Gold and Silver Rise Sharply on Tight Physical Supply

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Welcome to Money Metals Exchange's weekly market wrap podcast. Helping precious metals investors during these treacherous times. Now, here's this week's market wrap with commentary and analysis from the fastest growing precious metals dealer in America, Money Metals Exchange.

Mike Gleason:

Welcome to this week's Market Wrap Podcast, I'm Mike Gleason. Today, we welcome back our friend and colleague, David Morgan, editor of the renowned Money, Metals, and Mining Newsletter to get his take on some interesting market action in the precious metal sectors these days. David, thanks for joining us again.

David Morgan:

Mike, my pleasure. Thank you.

Mike:

I've got a number of things I want to cover with you today, but I want to start out with getting your thoughts on the recent move we're seeing here. As of this interview, silver has advanced some $2 in about a week's time, so what do you make of this David, because generally we don't see significant advances during these summer doldrum periods, generally speaking, of course? Do you think this is a false breakout or do we finally have the makings of a much anticipated reversal to what has been kind of a rough year for gold and silver overall?

David:

Well, rough year, rough two years actually as you know, Mike, and especially since silver broke down below $26 and gold below the $1,550 level. I think this is it. For my paid membership, I put out a buy signal recently and we have a seasonality that is has an 85% accuracy that I also gave to our members. That seasonality trade, again, has an 85% accuracy. I think this is a time, the best time to buy gold is normally in August and the best time to buy silver, as you see, is in July or August. This is probably a good opportunity, again, to repeat your question, is this it? Is it kind of a false breakout? This is at least a tradable rally.

For me to be a tradable rally, I want to see a 20% move in the underlying commodity. In silver, let's say, it broke at $20, a 10% move is $2 and so 20% move is $4. Some of them were like 20 to 24 as a minimum. I don't think we're going get right up to $26 right away. I am still forecasting the $26 level by the end of the year. I expect to get a good tradable rally here and then probably a pullback, probably, not to the low that we saw when I called the bottom. I didn't do it on that day although I alluded to it, but I did call it about a week or two later and now it's a key reversal on the 28th of June. All of July, we consolidated around the $19.50 level.

Then as you well know we had broken above that substantially now. The silver is showing good strength but yeah, this is the real deal. Is there still time to get on? Absolutely. I mean, I'm going to stick to what I said probably a year ago if you could buy under $30, do it. Well obviously, we've got under $20 for small amount of time, but long term, buying it $30 and I know that there are a lot out there that bought at $30 and they probably bought fromMoney Metalsand they're not happy because we're just $22 level right now. If you go out four or five years and you can tell you friends and colleagues you bought silver at $30 you will be very happy to announce that price from the aspect of where we're going to be, again, four or five years out.

Mike:

We had you on right after that reversal you mentioned there in late June. I remember you talking about that and you definitely nailed it. That was kind of a key point. We went sideways there for the better part of July, but it looks like we could be seeing some good action here going forward.

Kind of expanding on that, talk about some of the key indicators that you look for when you're sizing up a rally in the metals. I've heard some people say they want to say silver leading the way, others say the movement in the mining stocks is a good indicator and is what you really need to look at for whether the breakout can be confirmed or not.

What kind of things do you look for in your analysis because you obviously follow this as close as just about anyone and have been for a long time? I know you've seen it all.

David:

Well, I pretty much seen it all. It's probably something, or one or things that I haven't. With over four decades in this market and studying technical work and fundamentals and all that goes with it. I've simplified things a great deal. I mean, you want to get started in technical work, I would say by John Murphy, "Read it. Buy it and read it." He's the founder of stockcharts.com. It's one of the services I used and what I use the most often when I do my membership updates. For example, one of the favorites with MACD and if you go to Wikipedia and look it up, it's based on historical data and it's a moving average of two that are converging, diverging movement average.

It may have some merit. Basically, what I've learned, again, is to simplify. Specifically, I like to see, one, the mining shares leading, but that's not an absolute but that's normally what happens. I like to see the mining shares out perform at about a 3 to 1 ratio. In other words gold is up 1% as we're doing this interview. One of the main index is up about 4%. That's a 4 to 1 ratio. I don't have to see it every day, but I like to see that. In other words, the shares are starting to finally respond to higher metals prices.

Another thing is silver leading. That, I like to see. Not necessarily leading by price action. In other words silver is making new highs before gold makes new highs, although that is a factor but leading as far as, again, percentage gains. If gold is up on a nice rally, let's say, it's up 2% for the day, I like to see silver up like double that. It'd be like 4% for the day. I also like to see follow up to it. I mean, one day doesn't make a market. I'm sure people are sick of me saying that, but it's also something that bears repeating because people seemed to buy it for a long time. They seemed to buy not when the market's quiet, when no one's paying attention, but when it's rolling strongly, it's rolling in meaning four, five days in a row. Then they get excited and they buy only to see it fall off for three more days or something. But I like to see fall off. I like to see volume, price, and consistency when you markup three-days ... I have a three-day rule.

I explain it to my members. I'm not always consistent on it but it's a good way to keep you out of trouble because sometimes, again, if you chase the market it can fall off as quickly as it went up. All these are taking place in the silver and gold markets right now. The shares are confirming the move. The one thing that's happening is a pretty strong rally so far. We've got to see how far it goes. The one thing that no one seems to expect is a strong rally in a short period of time. Most of my colleagues ... and I won't name names ... are of the mindset that we've got like another two years to consolidate.

That may be true. I mean, it's way too early. I mean, we've gone from, you know, $18.30 up to $22 and change in a fairly small amount of time, but maybe it'll drift sideways for another several months. I doubt it highly. Nonetheless, it could be the case. Again, to just repeat one more time, what no one expects is a really strong rally that really, really goes. In other words, even I'd be surprised. For example, if this rally continued past the $26 level and busted through like a couple real big resistance levels, like $30 as a round number and then $33, which have a lot of action on the buy side which would be resistance on the way back through. If that were to take place, I'd be very happy. It'd be wonderful. I don't expect that. It's not usually how markets move.

Then in today's world with all that's going on, I mean, small amount of precious metals that are out there ... and the word precious means precious. There aren't ... there isn't much of it. I'm not talking about the derivatives market where you can create it to infinity. I'm talking about the real deal. Since it's so precious, so you know, that could take place. I don't, again, forecast out or foresee that, but nonetheless, no one, including myself is really expecting anything along those lines.

Mike:

As we always say, it's very difficult to predict what happens in the short term and really it's anybody's guess, but we just encourage people to continue to look at the fundamental picture, which of course is still very sound and everything is still in place for a bull market to continue forward.

One of the topics at the forefront right now is the backwardation in the gold market. First off, please give our listeners kind of a layman's definition, if you would, of exactly what backwardation is because I know it can be a little confusing and perhaps a little bit of "inside baseball" type of term. Then also talk about why it matters and what your take is on the situation. I know some think it's a major deal, but perhaps you've got a slightly different take.

David:

Sure. Backwardation is where the spot month of the near month or the contract month, in other words, whatever month you're living in, which would be August in this example. They trade in the price above the next futures month, so September or October depending on the commodity, sometimes there's not a delivery month. The further out you go, the more you pay for a commodity and that's called Contango and that's normal because it has to do with the price for commodity and then the interest rate of carrying the commodity and the interest rate almost always coincides with the LIBOR rate or the normal bank rate that you're going to get your normal interest rate.

When interest rates are very high, for example, any commodity that you carry for a year and the normal interest rate, let's say 10%, which is about 0% for all intents and purposes right now. Backwardation is where you have to pay more. For example, I just called my futures broker because I knew you were going to ask me this question, just to quadruple check this and asked him, "Are we in backwardation?" He said, "Yeah, we are. We're in about a $0.20 backwardation right now." The spot month is 40 ... excuse me ... $0.20 greater than the October month.

That is technically backwardation, but that's almost preposterous because $0.20 really doesn't mean much at all. I am on the other side, this happens about every two years or so. I went through this a couple years ago and some of these people that are on this huge bandwagon about backwardation are really good friends of mine. Nonetheless, backwardation in a commodity where it's significant is when there's some significant price delta or price change or price differential. For an example, with the spot gold right now is at $1,336. Let's say that the price of gold today to buy it from the commodity exchange was $1,400 and the October contract was $1,338, now you got significant.

That means something significant. What that means is that whoever needs that gold needs it now, doesn't want to wait and is willing to pay a greater price to have it today than they wait a month or two out. That does take place. It's taking place in almost every commodity. It usually lasts about two or three days and then it corrects. For an example, if you were in, silver, which might be a better example because she's more in industry than gold is, are you going to delay your production line if you can't get silver in your production line pronto? Someone that's running a factory like Mitsubishi or Ford Motor or Dow Chemical or DuPont or any big silver users for example, we would be willing to pay high to get it now and that's significant and again, it usually lasts just a couple of days.

That's when it has significance is interest rate spread and if it's not in Contango and you can play these interest rate games, all that is basically derivative interest rate swaps and that type of thing. It really doesn't have anything to do with the gold market. These guys are making a big deal out of it. Let them do that. Let them explain it. In the real world that I live in, I'm talking about the real commodity and we need the real metal and we need it now, you're going to pay a significantly higher. That's backwardation and that's significant and we're not there. This stuff that they're talking about is a bunch of interest rate swaps and this kind of thing and it really means nothing in my book, really means nothing.

Mike:

A potentially big story right now involves India and what they're doing to restrict gold bullion ownership over there by imposing Draconian type taxes and so forth. What do you make of this and what do you think the impact will be, not just on the supply of physical gold and the price of gold, but also what effect will it have on silver? Will this result in India becoming a major player in the physical silver market, because it's well-documented how much gold that country consumes?

David:

A couple of things, one is, what impact will it have on gold? Usually whenever you restrict something you get more of a demand, right? It's not really going to quell the demands, so you're going to have more of a black-market/free market/gray-market in gold. There will probably be more entrepreneurial types that will come into the market and take the risk of smuggling it or buying it from somewhere and bring it in and that type of thing. It's really not going quell the demand although it could certainly slow it down because a lot of people will just walk away and say, "I'm not going to pay that kind of fee to be able to buy gold."

There will be several leaving the market, but nonetheless it will continue. What it will do for the silver market, well, it's Sprott Asset Management already wrote an article I thought it was very good. Their theory, and I agree with them, was that if you can't buy a gold, they'll buy silver. The part that kind of annoys me, since I'm one of the big silver bugs around, is what it used to be like. I mean, if you go back into my history, looking at India, they were too poor to buy gold on a citizen basis, but they bought silver. Silver was the big thing. In fact, there was a big joke around during the Hunt debacle that it was a Bunker Hunt versus a billion Indians.

They were talking about Indians from India and that they had all these massive amount of silver, and they do. They're not sellers. There's very little exported silver out of India. It used to be silver, silver, silver, silver, silver and it wasn't until part of the last decade or approximately that timeframe where they really switch to gold, but they had the ability, due to higher income rates, to be able to afford gold or afford it more readily. We've always wanted gold and I don't want to misrepresent this. They just didn't have the ability to buy any quantity that they can now. So silver's really been kind of the fundamental precious metal for India for most of their economic history regardless whether it's silver or gold.

They are very astute on the Rupee and what happens to their currencies through history. So they are big savers in metal, not big savers in currency. They understand the how's and the why's of that. So what effect will have going forward? I think it will probably swing things more to a silver side again and that we have seen for quite some time where gold is kind of been favored, but I think it will move back into the silver realm.

Mike:

There certainly are seemingly a lot of tailwinds right now in the precious metals markets. It's going to be interesting the next few months. Do you expect this rally to last in the fall? I know you kind of hit on that a little bit earlier. Do you think we're going to continue to see a strong second half of the year?

David:

Yeah, I do. I think that we'll see a good rally here as I said, probably some kind of falling off. Again, I'm going to stick to my $26 by year end. The problem I've made the last couple years and it's based on seasonality and last year I really didn't have much excuse. I should just have sucked it up and come out with a last minute forecast. I really thought we ... we don't normally get going in the end of the year. There's a pretty good move that doing sideways but not down. The last couple of years, we have these big, big sellouts right to last trading day of the year. That's easier to orchestrate because there's still little trading on. You don't have to do much paper selling to get it to move down.

This year, I'm kind of prepared for that happening. Regardless, I think we're going to get to the $26 level to full by years end, which doesn't mean the last trading day. We could hit $26 in, let's say, in November only to watch it fall off to $24 by the last trading day of the year. I just don't know yet. A lot still depends on the physical market. A great deal depends on the paper markets. These paper markets are being less and less trusted all the time. And gold's are really the driver there. It's not silver, although it could be from my work and what I've looked in the study that we do here.

Gold is being drained from the COMEX rather significantly. The and the amount of gold in the COMEX is absolutely pathetically small. I mean, pitifully small. It wouldn't take much to continue to put pressure on the COMEX gold supplies to at least wake up some people to the fact that this area of paper derivatives trading is just that. It's paper, it's a derivative, and it's not real gold. Whether or not that will take place or not remains to be seen, but the trends clearly in place. So because of that, it's really hard, Mike, to say, "Well, it's going to this, or it's going to that," because I think we really need to pay attention to what's happening there. I do want to say this.

I think the worse is behind us. I think the bottom is in. I think you could still dollar cost average from here on out, and they could be bought hard. I know there're a lot of you listeners that have, a lot of my members have. Don't give up and don't sell back too soon. We are going to have to work again the overhead resistance levels and we could look at our chart and understand what those are, so we don't want to do technical work. That's fine, just realize that we held above the $26 level for a very long time. In silver, we held above the $1,550 level in gold for a very long time.

Then when you go down since the last few months, a lot of people given up hope, but they shouldn't, and also that ... once again ... back to those levels, so they become support again that we'll have to work our way higher and there's a lot of, what's 'called "stale bulls." A stale bull is somebody that bought two years ago and bought silver, as an example, at $40 on the way to $48 in 2011 early and just been very painful for that. When it gets to that level or near it, they might sell out. They got to broke even. "I got my currency back. I didn't lose. I bought it at $40. I sold it at $40. I'm happy to be out."

So there's that kind of mentality that goes on in all markets. It can happen with the stocks, commodity, limited partnership, I mean, all kinds of investments where people buy and they go down and then they do come back and they sell them. I don't expect this thing to get really whipping up hugely this year of course. In 2014, I do think, and we'll just have to wait and see what the volumes are like, but I think there will be more people come into it than this year, which is a transition year.

Mike:

It will certainly be interesting and hopefully exciting during the back half of the year and on the 2014 as well. A strong move would certainly be a welcome sight to many for sure. Well David thanks as always. Before we let you go, talk about your membership service. You mentioned it earlier, and tell people about what they get for signing up for that.

David:

You bet. First of all, I do give a lot ... I love the role of being an educator and I've done that for my career since I've been on the internet. I go to a lot of these conferences and I like to meet people and teach and that type of thing. There is a free report that comes out weekly. You just get on the website ( www.silver-investor.com) and sign up for free and it is free. But the way you're making a living is through the Morgan Report. There's three levels of service there, but the mid-service, which is the basic plus service has some benefits, but I'm going to outline one benefit of that level of services, which is you get to e-mail us. You can e-mail us basically any question you want and you will get an answer. We guarantee that.

You might not want to come ... do a consultation, but you have a specific question like I just don't understand why dadadada. You can e-mail that in, and again we do guarantee your questions. That's kind of the trigger point for some people it's like, "Well, I'm going to get this, this, and this. I really don't want to subscribe X amount of dollars a year." What they want to hear that they have the ability to send us an e-mail. There's little box form on the membership only, part of the website and just type in your questions, send it to us, and either I answer personally or send to one of my staff, but you will get an answer. I thought I'd point that out. Thank you.

Mike:

Certainly. Well we always appreciate your insights and thanks for being so generous with your time once again. Enjoy the weekend and we look forward to catching up with you again real soon.

David:

Thank you Mike.

Mike:

That will wrap it up for this week. Don't forget to tune in next Friday for our next weekly Market Wrap podcast. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening and have a great weekend everybody.

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