Eurozone Cuts Interest Rates as Gold Bullion Is Quietly Shipped into Far East Hoards

Announcer:

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.

As gold and silver prices continue to trade in a choppy range, are they forming a base for a rally in the final few weeks of the year? Or are they perhaps biding their time for a very big rally in 2014?

Respected metals and mining analyst David Smith weighs in with his thoughts on the near-term and longer-term prospects for precious metals later in this program, and gives an inside look at some major issues on the supply side. You don't want to miss that interview.

In the meantime, another week, another central bank intervention for investors to contend with! This time courtesy of the European Central Bank. The ECB surprised markets on Thursday by cutting the rate at which it lends to banks by 25 basis points – from 0.5% to an ultra-low level of 0.25%.

The move sent the euro lower and the U.S. dollar higher on the foreign exchange markets, and gold and silver prices came under selling pressure as a result. The declines yesterday after the news broke weren't terribly dramatic and on the week thru Thursday both gold and silver showed a loss of roughly 2%. Gold tested the $1,300 level on Thursday, held above it overnight, and then broke through $1,300 on this morning. As of the Friday morning recording, the yellow metal trades at $1,285 an ounce, while silver comes in at $21.42.

Turning to the Platinum Group Metals, platinum prices have fared somewhat better on the week. Now trading at $1,448 per ounce, platinum carries over a $160 premium over the gold price. That premium has been on the rise but still has room to increase before getting back to the historical average of about 1.4 times the gold price. The high point platinum reached in 2008 was 2.4 times gold.

As a reminder Money Metals Exchange currently sells the beautiful Australian Platinum Platypus coins, as well the platinum Canadian Maple Leaf and 1-oz platinum bars. Just call one of our specialists at 1-800-800-1865, or visit us online at www.MoneyMetals.com where you can view up-to-the-minute pricing or place an order through our secure shopping cart.

As for platinum's sister metal palladium, it remains the bright spot in the precious metals universe this year. Palladium is actually showing a gain on the week as prices near multi-month highs. Even though it's down a bit today like the other metals the spot price is currently at $759 per ounce.

And although price inflation in the real economy remains tame at the moment, the currency supply – the raw material for price inflation – is being relentlessly expanded globally. The people of India are suffering from high rates of real-world inflation right now. The government has tried to prevent its citizens from seeking refuge in gold, so they're starting to turn to silver instead. In Europe, the ECB just this week indicated that it is abandoning its former policy of relative restraint and is now explicitly pursuing higher rates of inflation.

Nobody wants a strong currency. According to the prevailing economic orthodoxy of our day, a constantly depreciating currency is needed in order to stimulate domestic consumption – and prop up exports. So a weaker euro will only encourage U.S. officials to pursue a weaker dollar.

Incoming Federal Reserve chair Janet Yellen has already positioned herself as the most pro-inflation nominee ever to ascend to the most powerful non-elected position in the country.

We can certainly expect some interesting times ahead!

And now, as promised, here to comment on some very interesting global flows of physical gold – and some key market fundamentals set to drive gold and silver prices higher – is our special guest David Smith of the Morgan Report.

Mike Gleason:

It is my privilege now to be joined by David Smith, senior analyst at the Morgan Report. David is a real market insider and historian and we're excited to get a chance to talk to him today. David welcome back, thanks for joining us again.

David Smith:

Very good Mike, nice to be back. And just to let your listeners know, I'm a serious student of the resource sector. I'm trying to learn something every day.

Mike Gleason:

Well David it's been a kind of a quiet market here, but we have some real interesting things going on behind the scenes that I want to discuss with you today, particularly on the supply side of the equation. You spend a lot of time dissecting the mining industry and visiting mines themselves. We understand that the miners are facing some real challenges right now, so what impact will it have on prices of gold and silver if we continue to see less capital investment by the mines? Talk about that and what you're seeing out there?

David Smith:

Well definitely, this has been an extremely challenging financing environment for the mining sector as a whole and that's going to continue for a while. Of course, the big 500 pound gorilla is the soft metals prices, which and for a lot of producers, it's below their cost of production. They're not making any money or very little. In addition, especially some of the majors have taken on projects, assuming much higher prices than we have today and they're not economical now. So they've been doing huge write-downs. Barrick has written down $5 billion or $6 billion worth of properties. AngloGold walked away from a property in Alaska after spending $500 million on it. In Argentina, another company walked away from a 700 million ounce silver deposit because the taxation regiment was going to make it unprofitable.

So these things are going to have a major effect in the actual supply of precious metals, especially silver going forward. It's not impacting today, but it's like a big deep river that has currents underneath the calm surface that belie what's really going on if you just look at the surface of the water.

Mike Gleason:

There's one project in particular down there in South America, I think you alluded to it the Pascua Lama mine and it's been in the news for a while now. Discuss what's happening there more specifically and the ramifications.

Then also, just overall the geopolitical issues that a lot of these mines are facing out there because it's certainly having a real impact and will continue to have a real impact on supply as you mentioned.

David Smith:

Pascua Lama is a monster project owned by Barrick Gold and it straddles the Argentinean-Chilean border. Reportedly Barrick has put up to $5 billion into that project and it's had a series of environmental question issues by the locals there. It was supposed to be up and running here, actually perhaps sometime next year, eventually producing 800,000 ounces of gold per year, 25 million to 30 million ounces of silver. Basically because of the environment that's going on down there now, the political environment, Barrick announced recently that it's going to put it on care and maintenance.

It's not giving up the project. It's going to keep the permits and everything, but it's not going to sink any more money into it for the foreseeable future. It's kind of a semi-walk away. Whether or not it will ever produce is problematic. It certainly isn't going to come on line anything near where the expectation was. So there is a 25 million to 30 million ounce hole in the silver supply market and there are a couple of other projects that are comparable to that for various reasons are not going to come on line anytime soon and maybe not at all.

Mike Gleason:

I know you mentioned when we were talking before about Mexico starting to make it a little bit difficult on some of the mining industry down there with taxes and so forth and Mexico's a pretty big producer down there.

David Smith:

Mexico is actually the world's largest producer of silver and the legislature decided this year to institute, which I think was very poor planning on their part, a very high increase in taxes not just on actual sale of the metals, but also several aspects within the running of the company in terms of how prospecting costs could be written off and things like this. It's going to be very a serious body blow to the industry down there. It's going to take effect in January providing it's signed into law by President Nieto which it looks like will happen. The stronger companies will survive. It will take them a while to eke out enough profit to bring back to where they were before, but there is some strong companies down there.

The concern I have is for projects that either want to go into production or explorers that are trying to get enough money to move to the stage of even getting a permit for a mine or getting a major to buy them out. I think it's going to create a vacuum in the middle. You'll have the strong horses that are surviving, even if they're not doing quite as well as they were. Then you have the not much in the middle and you'll have a real knockout blow at the bottom end. Mexico is going to continue to produce a lot of silver and as prices move higher as we expect going into next year and beyond, a certain amount of that will not be as severe, but right now with prices being pretty soft, it's a pretty tough nut to crack for all the miners down there.

Mike Gleason:

That certainly could have a real effect on the available supply in a year, two years out and if demand continues as it is and especially, if it increases, we could just be forced to see a run up the price in order to bring more supply to the market to meet the demand. Moving on here, we're seeing a lot of reports of some major amounts of physical metal moving from the depositories in the US and in Europe to the Far East, specifically China. First off, why is this happening and secondly, does it even matter? What effect will this shift have on the market in the future?

David Smith:

I think it's having an effect right now and again, it's like that river with the deep currents. The really big story about transfers of metal from west to east the one that's most written about is that of the gold. Massive amounts of gold are going into China through all sorts of venues, some official, some unofficial. As you know, the big ETF GLD has lost a lot of metal. I think it's lost 25% of its metal over the last six or eight months and there's a lot of evidence, beyond just anecdotal that much of the gold probably that's being sold, liquidated from the GLD is going into refineries in Switzerland and then on to China where it's not going to come back out again.

India has been a massive gold consumer, but the Indian government has put some of very onerous taxes on the importation of gold because they're trying to shore up their economy and the Rupee and they're trying to keep people from putting so much money into gold. What that's done is drive a lot that import business underground, but it has cut into the overall amount of gold currently going into India. But what's very interesting, and this has been heavily documented by Eric Sprott and David Franklin and others with Sprott Asset Management, is that in lieu of the gold that could be consumed by Indians, they're buying massive amounts of silver. And they are on line if they continue with the rate they have the first three quarters of this year to possibly by 25% of the global production of silver for this year. That's a huge deal.

It's just one more indication, as you mentioned, of the issue of supply versus demand. We have all sorts of things that we just discussed a few minutes ago that are cutting into the potential supply going forward. At the same time, counterintuitively to people that think that the gold and silver bull market is over is that the more prices remain soft and the lower they drop, the more people buy. That's been very pronounced in India and China, but also in the United States where it looks like it's almost a slam dunk that this year we will see the largest amount of American Silver Eagles sold since the program began, I believe it was in 1986. There will be over 38 million American Silver Eagles, each representing one troy ounce at .999 fine silver because they're going to find their way into the pockets of individual investors in North America this year.

Mike Gleason:

We're certainly seeing that of course, as a bullion dealer, we're seeing a huge demand this year with prices down. Absolutely, people tend to buy more when prices dip because they still believe in a long term fundamentals given the fact that nothing's really been solved here with the dollar and fiat currencies and so forth. Backing up a step there, the metal that is going to China, are we just going to see that available on the Shanghai Exchange or is it going to be going into private hoards and disappearing? Is this metal going to be available in the future or is it just gone once it goes over there?

David Smith:

There's a certain amount of metal from India and China that would become available at a certain price points higher than where we are now, but I think the vast majority of it, for different cultural reasons, is going to stay within these countries. In China, there's so much evidence that the Central Bank there is building up a massive stockpile of gold which they intend to keep adding to for some years out. They might even at some point have a Yuan-backed, gold-backed currency.

The individuals in China have it because it's easier for them to acquire than some of the overpriced real estate that's going on now and they have a tradition of holding as well, too. There's some selling that would happen and higher prices in India, but again, most of the gold and silver is not bought for trading purposes by Indians. It's bought in lieu of having bank accounts and having very many ways to invest their money. At least they know where it is. It's with them. That's been a tradition for millennia and that's not going to change anytime soon.

Mike Gleason:

Switching gears here, I want to dive into the philosophy of investing now because you've always had a great understanding of this and some real valuable advice for people. Give us your thoughts here and help people understand the proper way of investing. As your colleague David Morgan likes to say, "The metals market specifically is real good at wearing you out and scaring you out," which has certainly been true for many investors since 2011 who might have gotten in towards the peak in metals prices. So what advice do you have specifically for new investors and talk about your personal philosophy, of course, when it comes to investing?

David Smith:

I've been working with David Morgan for over a decade. I'm totally sympatico with his views on how to go about investing in the precious metals. He always recommends that new investors start out with physical, physical gold and silver and perhaps platinum or palladium if you learn enough about it to feel comfortable with it. Under your own control not in an allocated account or a paper silver like an ETF or something like this. That is a different purpose than having the physical. The physical is your foundation and also once you get it, you're not inclined to try to call the price link and then end up with no metal as the price goes opposite of what you thought it would do. After you've done that, then you start researching the different mining producers and of course, the Morgan Report does an excellent job of suggesting some of these companies to look at.

Mike Gleason:

Then, of course, once you make the decision to do it, obviously you want to continue check your premises, but I've heard you say that you got to take the emotion out of it. That's just not going to serve you well if you're getting all emotional about things. That's just not the way to keep investing, especially in metals.

David Smith:

Right, and as David Morgan has always said, "The market will find every weakness that you have and it will exploit that." You need to try to remain as calm as possible and you need to go against the grain so to speak. Jim Sinclair and Jeffrey Livermore and the greats always understood this. That they couldn't go with the normal emotions that you and I and everybody else has which is if prices are rising we're euphoric and our position is never big enough and we want to jump right in. If prices are going down, we're afraid and we want to sell. If what you bought still makes sense, then you don't sell. At any rate, you don't try to get taken out just because everybody else is going in a certain direction.

If our premise is correct that we are going to see much higher prices going forward and that we have a public mania ahead of us like the Dot Com Mania of 2000 before this is over, then this is what you want to focus on because as David has always taught and he's shown this in many of his presentations that up to 80% to 90% of the entire profit potential of the whole secular bull run will become available during the last 10% of that bull run.

If we have a market that lasts say 15, 16 years, the last maybe year of that or eight months is where the vast majority of the profits will be made. There will be a lot of profits made running up into that, but the profits then could actually go geometric once you get to that point. What I think where people make a mistake sometimes is trying to get ready for that and put everything they have into it and then not be able to wait. As David would say, "They get worn out or scared out," before they get around the profits they're deserving of for taking those early positions.

Mike Gleason:

Extremely well said and level heads will certainly prevail in almost any situation. In closing, David what are you looking for with metals over the remainder of this year and then as we turn the calendar to 2014, what do you see ahead for gold and silver and the other metals?

David Smith:

David Morgan is on record for believing that the lows that we established in late June, early July are likely to hold. Nothing is 100%, but it's probable. The longer this sideways action takes place without those lows being penetrated on a closing basis, the more likely they are to hold and provide a launch pad for much higher prices. The longer those last if that launch is above the resistance level of $25, $26 silver and $1,450, $1,550 gold, that area, then if that happened and you get a move of that that is sustained that's likely to make a much more durable price increase than let's say if we had a V-bottom and prices turned around.

My looking for my own feeling is that we'll see sideways action for the rest of this year within those basic parameters with attempts to punch holes in the bottom, but unlikely. A black swan could change that overnight, but I think going into next year we're going to see a base develop that can lead to much higher prices. I also think that platinum and palladium are interesting metals to watch because it's been my premise, which I've written about for over two years, both for David in the Morgan Report and in my presentations and for other publications like The Prospector News and at Silver Summit and this type of the thing, that platinum and palladium are likely to break out to new highs before gold and silver based upon their own fundamentals and it could be very much pyrotechnic when this happens. There's a tremendous deficit that's building in both of these metals and as I look at the charts today, palladium is actually of the four metals, it has the strongest technical sharp position right now.

It's going to be fascinating to watch that challenge the few layers of resistance above it and see what happens, but it would not surprise me to see new highs in palladium before the end of this year, not all-time highs, but new highs of the last five or six years which would be in the $850 to $900 area. The all-time highs would be above $1,100 which I think will eventually be exceeded and when that happens is anybody's guess, but I think we're going to see much higher prices for palladium and platinum going into 2014.

Mike Gleason:

We had you on back at the beginning of the year and had a great conversation about the PGMs and palladium in particular. Anyone who had palladium was glad they did. It held up better than any other metals this year certainly. So we always appreciate your insights on the PGMs. David thanks very much for your time and your excellent insights as always. We definitely hope to check in with you again in the future.

David Smith:

Sounds good Mike, call back anytime.

Mike Gleason:

That will do it for this week's Market Wrap Podcast. Thanks again to David Smith of the Morgan Report. Until next week, this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.

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