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The Mother of All Shorts

Bob Moriarty
Oct 15, 2010

I've been pissing and moaning about derivatives since soon after we began the website in 2001. Many times I've made the comment that I thought there might be ten people in the world who actually understand the dangers of $614 trillion dollars in derivatives. I'm probably wrong there; ten may be far too high.

There is a great book out about the subprime crisis and how a very few people actually understood how dangerous it was to slice and dice billions of dollars of subprime mortgages into derivatives. The book is titled, "The Big Short: Inside the Doomsday Machine." Michael Lewis, author of "Liar's Poker" wrote it.

Anyone concerned about the precarious state of the world's financial state should get the book and read it. When I read the book, I was shocked to learn that Wall Street simply didn't get it. They had no idea of the toxic waste they were creating and peddling. They didn't care, if it generated a commission, they sold it, no matter how dangerous.

I think Michael Lewis will be writing another book in a year or so titled, "The Mother of All Shorts." It will be about the stunning and sudden crash in the value of US Treasury Bonds.

We know from reading The Big Short that slicing and dicing subprime mortgages and then bundling them together doesn't add any value to the sum of the whole. If one subprime mortgage is basically garbage, if you bundle $100 million of them together, they are still basically garbage. Alas, the bond rating agencies pretended bundling used toilet paper into giant blocks of used toilet paper somehow made it smell better.

That was a scam and an obvious scam but only to a few. When the heroes of The Big Short started betting against sub-prime mortgages, everyone on Wall Street was thrilled to sell them cheap insurance on what in hindsight was a sure bet on their part. After all, if subprime mortgages by themselves are risky, putting a lot of them in a package is just as risky.

Eventually the government stepped in and bailed out the banks, foreign and domestic and transferred the now putrid bundles of subprime mortgages onto the backs of taxpayers. How they did it is going to create TMOAS or The Mother of All Shorts.

The Federal Reserve, in conjunction with the Treasury simply traded T-Bonds and T-Bills for the crap paper under the theory that trading good paper for bad paper turns the bad paper into good paper. There is a simple error in that logic. Actually the way the real world works is that trading bad paper for good paper morphs the good paper into bad paper.

Think about the basic logic of making giant mortgages to people who have no assets, no job and no credit. Banks did that and repackaged the paper and sold it to other institutions all over the world under the theory that real estate couldn't go down, it only goes up. Well, that theory blew up and taxpayers all over the world are on the hook for the stupidity of both government and banking institutions.

Then think about the stupidity of loaning money to a deadbeat for up to 30 years. We know from various sources that the real debt of the United States is somewhere between $60 trillion and $202 trillion depending on who you want to listen to. That's on an economy of $14 trillion. We have two and a half wars going on right now and the Zionist lobby both Christian and Jewish is doing everything in its power to get us involved in yet another. We stand to gain nothing from any of them except perhaps WW III.

T-Bonds looks as if they peaked back in August. For certain they are in a topping pattern and either we have seen the peak or we will have another blip upwards. Shorting T-Bonds right now is probably the easiest money to make in history. The US government has two choices, they either default on their obligations across the board or they go into hyperinflation. In either case, the value of government obligations is going to zero. And that of course is the entire purpose.

All indications are that most governments want to use hyperinflation to renege on their debts. It will destroy the world's financial system and happen very soon. It's not an issue of when the government destroys the value of T-Bonds, this isn't a forecast. They already have destroyed the value of US government instruments and maybe half a dozen people in the world get it.

While I am a firm gold bug, we have had a giant run up in gold and silver over the last month. Both act like they want a rest. I am not saying this is a top for all time but way too many Johnny-come-latelys who never heard of gold in 2001 yet now think they are experts. Nothing goes straight up or straight down. When everyone starts knowing something, it usually turns out to be false.

That was a long and somewhat convoluted way of introducing a company and a person that I have high regard for and who is about as close to a sure thing as I know of investing. That person is Quinton Hennigh, advisor to Gold Canyon Resources (GCU-V).

Many companies in the junior resource business consider geologists as interchangeable parts. A company will raise some money for a drill program, hire a few geos and go to work. At the end of the day they have some results that may or may not mean anything. Their attitude is that geos are all the same. It shows in the business model. Most juniors never come up with a minable resource. They exist to mine investors, not minerals. It's a rotten business model even if they make interesting lottery tickets.

I met Quinton Hennigh almost two years ago when I traveled to Colorado to drive with him to Wyoming to see the main project for Evolving Gold. EVG was selling for less than the cash they had on hand but Quinton was what seemed to me to make it a real buy.

If you think of George Bush, like him or despise him, you have to think incurious. He had no interest in anything outside his little sphere. I thought he was clueless and certainly had no interest in learning anything about anything.

Quinton Hennigh is the opposite. He wants to know about everything. He is curious and constantly thinking about things, all sorts of things. When it comes to geology, he questions everything. I've seen some really good technical people but to a greater extent than anyone I know in the industry Quinton is interested in more things than anyone I've come across. He used to be a schoolteacher and he's constantly sharing information. Not teaching or talking down to you as is so common but he shares what he has learned and he questions everything.

The issue is how you use someone like that. Quinton is presently the President of Evolving Gold. I think it's a waste of his time. He isn't a pencil pusher, he's a geo who wants to get projects cranking forward. There are people who are good administrators. Companies need management who can administer. But mining companies need people who can manage projects and move them forward. That's what Quinton Hennigh does best.

So let's be clear. Quinton Hennigh as President of Evolving Gold adds a lot of credibility to EVG but he's poorly cast. He should be a technical advisor, that's his forte.

I visited a company last month that uses Quinton effectively and efficiently. The company is Gold Canyon Resources (GCU-V), headed by Ms Akiko Levinson. Akiko has been associated with Gold Canyon for 21 years. Her husband was President and CEO of GCU until his death when she took over. Gold Fields, Noranda and Santa Fe Pacific Gold have extensively explored the property during those 21 years but everyone was presuming it was similar geology to the Red Lake district some 115 km to the Southwest.

Ms Levinson always believed the project was more than the short term geologists were suggesting. The brilliant Keith Barron of Aurelian Resources fame (and used to be author for 321gold) did his dissertation on the project in 1987 and suggested that instead of it being a small mesothermal gold system it was more likely an alkaline gold project similar to Cripple Creek and Rattlesnake Hills in Wyoming.

Akiko knew of Quinton Hennigh's work at Rattlesnake Hills and asked him to come on board as a technical advisor. I'm going to be very critical of most junior mining companies here. The TSX requires them to have certain staff positions filled and every three man shit-for-brains company has a President and a CEO and a CFO and a Chairman of the Board but does their accounting on an iPhone using Quicken. All of them have technical advisors, many of which have a major problem spelling technical.

Quinton Hennigh is a technical advisor to GCU. He isn't CEO or CFO or Chairman of the Board and he doesn't use Quicken. He is a technical advisor; nothing less and nothing more. His time is limited so he hired a highly qualified contract geologist named Alan Roberts from Alaska who shares similar technical beliefs with Quinton.

Alan spent the last 18 months going over all the data from the previous drill holes; he relogged all the drill core and sent out thousands of samples from core that had never been sampled because it didn't fit into the mesothermal gold model. Well, Keith Barron had it dead right back in 1987. It is a large intrusive related hydrothermal alkaline system. Once Quinton and Alan stood back and looked at the new data, they realized it was a lot bigger than anyone had imagined.

A new 6000-meter drill program began in July. Results began to appear in August and they were barn burning. One hole showed an intercept of 1.57 g/t over a true width of 153 meters. More results released in October were even more impressive with intercepts of 305 meters of 1.03 g/t.

Gold Canyon and Akiko Levinson have hit the jackpot. The stock that had been limping along at $.25 a share in August and was a pitiful $.03 a share during the dark days of late 2008 shot up to over $1 a few weeks ago.

The performance of this company is due to Akiko Levinson being smart enough to hire the right technical advisor, Quinton Hennigh and then listening to him. Without spending 40 hours a day peering at drill core, Quinton managed to find a good technical partner in Alan Roberts and steered him in the right direction. This was all teamwork of the very best kind.

In my view, Quinton Hennigh saved Evolving Gold with his brilliance at Rattlesnake and he's just pulled it off again at Gold Canyon. I just wish I had been smart enough to pick up shares back in July when he told me I should own some. My mistake.

I think Gold Canyon has another giant alkaline system similar to Cripple Creek, Livengood in Alaska and Rattlesnake Hills in Wyoming. The share structure is sill under control at 72.5 million share but the shares are no longer cheap. I suspect they are on to something very big and if you time your purchase correctly, GCU will reward shareholders greatly.

Gold Canyon is an advertiser and we own shares. We are biased as Quinton is a personal friend. I am pleased and proud to be associated with Akiko Levinson and I see a bright future for the company. The company is very approachable and you should feel free to contact them as part of your due diligence.

Gold Canyon Resources
GCU-V $0.89 (Oct 14, 2010)
72.5 million shares
website: Gold Canyon


Bob Moriarty
President: 321gold

321gold Ltd