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Sinking of the QE II

Bob Moriarty
Feb 1, 2011

In the first ever interview with a Federal Reserve Chairman, 60 Minutes brought up the issue of printing money with Fed Chairman Ben Bernanke in 2009. Listen at 8:19. Bernanke pointed out that Quantitative Easing is nothing more than printing money.

The same reporter did a follow up interview with Chairman Ben on December 5th of 2010. Between early 2009 and late 2010 Bernanke did the old switcharoo. Now Quantitative Easing II is not printing money, that's just a "myth that's out there." Listen at 6:34 and compare his 2010 interview with his 2009 interview.

Adding zeros to bank accounts is clearly "printing money" and it's also clearly inflationary. With over half the world's population surviving on less than $3 a day for food, food prices have shot up in the last six months and the cause can be laid at the shrine of QE II. You can safely say that the QE II has pretty much sunk.

Complex systems tend to fail in a sudden catastrophic manner. The failure of a complex system is almost always a true Black Swan event. In hindsight it may be obvious that failure was certain but it's hard to predict in advance.

The sudden failure of the government in Tunisia was a Black Swan event. From the first hint of crisis to the crash of government less than 15 days transpired. Egypt is going down just as fast. All because of the cost of food. The mobs may have hated the governments in Tunesia and Egypt for many years but government was tolerated as long as people could afford food. Now, thanks to Chairman Ben, they can't.

I've predicted a sudden and catastrophic failure of the US government and financial system for years. I started writing about the danger of out of control derivatives as early as February of 2002. Well, revolutions are like the flu, they spread easily and shots don't work. If you think Egypt was bloody, wait until the 22.4% of unemployed in the United States start to reach for the 200 million guns in the US.

Printing money leads to higher prices. Inflation of the money supply always leads to higher prices. Higher prices for food often provides the spark necessary to ignite a revolution. Even the Roman Emperors understood you don't mess with the food of the mob or you risked problems.

The public in general, the "lamestreet" media and indeed, even most newsletter writers, presume life will continue as normal with fits of economic chaos now and again. With $202 trillion in debt on a $14 trillion economy, 65% of mortgages in Florida and Nevada in default and a 22.4% unemployment rate and 11% of all homes in the US vacant, I'd like to suggest there is actually no way the future will resemble the past. The United States is going to collapse; the only real questions are when and how.

Tunisia and Egypt are showing the "how." "When" is probably soon, revolution is catching on around the world. While Tunisia doesn't affect the US at all, Egypt does a little and Saudi Arabia a lot. When the oil fields shut down every American will get a long awaited wake up call.

Thanks Ben, we needed that.

I spoke at Joe Martin's Cambridge House Gold show in Vancouver a week ago. My message then and now is clear. Gold serves as an insurance policy against financial chaos. When I spoke at the show three years ago, it was the day the market dropped 500 points on a US holiday. I told the listeners in the crowd that if they had any question about if there was going to be a crash, all they had to do was go home and turn on the telly.

Chaos is in Egypt, in Tunisia, coming to China, Saudi Arabia and the US soon. It's a great time to have some insurance against chaos.

A year ago, I went to Peru and wrote about a gold junior with a bright future. The company was Rio Alto and their stock was $.44. Today it's $2.31, up some 400%. Congratulations to the sharp readers who bought it anywhere between when I wrote about it and today. It's going higher. Great company, good management, nice project.

Then in October I wrote about another gold junior I like a lot with a brilliant geo working with them. The geo is Quinton Hennigh and he is my very good friend. The company is Gold Canyon and three months ago they were $.89 a share. GCU closed at $2.61 today for a tiny 200% gain in three months. But you can't nail them all. Again, great people, great project and wonderful return.

Friday I was in Vera Cruz Mexico visiting another gold junior. They have a director who is on par with Quinton Hennigh in the person of Paul Zweng. I really like him, too. Their projects are just as good and maybe better than either Rio Alto or Gold Canyon.

The company is Goldgroup Mining (GGA-T) chaired by Gregg Sedun and run by Keith Piggott. They have three major projects in Mexico with the central focus on Caballo Blanco, an hour's ride north of Vera Cruz. The company is well cashed up with almost $13 million in the till.

It's a new company, only trading since April when Goldgroup merged with a private company called Sierra Minerals. The flagship project is Caballo Blanco where they bought a 70% interest from the Lundin Group for $15 million cash and shares. Almaden owns the other 30% interest in Caballo Blanco. GGA needs to spend another million or so to complete their earn in as part of a $12 million work commitment. Almaden is carried through a Bankable Feasability study.

GGA's most minor project is the Cerro Colorado gold mine in Sonora Mexico producing 25,000 ounces of gold a year at a cost of about $800 an ounce. Keith Piggott explained in a briefing last Friday to a group of about 20 analysts and newsletter writers that the company intends to use the cash flow from Cerro Colorado to aggressively drill their 50% owned San Jose de Gracia project in Sinola and move Caballo Blanco toward production in as little as 18 months.

It's an aggressive plan but they have the people, the projects and the money. Naturally on a one-day trip, we had only time to visit the premier Caballo Blanco project but we were briefed on San Jose de Gracia and it's a high-grade vein system with some barn burning drill results. GGA plans on drilling 18,500 meters this year at San Jose with a $4 million dollar budget.

Caballo Blanco is a high sulphidation epithermal system. Such systems are the Holy Grail for geologists since they often form giant gold deposits with millions of ounces of gold. It appears that Caballo Blanco has the potential for a lot of ounces. As such, GGA is doing a 30,000 meter drill program and driving two adits this year to provide sufficient material for heap leach testing. The rock appears to be very suitable for heap leaching with run of mine material and that will drive costs down.

The company is guessing costs of about $400 an ounce for production of gold, obviously as they complete a PEA, they will have a better idea but in the brief they were being ultra-conservative. When they say they think they can produce 100,000 ounces a year starting in 2012, it looks like 115,000 is closer to the correct numbers. I like conservative, it beats pumping and dumping.

Thom Calandra was on the trip and he has been the source of a lot of valuable information about new junior miners in the last year. He practically put Colombia on the mining map and then turned around and did the same thing for Guyana. He has hit a lot of home runs lately and his service is well worth paying for. It's $399 a year and cheap at half the price.

Goldgroup is going to be a giant home run. When I had listened to the briefing about their San Jose project and Keith started talking about Caballo Blanco mentally I was wondering why they would focus on a low-grade deposit when San Jose had intercepts of hundreds of grams here and there. As Keith continued his brief, my mouth dropped as I realized the potential of Caballo Blanco. This is going to be a giant company with two company making projects and another smaller project helping to finance it all.

Rio Alto has been a wonderful home run, Goldgroup is better. Gold Canyon has been a giant moneymaker for investors, Goldgroup is better. When Keith finished talking about the company and the projects, I took him aside and told him that he pretty much could tell how his brief was accepted by the action of the shares. If the stock went up in the next week or so, that was a real good sign. The shares closed at $1.08 on Thursday before the site visit and two days later it's up to $1.37 on almost 3 million shares today. I'd say the visit went over very well.

I did buy shares on Friday, it's clear to me this is a hot company. Fifteen other analysts and four newsletter writers were on the visit. There is going to be a lot written about them soon. Thom Calandra may have discovered the company first but a lot of other writers including me are going to be covering it.

I am biased. I own shares. I love the project, Paul Zweng and the rest of management. This is an aggressive team but I want to put the emphasis on the term team. It's a smooth working team with clear goals and well financed. Caballo Blanco is going to be really big and they are going to make a lot of money from it.

I am responsible for my money. You are responsible for your money. Make your phone calls, ask your questions and make up your own mind about investing in anything. There are no gold gurus. But now and again Thom Calandra comes real close.

Goldgroup Mining
GGA-T $1.37 (Jan 31, 2011)
88.5 million shares
Goldgroup website


Bob Moriarty
President: 321gold

321gold Ltd