Mike Gleason, Money Metals Exchange: I'm happy to welcome back our good friend David Morgan of TheMorganReport.com and author of the book The Silver Manifesto. David it's a
pleasure to talk to you as always, how are you?
David Morgan, The Morgan Report: I'm doing well, thank you for having me on your show.
Mike Gleason: Well to
start out I'll ask you to comment on the market action here in 2016 so far.
Now, gold and silver have done quite well, we had gold advancing on weakness
and concerns in the equities markets earlier in the year. In March, we've
seen it continue to do well even as stocks rebounded from a strong employment
report. One would think it's a bullish sign when we get good price action
even with supposedly negative news for precious metals coming out. So give us
your thoughts on the market action so far this year, David, and specifically
why do you think the metals have done so well here in the early part of 2016?
David Morgan: Well a
couple things, one to quote The Economist magazine, which is a pretty
well-known and revered publication. They stated that, "This is the best
start of gold mark in 35 years." On top of that, the main reason is
because the overall equity market has basically gone 20% down. From a
technical perspective, you have a top in the stock market in the United
States and other markets around the globe. So the most negatively correlated
asset to equities is gold itself, not gold stocks.
That's basically it. I think it's pretty simple. I don't
think you need to look much further than that. I would add on another real
key element to knowing that things are finally off the bottom and going to
continue, backing and filling, up and down - but nonetheless, the bottom is
in - is the volume. The volume is substantial. The amount of flows into the
gold ETF is the greatest that it has been since 2009, which is after the 2008
crisis but the first one that was off the bottom were the precious metals.
Most of us know, or at least those who listen to this
show know, that gold basically bottomed in 2008 along with silver. Silver
went from basically the $9 level and over several months made it all the way
to $48. Gold bottomed, and I forget the number, but it went up to $1,900. Are
we going to repeat that? I think in the long-term yes, but in the short-term,
gold's ahead of silver.
Mike Gleason: That leads
me right into my next question. We do have gold outperforming silver so far this
year, which generally we don't see when the metals as a whole are rising.
That means that the gold to silver ratio has actually even gotten a bit
higher, sitting at about 82 to 1 as we're talking here. Are you concerned
that silver is lagging gold a little bit?
David Morgan: I am
concerned. I believe that we have a non-confirmation. I like to see that the
whites outperform the yellow and that non-confirmation does concern me. I
think that we want to see silver over $16 and then things will proceed
upward, probably even more than they have so far. In other words, silver will
either play catch up or it won't. If it doesn't, it doesn't mean gold won't
continue (going up). What it does mean is that there might be some more work
to be done.
As far as how these markets come off of bottoms, usually
what happens is the big money, the smart money moves into like the large gold
stocks, and they have. We've seen very big volume into the large top tier
mining companies, and they have moved substantially higher on a percentage
basis. You've seen that across the board, you haven't seen those smaller
stocks come up as strongly.
Silver of course is a subset of gold. It's 85% correlated
with gold. And the silver stocks have performed well. So we're really just
kind of keeping our eye on silver. It doesn't mean much other than we need to
pay attention because it could indicate that again, we might see kind of a
pull back, and we might come back all the way to where this launch took
place. Technicians can always pick their sweet spot. I'd say about the $1,200
level. I put that out for our members that I was long gold at $1,200. Obviously that's
paying off well so far and of course I've put my stops up, so I've protected
the profit.
Mike Gleason: Certainly
the mining stocks do quite well, you eluded to that a moment ago. They seem
to be leading the bullion a little bit. Is the worst behind us in the mining
industry or is there still more carnage coming?
David Morgan: Great
question, and of course you have to really answer it correctly, you have to
answer on a case-to-case basis. But from a broad brush perspective, yes the
worst is behind us for the miners. There are of course case-by-case basis
that companies that won't make it that need either a merger and acquisition
type of situation that they have assets of value or they just can't get loans
at this point in time to continue their projects.
And that means that there will be some even though that
from, again a broad perspective things have bottomed on individual cases,
that there may be some favorites out there in the lower tiers, not to
mid-tier so much as the speculative tier that may not make it even though
gold and silver look to continue onward. Again, I can't give a specific
answer. I will give the fact that for example that we had SVM as a short term
trade for our members, the members of our website. And that stock doubled and
that happened while silver basically did very little and gold was just
starting it's move.
So the equities can really take off. Silver sat there
from what you said, just under $14 to not quite $16, and I don't know what
the percentage is, 2 bucks on $14. 100% or a double on a silver stock, that's
a pretty liquid stock, is definitely an outperformer to what the metal itself
has done.
Mike Gleason: We have a
mutual friend, Steve St Angelo who runs the fantastic SRSrocco Report website, he's a bit of a peak silver
guy. Where do you come down on that? We've seen declining production coming
from places like Mexico, a huge silver producer, and other countries that
produce a lot of silver, certainly here in the States. Looks like our supply
is dwindling, mine production is dwindling. Where do you come down on that?
What are thoughts on the potential for peak silver?
David Morgan: Well, first
of all, Steve and I are pretty close and we do talk I guess every month or
so. I don't agree with him totally. Again, it's an economics situation, so if
you look at it from today's perspective, when you're looking at sub $16
silver, that statement could look very very accurate, but if you got to $40
silver again then all the dynamics change. Because what's very uneconomic
today would become very economic at those prices.
If you want the details, what we really think, we did a
whole chapter on it in the book The Silver Manifesto. And we go
through and based on our work and our projections on where we think the
metals are going, we think that the peak silver scenario is probably a few
years out.
Mike Gleason: Certainly
though, and I guess you hit on the point that at sub $16 silver, there is a
finite supply of the metal out there, meaning the prices can stay this low
forever and there still be supply, is that basically what you're saying?
David Morgan: That's
basically it. If you want to be a super deep thinker, you could argue that
it's never going higher than that, and if it didn't a lot more mines would be
out of business. I don't take that view. It doesn't necessarily mean that the
price has to go higher, but it pretty much is a strong indication that it will.
Mike Gleason: Negative
interest rates are in the news both in Europe and now here in the States,
which is obviously fueling the metals markets, gold in particular. Negative
interest rates on cash means that gold and silver actually pay a higher rate
of interest. What are your thoughts there, on the Fed, the likelihood that
they are done with the interest rate hikes or even experiment with negative
rates like central bankers are doing over there in the EU?
David Morgan: Yeah, tough
question, and I will answer it. In my views because this is opinion and I'll
give you my thinking. Obviously the negative interest rate scenario is one
that I don't think the central banks have really thought through very well.
The idea, first of all if we back up and look at all those with debt problems
say, "How are we going to solve this debt problem?" "Oh,
borrow more money and then increase the debt load." That was basically
what took place during the financial crisis with Hank Paulson that put out
this TARP situation.
Then we go to QE1 and we add more debt to our debt
problem and that doesn't work so what we should do now is add even more debt
to the debt problem, which was QE2, and that's when silver took off from $26
to $48 because people anticipated inflation in the marketplace on Main
Street, not just on Wall Street. It didn't take place on Main Street, but it
did take place on Wall Street, so the market backed off for that one and
several other reasons.
So now we're in a situation, well if adding debt to debt
doesn't work, what we need to do, and if a zero interest rate policy, let's
just take interest rates negative and that's certain to work. And of course
my view of certain not to work. As far as coming around to the question, the
U.S. has already raised interest rates on a very very modest level. I think
it was done more as a trial balloon more than anything else.
I'm still of the belief or the opinion that the United
States will not go to negative interest rates for a while, if ever. They may
get there, but I still think that the reason that these interest rates are
being raised by the Federal Reserve is to provide strength to the U.S. dollar
because what's really happened as my friend Hugo Salinas Price pointed out
recently in one of his articles is there's been a massive exit out of the
U.S. dollar by the Chinese, something on the order of a trillion dollars.
And that didn't move interest rates, which is almost
impossible. Anytime any market creates freely and there's a massive buyer, a
massive seller, it will change the price and interest rates is the price of
money. So it certainly should have changed the price and it didn't. There's
other interviews you can find on the internet regarding the mechanics of that
and why it did or didn't happen. My view is that the U.S. Fed, although
they'll never say this publicly, is concerned that they have to keep the
dollar game going as long as they possibly can. So to make it the strongest
kid on the block by keeping interest rates positive or perhaps even raising
them again somewhere down the road, perhaps once again before the end of this
year will give the illusion that the dollar has strength and the illusion
that our economy might be doing better than other places on the globe. Which
is really a fallacy, but nonetheless, perception is everything in today's
Orwellian society.
So I have a different view, Mike, I think they're going
to stay the same or even perhaps increase again. I'm a very very lone wolf on
this. I don't know many people that are saying what I just said, but that's
my view.
Mike Gleason: Switching
gears here a little bit, we've seen a big drop in the registered stocks of
gold in the COMEX and a seemingly ridiculous situation where more than 500
ounces of paper gold are backed by a single ounce of physical gold in
exchange warehouses. What do you make of that? Is there any reason for alarm
there? This is something that's been talked about for a long time. Could we
be at a tipping point as to the ability of the future's markets like the
COMEX to remain a trusted price-setting mechanism for physical gold and
silver?
David Morgan: Yeah, great
question. I wish I had an absolute for everyone. First of all, there's a
considerable concern. The actuality of it taking place I think is rather low
for a couple of reasons. One is if you read the contract that everybody
signs, well they're just an individual investor and trade, one contractor at
a time or a mini contract. Or they're a huge institution that trades
thousands of contracts at a time or even a central bank that
"hedges" in the thousands upon thousands of contracts at a time.
The rules are what they are, which means that you can settle in cash.
So if there were a stand-for-delivery mechanism, which
exists, AND it was above and beyond what the physical amount of gold in the
CME is, there would be paper settlement. And I'm sure that the mainstream
press would probably spin it to where they would make it sound as positive as
possible, something along the lines of, "Rogue trader stands for
delivery, contracts settled by law with the price." And they won't say
paper price. And "how dare they stand for delivery when everybody knows
that a gold contract is just a paper mechanism to set the price and nothing
to do with the physical demand." Which of course is true and false.
Less than 1% of all the trading ever results in standing
for delivery and taking physical metal. Nonetheless, over the years it has
taken place. And the amount of gold that exists on the CME is pitifully
small, so certainly someone could stand for delivery or a few people or
entities and really cause some havoc. But the next question is this: who
would be willing to do that? And the answer is I don't know. But most of the
bigger players would be unwilling to do it because the negative press would
be so great and probably the phone calls that you would never hear about in
the public domain, about you know, it's not going to happen, Bank X or hedge
fund Y or money manager Z. We're not going to let this happen.
I am suspect, and I hate to sound so cynical, but I've
been in this industry for 40 years and I've seen a lot of things. You look at
what happened in the silver market back in late 70's, and if you read the
book Silver Bulls, which I have several times, written by Paul Sarnoff, you
get a pretty good idea of the day-to-day what took place during the Hunt
brothers situation and what kind of conversations took place.
On a personal level, I would love to see it. I would love
to see someone stand for delivery on that pitifully small amount of gold and
see what the heck happens, but is it going to? I don't think it will Mike. It
could. Again, I'd like to see it happen, but the outcome is not quite as
optimistic, and I could be wrong. This purely my opinion, but I think if it
were to take place, first of all, I just don't think it could. I think
there'll be too many roadblocks, but let's say that it did take place.
If it were to occur, it'd be what I just said, I want to
repeat slightly that the spin on it by the mainstream would be severe and
they would try and make it look as if these gold bugs were causing problems
and these speculators were putting misery in the markets and on and on. So it
could have, to the general public, more of a negative outlay that it would be
to us that understand the financial markets and how important honest money is
than we might like to think.
So I would really want to think that one through. We just
have to wait and see what takes place in the future.
Mike Gleason: Very
interesting take on all that. That's pretty insightful. I think you're
probably right. I think we see it much the same way. But it'll be interesting
to see what happens there. Well as we begin to wrap up here, David, how do
you envision the year playing out in the metals? Do we get follow through
after the strong start this time because in 2014 and 2015 both, gold and
silver did well in January and February only to fall off to close the year
lower. So will 2016 be a different story? Will we see a strong performance in
the metals continuing this time? And if so, why do you believe that will
happen?
David Morgan: A great
refresher for everyone, yes I think we'll have a good year but not a great
year. I think the reason being is what I outlined. The biggest push for gold
is a negative equity market. It's certainly in the cards. If you look at the
rollover, the moving averages, the chart pattern, everything that I know
after years is the fact that the stock market looks as if it's peaked here.
And if that's true, then you're going to see more and more come into the gold
market. Plus, we have such a big start with the gold market, best in 35 years
and volume. In other words, more and more are coming in the gold sector,
which is primarily the large money which primarily invest in gold through the
paper system meaning the ETFs.
So I think we are on our way. I don't think it's going to
be substantially huge. I think it's going to be good. And I do think this
year finally we'll see higher prices at the end of the year than the
beginning of the year. My forecast for The Morgan Report was you could
have all of this assured back in January and hope you will get carried
through in like the middle of March or maybe even April, middle of April,
which I still hold to.
I think there will be the pullback summer doldrums type
of thing. A lot of these companies and the gold market and probably the
silver market will come off wherever they peak but they will be higher than
the end of the year last year and then they'll just kind of wallow around,
and then I think you will see a final finish for 2016 that's positive like we
usually see. The seasonality and the precious metals is usually that you get
a pretty good lift near the end of the year, and of course that has not been
the case as you pointed out for the last several years.
In fact, in a few of those years, we got the lowest print
of the year on the last trading day in the market. Going back to the CME
question, most of these traders take pretty long holidays and they just don't
trade. They close their positions and they're free of any obligations, and
they're off on holiday. So the trading platform is extremely thin, which
means there are very few participants, which means it's very easy to move the
market either up or down. And most of these guys choose to move it down, so
you can get a very low print at the end of the year for gold or silver.
Then the mainstream financial pundits can say, "My,
my look at gold close at a new law this year," Of course it's all true,
but it's easy to do because of the way the market is mechanically set up.
Mike Gleason: The heavy
volume that we've seen there in the ETFs, it will be interesting to see if
that's continues. Obviously that's a good sign that there's maybe more
interest among the gold-buying community.
Well it figures to be quite an interesting ride this
year. We have the contentious presidential election, Fed backpedaling on
interest rate hikes, a global economy that seems to be rolling over, and who
knows what else. There are a lot of things to keep an eye on, and we always
appreciate your thoughtful analysis here on the Money Metals podcast. Now
before we let you go David, please let folks know how they can follow you
there at The Morgan Report because this figures to be a great time for
people to dive deeper into the metals.
David Morgan: Absolutely.
I would like to suggest to everyone that we have, in fact, me, I basically
did it all on my own this time although I've got talent fairly deep, a new
report called "Riches in Resources." And the "Riches in
Resources" report is like eleven pages long and it will provide good
information to you about the big picture on down, which means you're going to
learn from the beginning about what happens at the end of the age of empire
and what the progression is to a state of empire and then it moves from there
down into the resource sector, then into the gold and silver story, the
dollar story, the debt problem, and then it moves forward into the mining
sector and what we do here at The Morgan Report. It gives you
opportunities to make money in this market, not only through a subscription
on The Morgan Report as a website member, but also we just give you
some freebies on how you can make money in that report. Just a very, very
easy situation if you are inclined to purchase gold and silver.
So we just finished it. It's going to be available. It's
a double opt-in. Go to TheMorganReport.com. Go to the right hand side, get
your pre-special report, Riches in Resources. All you need is a first name
and your primary email address and we'll send that to you in your inbox.
Mike Gleason: Well great
stuff, David. Thanks so much. We really appreciate it and hope you have a
great weekend. Take Care.
David Morgan: Thank you.
Mike Gleason: That will do
it for this week. Thanks again to David Morgan, publisher of The Morgan
Report. You can follow David, affectionately known by his peers as the
Silver Guru and for good reason, just visit TheMorganReport.com and that will
allow you to get the fantastic market commentary, mining stocks analysis, and
other great info he puts out there on a regular basis. Again, it's
TheMorganReport.Com, be sure to check that out, and obviously The Silver
Manifesto, the fantastic book about all things silver that David and Chris
Marchese wrote is available for purchase where books are sold, including at
MoneyMetals.com.
