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We are all Speculators now

Bob Moriarty
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Aug 1, 2011

My parents bought a small three-bedroom house in Texas in 1960 for the seven of us in the family. My brother and I shared one bedroom, my parents had the center bedroom and my three sisters shared the back bedroom. The house cost about $12,000. Today it’s probably worth $120,000. My parents put down about 15%, that’s all they could afford on a 15-year mortgage.

They didn’t look at it as an investment. At best they may have considered it a sort of savings plan. Owning a house was viewed as an expense just like operating a car. You might need shelter but painting and small repairs were constant. If someone had gone to them and suggested it was a great investment because housing could only go up, they would have looked at him like a goat with three heads. Housing an investment? Are you kidding? At best you might break even and it would take 18 months to sell.

My first experience with the banking system was as a 20-year-old 2nd lieutenant in the Marine Corps in North Carolina in 1967. I wanted to buy a car and the car I wanted was $1000. Buying a car and borrowing money from a dealer was easy to do but they had sky-high interest rates. A friend of mine was going to Vietnam and would give me a good deal on the car; a 59’ Ford but I needed cash.

The loan officer at the bank grilled me for 20 minutes about how much I made, how much I owed, what I spent my money on and how much I had in savings. (Savings? I was a fighter pilot. Fighter pilots don’t have savings accounts.)

I got the loan but the loan officer made it clear that that money belonged to the bank (It didn’t really, it belonged to the guys with savings accounts, the non-fighter pilots) and they wanted it back with interest. I paid it back promptly and sold it to another pilot when I went to Vietnam.

I bought my first house in 1973, actually a condo, in Stamford, Connecticut, just off exit 9 on Interstate 95. They were asking $19,500 for the two-bedroom unit but I managed to pick it up for $18,500. By now, people were starting to see the effects of monetary inflation and realized borrowing money and buying real estate cheap was a way you might beat the system. I put down 10%, kept the place for five years and sold it for $25,000. Housing was cheap and buying a place was an investment that would probably beat inflation.

By 2006, everyone figured out if you borrowed money at a fixed rate and inflation kept driving up the price of housing, no matter what you paid, you would make money by speculating on inflation. Housing wasn’t cheap but it was cheaper than it would be in the future. At least that’s what the theory was.

Barbara and I owned a condo in Miami but we were getting pretty nervous about all the Johnny-come-latelys who were buying houses with no intention of living in them or renting them. They were buying just to flip them to some other fool at a greater price. We let it be known that we were looking to sell our unit but wanted to continue to live in it as renters. Someone literally came to our door, made us an offer we couldn’t refuse and rented it back to us for the next five years.

As we expected the crash in real estate came and took out all the speculators.

The point I am trying to make is that there is a very important difference between investing and speculating. Investors buy things when they are cheap in the hope of making a financial return. Speculators buy at any price but never when things are cheap in the hopes a trend continues to infinity.

People buying gold at $252 in 1999 were paying the lowest real price for gold in a century. They were investors. People buying silver at $4 in late 2001 were buying at the lowest real price in 5000 years. They were investors. You can almost never get hurt buying at record lows when the price of a commodity is below the cost of production.

Speculators on the other hand get smacked on a real regular basis. They depend on more and more people coming into the market. They are speculating on future prices. Regardless of what you think about the future of the US dollar, $1637 gold isn’t a record low and you are not an investor by buying at that price. You are a speculator only.

Likewise, there is an enormous difference between money and wealth. You can view gold as a form of money, it has some features of money as does silver. Gold and silver are assets. But gold and silver are not wealth. Wealth is some productive asset that provides a real after tax return.

People in the US used to save money. If they earned an interest rate greater than inflation and taxes, their wealth increased. After all, wealth is nothing more than a positive difference between what you earn and what you spend. If you spend less than you earn, your wealth increases. If you spend more than you earn, you go broke.

For the last 40 years, since Nixon took the US totally off the gold standard in August of 1971, people have believed the road to success in the United States was to borrow money and buy things that would increase in value just because of inflation. The road to prosperity wasn’t savings, it was spending and speculation. The reason housing went up was inflation. The reason cars and food cost more was inflation. The reason gold and silver are so high, is inflation. Silver isn’t in any more short supply than it ever has been. Gold doesn’t do anything today it didn’t do 50 years ago.

Now governments all over the world believe going into debt is a good thing and savers should be punished. I’d like to suggest that theory is going to end badly. A profusion of lending enabled by the creating of $600 trillion dollars of derivatives in a giant global crap game has led to a profusion of debt that can never be paid. Kicking the can down the road has become a national sport that will continue only until someone fills the can with concrete. That’s going to end badly.

We are not investors any longer. There are few investments around that generate a real rate of return. At best we are all speculators now hoping we can guess the next mania.

Silver was in a mania in late April, early May. The daily bullish consensus was at a record 97%. The price curve had gone linear and dozens of eager new “gurus” were pushing silver as the next great thing, forgetting about an 1100% increase in ten years. Silver was more of “the last great thing.” I’ll get a lot of grief for saying it but silver has had its bull market top.

I’ll quote from the Market Scope issue of July 21, 2011. “In 160 years of trading, there has never been a correction in silver as severe as the 34% decline we experienced in to the May 17 low. Declines of this magnitude have always been an indication a final bull market top in place.”

Gold has yet to have its mania but we can be assured it will have one some day soon. All booms end in a bust. But there is an asset class that is a long way from a mania.

Investors are looking at $1632 gold and $41 silver in shock. They haven’t seen anything yet. Future shock is when the gold and silver stocks start reflecting the increase in the price of the commodities. Silver and gold hit a record price in January of 1980 and then crashed. The shares of gold and silver companies didn’t ride the boom up and they didn’t crash with the metals. They actually had their boom some 10 months later.

Gold and silver are up a lot for the year. Gold and silver shares are down for the year. Gold and silver can correct. I see a correction shortly and the shares should still go up once the summer doldrums finish.

I spend half my life on airplanes and in backwoods motels searching for the next good mining and energy project. I don’t get paid for it; I get little benefit other than the opportunity to get into a good story early. It gives me great pleasure to see good story and pass it on to my readers.

One of our advertisers and a company I bought shares in during a prior private placement has come out with some pretty good results but it’s summer and you could drill 500 meters of 10 ounce gold in the summer and have your shares go down.

The company is Northern Gold Mining (NGM-V). On June 23, they released [pdf] their Preliminary Economic Assessment (PEA) for their Garrcon Gold deposit in Ontario, Canada.

The Garrcon property contains 720,000 ounces of gold in the indicated category and an additional 430,000 ounces of gold in the inferred category. With a market cap of only $35 million today, investors are getting a mere $30 an ounce for gold. Similar companies in similar jurisdictions are getting $100 an ounce at the same stage. NGM is in the midst of a 30,000-meter drill program designed both to increase the quality of the 43-101-resource category as well as to expand the resource.

The PEA showed a Net Present Value (NPV) of 265.9 million, a cost per ounce of production of $495 per ounce and an IRR of 47%. Using a gold price of $1200 an ounce the cash flow over an 8-year mine life would be a healthy $393.6 million.

Garrcon is part of what NGM calls the Garrison project located in the Abitibi Greenstone Belt, home of production to 170 million ounces of gold in the past. The project was bought from Valgold for about $10 million worth of NGM shares and $675,000 in cash. NGN owns 100% subject to a 2% NSR.

Another part of the Garrison projects is named the Jonpol deposit with about 300,000 ounces of gold in a 43-101 resource. The current focus is on the Garrcon infill-drilling program. Work will commence at Jonpol later to provide high-grade material to a production mill.

Northern Gold announced [pdf] drill results for Garrcon on July 26th for an additional six holes. The entire drill program is planned for 30,000 meters, 24 holes have been announced. The latest results include 72 meters at 1.08 g/t.

The plan at Garrison is to define a mineable resource of over 2 million ounces and then either make a production decision or seek a major looking for a new production story. They are in the Abitibi Greenstone belt with dozens of mines so the story is well know, majors will pay a premium for ounces of Canadian gold and the infrastructure is in place.

We are all speculators now no matter if we are considering the purchase of gold or of gold shares. The opportunities to invest in real money making projects are few and far between. Just as long as governments across the world insist on trying to spend more money than they take in, we will remain in an economic never-never land of make believe money.

At some point we have to return to economic reality where governments and individuals live within their means. At that point, gold mines in Canada are going to be very attractive.

The shares of NGM haven’t gone anywhere lately but that true of the other 1499 juniors out there. That situation won’t last forever. Investors are going to learn the meaning of gold rush because there is going to be one.

NGM is an advertiser. I own shares I bought in a private placement and I am biased. I am not paid a cent to write this piece. The company has over $3 million in cash, there are almost 1.5 million ounces of gold in the various projects in the various categories of 43-101 and that makes for about $20 gold in the most gold friendly mining environment on earth. That’s not going to last long.

The company is well managed and very approachable. I want to remind investors, as always we don’t share in your profits or your losses so please take some responsibility for your own actions.

Northern Gold Mining
NGM-V $.34 (Jul 29, 2011)
NTGMF-OTCBB 102.5 million shares
Northern Gold website

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Bob Moriarty
President: 321gold
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