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Gold Stock Alert:
Bulls hate riders

Bob Moriarty
June 2, 2003

Two weeks ago, over the weekend, I penned a piece I called, "Caution, Caution, Caution" where I suggested gold was about to get creamed along with the Canadian Peso and I suggested investors show caution with gold shares. My timing was as close to perfect as you can get, on May 19th, gold shot up over $10. You can't time things any closer than that.

My accuracy left a little to be desired but timing was perfect. I thought of checking into a detox center to get off the drugs but I don't use drugs, (I even gave up smoking, for heavensakes!) So I have been thinking of starting, obviously my reality distortion field is somewhat out of balance. Actually Barbara yanked that Caution piece off the home page sharpish, and buried it in the editorial archives page, and sent me off to the coin shop, red-faced - with a fiver.

I was getting nervous about gold shares, they had barely moved on a good up move in gold. Obviously there is a connection between the price of gold and the price of gold shares. But at times there is a disconnect. And that's where I think we are and I think I know why now.

I was right about the dollar hitting a temporary bottom. This appears to have taken place. It is not a final bottom (not by a million miles) but the proverbial "dead cat bounce." Likewise, gold shares have been weak. But I was dead wrong on the short term direction of gold. Indeed, gold shot up about $20 before retreating.

Then I came across a piece by Tim Wood about the Yandal mine in Australia. Essentially, when Newmont bought Normandy, they picked up the Yandal mine in Australia whose brilliant management had not only sold forward 3.6 million ounces of gold, they did it in US dollars so when the dollar got stronger, the hedge postition got weaker. And they only could prove up 3.0 million ounces of gold anyway. But the hedges contained an interesting feature. The counterparties could demand early payment once the book went underwater but Yandal could effectively tell them to pound sand. Newmont has no liability for the liabilities of Yandal even though they own the mine.

So a counterparty demanded payment and Newmont offered them $.50 on the dollar. So far, so good. But the key issue here is that the counterparties have to balance their books. And once it looked as if Yandal might be forced into receivership, the counterparties would get caught in a position that they were now short gold which was not covered. So in the past two weeks, the $10 spikes in gold may well have been the result of Yandal counterparties being forced into the market to cover existing positions.

Naturally if they accept the Newmont offer, they will just as promptly dump the gold they have recently bought. They are faced with Hobson's choice of either no nag at all or the nag closest to the door. I suspect if they can count, they will take the $.50 on the dollar and be counting their blessings. If not, they are going into the gold business where they will soon learn that gold in the ground is not the same as gold in the hand. One can only hope Barrick will learn that lesson soon.

The bullish consensus on gold is above 81%. When everyone is bullish and spouting on about how gold is going above $400 next week, use caution. It probably ain't so. But any doubt as to if we are in a gold bull market should have been buried last week with the relevation that the real national debt for future commitments is in the neighborhood of $44 trillion dollars. If we reduced the Federal government by 50% tomorrow, we would still face a deficit. (Isn't that a wonderful thought?)

Some of the sentences in the testimony before Congress were terifying.

"The fiscal imbalance grows by about $1.5 trillion each year between 2004 and 2008."

"the government must make cuts or increase revenue totaling more than $43.4 trillion in future years so that, when discounted to today, the sum of those cuts and extra revenue equals $43.4 trillion."

In essence, the United States of America is essentially broke and getting another $1.5 trillion dollars in debt each year. And what do we get from those bright sparks in Washington today? A tax cut. How wonderful and thoughtful of them.

I'm 56. A snowball in hell has a better chance of survival than I have of ever collecting what I have put into Social Security. I'm really responsible for myself and my family. If I don't provide, the government sure as hell isn't going to be able to. So my retirement funds are 100% in gold. There are times such as now where I will ease out of positions since I believe prices on shares will be even better in weeks to come but you either protect your future or you had better be picking out a nice bridge to live under.

But what about Real Estate? Aren't we in a roaring bull market in Real Estate? Well, yes we are. As a matter of fact we are in yet another bubble. No, make that two bubbles. As a result of all the excess liquidity dumped onto the markets by 'Sir' Alan, Real Estate has evolved into a bubble even more significant than the late stock market bubble. Because everyone lives somewhere and when Real Estate crashes, it will affect 100% of Americans. It's going to affect even you. Unless you are already parked under a bridge.

How do I know? Well, in the 1960s I got sent to an 8 week Army Intelligence school at Fort Holibird in Baltimore, Maryland. The essence of the course was that you should open your eyes and look around and you really didn't have to believe stuff just because someone told you something was true. If what you see with your own eyes varies from what you are told, you should go with what you see.

Barbara and I live in a fairly modest condo in Miami. In the last year prices have gone up by 50%. That's pretty strong evidence of a bubble to me. It takes 3-4 months to rent out a unit here but you can sell one in a week. Our next door neighbor used to be a well-paid programmer and had no problem at all finding a new job anytime he wanted. Now he's a $25,000 a year Airport Nazi sorting though ladies underwear trying to sniff out weapons of mass destruction. If his family relied on his pay to afford a month's rent here, the value of these places would be 1/3 of what it is now.

We are in a housing bubble. It will break no later than the first time interest rates go up. It may well break before then, the American consumer is tapped out and zero percent down on cars doesn't work any more to create demand. We are only a short time from the same thing being true of Real Estate. All the fools who didn't give all their money away in the stock market have lined up to place their bets on Real Estate and want to crowd through the door right at the top. Good luck to them.

And the other pending bubble is the bond market. Few investors realize it but the bond market is many times larger than the stock market. I laugh everytime I hear some talk about the "impending gold derivative time bomb." It's been "impending" for five years now. So it isn't all that "impending." As a matter of fact, if gold can jump from $252 to $390 and nothing happens, it sure looks like the time bomb is a weapon of mass distraction.

Gold derivatives actually only represent 1/5th of 1% of all derivatives. So what's the big deal on a time bomb? After all, total derivatives are now around $150 trillion dollars and their sheer size guarantees problems. Well, 89% of derivatives are interest rate related. So when the bond market self-destructs (and that's on the cards shortly) the entire derivatives market is going to melt down. The bond market is a bubble. The US Federal Reserve is on the verge of buying up the long bonds to lower interest rates. (Let me see if I can understand this clearly. We are going to buy up a bunch of funny looking but basically worthless bonds with funny looking but basically worthless dollar bills. Why didn't I think of that? Of course).

The dollar is toast. When it is going down even against the Iraqi dinar, you have a problem. Now and again, you will have violent counter moves, that's where we are now. It's fun to watch the bouncing cat, they do bounce good but a dead cat is still nothing more than a dead cat. The dollar is a dead cat that Monica Lewinsky couldn't suck start. But don't get caught on the up stoke. It's due for a bounce.

Jay Taylor says don't invest more than 5% of your money in any stock. That's real good advice if you can afford it. You can't get hurt too bad. Investing in gold stocks right now is about as difficult as falling off a bike. The only thing which scares me is that it's almost too obvious. But the American couch potato hasn't even begun to buy so buying is as safe as it will ever be and you will be making a lot more 10 bagger investments than you have every seen in your life.

What stocks do I like if they go lower?

1. Desert Sun (DSM) in the low $.80 range is pretty cheap. They brought in more money when they were higher and are using it to advance their Jacobina property in Brazil. I really like the idea of a Canadian company working in Brazil. Brazil needs the jobs and Canada isn't nearly as insane as the US.

2. Cardero and Ascot remain my favorite silver stocks. 5 Ascot shares equals 1 Cadero share in value. So anytime you can buy 5 AOT cheaper than 1 CDU, you are in effect buying CDU at a discount. Right now it's about 35% discount. Cardero is busy drilling their second best silver property. They know they have excellent silver values but if they drill their best property first, they may get a buyout offer at a lot cheaper price than they think they are worth. If someone wants to be a giant silver company, they will buy Cardero. At $5 or $6 silver, CDU is going to glow like a 4th of July sparkler at midnight. At $4.50 silver they will be profitable. They are a pure unlimited option on the price of silver.

3. But if I wasn't in love with Cardero, I'd be in love with IMA Exploration. (IMR) They stumbled, literally stumbled, onto one of the richest silver properties I have ever heard of in Argentina. (Guess where the name Argentina came from) Everyone in the mining industry uses the term Bonanza. If someone finds a gold filled earing on the ground, it's a Bonanza find. But IMA Resources has a bonanza find for real. I talked about the stock when it was 25% lower, it hit another yearly high at $1.07 on Friday and is still wholesale. The company should be selling at twice what they are selling for. That's until the first drill results come in. Then you can fasten your seat belts.

4. Lakota Resources cut a up to $10 million US deal with Goldfields on their premier property in Tanzania next to Barrick's Bulyanhulu mine. As usual Barrick was a day late and a dollar short and may well wake up one day to find a Goldfields mine right next to them. Lakota hit a new yearly high of $5.25 a week ago on the news released in an excellent story on them in the Northern Miner. Also the company has begun to trade in Frankfurt. With a $65 million dollar cap, the stock isn't the great gimmie it was 9 months ago at $1.35.

5. If you could only afford one gold stock or need a core gold position, it should be Apollo Gold. APG is down 50% from its yearly high and it was absurdly cheap then. These guys are run by the sharpest management team in the business, they keep announcing exciting results and the market just yawns. I'll bet the market won't be yawning when they are up 300%. Apollo at $3 Canadian is like stealing candy from a baby.

6. If you like management teams and could combine that with a stock with twice the leverage of the average small producer/exploration stock, you have to love Endeavor Mining Capital. EDV is selling at a 33% discount to their yearly high and probably a 40% discount to Net Asset Value. If that doesn't interest you, EDV is loaded to the gills with warrants and shares of such companies as Apollo, Wheaton River and Northern Orion. If gold goes up 10%, small golds should go up 60%, they have a 6-1 leverage. But EDV has twice the leverage so they should be going up 120% with a 10% move in gold. Don't believe me now, wait until they are selling for a multiple of what they are now and then kick yourself.

Bob Moriarty
Jun 2, 2003

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