It’s been a rough few weeks in the precious metals and junior resource sectors since the last time 321gold founder Bob Moriarty and I spoke in early April. There has also been some big news in individual junior mining stories such as Newmont Goldcorp’s investment in Irving Resources, as Newmont makes it clear that it is very interested in Japan as an emerging mining jurisdiction. I managed to get Bob on the phone during the depths of Thursday’s precious metals sell-off and what ensued was a very thought provoking and insightful conversation.
Goldfinger: Precious metals are getting sold off pretty good today and mining stocks are also making multi-month lows as we speak. The Fed poured cold water on the idea of a rate cut yesterday which upset the stock market and economically sensitive commodities such as oil. What are your thoughts on the broader market, precious metals, and mining shares right now?
Bob Moriarty: I think the stock market is in a topping process and until it does precious metals aren’t going anywhere. The gold shares are unloved but that is the best time to be buying. You just made a really good point that the gold shares are at lows for the year and that’s actually a good thing. Everyone thinks that if their stocks aren’t going up every day that’s a bad thing, but that’s rubbish. I’m not at all concerned, i’m looking for a bottom at some point soon in June or July and I wouldn’t mind seeing the juniors go sideways or lower until then.
Goldfinger: Do you pay attention to seasonality? May has historically been a poor month in the precious metals sector and everyone talks about “sell in May and go away” – so far we’ve seen “sell in April and go away” this year.
Bob Moriarty: I think there is something to seasonality but as i’ve said many times you want to be buying when nobody else wants to buy. As i’ve said in both of my books you want to be buying when nobody else is interested. When it’s difficult to sell shares that’s the time to buy, and when it’s really easy to buy shares that’s the time you want to sell. It all goes back to sentiment.
Goldfinger: There are a lot of cheap junior mining stocks out there today, should I be buying my favorite stocks today or should I wait for them to get even cheaper since you said we could have another month of declines ahead?
Bob Moriarty: You should do both. At a new low for the year is the stock cheap or expensive?
Goldfinger: It’s cheap.
Bob Moriarty: Could it get cheaper?
Bob Moriarty: Yes it could but who cares? If it gets cheaper buy more. It’s always a good idea to keep some spare cash handy but if you’re buying a stock at its low for the year it’s a wonderful opportunity. Now what I do is put in stink bids – let’s talk about stock XYZ that’s selling for $.12, I put in a bid at $.09 and if I get filled it’s great, and if I don’t get filled it doesn’t make any difference. If you buy cheap and sell expensive you’ll always do well.
Goldfinger: You have a way of making things clear and simple, more than most people. The trick is figuring out what is “cheap” and what is “expensive”.
Bob Moriarty: There’s no trick, if it’s at a yearly low it’s cheap and if it’s at a yearly high it’s expensive. Could it get cheaper? Yes. Everybody wants to make this stuff complicated and it’s not complicated.
Goldfinger: I agree with you. However, there are specific circumstances where a stock may trade to a new high for the year and it could be on the verge of a much larger breakout from a long term basing pattern. Take Novo Resources (TSX-V:NVO) in July 2017 for example, if you sold when it made a new high for the year you would have been making a huge mistake:
Bob Moriarty: You’ve got to pay attention to the news. I wouldn’t recommend anyone sell a new high blindly. Let me give you another example, take Aurania (TSX-V:ARU) today. Have you followed it?
Bob Moriarty: Ok, ARU announced results and they didn’t hit anything. Is that a big deal or not?
Goldfinger: Not really because this is greenfields exploration of a massive area in Ecuador. They’re not supposed to hit in the first few holes.
Bob Moriarty: Absolutely. In relative terms when it was selling at $4.00 on Wednesday it was expensive and when it’s selling at $3.14 today it’s cheap. I love 22% off sales and I personally like the Aurania story a lot. If you like it you can put in a bid 4% or 5% under where the market is trading and if you get filled then it’s great, if you don’t it’s no big deal.
Now this is exactly what happened with Miramont (didn’t hit on their first holes) except they did a really ugly job of releasing the results. In fact, they didn’t release the results for the first three holes at all. When they did release the results for holes 4-6 the market said “this is horrible” and dropped the stock more than 70%.
With Aurania they still have one of the top geologists in the world, they still have enough money for a drill program, and they’ve still got 16 targets to be drilled. So I don’t really care if they hit in the first six holes, or the first ten holes. All this does is give investors an opportunity to be in cheaper if they like the long term story. I think the smart money is buying here today.
Goldfinger: Companies that have announced anything short of stellar results have been brutally sold off in the last couple of weeks so i’m sure the sector sentiment isn’t helping Aurania.
Bob Moriarty: Yes, but I consider that a good thing because I think we’re seeing capitulation selling here today (Thursday May 2nd, 2019). I’m not concerned one bit and I would actually welcome lower prices in the precious metals over the next few weeks. I think it would simply create an even better buying opportunity. One day soon we’re going to have a top in the stock market and then gold and silver are going to start to really move a lot higher.
Goldfinger: Bob, have you seen that Bitcoin has almost doubled from its December 2018 lows?
Bob Moriarty: There’s a sucker born every day.
Goldfinger: (belly laughs) Do you think some more suckers are going to be born in the next few weeks to help drive the price even higher?
Bob Moriarty: Having two piles of dog shit is not better than having one pile of dog shit.
Goldfinger: What do you think about this notion that the cannabis sector has hurt the junior mining sector because it has drawn away some of the speculative money in the market? I have heard this from more junior mining executives than I can count and I wonder if it’s just a convenient excuse or if there is some validity to it.
Bob Moriarty: I’m gonna hedge with my answer. Yes, it’s true that cannabis has taken some cash out of the junior mining sector but the mining execs also want someone else to blame and cannabis is convenient.
There are so many indications that we’re at a major turning point in both the stock market and precious metals. When we began 321gold back in 2001 I remember researching the number of mutual funds and it was something like 1500+ funds in total, only 3 of these funds were focused on precious metals. That was a great sign that gold and silver had nowhere to go but up in 2001.
Today, Bloomberg is saying inflation is dead, Barron’s is saying the stock market is going to go up forever, politicians are day trading the market. I mean we’re seeing insanity out there, we even have the Vice President calling for a 100 basis point rate cut with the stock market at all-time highs and the economy supposedly near full-employment. Meanwhile, junior mining shares are bracing for much lower gold and silver prices and if anything except the worst case scenarios take place these stock have nowhere to go but up.
Everybody wants their stocks to go up every day but that simply isn’t possible. Stocks go up and stocks go down and what you want to do is buy when things are low and sell them when they are high. This is the time to be buying and I know you’re going to ask me for some good stocks to buy and my answer is “all of them!”. Every piece of crap gold and silver stock is going to go up because they are so cheap today. The sector could turn tomorrow, or next month, or July. I don’t know when it’s going to turn but I do know mining shares are cheap today.
There was an article about credit card defaults published by Business Insider which stated that 37 million credit card accounts were 90 days or more late. Add that to the 7 million Americans who are 90 days or more late on their car payments and we’ve got a very large portion of the U.S. population that is struggling to survive. Meanwhile, the business media would like us to believe that the economy is humming along just fine and the stock market will keep moving higher.
Goldfinger: To make matters worse those 37 million credit card accounts that are 90+ days past due are accruing interest at 20%+ in addition to penalties and fees. Taking on too much debt is a very difficult situation to pull oneself out of and it sounds like there is a big piece of the U.S. population that is finding themselves in debt trap even as the economy is supposedly strong. How can they get out of it short of winning the lottery?
Bob Moriarty: Simple. File bankruptcy.
Goldfinger: This is a really amazing situation. We have the stock market at all-time highs and if we were dumb enough to think that the stock market has something to do with the economy we would assume that the common man is doing well and improving their quality of life. However, the reality is that there is this whole segment of the population that is trapped in a vicious debt cycle and unable to benefit from the financial asset price inflation that has been engineered by the Fed and billionaire class. The percentage of people who really benefit from the S&P 500 making a new all-time high is tiny, the vast majority of Americans have little to no stock market exposure.
Bob Moriarty: That’s absolutely right. There are a few things that could blow this debt-laden economy sky high and to name a couple there is a record amount of money shorting the VIX, and student loan debt has reached a new record high of $1.5 trillion. In 2008 subprime mortgages blew the whole system sky high even though we all knew that subprime was a bubble that was bursting. The people who are short the VIX here could get mouse trapped trying to pick up pennies in front of a steamroller. We got a prelude of a VIX-plosion in February 2018 and that episode blew up several funds including the billion dollar XIV exchange-traded fund. Investors are going to learn something about counterparty risk the next time the VIX surges above 50.
Goldfinger: It’s interesting you mention the VIX because I pointed out the recent positive VIX/SPY correlation in yesterday’s morning email for the Trading Lab and how the last time it reached such a high positive correlation was January 2018 and we know what happened a couple of weeks later:
VIX (Daily – VIX/SPY 10-day Correlation At Bottom)
VIX daily chart with VIX/SPY rolling 10-day correlation (bottom) from Trading Lab morning email 4/30/2019.
This also leads me to another story. A couple of days ago I took an Uber home from the airport and got into a conversation with the driver. He trades options from home between 9am-4pm EST and drives for Uber after market hours. We got into a discussion about his strategy and he told me that he’s up about 20% year-to-date using a strategy involving selling naked put options (without a hedge) on large tech stocks and major equity index ETFs.
This sort of options strategy works like a charm in rising market conditions with declining implied volatility (falling VIX), however, this type of strategy can quickly turn disastrous when conditions change and volatility spikes. My Uber driver then went on to explain that he has several large investors who want to fund him to start up a hedge fund that utilizes this options strategy that has generated a 20% return in the first four months of 2019.
Now Bob, I haven’t been around as long as you have but i’ve been around long enough (trading since 1999) to know that i’ve seen this movie before. It seems like every few years we get an ideal market environment in which any old “all-in long equities” “short volatility” strategy works for a while. Sometimes it can work for a year, maybe even two years, but it always inevitably blows up in a very short period of time when market conditions change and correlations that had been working for a while get turned upside down.
Remember the natural gas options hedge fund that blew up at the end of 2018 which not only wiped out its clients’ investments but also left them owing more money to the firm’s clearing broker? Some of the stuff i’m seeing and hearing out there has me thinking we must be very close to a market/cycle peak.
Bob Moriarty: Nope, you’re not close. You are at a top. I think those sorts of anecdotes are brilliant. When i’m in the precious metals market looking to buy do you know how I figure out when it’s the right time to buy?
Goldfinger: I know you use sentiment.
Bob Moriarty: Yes, you’re right but who knows more about people buying and selling gold and silver than anyone else? Who has their finger on the pulse?
Goldfinger: Bullion dealers.
Bob Moriarty: Yes. I talk to the guy who is in charge of a vault where I keep some metals. He calls me when there is someone unloading a big position to find out if I want to buy some of what the other guys are selling. This bullion dealer knows more about sentiment than just about anyone else because he is seeing what people are actually doing. The vast majority of people have a tendency to want to buy at tops when everything looks great, and to sell at bottoms when they become fearful.
If you can figure out when everyone else is being greedy or fearful you can figure out what you should do. I’m looking at silver down here ($14.70 per ounce) and it’s like stealing.
Goldfinger: So you’re saying you’re seeing a lot of fear right now and gold and silver are cheap?
Bob Moriarty: What i’m saying is all this analysis about the Fed, BREXIT, interest rates etc. It’s all bullshit. Fear & greed drives markets and if you have your finger on the pulse of sentiment you can do a pretty good job of figuring when it’s a good time to buy or sell. Everyone likes to make it too complicated. Silver is cheap right now and I recently bought some silver with cash I raised in February when silver was up near $16.20 and I felt like too many people had become bullish.
Silver printed a large full bodied bullish candlestick on Friday and it is poised to break higher from a bullish falling wedge pattern as Money Flow displays a bullish divergence at last week’s low.
Goldfinger: I want to talk about a stock that you’ve been bullish on for a long time and that you’ve been right on, Irving Resources (CSE:IRV). A couple of interesting things have happened since we last spoke – first of all, Irving got an investment from Newmont Goldcorp at a premium to where its stock had been trading. Irving has also been drilling at its Omu Sinter target in Japan and the company has posted a bunch of core pics on its website. Do you have any comments on the Newmont investment, the core pics, or any insights into when we will start to receive assays from Irving?
Bob Moriarty: Brent Cook whom I respect a lot talked to Quinton and said that he expects the drill results from the second hole to be back in two weeks, which would make it a week from today (results May 9th or May 10th). That will only be a seven meter section but that picture is on the website and it is identical to exceptionally high grade core that I saw at the Midas Mine in Nevada. The interesting thing is that was the first time I had ever gone down a mine, I think they were only doing 250 tonnes a day but it was really rich ore. The geologist came down to paint where they were going to blast and the actual vein was only 18 inches wide but the mining width was two meters so it’s like 4x higher than the vein width. The week I was there they tested across two meters and they had twelve ounces per tonne so that means the actual vein would have been 48 ounces per tonne.
Now I don’t think all the Irving material is going to run (grade high), however, I do think it will give people a really good idea of how high the grades can be over a couple of meters. Newmont Goldcorp is also giving some technical assistance to Quinton and Akiko, Newmont redid the mag survey using their own proprietary software and hole 3 should be the home run hole. Hole 2 will give investors a nice taste of what’s there but they are drilling hole 3 right now and they are drilling it on better information than they had on the first two holes. I think hole 3 is going to be really interesting and it will probably be 6-7 weeks until we get the results for hole 3. We will get assays for seven meters of hole 2 next week and then a week after that the rest of hole 2 should come back. I don’t believe investors are going to be able to buy Irving shares any cheaper than it is now.
Goldfinger: Really good information Bob, thank you. Is Irving still your largest position in your portfolio?
Bob Moriarty: Yes.
Goldfinger: I heard that there are no assay labs in Japan because the mining industry has been dormant for so long, where is Irving sending the core samples to for assaying?
Bob Moriarty: They’ve got to send it to Canada. There are two junior explorers working in Japan, one of which I am very close with (Irving) and the other I am familiar with (Japan Gold, TSX-V:JG). Everyone on the chat boards is talking about Japan Gold and how wonderful everything is, meanwhile every time I talk with Quinton he’s telling me how difficult it is to work in Japan. Irving had to ship in ten Canadian drillers who had no criminal records in order to drill this year and that wasn’t a piece of cake (evidently a lot of drillers have criminal records). Then they had to hire some Japanese workers to help move around core and other stuff. The Japanese are not big people and it’s been very challenging. I mean on a drill rig you need a bunch of Samoans! (both laugh)
It’s been difficult and the drilling has been slow. Everything they do is brand new but Quinton is approaching it in the right direction, Irving is well cashed up with a great management team and they’ve got the top geologist in Japan working with them (Hidetoshi Takaoka).
Goldfinger: You make a good case for Irving Bob. I am fond of Irving and I will be eagerly following the story this year. I currently own shares in Japan Gold simply due to the valuation gap between the shares (C$97 million market cap for IRV vs. C$27 million market cap for JG). However, I am rooting for both companies to be successful. I have stated a couple of times on CEO.ca that I think drilling success for either company will be beneficial for both. It’s also really interesting that Newmont Goldcorp is now a significant shareholder in both IRV and JG due to the fact that Newmont inherited Goldcorp’s 19.9% stake in JG when it acquired Goldcorp.
Bob Moriarty: Just because Newmont inherited Goldcorp’s stake in JG doesn’t mean that they are going to put any more into it, however, it’s quite clear that Newmont wants to put more money into Irving.
Goldfinger: I think we can both agree that there is an exciting summer of exploration ahead for both companies; JG and IRV have the potential to really put Japan on the map for gold mining investors both literally and figuratively. Are there any other stocks that you’d like to discuss today before we wrap up Bob?
Bob Moriarty: If you want a company that’s going to get a free ride on Japan Gold and Irving you should take a look at Lion One (TSX-V:LIO). LIO is in Fiji and they brought in Quinton and said “what do you think about our epithermal alkaline system?” and Quinton said “Well, I think it’s bullshit” and of course they stepped back and said “Huh?” then Quinton explained to them that there is no such thing as an epithermal-alkaline system because epithermal systems are epithermal and alkaline systems are alkaline. He then explained to LIO that they weren’t drilling deep enough. In alkaline systems you have to go deep because alkaline systems can go down thousands of meters.
Lion One has about a million ounces of gold in a resource and they were moving towards production when Quinton came in and advised them to take the $10 million in their treasury and put it into the ground with drilling to make a new discovery. As soon as I found out Quinton was on board with Lion One I bought some shares.
Goldfinger: That’s interesting Bob. The Lion One story you just recounted brings me to another topic. You’re a big fan of Quinton Hennigh and you have helped promote many of the companies which Mr. Hennigh is either the CEO of, or an advisor to. It’s clear to me that Quinton has a vast knowledge and understanding of geology and a lot of smart people in the mining sector have vouched for his expertise and encyclopedic knowledge of global mining projects and geology. However, I must say that there are detractors who will say that Quinton Hennigh doesn’t have the track record of success that some might purport him to have. In my estimation some of these detractors are jealous and simply enjoy attacking others who are more successful than they are. However, it’s true that Mr. Hennigh hasn’t led a junior from wire to wire (from a tiny market cap to a takeover by a major). What would you say to them and why are you such a fan of Quinton?
Bob Moriarty: Well because I know him. Quinton and I have spent months together. We did a trip to New Zealand and Australia a few years ago and the entire trip was three weeks long. I was with him breakfast, lunch, and dinner on this trip. It was on that trip that we sat down with Mark Creasy in Perth and they began talking about the Pilbara being another Witwatersrand. I know Quinton and i’ve never met someone who has his level of knowledge of geology. You can learn more by talking with Quinton for fifteen minutes than you could by spending days with other geos.
There’s a lot of jealousy in this business and there are some very senior guys in major mining companies that are very jealous of Quinton because they know he’s better than they are.
Goldfinger: Bob, I must say that i’ve really enjoyed this conversation and I think it’s packed full of timely information and insights. I want to finish this month’s interview off by offering 321gold readers the opportunity to subscribe to my premium service, The Trading Lab. I believe it’s a great time to begin accumulating positions in the junior mining sector and there are a lot of tremendous opportunities out there for savvy investors who know what to look for, and more importantly, what to avoid. The Trading Lab includes a daily morning market email, access to the Trading Lab Channel on CEO.ca where I post real time market analysis and trade setups, in addition to weekend instructional videos.
Through May 10th I am offering 321gold readers the opportunity to sign up at a 20% discount to the regular price of US$500 per year. I am also offering a monthly subscription option for a limited time for US$50 per month.
Bob Moriarty: I receive your daily morning market emails I find them to be highly valuable. I think you’re one of the few guys who gets it right a lot, you’re pretty much correct 90% of the time. Your insights and analysis are valuable to me and I have access to pretty much everybody. It doesn’t take much of a boost in information to change your losing positions into winning positions by subscribing to the right service.
Goldfinger: Thank you Bob, that means a lot. Not only is it a good time in terms of investment opportunities, but it’s also more important than ever to avoid potential investment pitfalls which are arguably more numerous than ever. I like to think that the Trading Lab is not only a very effective tool for identifying opportunities, but it’s also a valuable tool that has helped subscribers avoid some big mistakes over the last few years.
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