In this month’s conversation with 321gold founder Bob Moriarty we discuss the negative investor sentiment in the junior mining and commodities sectors. Bob also believes that investor sentiment on the US stock market has reached frothy levels, and the broader stock market is set up for a crash as soon as September. We then delve into Eloro Resources’ MRE announcement and discuss why the market reaction was so negative. We conclude by discussing a company that Bob says has been generating the best gold drill results he’s ever seen in his life. Without further ado, Energy & Gold’s August 2023 conversation with Bob Moriarty…
I think the first order of business is to talk about the overall market environment and the end of August. In fact, I think you probably read the blog I wrote yesterday called “The State of the Junior Mining Sector: 2018 Redux”. And the point I made was, gold is holding above $1900. In fact, it’s actually above $1970 this morning, and companies are putting out good exploration news on a pretty regular basis across the sector. Yet the junior mining sector has had horrendous sentiment for the last couple of months. This is some of the worst sentiment I’ve ever seen. A lot of companies are cutting back and not attending conferences, they are preferring to wait and see how things play out after Labor Day.
What’s your take on this current market environment?
Well, strangely enough, what we should have done is you put out that piece under your name and my name, but I didn’t have to contribute anything because you pretty much nailed it. As you know I’m a contrarian. And believe me, when everybody hates commodities, when everybody hates junior mining companies, the sentiment is horrible and people don’t want to advertise and they don’t want to spend money on conferences, that’s the opportunity of a lifetime. We’ve discussed this literally for months, I believe the general stock market is on the edge of a cliff, and I’ve said so publicly, and we’ll know in the next month.
So the general market is on the edge of a cliff. What could push it over the cliff?
The internals of the market are horrible. And there are so many things going on, like the Chinese property fund (Evergrande Group) that’s failing, and high interest rates, and the Fed saying they’re going to continue to raise interest rates, commercial real estate and homeowners are waking up for the first time in 20 years to how important the cost of interest is on a 20 or 30 year mortgage. So there are so many internals that are collapsing that I personally just can’t see any alternative other than a massive crash.
The average interest rate for a 30-year fixed-rate conforming mortgage loan has soared to 7.31%. That means borrowing costs are now at the highest level in 23 years, which has caused the demand for purchases to plunge to the lowest level in 28 years. In fact, mortgage purchase applications are 30% lower than they were one year ago, and applications to refinance an existing loan have cratered by 35% from the year-ago period. An all-time record-high bubble in real estate prices, combined with a surge in mortgage rates, is a bad omen for this economically crucial sector of the economy.
Now, what do you think the ever-loving response from Wall Street will be to fix the dysfunctional and frozen real estate market? Well, if you thought it would be to allow home prices to fall to a level that can be supported by the free market, you would be wrong. In a dramatic illustration that we have learned absolutely nothing from the previous collapse of the housing market and Great Recession circa 2008, the leading real estate marketplace company, Zillow, has launched a new program to help people buy a home who have no business taking out a mortgage in the first place. The real estate company’s Loan division is offering mortgages with a 1% down payment!
Zillow Home Loans’ senior macroeconomist Orphe Divounguy had this to say about the program: “For those who can afford higher rent payments but have been held back by the upfront costs associated with homeownership; down payment assistance can help to lower the barrier to entry and make the dream of owning a home a reality.” According to Zillow, this program will reduce the need for potential home buyers to go through the hassle of saving for a downpayment. Isn’t that nice? The cherry on top of this poop Sunday is that the eligible credit score to buy a home with just a 1% equity stake is 620. A home buyer with a 620 credit score is, by the way, a subprime borrower.
The conclusion is as clear as it is sad. Our government and financial system have set the economy up for another collapse of the real estate market. The Fed’s QE and ZIRP policies, which were in place for 11 of the past 15 years, have caused the home price-to-income ratio to soar to a record high. Yes, home prices are now far above the previous record set in 2006, both in nominal terms and in relation to incomes.