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Bulls hate being milked, too

Bob Moriarty
February 21, 2004

Some 40 years ago I was a senior in high school in a sleepy Texas town named Fort Worth. The town was a two trick pony, we had an Air Force base and General Dynamics. Other than that, there simply wasn't much industry. But with great pretensions, Fort Worth billed itself as "Where the West Begins."

All the kids who lived in ranches out west of town attended my high school. Their idea of fun was to wrestle cattle, rope horses and ride bulls. I didn't weigh 135 pounds soaking wet so being a Rodeo cowboy was never high on my list of 'things to do.'

Barb and I watched a movie recently about bull riding and it brought those years spent in Fort Worth back to mind. I did a lot of really dumb things when I was a kid but I was never quite dumb enough to even try getting up on one of those bulls. As we all know, bulls hate riders.

I'm not sure there is a world of difference between the 1000 pound bulls with the nasty sharp hooves and horns and the figurative bull market. Bulls hate riders.

And anyone who actually believes they can sit on a bucket and pull on a teat and get some cream anytime they want to, doesn't understand bulls. You pull on the wrong part of a bull thinking it's a teat, you are going to be in for a big surprise. Bulls are nasty mean critters and hate being ridden or milked.

If you read all of the investment writers out there, you will come across a lot of good information. For example, Richard Russell often muses that it's probably a waste of time for most investors to try to outsmart the market. He suggests buying mutual funds and when you have guys around with the record of Prudent Bear or John Embry or Frank Holmes, that suggestion makes a lot of sense. You really do owe it to yourself to ask just how qualified you are to study dozens, even hundreds of stocks, to find the winners. If you believe in a gold bull market and want an easy way to invest, at least consider letting the experts do your investing for you.

On the other hand, Jay Taylor likes the juniors, just as I do. And he comes up with some real good advice. Spread your investments across a variety of companies. He recommends never putting more than 5% in any stock. At least that way when a company doesn't work out, you can't get hurt too bad. It is important to understand that risk is the opposite side of the coin of opportunity. I write about a lot of juniors. The juniors have far more potential but they also go broke on a regular basis.

While Jim Sinclair often confuses me, he does come out with pearls now and again. Sinclair suggests you trade no more than 33% of your position and keep 66% as a core holding. You always buy weakness and sell strength.

Here's something interesting to understand about the juniors. Basically, they are pretty illiquid. When you want to buy, you need to put in an order below the market and let the shares come to you.

When everyone wants to sell, buy from them, when everyone wants to buy, sell to them. It's a quirk of human behavior that people acting as a mob always, always, always do the opposite of what they should do.

I have heard probably every guru, real or imagined, expound on what they think the price of gold or silver will go to. And that pretty much shows they don't understand what they are talking about. Anytime you price gold, you are talking about two commodities, not just one. If you are talking or thinking about gold in dollars, you are dealing with both the value of gold and the value of the dollar.

The REAL QUESTION shouldn't be: How high can gold go? It should be: How far can the dollar drop? Because if we are in a long gold bull market, for sure, we are in for a long dollar bear market. Gold is a currency, just the opposite of the dollar.

If you are basically familiar with the balance of payments issue, you probably understand that it is a balance issue. At some point, just as with your family checkbook, you have to have balance. For many years, the US has shipped dollars overseas in return for real goods. And those dollars will come back to the US in one form or another. We have had a tremendous competitive advantage since Bretton Woods in 1944 that the dollar was the world's reserve currency.

With the advantage of being able to print paper anytime we wish, we have also gotten into a bad case of Imperial Overstretch. And believe it or not, that's not a Liberal vs Conservative issue. The rest of the world understands that, they have seen the US assume a self-elected role as world policeman for the last 100 years.

We got away with it because whatever fool happened to be in power spent money like a drunken sailor. Why not, all we had to do was print more? While the latest quagmire in Iraq is obviously becoming a serious and expensive mistake, we have been pulling the same stunt on and off for the last 100 years. Are you really surprised that 71% of Europeans believe the US is the greatest threat to world peace?

The era of 24/7 printing presses is going to end one day soon. Could be next week, could be next year. But the dollar is getting chucked out of the bar and the hangover is going to be severe. January saw the Japanese throw $70 billion dollars down the toilet in a hopeless effort to destroy their currency even faster than we destroy our currency. It's not just amazing that they are quite willing to throw money away, it's had next to no effect.

It sure seems to me that the last week has shown the Europeans have jumped on the bandwagon. Last Friday and this Tuesday had all the signs of massive and clumsy manipulation of both the Euro and the Dollar. And whatever you think of the Japanese, they flush their financial toilet with a lot more finesse than the Europeans do.

So the rush to the bottom seems to have started. The Americans under Bush and Greenspan have a head start and the natural advantage that comes to any country in the very last stages of Empire. Our currency may as well be used toilet paper for all its worth. And if the Japanese and Europeans want to destroy their money, they probably will succeed, too.

But if gold is in a bull market, it's hard to prove it in comparison to all the other industrial metals. Copper has gone up faster, so has zinc, and nickel. All real goods are both in high demand and short supply. I suspect the slumbering public is about to wake up and when they do, fasten your seat belts. A commodity bull market is interesting to watch.

It's just my opinion, humble as it may be, that the world faces the biggest transfer of wealth known to man very soon. Paper assets are going to be destroyed and it really matters not if it's through inflation or deflation. A $100 trillion dollar debt load is going to implode as it sets off a $200 trillion dollar derivatives time bomb. While I agree gold and gold shares are going to rocket, beware getting caught up in a general stock market crash soon coming your way.

I've said many times before and I will say it again. When the tide goes out, it goes out for all the boats. If you are in shares when the stock market goes down 20% in a day, your shares are going down and I don't care if it's Newmont or Intel. That isn't a recommendation to sell, it's a warning about a potential problem. If the market crashes it will take down all boats.

The metals will drop less and recover faster but don't get caught up in the panic I see right around the corner. Maybe I'm wrong on timing, I saw a lot of danger last summer into the fall. And we made it through. But when you have record high bullishness and record low bearishness and new lows for cash available, you have a disaster on the way. Soon.

There are stocks I like. Many of them are advertisers. There are half a thousand gold companies out there and no one knows them all. So before you begin throwing stones my way for writing about advertisers, you should think about the fact we have a whole bunch of advertisers and it's pretty natural that I know a lot more about those who advertise than those who don't. We are biased, we do like these companies and as those readers who have been following us for the last three years know, we have had more than our fair share of home runs. But since you don't share your profits with me, please take some responsibility for your own investment decisions. And we never write up a stock and sell in the aftermath, that's bad business.

For the first time in three years, there are a lot of fairly valued companies. I don't tell people when to sell, that's your decision to make. I try to identify the next big deal but you need to figure out for yourself which are your core positions and which stocks you are willing to trade. It might make all the sense in the world for one investor to be selling a stock and another buying the same stock on the same day and both of them are better off. We can't help you time sales and naturally if we like a stock at X-price and it's 2X a month later, our feelings would have changed.

If you are not buying stocks to both maintain your wealth and hopefully profit, you are a dolt and belong elsewhere. Gold and silver isn't a religion and all those who want you to worship at a metal altar aren't doing you any favors. At any given time there are always alternatives. So if you buy a stock and it goes up hundreds of percent, sell some and at least cover your costs. I don't marry stocks, if they go up, I sell them. I thought that was the whole purpose. I have core positions which I will trade in and out of but I'm married to Barbara, not some silly gold stock.

Enough of the blather. In late December, I pointed out that gold shares had been in a correction since the first of December. Gold was still going up and indeed went up into January but gold shares pretty much across the board went down 25% or so. That's a good thing. People got too bullish.

Then gold went down in January in some brutal moves and a couple of weeks ago I suggested we were at a wonderful time to be buying. I think that period is about over. All of the action in the dollar and as a result of the dollar manipulation, gold, has been based on $70 billion dollars worth of Japanese Yen dumping in Jan and European manipulation.

Well, I've got some news for them. All the King's horses and all the King's men aren't about to put Humpty Dumpty together again. All that the Yen/Euro/Dollar manipulation is accomplishing is to create the final stock market crash. And for all of the fools who missed Act I in 2000, they won't dream of missing Act II. The market is going down for the count.

I like Cardero (CDU-$3.08 Canadian 32 million shares outstanding). I have always liked Cardero. Last year they screwed the pooch and had some terrible drill results based on some poor management on site. While the rest of the industry was ready to hang Henk Van Alphen, I stood by him and said the results were wrong, it was just a case of them getting a little cocky. When they twinned the holes, I was proven correct. The stock tumbled from about $1.60 Canadian to $.55 as everyone and their brother dumped the stock at any price. For those with the courage of my conviction, the ride back to over $3 has been rewarding.

But the best is yet to come. A year ago they were a one trick pony with a nice silver deposit in Argentina (hint. Where does the word come from?) About ten days ago they announced a new deal in Peru. A giant ($24 billion worth of iron ore) IOCG property in Southern Peru. IOCG stands for Iron Oxide, Copper and Gold. And those who find massive IOCG deposits make giant companies out of tiny juniors.

Rio Tinto found the 1 billion ton Pampa de Pongo deposit back in 1995. The ore grades about 75% magnetite (about 40% Fe) and widely spaced drilling suggests a potential resource (words are from a Rio Tinto paper published in 2002) of 1000 Mt. With anomalous copper and gold.

It's not big enough or the right grade for Rio Tinto and they took a walk. Cardero partnered with the Peruvian company which had the deposit and it's now Cardero's in exchange for shares in Cardero.

Anyone who has done any reading lately should understand the ongoing influence of Chinese demand. While I feel we are headed for a massive depression, actually I believe the Chinese will weather it well. They have learned to consume and while I can't say if it's good or bad, the demand from a couple of billion Chinese is enormous.

The difference between companies like Rio Tinto and Cardero is that Rio Tinto can walk away from $24 billion dollar deposits and they do it now and again. But much smaller companies such as Cardero can handle the crumbs from Rio Tinto and profit nicely. I worked up some numbers and here's what I came up with.

A $24 billion dollar deposit of silver would be 3.5 billion ounces of silver at $6.67 or 58,500,000 ounces of gold at $410 or 18,000,000,000 pounds of copper at $1.32.

Do I think Cardero has a giant future? Actually yes. But not because of just the Pampa de Pongo property in Peru. Anglo American has a 70/30 JV with them in Baja California which has all the potential for being even bigger. Anglo spent the best part of the last year testing 50,000 square kilometers and whittled the best ground down to a number of properties with a total of about 2,000 square kilometers. Henk said in his latest press release, "We view this as an opportunity to develop a whole new IOCG belt."

I'm going down to Baja today to look at the properties and bang some rocks. I don't have a clue as to what I'm doing but I've watched real geologists bust up rocks and if they can do it, so can I. I will take pictures and report when I get back. (Note: I will be out of email contact from Sat Feb 21st through Wed Feb 25th, so please don't write to me until I get back).

And if you like Cardero, you have to like Ascot (AOT $.34 Canadian 36 million shares). I've written about them before. They own a bunch of Cardero stock bought at much lower prices. The ratio should be about 5-1. If 5 times the price of Ascot is equal to the price of Cardero, they are at a par. Right now Ascot is selling at a 36% discount. I believe Cardero is going to be a tempting target for a major and the easy way to buy them is to snap up Ascot first. When Cardero went down for the count last year, Ascot actually sold at a premium to Cardero. I rolled all my Ascot over into Cardero.

Ascot tends to sell at a range of between a 25% discount and a 40% discount to Cardero. It has really poor liquidity but if you will follow Sinclair's advice and buy into weakness, you can put in a stupid offer, 10% below the market and get filled all the time. You could make money doing little more than day trading the discount.

This is going to be a real switch but when I was in Vancouver I met with the nice people at Knight Resources (KNP $1.29 Canadian 47 million shares outstanding) If you go to their website, you can look at an interactive map of their deposit in Northern Quebec. The map shows their property and that of Falconbridge's Raglan located some 40 miles NE.

I saw the maps and all indications are that the deposit at Raglan continues all the way to Knight's West Raglan and the grade improves.

West Raglan is a big nickel play and it's the sort of deposit which makes giants out of juniors or at the least, rich juniors out of juniors. This is the kind of stock you want to be buying on any weakness and selling when people start getting stupid. It's a 2-3 year project and there will be several opportunities to both get in and get out at a profit. I love gold and silver but the other metals are going to have their day as well.

I talked about Atikwa last month. (ATK $.21 Canadian 32 million shares outstanding) It was a steal at $.15 and it's still cheap. The management is top notch, they are going to find a good project soon, they have a website and a phone. In a booming market, good management and a phone is going to be worth a cap of $20 million. In this boom coming, there will be lots of projects and nobody around to manage them. ATK is a good bet at this price.

My favorite trio of related gold/silver/copper stocks consist of NovaGold, (NG $6.80 $300 million market cap, $55 million in the bank) Spectrum Gold and Eagle Plains. I'd like NovaGold even better with some production but when they begin producing, they will be producing a lot. This is one of the top managed juniors in the business. Three years ago they were a $3 million cap.

Spectrum Gold (SPX $3.70 25 million shares outstanding) is NovaGold's Canadian subsidiary. Same great management and similar great projects.

Eagle Plains (EPL $.63 26 million shares outstanding) shares a property with Spectrum and plans on developing their related properties jointly with Spectrum.

With all of those three companies, please people, do some research on your own. They have done a great job on their web sites and are always willing to discuss their projects. It's simply criminal for investors not to do some of their own research. These companies make a lot of information available which wasn't possible 5 years ago. Look into them and make up your mind yourself.

But I like all three, with gold and silver and copper rocketing through the roof and when it appears that situation will continue for yonks, you owe it to yourself to invest in companies with true home run potential. All three companies have that potential.

Let's talk about home runs for just a minute. For anyone who has been following gold shares for the last three years, there are literally dozens if not hundreds of small junior mining companies who have gone up 10 fold or more in the last few years. It's a bull market and that's what happens. So we have this very bizarre situation where we have the most dangerous investment climate in history but one area of investing has been as rewarding as any as I have ever seen. Of course that is gold.

But the big booming market is yet to come. Richard Russell believes we are in only the 1st phase of what will be three phases. The general public doesn't have any clue as to gold and silver yet.

In phase two and three, there are going to be stocks which go from $.15 to $15 and a few to $150, that's how crazy this market is going to get. Those are the stocks I try to pick out of the litter. Sterling was one, Canadian Zinc was another.

There is another pair of stocks which may as well be joined at the hip, they share half a dozen projects. My favorite of the two is Vangold (VAN $.71 Canadian 22 million shares outstanding) but I like New Guinea Gold, too. (NGG $.75 Canadian 45 million shares outstanding).

Someone else just wrote up the status on their Feni project which is 75% owned by Vangold and 25% owned by New Guinea Gold. It sure seems to me that with twice as many shares outstanding, NGG should sell at a discount to VAN. Vangold has three times as much of the project and half the shares. Be that as it may, often NGG sells at a 20% premium and it sure looks to me as if you could be selling the one and buying the other on a regular basis.

Two weeks ago I wrote up Endeavour Gold (EDR $1.80 Canadian Market cap of about $18 million) Everything I said is still true and the company is still cheap. You should be looking for small juniors (small in market cap) which are soon going into production. Those are the highly leveraged companies which will gain the most benefit from soaring gold and silver prices.

I am a little nervous at the price of silver stocks across the board. I wrote up SSRI when it was about $2 and now it's up 650%. Silver stocks have a lot of risk which they didn't have two years ago. That said, silver is one of those commodities which can double in a month. If investors in silver stocks are reading the market correctly, silver is about to blast off. If they are reading it incorrectly, there is a lot of risk in silver stocks at today's prices. EDR allows an investor to buy a silver producer which is both highly leveraged to the price of silver but has a far lower price of silver in the ground than all the other silver stocks. It seems to me that's the best of all worlds, lower risk and higher potential.

And another old favorite of mine is Desert Sun Mining, (DSM $1.50 Canadian 57 million shares outstanding) Sprott Securities just did a report on them a week ago calling for a target price of $3.35 based on a 3.8 million ounce resource and plans to go into production in about a year at a rate of 100,000 ounces a year. The company is well funded and has the money in the bank to get into production. DSM is a very tradable stock which is not true of most juniors. As they advance the project closer to production, I expect investors to give more value to DSM. It's good buy and hold stock with the alternative of having a good trading range and good liquidity.

We own shares in many of the companies I write up. It doesn't make any sense to me to have an opinion on companies you don't value enough to own. And many of these companies are advertisers. We don't charge for our opinion. At the end of the day, every investor gets to keep both the profits he or she makes on good calls and the losses from bad calls. So in the end, investors must accept some responsibility for their decisions. We try to call them the way we see them but our information is only based on what we read and what we see. Please do your own research, it's your money.

Bob Moriarty
February 21, 2004
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