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Daniel: Greetings. I thank you for joining me at FutureMoneyTrends.com. I’m here with a good friend and mentor, David Morgan of “The Morgan Report.” You can get weekly updates by him on both his opt‑in newsletter that is free, and a paid newsletter service if you are serious about commodity investing and into furthering and expanding your education.
David taught me something very important. He’s not a know‑it‑all. He’s a learn‑it‑all. You’re right there with David, looking over his shoulder at the markets.
David, thank you so much for joining us.
David Morgan: Daniel, my pleasure. Thank you.
Daniel: David, I wanted to start us off with what’s going on with silver and gold right now. I try to buy about 10 percent. Whatever I make, my earnings, I usually put 10 percent to gold and silver. I have this own internal rule. I try to wait for days where the metals are down.
I’ve had the great pleasure of buying silver at $19, and here we are at $18. Should I go ahead and buy at $18, or is a further drop, something more significant on its way?
David: It’s always tough. Bottom picking is something that I’ve done reasonably well, but I’ve been much better at picking the tops than I have the bottoms. I’m on record. I’ve said the bottom is in. I said the bottom occurred almost a year ago. The 28th of June 2013, had an intra‑day low of 18.17. It was a key reversal date.
A key reversal is when there’s a down move like that, making an all‑time new low. All‑time, meaning within the day, week, year, month. In this case, it was a couple of years, that low. Then it changes and closes above the high of the previous day. It closed at $20.06. It was almost a two‑dollar move in one day.
Key reversals are called that because they are key. They happen very rarely. They usually show an exhaustion bottom, or spike low, which is how I like to refer to it.
Since then until now at the time of this interview, that low is the low. However, to be consistent, I’ve given my paid members fair warning on this, so I’ll say it publicly, if we close under 19 three times ‑‑ it doesn’t have to be three days in a row, although that’s what has taken place ‑‑ be very concerned that that $18.17 level will be tested.
Is it going to be tested? Don’t know. The market knows. The manipulators, whoever, “The market,” I’ll say. What we don’t know is, one, will it be tested. There’s a high probability it will. That’s number one. The probability is 80 percent that that level will be tested.
The second probability that we don’t know is what happens when it gets there. In other words, will that low hold or will it not? I think that level will be tested. I don’t see it going much below that. Even if it does go below that…
Let’s take a thought experiment. Let’s get a spike low, David. How low could it go? The answer is, at the end, no one knows. It could go to 16, as an example.
If it were to go to 16, I’m very strong on what would happen. It would get to $16 and maybe make two or three trades in futures market. You wouldn’t be able to phone up a coin dealer and get coins at that price, and then sell at the close of the day maybe at 18. It would be very similar to what I just described happened about a year ago. It would be an intra‑day low that was a paper play only. You wouldn’t be able to take action on it.
I don’t see a new low happening in the manner that we have been in this last many, many months, where we’re grinding and grinding and grinding along sideways. Up a little, down a little, up a little, down a little. Maybe the overall line is slightly down, but it’s grinding sideways to slightly lower, day after day, week after week.
That is not the kind of bottom that you’re going to see if there is a new bottom. The kind of bottom that you’re going to see if there’s a new bottom is going to sharp. It’s going to be fast, it’s going to be immediate. It may come up. It might come back up to that line and grind on for a while, but you’re not going to see it go down to 16 and stop at 16.
I don’t want to run this interview, but you would ask me, of course, “David, how can you be so confident or how can you be sure why is that going to be like that?”
Daniel: David, looking at the length of this bear market, you’re talking about a possible spike down for the final bottom. Is that what historically happens with other bear markets, not just silver but outside of silver? Looking at silver, the other bear market that’s been over that past 10, 20, 30, 40 years, are they normally this long?
I’m looking for that margin of safety for people who are buying silver right now. It’s like people who are buying stocks, for example. This bull market is old. It’s getting a little late in the game to buy stocks for sure. Is it now so late in the game on the short side for silver for anyone to short silver where silver has been in a bear market for a very long time?
David: Yeah, I think it would be extremely detrimental to short silver, at this point, as a speculation. If you’re a coin dealer, if someone puts a big order in at today’s price, then you have to hedge it.
That’s not shorting, that’s just covering your position so you’re neutral. You’ve covered what you’ve sold at a given price. If the price drops, you’re protected. No, I wouldn’t dare short the market here.
Thinking about markets, it’s pretty basic but even what’s going through the financial school and economics, and all that. True, I really worked in the markets for some time.
It really didn’t dawn on me on how markets really work. I’m not saying the audience really doesn’t know but as a brief review, what you’re really saying when you have a spike.
How much $16 silver is available? The answer is, not very much. [laughs] The reason is that it’s well under the cost production anyone that would want it for manufacturing that’s half way awake would jump on that kind of thing.
There’s not that huge group out there like the Silver Users Association, for example, waiting to see a certain price before they pull the trigger on that. It’s just that those events are rare and they usually don’t last long.
You asked me about general markets and that spike close. I look at all the markets and have for years, but I really focused on gold, silver, the bond market, the dollar, and interest rates, the last several.
The spike loads are really typically in the silver markets. I was asked to write for “Futures Magazine” some time ago. I forget the exact name of the article but it was “Spiked Again,” or “Don’t Get Spiked,” or something like that.
I used the word “Spiked” in it. I sent a chart because “Futures Magazine,” is all about charts.
I use them although my newsletter has some in there, it’s not really a technical letter, although I do some technical analysis but that’s a definite advance service.
I wrote about it and said how silver typically spike loads but it doesn’t every time. In all markets, some kind of time had shown that, some of the bigger markets like, let’s say, huge stock or huge company that has a huge flow like IBM or something, you’re not going to see that type of thing except in panic sell, like in 2008, you’ll get a spike load.
Almost every stock out there because the overall crash was a financial crisis, as we referred to it. Generally speaking, a lot of markets are normally good at that.
Silver, since it’s a thinly traded, small market, you can sell a lot of paper, move the market in either direction. You could buy a lot of paper and move it up or you could sell a lot of paper and move it down. Then, you’ll see these spikes.
It’s actually historically fairly consistent, not always. We have had times like now when this bottom certainly, if we come up from this bottom, no one’s going to say, when we come up from this bottom, let’s say we come up without breaching that 18.17 that I keep referring to.
Let’s say we just move up from here. Let’s say that is a low, it holds, and we come up, and at the end of the year, we’re at $26 silver. That is going to be a long protracted bottom. I would never argue with that.
If someone was having a glass of beer in a bar and said, “Oh, did we get a spike low?” I would say, “Yeah. I would say we did.” I would refer back to the universal day.
That is talk, really. The main point you want to know is, is it going lower. The answer, we don’t know. The only way to approach it is logic. The logic is that there’s a pretty good probability that that load will be tested. There’s some probability it will go lower. Your approach should be to do what you outlined at the beginning of this interview. Continue to buy.
Plan to buy 10 percent June, 10 percent July, 10 percent August. By the way, historically, August is the low for gold. It’s not always. It’s a strong season now in the gold market, silver too. In fact, there’s a trade that I usually put on that happens in August, a long term position trade is the way I like to trade.
It’s 85 percent probability. It’s usually somewhere in August and hold into March.
Daniel: David, when it comes to the mining companies, are you seeing…I know expiration is definitely been but back. As far as, is anybody reducing production in their actual mines, maybe delaying the production of a mine. Because essentially now they’re just turning this stuff out to sell it at a loss, right?
David: A lot of them. I just read the update from Pan American Silver, and I could get it out here on my desk, but it was like $19.40 I think was their all‑in cash‑sustaining cost, and that’s a dollar less than it was a year ago or so, so they’re very honest about their all‑in costs.
At $18.91, they are unprofitable right now, so yes, they are mining at a loss on a company‑wide basis. There may be some mines that are doing better than that and others worse, but on a company‑wide basis, they’re actually losing money.
It’s very standard in the industry when prices are right around the total cost, the all‑in sustained cost, that they will keep mining, and the reason is that it’s better to keep the business going at a slight loss or a manageable loss, I guess you could put “manageable” in quotation marks because the industry lost over a billion dollars on a whole last year, but it’s easier, believe it or not, than to shutdown and start-up again.
There’s all kinds of penalties for shutting down and a lot of labor agreements, they have to give them severance and all that, and the mining industry is sort of like an automobile. You don’t want to just turn it off and let it sit for too long. If you do that then it’s very difficult to start it back up without all kinds of problems, so it’s a bunch of mechanized stuff that needs to be working, basically.
What they have done is they basically have gone to a low rate of production, or standard rate of production would probably be a better way to state it, where there’s no overtime, no three eight‑hour shifts, forget weekend work, that kind of thing, depending on the mine; I’m speaking in general terms here.
There’s exceptions, but generally speaking, they’re just going to plod along and try to keep their losses low as possible until the market turns around, and the longer it goes in this direction then the day of reckoning comes up. At some point the shareholders, the board, combination thereof says, “Wait a minute. We’ve lost money for X amount of quarters. What are we doing?”
I don’t think that’s the issue right now. I think that we’re going to meander on for another three months or so through the typical summer doldrums and then I think the market is going to start to come up.
I’m not super optimistic about how fast the market is going to come back barring a black swan event, which of course I don’t rule out because there’s so many out there flying around that something could happen at any time, and that’s why you really want to be early and you don’t want to focus on how low it can go. You want to focus on whether you have the right amount or not and in the right form.
Daniel: On the flip-side of it, one thing that does concern me in the back of my hand, and there’s always going to be fear when you’re trying to buy low to sell high later on, but the Dow Jones and the S&P are at highs, and this thing has gone on now for over five years.
The only thing that keeps hope alive that it’s not going to crash is that even MarketWatch.com and some of these commentators are forecasting something. Now it’s like, “Well, if the media is forecasting a pull‑back then it’s definitely not going to happen this year,” but that’s kind of a concern out there like, “Well, if the stock market pulls back, are we going to see the metals and everything else pull back?”
Then I guess to tag that along, is it possible, have you considered that the metals are going down because they’re forecasting deflation?
David: That’s two questions. The first one is, yes, the metals usually sympathize on a big market sell‑off. The reason for that is there’s far more “money” involved in the paper paradigm than in the physical reality, so all of these hedge funds, which are largely out of the market, by the way. But hedge fund, money managers, mutual funds, all of this stuff, the market dumps, they’ll sell anything that’s liquid.
If gold is doing a little better than the market overall, they’ll sell it to margin calls. There’s lots of reasons why you’ll see the gold equities go down with the general market, and you also usually see gold and silver do the same thing.
Usually, it’s short‑lived and they’re the first to turn around. The most negatively correlated asset to the stock market is gold, not gold stocks, and that is something that usually goes the other way, but not immediately, not during a sell‑off. Something just to take a deep breath and just hold tight on what you have, or buy more if you’re brave, and know that gold is negatively correlated to this general equity market and that, over time, it will do far better.
I think Mike Maloney does one of the best jobs on that, if you look at one of his series, I forget which one, but he shows the stock market going up, up, up, up, and then gold going down, down, down, down, and then gold going up, up, up, up, and the stock market going down, down, down, down.
Then he puts these three or four charts together and shows if you bought stocks and held them to here, and then bought gold and held them to here, and then bought stocks again and held them to here, and bought gold, you would make a lot of money. That’s something I addressed with Jim Puplava years ago.
Coming back to your question about deflation, yes, it could be. It could be a signal to deflation, but Jim Puplava did a great job of looking at that one summer. I don’t speak to Jim personally much anymore, I kind of miss it, but this was many summers ago, and he looked…
What he discovered was that there has never been a deflation in the fiat system. All the deflations have been with Global’s of money of the realm, so to speak, so this would be the first time where paper trumps gold, and that’s the point I make.
I know there’s good analysts out there. I know there’s one in particular that’s written several books on deflation. As an Austrian economist I really shouldn’t say that it can have inflation and deflation at the same time, but common sense kind of shows that.
You’re going to have deflation if you want to call it deflation. It’s not a monetary supply contraction, which is the true definition, but you can see lowering of prices and housing as an example in increased prices for foods, and that doesn’t really mean there’s deflation and inflation at the same time, but the common layman would say, “Well, yeah, what is going on?”
I don’t think it’s portraying a deflation area scenario in a big way. I think it’s alluding to or showing a deflationary mindset or situation currently that we are experiencing. I think there’s deflation in some areas and there’s other signs that the real inflation, usually John Williams’ Shadowstats shows an inflation rate roughly at nine percent, but we’re in a mixed bag, and this is true of a hyper‑inflationary environment or a deflationary environment.
There’s a lot of similarities. There’s high unemployment. There’s high uncertainty. There’s a mixed bag of prices.
In the Depression, prices came down, down, down, but people couldn’t afford them anyway because they were broke. We’re in a similar situation here, maybe not necessarily food prices, but maybe the electronics and technology are coming down, down, down, down, but I was in Best Buy recently and there were less customers in a Best Buy on a Tuesday afternoon than there were Best Buy employees. I was sort of shocked.
Daniel: The U.S. economy is ‘fake it till you make it.’ It seems at least the people who could change something in the manipulated data, they seem to be perfectly fine with the U.S. monetary schemes.
No one is dumping the dollar or doing anything crazy out there like that to show the emperor has no clothes. David, I want to ask you one last question in closing. We’ve got about two or three minutes left. I’m excited.
There’s a huge opportunity in the metals. There’s a huge opportunity in the mining shares. If you have the courage to buy low, this is it. We’re definitely buying at extreme lows. I want to basically plug your paid member’s area.
You guys have the best research when it comes to finding the mining stocks. The exciting thing for me right now, and I hope everyone is listening, is that you do not need to buy the speculative plays to make a lot of money over the next few years.
You can actually probably buy some of the safest mining companies in the world because everyone has just been crushed. Very safe miner that I know of, I’m not going to mention the name, it’s gone from $26, and now it’s roughly $8.
I just wanted, if you could share with us, you don’t have to mention the name so people have to actually sign-up at your newsletter to get the information, but if you could just let us know about maybe one company that you have listed for your paid members, without giving us the name, and just describe maybe a scenario that is so ridiculously bullish that, we’re looking for extremes.
An opportunity for people to where they can expose themselves to the metals, but really not take much risk when it comes to business risk. Not talking about volatility but the business is sound and this company is going to do dramatically better than the others when the metals turn around.
David: There’s one in particular that I hold. It’s a royalty company for a lot of reasons because there’s a lot of costs that you know on your balance sheet on your income statement ahead of time.
You know, for example, what you’re going to be paying for an ounce of silver. I would say you don’t care but you don’t care nearly as much as a primary miner or a base metal miner what the costs are because that company it depends upon the cost.
This other one doesn’t. It’s already got a contract to buy silver at a certain point. You’re in a situation where you’re guaranteed a certain profit.
These royalty companies, one in particular, it’s just loaded with cash. They’re able to buy up assets that are at distressed prices. They just keep building a balance sheet.
Year over year over year. It’s one of those kind of investments that you basically buy and hold for the long term. When I started looking into investing when I was 16‑years‑old, I traded a lot and I still do.
To find those type of investments and giving credit to Warren Buffett ‑‑ I’m not a big fan. I wrote an article. I wrote a white paper about Buffett versus his father. His dad was a big sound money guy but Warren isn’t. Back on point, if you could just compound at 20 percent, you could get very, very wealthy in a not very long period of time.
People in the mining industry, especially that do the speculative stocks, we do some, get the idea that unless you’re getting a 10 bagger, you don’t know what you’re doing type of thing. Those days are gone, Daniel. Those days are over.
There will be some like that but it’s at the very top of the market because there will be a lot of smaller companies that come in to just ride the final wave. The way to do it is to find a good strong royalty company with a lot of cash that’s their costs fixed, and is making money in today’s market.
We have several of them on the list. Buy those and wait. Wait until the bottom is definitely in and the market starts up and starts up strong.
Yeah, you’ll be paying higher, but you’ll be assured of a strong market. You’ll be almost guaranteed. I can’t use that word. Almost guaranteed that you’re getting it at the right time even though you’re paying a little higher but you’re paying safe where you’re not going to lose.
People love to buy something. If you really think about it, don’t care too much what they paid for anything as long as whatever price they paid, is higher than the next day. [laughs] They really get upset if they buy it and it’s lower the next day.
Daniel: Just morganreport.com or silver‑investor, and you can find out about these stocks. It’s really just look at these things historically or just looking at a chart, anyone can see that this is the low.
As a mutual friend of ours, Rick Rule says, “In order to sell high, you got to buy low,” but nobody wants to ever buy low.
David Morgan, thank you so much for your time. We really appreciate it.
David: My pleasure, thank you.
Transcription by CastingWords