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Lost Wages
A report from the Las Vegas
Precious Metals Show
Bob Moriarty
May 8, 2003
If we are in a depression you
can't tell it from the crowds at the one-armed bandits in the
delightful never-never land of Las Vegas (a.k.a. Lost Wages).
I attended the
Precious Metals Show there
the weekend before last, and it had the atmosphere of Pompeii
just before the volcano.
As much as for any other reason,
I attend these shows to get a feel for the attitude of both mining
companies and investors about gold and silver. I know a lot of
people follow TA and study charts as if they are looking at the
intestines of chickens but I don't know that many rich people
who have become rich because of their study. The one and only
sure measure of markets seems to me to be the behavior of people.
I wrote two years ago about another gold show and called a bottom
for gold. I was a lonesome voice in the wilderness. Nobody wanted
gold then and it doesn't get any more negative than that.
There is one book I believe
is the be-all and end-all of investment books. If you read and
understand it, you will always know how to invest. It's called,
"Extraordinary popular delusions and the madness of crowds."
Basically, the mob is always wrong and you should be betting
against the crowd to make money. If you understand the
book, you will understand where I come from.
Two years ago there was no
interest in gold from either a mining company or investor perspective.
I think there may have been 6-8 companies with booths at the
show I went to here in Miami in 2001. It was so bad the company
putting on the show had to bus in little old purple-haired ladies
who promptly stole every piece of candy and promotional item
in the room.
The show in Las Vegas had many
dozens of companies representing all variations of gold companies
from wild-eyed promoters to the biggest of the big. But the public
still isn't interested in gold or silver.
That's a very good thing.
According to Richard Russell
we are only in the first of three stages in the gold bull. We
are in the accumulation stage where the smart money is buying
up unloved gold shares on the cheap. Two years ago they weren't
just cheap, they were being given away. Now those same stocks
are up hundreds of percent and are merely cheap. But as Silverado,
Golden Eagle, GoldCorp and Agnico Eagle remind us, no matter
if the management is good or bad, stocks will go down now and
again as well as up.
I enjoy the gold shows for
the brilliant talks. You cannot help but learn. Frank Holmes
of US Global Investors made an excellent point in his talk. When
they look to buy a stock, they first determine the level at which
it is selling. Is it at a Wholesale price level? Or Retail
or has it already passed into the Fairy tale level?
As a small investor, that's
exactly what you should be doing. First of all, ignore the crowd.
They don't know anything you don't know. If a stock is at the
highest price it's been in 18 months and has gone up 500%, you
are not buying at wholesale. And that doesn't matter if it's
GoldCorp or Silverado. You should be thinking of where the overall
gold shares market is (and right now it's wholesale almost across
the board), and where the stock is in comparison to the rest
of gold shares.
Jay Taylor made a really good
point in his talk. The most money is to be made in the junior
exploration stocks. But that's where the most hype is and biggest
con games. So spread your money across a lot of stocks. Jay recommends
no more than 5% of your money in any single exploration stock.
And I can only agree. These stocks can explode and many will.
But they also (ala Silverado) implode on a regular basis. Rather
than trying to pick someone other than yourself to blame for
picking a dog, spread the risk around. Barb and I probably own 30 different small gold stocks and
a few of them snack on dog biscuits and howl at the moon on a
regular basis.
Another speaker pointed out
that far too many gold investors are looking for $1000 gold and
waiting for the long-promised $50 rise in a day. Forget it. Gold
may go to $1000 an ounce but it's irrational to sit and wait.
Buy on fundamentals and buy when you can buy cheap. If and when
gold gets to $1000 an ounce, share prices will be insane. And
remember that gold has gone up $50 in a day only half a dozen
times in history. If you are waiting, you may well wait for a
very long time. Gold is in a bull market and gold going up $5
in a day makes a lot more sense.
If and when gold goes up $50
in a day, we will be approaching the end of the bull, not the
beginning.
Steven Saville is one of our
best and most popular writers. His insight is nothing short of
brilliant. He made a point recently which is so simply yet so
meaningful that I want to share it with you.
Anyone who follows 321gold
knows what I think about gold and the dollar. And has a pretty
fair idea of where we are headed. I take it for granted. I started
investing in gold in a small way in 1969 while I was still in
Vietnam and everyone else was trying to push mutual funds. They
just didn't sit right with me. I couldn't see how all these guys
who didn't know anything about investing could all be right about
something they knew nothing.
I liked gold then because it
was cheap. I like it now because there are no alternatives to
gold as money. Here's why.
All money is created by lending
in a fractional reserve system such as we use. Please don't ask
me to explain how the banks create money when everyone believes
it's the Federal Reserve. It isn't the Fed. The banks create
money every time they make a loan. Since in the act of lending
money, they expect to be paid back and also get interest on the
loan, there is always more money loaned out with interest than
there is money to repay it. So at any point, if you marked to
market, the system would fail. Not all borrowers could repay
their loans and interest. Note that it's true at all points on
the curve.
So what happens is, this natural
inclination of banks (and governments) to create inflation in
the money supply in order to continue what is essentially a negative
sum game. Someone has to lose. Either the borrower loses and
goes broke or the lender loses and goes broke. Or both.
So that's where we are. The
Fed wants to continue pumping money into the system as long as
they can and the government (both Republicrats and Demolicans)
can prolong the game as long as possible.
Here's what you need to know
to preserve your wealth. The system always fail when there is
no discipline (gold). It fails because mathematically it has
to fail. It will fail and when it does, how much of your wealth
you preserve depends on how wise you have been with your investments.
After I wrote the last piece,
some fellow wrote me to tell me how much smarter he is than I
am. Besides being dead wrong on his facts, he wasn't even smart
enough to remember his own email address. But knowing he will
be searching desperately to find some error of fact or opinion,
I'll just wing my response to him here, since my email reply
to him was undeliverable.
I made mention that we started
buying gold as it passed $300 headed south. And the nameless
writer pointed out that if I was buying physical gold at $300
and it only went up to $330 a month ago, I'd made a mere 10%
on my money. His facts were correct, it was his logic which failed.
Buying physical gold is to
purchase an insurance policy against the insanity of governments.
Not just the US government, all governments. While I certainly
believe our country is in the hands of people quite insane, the
same can be said of most countries at most times.
What happened in Argentina
could happen here. As a matter of fact, it has happened here
several times. It's not an accident that those who belong to
the Church of Latter Day Saints (Mormons) are encouraged to store
a 6 month supply of food for their entire family. Actually it
makes a world of sense. Bad things happen.
Warren Buffett believes there
is a 100% chance of nuclear terrorism. Not 99%, not 90% but 100%.
I agree. President Murbarak of Egypt said recently that our invasion
of Iraq will create 100 Osama bin Ladens. Washington is still
holding tail gate parties at the idea of how easy it was to conquer
a defenseless country and none of those folks have actually considered
the impact of 100 Osama bin Ladens.
Whoever is correct, we have
increased the number of enemies we have in the world and now
over 70% of those questioned world wide identify the United States
as the biggest single threat to world peace. That's somehow a
victory we are told but I'm not sure how.
In any case, physical gold
and physical silver has meant safety, even food on the table
in the past. It could well be true again in the future. So consider
it an insurance policy and have some real wealth handy that would
serve as an insurance policy against insanity no matter what
the form.
John Doe failed to consider
I said I started buying gold at $300. I continued to buy all
the way down. We bought some gold coins at auction where the
price was actually below $250 an ounce delivered so naturally
our average price for physical gold was well below $300. I'd
guess over the past four years, we have made maybe 30% on our
physical positions. Which isn't much per year but remember, this
is an insurance policy, not an investment.
Do you expect to make a profit
on your car insurance or life insurance? Do you even want to?
Investing in gold and silver
shares is entirely a different story. Those who have been reading
us all along know I was calling a bottom two years ago. And it
seems I was right. It's a rare gold stock not up hundreds of
percent in the last two years. Last month I said to "Buy,
buy, buy" and that looks like a pretty good call. Shares
are very cheap now, investors are spooked and no one wants to
buy risky mining shares. That's the time to back up the truck.
Here's some shares I like.
Naturally I own most of them and many of them are advertisers.
We write about mining companies not because they can afford to
buy my opinion, they can't. But we happen to know our advertisers
a lot better than many other companies. Investors are in charge
of their own due diligence, we are only commenting on what we
like.
I'll cover the two stocks which
haven't done well. Queenstake (QRL) canceled their deal
to buy the Jerritt Canyon property. In simple terms, they bit
off more than they could chew. The stock was priced at $.38 when
the deal was killed and has dropped 50%. When I first wrote about
them, their price was in the Wholesale range. With the cancellation
of the deal, they are Retail at best. Paul Van Eeden calls the
stock a sale.
Gallery Resources (GYR) had a drill program in the works
at their Katie property in Newfoundland. Their results were encouraging
but hardly spectacular. It remains my belief that someone is
going to find a massive deposit in the Botwood basin but the
results shown by Gallery indicate it isn't them, just yet. The
stock was $.10 when I first wrote about Gallery and was Wholesale.
Now it's Retail in the $.08 to $.09 range. It's what I call one
of my 'long-shot' investments. And Gallery has great management.
Cardero (CDU) remains my favorite silver stock
and the price is at the low Wholesale level in the $1.55 range.
(All prices are Canadian) Cardero will begin drilling their Argentina
properties this summer. I believe Cardero may well end up the
largest silver company in the world. No one knows just how much
silver they have on their properties, but everyone agrees it's
a lot.
Ascot (AOT) is a good substitute for Cardero. Buying
5 AOT shares gets you 1 CDU share. Right now you are buying CDU
at a 40% discount by buying Ascot. I believe someone will eventually
make an offer for Cardero in order to tie up their massive deposits
and the best way to do it would be to buy Ascot at a premium
first. AOT was selling for $.20 today and is at a low, low Wholesale
level.
IMA Resources (IMR) has a giant silver/copper/lead
find at the Navidad project in Patagonia, Argentina. The market
has failed to recognize that again, the issue isn't if there
is a massive deposit but rather just how big it really is. In
simple terms, it is really big. It will be a mine. The stock
doesn't reflect the find. As of today the price is $.87 giving
them about a $23 million dollar cap. Which is absurdly cheap.
IMR is wholesale.
Apollo (APG) continues to advance their three major
projects. They will produce about 200,000 ounces of gold this
year at about a $250 cash price. The share price doesn't reflect
the additional $40 a share advance in gold in the last 6 months
which will add to the bottom line. In my opinion, David Russell
of Apollo is the most talented and knowledgeable miner in the
business. He has built Apollo from the broken bits of other mines
which had been managed into the ground. He picked up hundreds
of millions of dollars in assets for pennies on the dollar and
his share price is that of a good exploration company, not a
production company.
Different people advocate different
ways of investing. Richard Russell says buy gold shares and gold
and sit on them. James Sinclair and Harry Schultz say you should
trade gold shares, buy low, sell high. I advocate holding core
positions and selecting a number of juniors for trading. Apollo
is priced so low that it makes a perfect core position for any
investor.
Apollo Gold should produce
about 40% as much gold as GoldCorp yet the company is selling
for about 5% of what GoldCorp is selling for. GoldCorp would
be better off selling some of their own shares and buying Apollo.
I know Rob McEwen of GoldCorp and he is rightly believed to be
one of the sharpest minds in the mining business. David Russell
is just as good. Or better.
Apollo is selling at Wholesale
in the $3 range.
Eastmain Resources (ER) has an interesting situation.
The company has a $10 million dollar market cap with 600,000
ounces in resources making the stock fairly cheap. Eastmain has
a warrants issue expiring at the end of May at $.40 a share and
ER shares are selling for right at $.40. I expect the shares
to advance when the warrants expire. Naturally the company would
like to see the stock above $.40 a share so they can bring in
the money from the warrants.
Eastmain has a deal whereby
they can recover 60% of all drilling expenses from the Quebec
government on the project. And they can recover the 60% again
and again and again. What that means is that $100,000 worth of
initial cash will buy $245,000 worth of drilling. It means their
costs of increasing resources are very low compared to the rest
of the industry.
Eastmain has good management
and their Eau Claire gold deposit is attractive even without
the subsidies, but the subsidies make the project especially
attractive. Eastmain is still at a Wholesale price at $.40.
Desert Sun (DSM) remains one of my favorite gold
shares not least because I like the management. Desert Sun has
a market cap of about $20 million with about 3.6 million ounces
of gold in resources at their Jacobina property in Brazil. They
are in the midst of a feasibility study to put the mill back
into production. It looks as if it will cost $15-$20 million
to go into production. I told them when I first met them that
they would be better off going into production, the market would
value them at a higher price. When I first wrote about them,
the stock was $.50 a share and at a Wholesale level. It's $.85
now and still Wholesale. They could double or triple from here
with only a little help from the price of gold.
I think Lakota Resources
(YLA) was about $1.25 a share on an adjusted basis when I first
mentioned them. The stock split 2 for 1 and doubled again. While
most stocks are down 30-50% from their yearly highs, Lakota is
down about 12% from its high. Part of the reason became obvious
last week when they announced a $10 million dollar deal with
GoldFields to advance their Ikina property in Tanzania. The property
is next to the $500 million Bulyanhulu mine of Barrick. (formerly
owned by Sutton).
The deal calls for GoldFields
to invest up to $10 million (US) to acquire 70% of the Ikina
and related properties. Since Lakota still has a stable of over
60 other mining properties in Tanzania, the sky is the limit.
GoldFields is advancing $800,000 to Lakota to begin a drill program.
We expect interesting results.
I have a hard time measuring
Lakota. At $.90 a share, the stock was selling at Wholesale.
But with a market cap of $50 million, it has to be a Retail priced
stock until drill results come in. But Lakota could well turn
into another Sutton in a buyout and have a market cap ten times
higher in a good gold market.
Bob Moriarty
May 8, 2003
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 321gold Inc Miami USA
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