In Energy & Gold’s latest conversation with 321gold founder Bob Moriarty we traverse a wide variety of topics ranging from a half dozen of Bob’s favorite stocks right now to the outlook for copper and a potential return to the gold standard. Bob even manages to drop a few investing adages that i’ve never heard before including the one in the title of this interview. Without further ado here is Energy & Gold’s March 2019 conversation with Bob Moriarty…
Goldfinger: The last time we spoke gold was about $1340 and the Daily Sentiment Index for gold had just hit 90. You warned that gold and palladium were getting frothy and might be vulnerable to a correction. Sure enough that’s exactly what happened and we got about a 5% drop in gold from $1349.80 to $1280.80. Is that it? Is the correction over or do you see some more downside ahead?
Bob Moriarty: The problem with being a contrarian is that you love to see extremes. We’ve had a bit of a pullback since I said gold was getting frothy, and we’ve had a perfectly normal correction. However, I’d love to see gold get down to $1250 and shake the tree a bit more. A little bit more of a correction would please me but that doesn’t mean it has to happen.
Goldfinger: I tend to agree with you Bob. I saw a chart this morning showing a widening gap between growing global copper demand and declining copper mine production; the supply from existing mine production is set to peak this year and then steadily decline over the next decade – with all things being equal by 2025 the global copper market is forecast to be in a large deficit. If copper prices stay near current levels we’re going to have a big problem in a few years which means that copper prices are likely to move substantially higher in order to incentivize new supply to come online.
What do you think of copper Bob and do you agree that prices have to move much higher?
Bob Moriarty: Supply and demand really does work. Mine supply is really dwindling and there are lots of reasons to believe that copper prices need to move higher. I think copper is pretty cheap right now.
Goldfinger: So if you think copper is going to go to US$4-$5 per pound in the next five years how do you play it? Do you buy a big producer like Freeport McMoRan or do you buy a copper ETF?
Bob Moriarty: A big producer like Freeport may not even move that much even if copper goes up 30% or 40%. What you want to do is buy explorers like Barksdale (TSX-V:BRO) or Quaterra Resources (TSX-V: QTA). Quaterra has C$.17 per share in cash and water rights in Nevada, meanwhile the stock is trading at C$.11 – how can you lose in that situation? And that’s not to mention Quaterra has 1.6 billion pounds of easy to process oxide copper in the best mining state in the U.S.
Barksdale is in Southern Arizona and Peter Megaw is the technical advisor to the project and the company right next door to Barksdale (Arizona Mining) just got sold to South32 for C$2 billion. Barksdale has what they call the Sunnyside Project right next door to South32’s Taylor Project and there’s a pretty damn good chance that the high-grade skarn copper-lead-zinc mineralization extends at depth from Taylor to Sunnyside. Peter Megaw believes Barksdale has the sweet spot of the deposit. He’s the expert on those sort of deposits so he’s worth listening to.
You want to choose the stocks that will give you the most leverage to higher copper prices and Barksdale and Quaterra both certainly fit the bill.
Goldfinger: Have you heard of Sun Metals (TSX-V:SUNM)?
Bob Moriarty: I don’t think so.
Goldfinger: Well you mentioned Peter Megaw and it reminded me of Sun Metals (I own Sun Metals shares), Megaw is also a technical advisor to them. Sun Metals is another junior explorer that could offer a lot of upside leverage to higher copper prices. SUNM’s Stardust Project in Central British Columbia, Canada is a Carbon Replacement Deposit (CRD) that boasts a high grade copper-gold skarn called the Canyon Creek Skarn Deposit. At the end of 2018 Sun Metals reported a 100 meter intersection grading 4.99% copper-equivalent and SUNM is fully funded and all set to resume drilling again in May. I should also mention that SUNM received a C$3.5 million investment from Teck Resources (NYSE:TECK) in December, which I believe is notable because Teck doesn’t have a habit of making a lot of investments in base metal explorers.
Bob Moriarty: I have a program that tells me what that 100 meter intersection would be worth and it’s US$324 per tonne. That’s extraordinary for a porphyry or a skarn system and to have that kind of rock over a 100 meter intersection is exceptional. If you’ve got open pit costs of $10-$20 per tonne you’re going to be able to make a fortune if you’ve got enough of that rock. Even at underground costs of $50-$60 per tonne you’re still going to make a fortune so it will be important to see how much Sun Metals can expand upon that impressive intersection from last year.
Goldfinger: Great points Bob and I think it will be a company that we revisit again this summer once they’re a few weeks into drilling at Stardust. In your newly published book “Basic Investing in Resource Stocks: The Idiot’s Guide” you mentioned that you’ve been lied to by a lot of junior mining CEOs but that it’s still better than a lot of other sectors. How do you ask questions to detect if a company exec is being truthful or perhaps withholding some of the truth?
Bob Moriarty: Have you read the entire book?
Bob Moriarty: I started writing the book and it ended up different than I had originally planned. I originally intended to answer questions like you just asked me but then I realized that’s bullshit, this isn’t how the resource sector works. I have lost the most money on the greatest projects, because I thought “nobody can screw this up”, but in fact anybody can screw anything up. Rather than look at too many details you should buy resources for no other reason other than that they are cheap. If you buy when things are cheap and sell when things become expensive you will do very well over the long run. Everyone wants to make things more complicated than they need to be, whether it’s in analyzing the macro or the micro everyone makes investing more complex than it needs to be.
By simply using sentiment and knowing where you are in the market cycle you can be way ahead of the game. If all you had was sentiment you would have the best indicator you could possibly have; buy when things are out of favor and sell when there are no bears left.
Goldfinger: I agree that sentiment is very powerful, however, timing longer term market cycles is by far THE most powerful thing any investor can do. But how do we know where we are in the market cycle? Are we in a bull market or bear market cycle in the junior mining sector right now?
Bob Moriarty: We had a generational sentiment washout in December 2015 and it got to the point where there were no bulls left and everyone was skeptical of commodities and junior mining. I contend that until we see a euphoric blow-off top we are in a bull market cycle.
In 2001 you couldn’t find a precious metals or commodities bull anywhere. Sure enough we had one of the greatest bull markets ever between 2001 and 2007. In December 2015 or January 2016 you could buy juniors for less than the cash they had in the bank because everyone was pessimistic and nobody cared about resource stocks. Rather than try to outsmart the market simply figure out where you are in the cycle and if you’re near the bottom then it doesn’t matter what you buy, everything is going to go up in a true bull market.
If you buy at exactly the right time you can make a fortune in six months (2001, early 2009, December 2015, etc.).
Goldfinger: So is now exactly the right time?….
Bob Moriarty: It’s past the right time.
Goldfinger: So does that mean we can’t make any money?
Bob Moriarty: Nope, it means there’s still plenty of money to be made but you probably won’t make a fortune in six months.
One of my favorite indicators is the premium/discount on the Sprott Physical Silver Trust. In April 2011 the premium hit 25% which was a ridiculous extreme indicative of a major top in silver. I called the top in silver in April 2011 to the exact day.
Sprott Physical Silver Trust (Historical Premium/Discount to NAV)
In November 2018 the discount on the Sprott Physical Silver Trust reached 5%, another ridiculous extreme which is indicative of extremely depressed sentiment. Sure enough silver bottomed at $13.86 an ounce in November 2018 and has since rallied almost 20%. Tell me when the Sprott Physical Silver Trust moves to a big premium and I’ll tell you when it’s time to sell silver again, until then I think silver is still too cheap.
The problem with most investors is that they don’t invest when they should and they do invest when they shouldn’t. You should invest when you’re terrified and you should sell when you’re pleased.
Goldfinger: I think your new book is absolutely excellent and I left a review on Amazon.com basically saying that you’ve distilled 20 years of intensive experience as a junior mining investor into a book that is an easy one day read. How can someone beat that? Spend a few hours reading a book and suddenly you’ve gained 20 years worth of high level investing wisdom in one of the trickiest stock market sectors there is.
I think there is one topic that you may not have touched upon in your book and I think it is extremely important – position sizing. I see so many inexperienced investors putting way too much of their portfolio into a single position. I regularly see guys putting 25% or 30% of their accounts into one stock, sometimes even 50%! If we consider that 99% of junior mining stocks experience at least two 50% declines at some point in their history, then by putting 50% of our account equity into a single stock we are basically guaranteed to suffer 25% account drawdowns on a fairly regular basis. I don’t know about you but I’m not into 25%+ account drawdowns.
Bob Moriarty: I wouldn’t recommend putting more than 10% of your portfolio in any one position. In fact, I’d say i’ve got about 25% of my portfolio spread out among 3 Quinton Hennigh stocks: Irving Resources (CSE:IRV), Miramont Resources (TSX-V:MONT), and Novo Resources (TSX-V:NVO). For the longest time Novo was my biggest position but i’ve since trimmed some Novo and put the proceeds into Irving and Miramont because both of those companies are drilling now. I think Irving and Miramont could be grand slam home runs and we shouldn’t have to wait long to find out.
I don’t have any single stock that could make me poor, however, I’ve got half a dozen stocks that could make me rich.
Another great stock is Keith Barron’s Aurania Resources (TSX-V: ARU) which just announced they are drilling now in Ecuador. Keith Barron is the biggest name in Ecuador. Ecuador is a target rich environment to say the least (Aurania has identified 16 major targets across their property package). Barksdale, which I mentioned earlier, is another stock that could be an absolute home run.
Goldfinger: I think that’s really important Bob, no more than 10% of ones portfolio in any single position. I must admit i’ve broken my own rule a few times and i’ve almost always regretted exceeding the 10% threshold.
Turning to Novo, it’s been a few months since we discussed Novo in any detail. What’s new in the Pilbara and what are the big catalysts coming up for the stock in the next few months? What’s new with Novo?
Bob Moriarty: Nothing.
Goldfinger: (laughs) Really? Nothing?
Bob Moriarty: It’s summer in Australia which means that it’s literally hotter than hell. They will be doing a lot of work at Egina, Purdy’s Reward, Comet Well, and Beaton’s Creek in about two months. So you’re going to have really steady and important news flow starting in May going all the way through the end of the year.
I’ve been to the Pilbara five times and I probably know the company better than anyone except for maybe the company insiders. When it was C$.45 per share I said Novo would be somewhere between a 10-bagger and a 100-bagger, well it turned out to already be a 20-bagger since I said that. A few months ago when Novo was trading around C$2.00 I said it will still be a 10-bagger from those levels because everyone is still greatly underestimating the potential.
The gold got to the Wits (South Africa) through precipitation. The gold got to the Pilbara through precipitation and there’s a lot of damn gold there. Because it’s nuggety it’s difficult to measure, but just because it’s nuggety doesn’t mean the grades aren’t extremely high. Here’s the best part: I think Quinton has a home run with Novo and we will know for sure in six months.
NVO.V (Daily – 1 Year)
Goldfinger: Hold on, we’re going to know whether Novo is a boom or a bust in six months? Why is that?
Bob Moriarty: Here’s the thing, you only need to succeed once. Novo has 3 main areas it’s working: Karatha, Egina, and Beaton’s Creek. Millennium Minerals is right next door to Beaton’s Creek and Beaton’s Creek easily has a million ounces of gold. Now Millennium has been waiting for Novo to fail so that they can scoop up Beaton’s Creek on the cheap, however, Novo isn’t going anywhere and Millennium needs that ore from Beaton’s Creek for its mill. The best part (for Novo) is that Millennium has a sulfide resource and an oxide mill.
Goldfinger: It seems like it could be an eventful year for Beaton’s Creek, especially if we see additional upside in the gold price. It simply makes too much sense for Millennium to acquire Beaton’s Creek and create a win/win situation for both companies’ shareholders.
Bob Moriarty: Australia amazes me. They have some of the finest mining companies in the world and they have some of the dumbest bastards in the world. It’s quite common for Australian juniors to go from $.03 to $3.00, and it’s just as common for stocks to go from $3.00 to $.03.
Goldfinger: You recently did an interview in which you said that you think we are on our way back to the gold standard. Why do you think we’re headed back to the gold standard and how could a gold standard possibly work given how much debt there is in the world and how little gold there is relative to all that fiat debt sloshing around?
Bob Moriarty: Let’s start with what we agree on. Do we agree that the world is awash in debt that will never be repaid?
Goldfinger: Yes. There’s this whole new economic theory called MMT which basically suggests that government debt isn’t a problem and the only constraint for more debt is inflation.
Bob Moriarty: Do you know where they got that theory? I know who wrote the theory.
Goldfinger: Who’s that?
Bob Moriarty: Mugabe (former President of Zimbabwe)
Goldfinger: I didn’t realize Mugabe was an economic theoretician.
Bob Moriarty: Where does an avalanche start? Does it start at the top of the mountain or the bottom?
Goldfinger: The top.
Bob Moriarty: Ok so if the United States is at the top, the US dollar is the world’s reserve currency, and the US is one of the most indebted countries in the history of the world do we have 20 years of prosperity to look forward to or 20 years of shit to look forward to?
Goldfinger: Probably the latter.
Bob Moriarty: You got it! Every empire in history has crashed when they started getting involved in military adventurism. It happened to the Romans, it happened to the French, it happened to the Spanish. And look at these fools in Washington they’ve decided that they don’t need to collect taxes, they’ll just print money. Damn what a great idea! Why didn’t Germany think of that in the 1920s?
There’s $250 trillion in debt out there that’s never going to be repaid. So when everything grinds to a halt one day like it has in Venezuela somebody is going to say “Well, we can always try gold” and that’s when you’ll see the world go back to the gold standard. Simply because everything else has failed and we know that gold works as a store of value.
Would you rather have a $100,000 Treasury bill or would you rather have an ounce of gold?
Goldfinger: Well if that T-bill can’t buy me a loaf of bread i’d rather have an ounce of gold.
Bob Moriarty: The last time we spoke I pointed out there were seven million Americans more than 90 days late on their car payments. I want to ask you something else right now. How many credit card accounts are more than 90 days past due right now?
Goldfinger: I’m going to guess 10 million credit card accounts.
Bob Moriarty: 37 million.
Goldfinger: That’s a big number.
Bob Moriarty: Did you know that Norway has a population of 5.4 million people and every man, woman, and child in Norway owns a roughly $45,000 stake in the U.S. stock market via their country’s sovereign wealth fund?
Goldfinger: I didn’t know it was that large of a number.
Bob Moriarty: What could possibly go wrong?
Goldfinger: If the stock market turns down Norwegians might not want to own U.S. stocks anymore?
Bob Moriarty: Why did you use that term?
Goldfinger: What term?
Bob Moriarty: Why did you say “if” it turns down? We are in the crash now, it’s just that most people don’t realize it and it’s being covered up by the stock market indices which are still in la-la land.
Goldfinger: You know you make a great point there Bob. Do you remember October 2007? In October 2007 the S&P 500 made what at the time was a new all-time high. However, what was interesting about October 2007 is that was after we knew the housing bubble in the U.S. had popped and the subprime mortgage debt situation was an absolute mess. In October 2007 we also knew the banks had tons of bad debts on their books, yet somehow the stock market made an all-time high.
It sort of feels like October 2007 all over again in the sense that we know there are all of these unsustainable situations out there around the world yet the stock market is operating in some sort of Pollyanna world.
Bob Moriarty: You’re absolutely right. Let’s go back to the book, in the book I make the point that if you use your brain and open your eyes and look around you can figure this stuff out. I don’t have any special information, I just have some experience and I open my eyes. If you open your eyes and look around you’ve got to come to the conclusion that we’re fucked.
Goldfinger: On that note I think this is a good place to pause the conversation for another month. 2019 is shaping up to be an intriguing year that was made even more interesting with this conversation; we have lots to look forward to in terms of news flow from junior explorers over the coming months including some companies mentioned in this interview. I’d like to thank Bob for his time and insights, and I look forward to looking back on this conversation six months from now.
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