into a hole, and if you spend your way into a hole, you cannot spend your way out of it. Obama is paying for two stupid wars. He's just pouring money into the system. Geithner, Bernanke, Greenspan—these are the guys who caused the problem in the first place. If they caused the problem by spending too much money, they can't solve it by spending too much money. So we have a world-class disaster on our hands.

TGR: How do you get to that $11.6 trillion figure?

BM: Some of it's bank guarantees; some of it's handing things; some of it's swaps. But the total amount of money that the U.S. government has committed to the bailouts to date is $11.6 trillion. If that doesn't tell you where the price of gold is going, nothing I could ever say or do will convince you that gold is a good investment.

TGR: By that, do you mean that all this money will lead inevitably to inflation?

BM: Inflation is hardly part of it. It's going to lead to revolution. Let me give you an example. Merrill Lynch was founded in 1914; it's a 95-year-old company. They turned into an investment bank and put a bunch of money in derivatives. They lost it and were about to go out of business. The Fed stepped in and said, “We can't allow this.” They made it very attractive for Bank of America to take over Merrill Lynch. And what do you think the last thing the executives at Merrill Lynch did before they turned over the reins to Bank of America? The U.S. banking system is bankrupt; the top 10 banks in the United States are all under water. Bernanke says he will not allow the banks to fail. Well, if you're running Merrill Lynch today and you're about to go bankrupt and you know that the government was going to bail you out, what would you do?

TGR: Wouldn't be too worried.

BM: I'd give myself a bonus. That's exactly what they did. They stole $3.62 billion from the taxpayers, and the reason they did so is because they could. What do you get when you destroy a 95-year old company? A bonus. That's like George Bush handing out a Medal of Freedom to (former CIA Director) George Tenet. This is totally insane.

It is insane for Bernanke to say, “We're not going to allow the banks to fail.” I wish he would go down to the ocean with a pail and try to stop the tide. He can't stop the tide, and he can't stop these banks from failing. The only thing he can do is load the American taxpayers with tens of trillions of dollars in debt. He's not spending your money; he's spending your kids' money, and their kids' money and their kids' money. He's going to turn the United States into a third-world power. We have good banks in the United States, and we need to let them succeed, and by keeping the bad banks in business, we're destroying the good banks.

TGR: So the bailout will save the banking system?

BM: The bad banks have to fail. There's a $700 trillion elephant in the room that nobody's talking about except Jim Sinclair and me. There's $683 trillion of derivatives as of last June. There's probably $100 trillion or $200 trillion in there that is utter fraud. How are you going to stop that from failing? You can't unless you start printing Zimbabwe dollars, and that's probably what we're going to do. I hope the system fails before we get to hyperinflation, because if you think deflation is bad, wait until it costs a trillion dollars for a loaf of bread.

TGR: That's hard to get your mind around.

BM: But we're doing exactly the same thing as Zimbabwe. This is why gold is a good deal at $250; it's a good deal at $1,037; it's a good deal at $900; it's a good deal at $600; it's a good deal at $800. Who cares what the price is? It doesn't make any difference. When a loaf of bread costs a trillion dollars and you've got an ounce of gold in your pocket, you'll be amazed at how many loaves of bread you can buy.

TGR: If hyperinflation hits, is that when we'll have that revolution you mentioned?

BM: When Americans who are losing their houses, cars, pensions and their jobs realize what these fools have done, they're going to be very angry. $11.6 trillion is just a staggering number, and while the people in the banking system are busy stealing from the taxpayers, Obama doesn't realize it—he's destroying the country.

TGR: Do you think the people actually will realize this? How will they find out? The media isn't talking about it.

BM: Funny thing you mentioned that. That's exactly what scares me so much. A lot more people realize it. Peter Schiff (economics commentator) does, Gerald Celente ( Trends Research Institute ) does. Lots of people do. They write about it in British newspapers; they write about things they wouldn't dare to here. There will be riots in the United States in three to six months; there's going to be civil disorder. The government knows it; the military knows it; the police know it, and sooner or later the American public will know it. I think people are waking up. We are in a depression; this is not a recession. This is not something the world's ever gone through before. Interestingly enough, a get-together of 50,000 people in New York City—government employees who did not want government spending cuts—almost turned into a riot.

TGR: Bernanke and Obama say this is a worldwide problem, so it calls for a worldwide stimulus package. Does the world go along with that?

BM: Governments always want to expand power. That's why they clipped coinage back in Roman times. That's why they use inflation to increase government spending. Governments always believe the solution to every problem is more government. The net situation—the cause was too much government; therefore, the solution cannot be more government. The only thing these guys know how to do is open the taps. But where's the money going to come from? I'll tell you something mathematically: the amount of cash that Bernanke, Geithner and Obama are talking about spending, there isn't that much free savings in the world. The programs simply cannot exist because there isn't enough money.

Interest rates and inflation are about to shoot through the roof. Geopolitical tensions are increasing at a staggering rate. A couple of weekends ago, we had a spy boat 70 miles off China, and it came to a confrontation. What's going on with Israel and Iran, and what's going on between Pakistan and India, are heading for confrontations. We have a very dangerous, unstable world. The only solution is less government and an honest money system. Until we get that, the problems will just increase. Very easily, we could be looking at World War III.

TGR: If the only solution is less government and more civil unrest and international geopolitical conflict are ahead in the short term, what's the timeframe in which we will finally get to less government?

BM: I don't know. That's a really good question. We're going to see catastrophic problems. Americans are waking up. The people I've talked to are absolutely terrified. Six out of 10 Americans are afraid of losing their jobs. They're still looking for solutions. The government is not giving them solutions, but they know the government is doing the wrong thing. If you ask Americans what they think about the bailout, more than 90% would be dead set against it. They're absolutely correct. The bailout is a disaster.

Every time Obama gets on television and starts talking about the economy, the stock market tanks. I do see a stock market rally for the next month or two, but we have not yet seen the bottom. After a rally in the Dow and the S&P, which will last about two months, we're going to have another monster-sized crash. When the market has gone down 87%, we will be at a bottom.

TGR: 87% from where?

BM: From the high, I think the high in the Dow was something like 14,100. Taking 87% off that brings it down to around 1,600. That will be the bottom.

TGR: Whoa, a low number.

BM: If you take the high in September of 1929 to the low in June of 1932, it went down 87%.

TGR: Are you then projecting that gold and the Dow will cross and that gold actually will be higher than the Dow?

BM: I don't put it in those terms. Gold is real money, and all the other paper currencies in the world today are totally worthless. We're in an interesting predicament. Richard Russell ( Dow Theory Letters ) has predicted that for years. I don't try to predict a price for gold. I don't think anybody can because what you're really doing is predicting a price for the dollar. But I will say that gold will be one of the very few things that actually has real value. Gold and energy and food.

TGR: Speaking of energy, what do you think of the recent rally in the price of a barrel of oil? Do you think we have hit the bottom there, or are we going to see lower oil prices?

BM: I don't think so. Peak oil is real. The decline to $30-something per barrel was totally artificial. It was way overdone. I don't know the correct price for oil, but we have seen the very last of cheap oil. It's never going to occur again. We can be in depression, and the price of oil is still going to go up.

TGR: Where does silver play in all this?

BM: Silver is cheap right now, and it will increase for the next six months or year at a greater speed than gold. I own silver, but it's a pain in the neck because it's hard to move. The ultimate solution is the gold standard, and in a gold standard, there's more demand for silver than for gold. Everything else being equal, going to a gold standard is the one thing that would make silver go up to $50 an ounce relative to gold at $900.

TGR: Do you see currency ultimately being backed by gold again?

BM: No central bank will come out and say we need to go to a gold standard. We'll go to a gold standard because every currency in the world will fail simultaneously. People will say, “Hey, we need to use something” And somebody else will say, “Why don't we use shells?” And somebody will say, “Nah, there's too many of them.” And somebody will say, “Why don't we use salt?” “Nah, we tried it before and it didn't work.” “Very well, geez, why don't we use plastic?” “No, we tried that and it really didn't work.” “Well, why don't we try gold?” “Hey, a good idea, but how do you buy a loaf of bread?” “Well, you could always use silver.” And that's exactly what we'll do.

We'll do it. When the market crashed in October and November, Europeans were actually talking about a new Bretton Woods agreement. When the system crashes and everybody realizes we're in a depression, people will start talking about gold seriously. The first country to go to the gold standard will have the highest standard of living in the world and the most solid economy.

TGR: In the absence currencies moving onto a gold standard, silver will see an increase relative to gold but not up to the projection of $50 an ounce?

BM: Correct. I could see a ratio now of 40:1 or 50:1, silver to gold, but to get it to 16:1, 17:1 or 18:1 would take us going to a gold standard. You can forget all this nonsense about some kind of shortage of silver. There is no shortage. It's fiction. A bunch of dingbats have been running around saying that for years. It's not true. The manipulation or conspiracy theory is all nonsense. Silver isn't any more manipulated than corn or soybeans. But for $50 silver you need to go to a gold standard.

TGR: It's interesting that silver coins carry a much higher premium than gold coins do. What's causing that if there is no shortage?

BM: That's not really true. I went into my coin dealer in Miami a couple of weeks ago, and I was buying Mercury dimes for 99 cents each. If you buy them right, there's no shortage of gold or silver. It's just a very inefficient system. When I was a kid, a city such as San Francisco or Fort Worth or Dallas would have 100 coin dealers. I think there are three coin dealers in Miami now. It's hard to buy silver and gold. eBay is kind of a blessing because anybody who wants to buy it can find it there. You can get sterling silver on eBay for $7 or $8 an ounce. There's no shortage of silver. It's just a very inefficient marketing system.

TGR: Few base metal stocks have responded from their November lows the way gold has. What are your thoughts about copper these days?

BM: It all depends on China, and I'll tell you why. Depressions are perfectly normal, and if governments would keep their nose out of the economy, they'd last about 18 months to two years. They exist because there is always more money owed than exists in a fractional reserve system. It takes about 80 years to grow out of control; at that point, you wipe out all the bad debt, start all over and the economy recovers.

The price of copper is 100% dependent upon demand from China. If China lets its economy come out of the depression, the depression in China will last about 18 months to two years. I think the Chinese are smart enough to do that. They certainly see how foolish it is for the United States to keep pouring money down a rat hole. And I think they will be fine, so I think the price of copper will go up, but the proviso on that is it all depends on China.

TGR: So you expect the price of copper to go up in about two to three years?

BM: No, it will actually tend to recover; but copper has really been hammered. It has come down from $4 to $1 and change. Copper is probably pretty cheap right now, and investors will go in and say that in relative terms it's still pretty cheap. I would guess the cost of production worldwide is probably a $1 to $1.25. Any time the price of a commodity comes down to its production cost, the risk is virtually zero regardless of demand. Two things determine price: one is supply and the other is demand. If it costs $900 an ounce to produce platinum, which it does, nobody is going to produce it at $800 an ounce, because it isn't worth it to operate a mine.

TGR: So it's self-correcting.

BM: Exactly. That's the way the economy is supposed to work. That's the way the laws of supply and demand work. It's only when governments start trying to pass laws to change supply and demand dynamics that economies gets screwed up. How can you create artificial demand and believe that you're helping your economy? It's like taking piles of $100 bills out in your yard and burning them and saying this is a good thing for the economy. It's not; it's stupid.

TGR: You've recently returned from a trip to Mexico. Any mining companies you visited that you'd like to talk about?

BM: I saw three companies, and all three were brilliant. It was a really productive week for me. The first was Pediment Exploration Ltd. (TSX.V:PEZ) (OTCBB:PEZFF) . I went to their project in the Baja, and they have hired people to put it into production. It will be in production in about a year, which is exactly what I am telling people they should be looking at now. And then we flew up to Hermosillo. We took a look at La Colorada, which Pediment also will have in production in about a year. It probably will be 80,000 to 120,000 ounces total between the two projects. CEO Gary Freeman has made an absolute commitment to get into production, which is a good idea.

The second company I went to see was Fortuna Silver Mines Inc. (TSX.V:FVI) , and I had written up its big silver-lead-zinc Cayoma project in Peru three or four years ago. I was a little disappointed that I hadn't heard very much about it, and I talked to the president of the company and asked about it. He said they're moving forward; they're doing very well down, making money and throwing off cash, even with the low lead and zinc prices. The project I went to see in Mexico was their San Jose gold project near Oaxaca, which is probably about 18 months away from production. I said, “Hey, guys, you guys got to speed it up. This is a great project with really solid numbers. You've got positive cash flow; get it into production.”

The third project I saw was Castle Gold Corporation's (TSX.V:CSG) incredible project near Durango. It's low-grade gold, costing them about $600 an ounce to produce, but it's very highly leveraged to gold. Great company, great management and a really good story.

TGR: What is their production target? About 30,000 ounces?

BM: I think it's about 35,000 ounces, but Castle Gold also has a project called La Fortuna. There were maybe 15 or 20 mines there 100 years ago. That's the kind of project that could very easily be a district play. That's one of the things that I like to see a company focused on good, solid prospects. Most of the guys in the mining business treat projects like Beanie Babies; they collect them. A company may have 13 different projects, but most of them are moose pasture. They consume money and will never do anything.

So I was very pleased with Castle Gold (1) because of this gold project that should to produce about 35,000 ounces this year, and (2) their expansion capability with both projects is simply brilliant. Castle Gold is one of those companies that's way off the radar. They need to do a better job of telling their story, because they have a really wonderful story.

But the companies that are going to succeed, where you're going to get a real payback in this environment, are the producing companies. It was true in 1930, and it's true today.

TGR: Two of the three companies that you mentioned are not yet in production, though.

BM: They are all production stories and all have excellent management. What I tell people is that the very best time to buy any stock is just as they go into production. That is when you get the biggest bounce to the ounce.

TGR: Do you see the possibility of any combinations? Doesn't the institutional side typically want to see production between 100 and 200 ounces to want to get involved in the stock?

BM: That's true, but it's also meaningless. If you went back 100 years ago, the average mine in Nevada probably produced 2,000 ounces annually. As the price of gold goes up, smaller projects become more viable. The magic number has been a target of 3 million ounces if you want a Newmont Mining Corp. (NYSE:NEM) or a Barrick Gold Corporation (NYSE:ABX) or a Placer Dome to take an interest in you. But that doesn't make sense in today's environment. If you can produce gold at $600 and gold goes to $1,200, that's a good deal. Whether you produce 35,000 ounces or 350,000 ounces is relatively meaningless.

What I would like to see is kind of the opposite of mergers and acquisitions.

TGR: How so?

BM: I'd like to see a third of the companies that are in mining today disappear. Every guy who's ever walked on a mining project was able to go out and get financing to start a company and raise money and spend it. There's probably 3,000 juniors out there now, and I'd like to see about 1,000 of them go out of business.

TGR: You may see that if they aren't able to get financing.

BM: I hope so.

TGR: Of all sectors, the gold sector has been one of the few that's been able to raise money in the last three or four months.

BM: That's true, but I really hope investors start sharpening their pencils. So much money has been pissed away over the last seven years. It really angers me. I've heard story after story after story after story of “what we're gonna do” and they never do it. If a company has had five placements in the last five years with a stock price at 10 cents, I hope they go out of business.

TGR: You mentioned Newmont a little while ago. The last time we talked, you said that Rare Element Resources Ltd. (TSX.V:RES) is another company that's really good, well cashed up, and has Newmont behind it. Any update on Rare Element?

BM: I just talked to the company a few days ago. The U.S. Forest Service just published their acceptance of the new disturbance plan. Newmont's been fairly quiet about drilling for some technical/political reasons. They could be drilling in probably less than 90 days, and I expect that the gold project will really move forward quickly. This is a big system and six months from now it will be a much bigger story than it is today. Rare Element Resource is also expected to release a new 43-101 resource estimate on the rare earths project very soon. The historic resource was about 4 million tones of 3.7% rare earths, which makes it one of the largest rare earths projects in North America. Ninety-seven percent of rare earths supply comes from China; this resource could grow and become very strategic. [Here is a link to an excellent times article on this subject ]

TGR: So they have the permit for the 200-acre expansion?

BM: Almost. This big wait has been for the U.S. forest service to sign off on final approval, which was done in early March. It has to be published for a short period of time and then is issued. They previously had a 5-acre disturbance permit, and now they will have got the 200-acre. From a technical point of view, it allows them to set up a lot more drill pads, roads and use their equipment. Newmont has been very patient and strategic in that this permit would be sufficient for a project to move all the way to bankable feasibility. They can now start doing it the way they should have been doing it two years ago.

TGR: Another company you've followed is Evolving Gold (TSX.V:EVG) . What's going on there?

BM: Evolving Gold has one of the best exploration projects. It's one of the very few explorers I would touch with a 10-foot pole. It has a giant Cripple Creek-type deposit in Montana. I am convinced that it's a really big deposit, and I am convinced it will move forward. The time it has taken to get assays and drill results back has been an absolute disaster for them, but they have one of the sharpest technical teams I know of. The stock got up to 42 cents; but it's dirt cheap. It should probably be $1 a share.

TGR: Have those delays in drill results and assays driven the stock down?

BM: That's part of it, but up until about a couple of weeks ago, the gold stocks were really holding up well. Evolving Gold was down to 14 cents back in October through December. So even at 30 cents, it's recovered nicely. Despite being hammered recently, gold stocks don't concern me at all. It's March; it's selling; it's no big deal. The gold stocks will be the first to recover.

TGR: Another company you told The Gold Report readers about back in November was ATW Gold Corp. (TSX.V:ATW) . It has done really well and has held its gains. It's given a little bit back, but it's about 50%.

BM: ATW is at exactly the sweet spot. They literally started production two weeks ago; they had everybody in place; the final permit came in. They are in production and mining today. They're running a leaching system. They're shipping the carbon with the gold in it and will be pouring doré bars in a month or two. This is another great company. They have another project, Gullewa, in the wings; it will be in production in about 18 months. I love the company. I love the management. I've got a lot of the shares.

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. What I would say is that this is the time to do some due diligence. Understand one thing: There are no gurus. There may be people who have more experience than you, but there are no gurus. 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 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, , to the family as well. Both sites feature articles, editorial opinions, pricing figures and updates on the current events affecting both sectors.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

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