“It’s the most dangerous time in World Financial History” and “Gold shares are probably as cheap as they will ever be in anybody’s life time” – Bob Moriarty

Michael Campbell: Bob, what do you make of the action in gold over the last couple of weeks?

Bob Moriarty: Well, not just the action of Gold but the action of the markets. I started in that scene in March of 1970; I’ve been watching the markets for 41 years. I’ve never seen anything like last month. Now, let me take you through what happened last week. One of the things that you can expect is a stock market correction upwards from here.  The 420 point climb on Tuesday, 500 point decline on Wednesday and the 400 point climb on Thursday sure makes gold rising a fraction in the days look thin.

Michael: What are the things you think are driving this huge volatility in the market?

Bob: Well, there’s two issues. the schizoid nature of the market that doesn’t know whether it wants to go up or go down has a simple explanation for part of it, certainly in shares. High frequency trading which is programmed trading by the big funds and the big banks that should be illegal. It’s stealing, okay? You want to go buy a stock and stocks got 500 shares at 87, and it has got 500 shares at 88, 500 shares at 89 and 10,000 shares at 90 and you want to buy 15, 000 shares. So you put in an order in for 15,000 shares at 90, you would expect to pick up the shares at 87, 88 89 but the Bank of America or JP Morgan jumps in front of you with high frequency tradings. They snap the shares up a quarter of a second ahead of you and sell them back to you at 90. It should be illegal, it’s stealing and what it does is it magnifies the markets and that’s very, very dangerous.

Michael: I looked at the market at 11:45 last monday and it was down 200 to 300 points and in that last hour of trading it just absolutely fell out of bed. That’s happened consistently; that last hour of trading seems to bring a lot of action in the market. Is that what you attribute to as some computer selling program?

Bob: Actually not, the computer selling magnifies everything but if you are going to sell in a mutual fund they put their order in at 3 o’clock. So 3 o’clock to 4 o’clock is the most active period of the day when people are trying to move mutual funds. it also tends to show what the market going to do the next day. But the program trading, high frequency trading which is stealing, magnifies everything in the market. Now, we had two days last week with gold moving $60 from a high to a low in one week, that’s unbelievable.

Michael: Think about the non professional investor, the person who’s got other things to do than stare at the market. My goodness it’s a tough environment.

Bob: How do you cope with 600 points down on one day and 500 points up the next day? How do you cope with gold moving up $60 one day and moving down $60 the next? It doesn’t make any difference whether you are a bear or bull, you get creamed.

Michael: Let’s come back to the Gold market for a moment here, I have been recommending a core position in gold since 2001, 2002 that was 30% of people’s portfolio and then you could have a trading position beyond that. I know you talk a lot about trading and investing, and I think that the 200 points that gold gold tacked on in such a short period of time.was a great example of why you never want to be out of  a core position in a massive bull market.

Bob: That’s a good point, you are defining it slightly differently than I do, I define gold as having two functions. The first and the most important function is it’s an insurance policy. It’s an insurance policy against Central Banks like Zimbabwe where they print hundred trillion dollar notes. The most valuable currency that you could have in Zimbabwe then and now is gold because it keeps its value. I would encourage people even at $1800 gold to have a gold insurance policy.

Michael: My bet on gold has been simply a really strong feeling about the incompetence of government to be able to handle the financial circumstances that were coming. Do you see anything out there that would discourage that view?

Bob: We got started in July in 2001 because I saw Gold and silver being at the bottom and I said so; gold at $252 was like stealing. It costs $400 dollars an ounce to produce. If you could buy it at 252 you were doing extremely well. Silver gets to $4 in November 2001. $4 an ounce for silver, are you kidding? But when you talk about $1800 gold and $50 silver, you’re no longer investing, you’re now speculating, you’re betting on the future of the dollar. You’re not buying it because it’s cheap, which is when you should buy it. You are buying it when it’s expensive hoping that somebody else is going to buy it from you at a higher price. Now, I am coming to the conclusion deflation may be the risk.

Michael: Generally gold share prices have not kept up to the metal. What do you make of that?

Bob: It’s interesting that you picked up on that. For years I used to use the XAU over gold as a measure and I had a very good record of predicting both tops and bottoms. It was a very predictable range when it got to a certain point, you were at the top and when it dropped to a certain point you were at the bottom and it was as regular as clock work. The XAU over gold measures psychology, when everybody is very bullish they want the shares, when they are very bearish they want the gold. So, regardless of the level of gold that gave you a very good measure of psychology; that broke down in August of 2008. Everybody should go look at the chart of the XAU over gold now and look at what it was prior to August of 2008. In real terms, gold shares are cheaper today than they were in 2001. Now, in 2001 Michael you were not mainstream, I was not mainstream; we were goof balls saying, the economic system is going to fall apart, GM is going to go bankrupt, Ford is going to go bankrupt, the banks are going to go bankrupt and the system is going to come to a screeching halt. Well, everybody understands that now but shares are cheaper today at $1,700 gold than they were $252 in relative terms, that creates opportunity. Now, I encourage people to invest when things are cheap. Gold is not cheap, silver is not cheap, the stock market is not cheap, housing is approaching being cheap but it’s not yet. But gold shares are incredibly cheap. The market will respond so you buy them now and you are set for life for the market to expand. I think you will see gains of 100%, 200, 500% in lots and lots of companies including some of the ones that are totally corrupt run by idiots.

Michael: We were talking to Don Vialoux who does seasonality analysis, he was also saying it’s a very good time to be looking at gold companies right now in this time period. How would you approach the senior gold companies, the mid tiers and the juniors?

Bob: Well, if you want a savings account you should invest in the majors. As the price of gold goes up, they are getting enormous benefits from it and some of them will pay a dividend. If you want to make money, you want to invest in the mid tiers and the juniors. When I invest in those stocks I look for a ten fold return. You don’t see it very often but you see it often enough.

Michael: I am sort of a conservative in my approach, I like to keep my money. So when I’m investing in a growth story I’ve preferred things that are already in production because then I do get a direct bang from the rise in the gold price since the costs generally don’t go up with the rise. What’s your take on that.

Bob: Here is the beauty, investing in majors is the savings account, investing in mid tiers companies is the convertible that is paying a percentage return and investing in juniors is crack cocaine. Now, because I visit 30 or 40 juniors a year I get to see these companies six months before anybody else does. Investing in juniors it’s very difficult, it’s very dangerous. Strangely enough I would tell people to ignore the facts because that defies everything, It’s really simple, everything that goes up goes up because of psychology and everything that goes down goes down because of psychology. The old adage of sell in May and go away works because everybody goes on vacation for the summer so everything dies in May and it revives in September. If you want to make money in the junior market buy when nobody wants to buy and sell when everybody wants to buy. If a stock’s sitting there and it’s trading 2000 shares a day, put it in a stink bid five cents under whatever it is and wait for it to come to you; because the fact that nobody wants to buy means that these things go down a lot more than they should and you can pick them up cheap. Now, when everybody wants to get into the market its a very liquid market and that’s when you should sell.

Michael: When you are investing in gold shares the direction of the broad market plays an important part. Where do you see the broad market indexes going?

Bob: It’s my belief that we face a very real risk of deflation now. I think the broad markets will be down between now and October, I think it easily could be worse in 2008 and they will have tendency to drag down the gold shares. That said, from a timing point of view gold shares are probably as cheap as they will ever be in anybody’s life time. They are exceptionally cheap and I think they are going up and they are going to up a lot more. So you can sit on them and they go down, so what?

Michael: Let’s come back to the inflation, deflation tug of war going on. People have an intuitive sense that when inflation comes gold goes up, what about in a deflationary environment?

Bob: The value of gold buying power goes up. Now we have $600 trillion in derivatives, I am not even going to try to explain it, I am just going to say ten times the size of the world economy and they are at our backs. Now, in real simple terms, the problem of the United States , the problem of Greece, the problem of Italy, the problem of Spain, the problem of the UK, the problem of Ireland the problem of Iceland is too much debt. We have hundreds of trillion of dollars in debt that will never be paid off and no government has the guts to come up and say you know we’re going to match what we spend to what we take in. Well, I am sorry, folks it’s that simple, your income has to match your out go. If it doesn’t you’re broke and since governments don’t want to do that they keep printing money and they keep wanting to put debt on the backs of the tax payers. We can’t afford it, okay? Those debts are going to be written off and when they do that’s going to be very inflationary. So, we could see $500 gold that would buy ten times as much as it would now. There a two ways a financial system can die, inflation or deflation,  the end result is exactly the same but there is a very real risk of deflation.

Michael: We’ve been in an inflationary world for so many years, over generations. It’s difficult for people to grasp the deflation concept when we all have a fair amount of faith in the government to debase their currency so much that you get Zimbabwe 100 Trillion Dollar Bills that are worth nothing.

Bob: .Yes but there is a as flaw to that thinking too Michael. I spent two years in Vietnam. I was a fighter pilot and I was an intelligence officer, how much faith do you think that I have in the power of government?

Michael: I hope not much.

Bob: No, that’s the most powerful military in the world, we had unlimited money to spend and we lost. I know how impotent governments are, and what’s going on in Europe now is a perfect example. We see the debt debate in the United States. You’re going to tell me those guys are in control? You’re going to tell me they know what’s going on? They are hopeless, they are idiots. It is spinning totally out of control and there is nothing anybody can do about it. They are trying to save the banks in Greece. What do you think the depositors are doing? They are walking in saying give me my money, when everybody in it says give me my money the banks goes under.\

It is really simple, it’s not a Democrat issue, it isn’t a Republican issue, it’s a simple fact of life. You cannot spend money you don’t have and governments have been doing this since 1694 when the Bank of England started and I’m sorry but that model no longer works and we need a new model. We are drowning in debt, everybody knows we are drowning in debt and everybody is saying well, we’ll put on a little more debt and give them a bottle of Jack Daniels to drink.

Michael: I couldn’t agree more. What are you telling investors, people to do these days?

Bob: It’s the most dangerous time financially in world history, do not take risk, do not have debt, do not have leverage positions, have an insurance policy in the form of gold or silver and do what makes sense rather than listening to everyone around you. Don’t trust anything the government says.

Michael: Bob its so nice to have the chance to talk with you and we certainly appreciate you talking longer than we asked for,  but it’s been so insightful. Thank you.

Bob: Thank you Michael it’s been a great pleasure.