Always challenging, always controversial and always the contrarian, 321Gold 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.
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: 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.
But 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.
