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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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