Gold & Silver: There Is A Time To Get In, And A Time To Get Out

This article is based on an interview with Bob Moriarty who is the founder of 321gold. He relies not only on a rich professional background, but also on wisdom. The fact that he was among the first on the internet to start up a website about precious metals tells a lot.

You will never see the word conspiracy on 321gold because – even if there is a conspiracy – it is absolutely meaningless for investors. “All financial markets are manipulative. It doesn’t tell you what to buy and when to sell”. The daily efforts at 321gold include many hours of sifting through tons of articles, looking for the ones that will give investors a fair shot. In the daily selection of articles, the focus is on signals, not on noise. There are a lot of people that are very popular although consistently wrong, and a very few people who are consistently right. The latter are less popular as they are not telling what most would like to hear; they are telling what people need to know.

In his latest writing Bob Moriarty looks back to the previous gold bull market in the 70’s. People who invested between November 1979 and January 1980 were really caught in a big trap. “Without an exception, all of them were up with tremendous profits and lost it all by never selling. It wasn’t the bears who lost money in the 1979-1980-bull market in silver and gold; it was the bulls. The reason: they listened to the cheerleaders who told them to buy at the top.” In a comparable fashion, some people today are caught in the negative sentiment. The ones who are giving up will prove to be very unlucky longer term.

The bigger picture

Bob Moriarty was one of the few that he saw the current gold bull market coming well ahead of time. After the significant correction in the past 1.5 year, he expects the next trend will be a substantial move up in the gold shares. Every boom cycle has three waves. In phase one, a small number of very sophisticated investors enter the market. In phase two, institutions get in; it is only in the third wave that the public participates. The stock market bubble of 2000 and the real estate mania of 2006 will spill over to gold, platinum, and other high value metals. Understanding this principle is mandatory; there is a time to get in, and there is time to get out. When everybody wants gold and silver, you should sell as the next move will be down.

Meantime, growing debt levels are somehow a guarantee for the continuation of gold’s bull run. Every government in the world acts like if it can spend its way to prosperity with additional spending and debts. We know as an individual that this simply is incorrect. It is not possible for an individual, nor for a company or a government. Yet governments are getting away with it saying that this time is different. “It is not different; it is a casino that will blow up.”

Derivatives play a key role in this debt crisis. The key to understanding derivatives is that very few people understand them. Mainly their size is a big concern. With a world economy of 64 trillion dollar, it is obvious that a 700 trillion dollar value of derivatives is an incredible risk. Derivatives are part of the problems in Southern Europe, UK, Japan, the US, you name it. They have unleashed a flood of liquidity. It is like someone asking to fit 800 people into a standard size Mercedes Benz. Everyone knows this simply is not possible. “What about 700 trillion dollars worth of bets in a 64 trillion economy? They simply can never be paid back!”

When you know a disaster is coming your way, you have two ways to look at it; either as a disaster, or as an opportunity.” Herein lies the fundamental case for gold. The value of real assets does not change; they remain real assets. “I saw the same in 1971, when the US came off the gold standard. When you are not on the gold standard, you simply cannot spend your way into poverty.” In order to prepare, one needs to avoid being destroyed financially, which means staying out of debt; it means working and producing an income; it means putting some money aside in the form of assets that cannot evaporate. Obviously those assets are gold, silver, platinum, palladium. “You really can’t be over prepared.”

A contrarian view on the gold shares

Being a contrarian is one of the key success factors for investors. The governing contrarian principle is described in the book “Extraordinary Popular Delusions And The Madness Of Crowds” which every successful investor understands. “It is probably the best book about people’s behavior in Psychology ever written.” It applies to today’s situation; the current correction in the gold shares makes people literally hate them. “As a successful investor you should be throwing money at the gold shares when the masses hate them. If you look at the XAU over gold chart it is lower now than it was in 2008, but the fundamentals of gold and silver are much better. It means that people can buy gold shares as if gold stood at 600 dollar and silver at 18 dollars an ounce.”

People need to realize that all things change. We are now at an extreme in emotions in both the stock market (optimism only) and the gold market (a surplus of pessimism). The stock market has gone up since 2008; that will change. The gold shares have been going down for almost 2 years; that will change as well.

Interestingly, Bob Moriarty believes it is realistic to expect a disconnect between the stock indexes and the miners, although gold shares behave more like stocks than metals. The reason: there are extraordinary mining companies that create tremendous value. An estimated 1 on 3 will be big winners. It requires hard work to select them out of the 1,700 TSX companies. The time is coming where those good companies will substantially go up.

The challenge is to find tomorrow’s winners. Bob Moriarty’s experience reveals an interesting insight. Although there is no easy solution to select the winners, as a general rule of thumb it is important to discover what and whom to listen to. “Most of the information in the mining business is plain noise. Nobody can make money by listening to noise. People should learn where to get the real signals.”

Running one of the first gold websites, Bob Moriarty is very close to the precious metals mining business. He has seen a lot of projects, and he knows how to distinguish the promoters from the creators. One of the diamonds he discovered during a recent site visit is Waymar (WYM-V). The team behind the company saw something that everybody else misses. They use a gypsum rich deposit which improves the ground preparation. If you add water to gypsum it swells by 63%; it shrinks by 42% when you remove water. Waymar’s deposit has swelled and shrunken very often over time. The expansion over geological time opens up the rocks, and the shrinking creates up voids for fluids to move into. Every bit of the core was different from every other bit; the more episodes of potential mineralization, the richer the deposit. “I believe the company is a diamond. They pick the deposit for peanuts, they moved it forward extremely swiftly, and I think they are going to do very well.”

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