-- Posted Wednesday, 5 May 2010 | | Source: GoldSeek.com
Talking heads are waxing enthusiastic over signals that the recession is receding, but debris from the derivatives debacle won't go away without a total financial system collapse, according to 321gold.com founder Bob Moriarty in this exclusive Gold Report interview. "Nobody and nothing is going to stop it from happening. It is as absolute as the time and tides," he says. While folks are all hunkered down in their bunkers waiting for the apocalypse, though, he suggests investing any spare cash in resource stocks—a "slam dunk" now that they're cheaper than they've been in nearly a decade.
The Gold Report: Moody's has downgraded Portugal debt, and recently S&P downgraded the Greek debt to the status of junk bonds. As a result, we see an increase in gold. Can you give us your perspective on what's happening here?
Bob Moriarty: Most of the time tying news to gold going up or down is absolute rubbish, but in this situation, there probably is a link. Portugal's debt has been downgraded two notches from A+ to A-, with a negative outlook saying it could be downgraded further in the future, and as you say, Greece's debt is now junk status.
We all follow the stock market closely, but we don't realize that in absolute terms the bond market's far more important. It's 10 times bigger than the stock market. Greece is on the verge of a collapse; I've been predicting this for months. We're going to have Greece, Portugal, Ireland, England, Japan and eventually the United States. The risk now is sovereign credit default.
In the case of Greece, what happened originally was Greece wanted to get into the EU and get the benefit economically of the EU. They had a lot of debt, and used derivatives to hide it. Let me give you an example from an individual's perspective. You go down to the bank and report your $100,000 annual income. You want to borrow $50,000. The bank asks how much you owe, and you say nothing. You lease your home, your car, your airplane, your boat, so you have no debt on the books. The bank gives you the loan. But you absolutely do have obligations, and what Greece did was hide debt through the use of derivatives.
Eventually, the derivatives float to the surface and become obvious. The immovable object meets the irresistible force. Greece has a debt it cannot possibly pay, and they're trying to borrow more money. At some point, somebody says, "Look, Greece has to get their outlays in line with their income."
For years, derivatives have allowed the world to maintain a disconnect between how much they bring in and how much they spend. For the past 18 months we've been shuffling the chairs around. We're not paying any debt off. We're not writing any debt off. We're simply shifting who owes it. Taxpayers in Iceland voted against bailing the banks out, and that was a very rational vote. In the United States, every American now has an obligation of about $100,000 more now than they did 18 months ago because we've taken all these toxic assets away from the banks and put them on the backs of the taxpayers. That is actually quite insane.
There are two problems with derivatives. First, only 10 people on earth actually understand what they are. Secondly, they allow people to confuse other people, which is a function of the first part. Goldman Sachs wants an instrument where somebody who wants to bet against it gets to say, "Okay I want you to put all this into these pieces of trash, and then you put your name on them and sell them to people who will think you're behind them." Well, that's absolutely total fraud, and I've been saying this for years.
TGR: But this isn't unique to the U.S.
BM: The fraud is a function of the derivatives market. Prostitution of the political system exists everywhere to a great extent. But politicians in the United States are as bad as they've ever been, and the corruption level is so high it's absurd. I simply can't remember what part of the Constitution allows the federal government to force people to buy health insurance. This law they just passed in Arizona? You can flat guarantee it's going to be abused. Not that I favor illegal immigration, but we're passing laws that are blatantly unconstitutional and getting away with it.
TGR: What exactly happens when the derivatives market blows up?
BM: All these government bureaucrats and guys who have had fat salaries for the past 10 years will have to lower their salaries or not have jobs at all. Tens of millions of government employees all over the world will lose their jobs. The derivatives market is going to go into a meltdown like nobody's ever dreamed of because nobody but me and the other nine guys actually understand exactly what $600 trillion dollars is. It's 10 times the size of the world economy, and it's been blowing up since June 2007 when those Bears Stearns funds went under.
TGR: Are some countries positioned to benefit?
BM: Strangely enough, everyone is in a position to benefit. We have this giant, lopsided financial system. Think of it as a rowboat with 40 people in it, all on one side of the boat so it overturns. Sometimes, the best thing is to get thrown into the water and have to climb back into the boat. Somebody says, "We went under because we were all doing the exact same stupid thing." Maybe if one guy gets on one side of the boat and the other guy gets on the other side, the boat will float.
So, okay, we let it blow up. We need the entire system to collapse and have total chaos for six months. Then somebody will say, "If we get back in the boat and one guy gets on the left and one guy gets on the right, maybe it will float."
TGR: Doesn't that downplay the collateral damage?
BM: It's what cures the problem. If you pay a guy for 99 weeks to not work, what happens to unemployment? Unemployment goes up; you do better if you're unemployed than if you're working. You make money for doing nothing. How much sense does that make? The way to get people to work is to kill the unemployment programs. They don't help people; they hurt people.
TGR: Going back to the derivatives blowing up and sovereign debt defaults. . .if we catapult forward with people rioting and revolting and all these countries in chaos, what do investors do to conserve their wealth?
BM: Be as financially conservative as you can possibly be. Don't take on additional debt; don't spend beyond your means. Very, very bad things are coming, so prepare yourself to the extent you can. Own some gold; own some silver. That's going to be some protection. But it is time to reflect on where we are; it's time to head for the bunkers. If you want to speculate on stocks because the fools on TV are telling you about green shoots; if you want to invest in real estate because you think it's hit bottom, you're risking your financial future.
TGR: Other than holding precious metals as a hedge, is there nothing to look at in the stock market?
BM: Actually—and I've said the same thing for years—resource stocks will be in demand. Even though China is about to blow up, I still believe it has to transition from an agrarian society to a consumer society, and that's where real wealth is created.
I go to the gold shows because I want a feel for what ordinary investors are thinking and saying. I met with a lot of people at PDAC (Prospectors and Developers Association of Canada) in Toronto. Americans and Canadians are quite pissed off at government. They realize government has created the problem. We can't afford the government we've got now. Everybody knows that. They just don't want to address it.
TGR: Did you sense at PDAC that regular investors felt that the market was changing for gold?
BM: And silver. PDAC was the first time I saw ordinary investors participating and asking rational investment questions. Every other gold show that I've been to for nine years was the same old very conservative investors who went through the Depression and believed in owning gold and silver. Silver companies were getting $1 an ounce in the ground for silver in 2004 and 2005; they get a nickel now with $18 silver. And nobody wants to buy silver companies. Excuse me? Something's wrong there. Now, more ordinary investors have started thinking that with silver at $18, maybe it makes some sense to invest in resource companies. Resources are a slam-dunk. Peak oil is very real. You need to be investing in well-run energy companies. We're short of water, and investing in water makes sense. And we're short of resources; so, there's an interest, especially in the last month—I'm getting two or three calls a day from gold and silver mining companies saying they want to advertise. They've been sitting on their wallets for 18 months.
TGR: If we do indeed have this blowup of the derivatives markets, doesn't the stock market crash with it?
BM: Sure. Of course, it does. You keep saying "if," but it's not a question of "if"—it's a question of "when." In the 1930s, the stock markets closed for six months or a year; no big deal. The reason you own gold and silver and the reason you've been very conservative in your debt obligations is because very bad things can happen. In 2001 you couldn't go to the bank for a year in Argentina. I think they'd give you 1% of what you had on deposit. That's going to happen again.
TGR: As you noted not long ago on your website, gold shares are historically cheap. They're basically where they were in 2001–2002; yet gold itself has gone up five- or six-fold. Why haven't gold stocks gone up with the general market when many stocks are trading at historical highs now?
BM: I have followed a ratio, and you can plot it very easily by filling it in one of the charting programs; the ratio of gold stocks to gold. That's the XAU or the HUI over gold. There used to be a band and anytime it got out of the band on the top, you had a top in gold and silver; any time it got to the lower band, you had a bottom in gold and silver. The interesting thing is that it was only a measure of psychology. It wasn't a pure measure of gold or gold stocks; it was a measure of gold compared to gold stocks. When people are very, very optimistic, they buy gold stocks, and when they are very pessimistic, they sell gold stocks.
Well, that ratio broke down in September 2008, and we are lower now than we have ever been at any period where people traded gold stocks and gold. We have been there for a year, and I think I know why. All these hedge funds that were borrowing money because of derivatives poured tens of billions of dollars into every fleabag junior resource stock in the universe and were forced to sell because of deleveraging in 2008. That money has not come back into the market, but there are some extraordinary companies.
TGR: So, you still consider resources a slam-dunk.
BM: Once you've got some cash in hand and some gold or some silver bars under the bed, and you have six months' necessary resources available, you've got to put your money into something. And the resource stocks are just so cheap now; as cheap as in 2001 in terms of historic ratios. In 2001, we had $4 silver in November and $250 gold all summer. Now we have $1,150 gold, and I'd think that there would be a major gold rush.
TGR: Any final thoughts you'd like to wrap up with?
BM: We're going through some interesting times, and it's going to get more interesting. People tend to look at guys like me and Peter Schiff, and Gerald Salenti and Ron Paul as Cassandras, always predicting disaster. But they forget Cassandra was always right, too. So I will reiterate. You talk about "if" we have financial collapse. I talk about "when" because no other alternative possible. Nobody and nothing is going to stop it from happening. It is as absolute as the time and tides.
Convinced that gold and silver were at a bottom and wanting to give others a foundation for investing in resource stocks, Bob and Barb Moriarty brought 321gold.com to the Internet almost 10 years ago, and later added 321energy.com to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites feature articles, editorial opinions, pricing figures and updates on 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 and the youngest aviator in Vietnam. He holds 14 international aviation records, and is the only person The Gold Report knows who a) has an entry in Wikipedia and b) once flew an airplane through the pillars of the Eiffel Tower "just for fun."
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-- Posted Wednesday, 5 May 2010 | Digg This Article | Source: GoldSeek.com