New 2014 Metals Forecast; Fed Spooks Markets

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

Well, the global markets seem to revolve around the Federal Reserve these days, and this week was a great example. The Fed chair spoke, and investors nearly choked.

But before I get into that, let me encourage you to listen to the end of today's special podcast, because we have a real treat for you coming up…

So Janet Yellen gave her first press conference on Wednesday, and she vowed to continue gradually unwinding Quantitative Easing while keeping rates at ultra-low levels for the meantime. But her off-the-cuff comment that the federal funds rate would likely stay near zero for “ONLY” about 6 months after QE is wound down spooked the markets.

Stocks, bonds, and precious metals all sold off on the Yellen comments. Investors apparently were hoping for a longer or more open-ended commitment to ultra-low rates. Federal Reserve chairmen usually speak in vague and obtuse language that is deliberately aimed at fueling endless speculation about what they really mean. When Yellen blurted out the specific figure of 6 months, she violated protocol. Given the reaction from the markets and the media, it's likely she won't make that mistake again!

In any event, the real substantive takeaway from Yellen's comments is that the Yellen Fed will no longer use a move in the official unemployment rate down to below 6.5% as a trigger to raise rates. Instead, it will continue to stimulate until inflation starts getting out of hand. Yellen's exact words: “Unless inflation were a significant concern, we wouldn't dream of raising the federal funds rate target.”

The Fed isn't in inflation-fighting mode right now, which means inflation could rise without triggering an attempt to restrain it. But the precious metals futures markets reacted as if Janet Yellen was somehow threatening to impose a tighter monetary policy. Through Thursday's close, gold prices had fallen 4% on the week while silver suffered a 5.5% whacking.

As of this Friday morning, gold and silver prices are recovering somewhat – gold more so than silver. The yellow metal currently trades at $1,337 per ounce, while silver comes in at $20.39 an ounce.

Gold touched its 50-week moving average on Thursday, which could act as a support level. The silver chart, on the other hand, looks less encouraging, at least in the very near term. Silver prices dipped below the February breakout level on Thursday. Unless prices can recover quickly here, silver could be at risk of probing for lower levels of support in the days ahead, perhaps back near the lows seen earlier in the year just above $19 per ounce.

Again, this is the very short-term technical setup. Long-term investors shouldn't be fazed. They should remain focused on the fundamentals, which overwhelmingly augur for higher silver prices over time. Silver has struggled to sustain rallies over the past few months, but it has at least put in a pretty firm longer-term base. With silver prices hovering in the $20 range for most of the last year, investors have had a nice stretch of time to accumulate.

We continue to see better price action out of palladium, which comes in little changed on the week despite the big sell-offs in gold and silver. Palladium's relative strength versus other precious metals since 2013 is one of the issues I broached with this week's featured guest expert, respected precious metals analyst David Smith of The Morgan Report. David wants to share some fascinating developments with us, including the reasons why he believes that 2014 will be a pivotal year. So let's get right to our featured segment.

Mike:

It is my privilege now to be joined by David Smith, senior analyst at the Morgan Report. David is a long time market analyst and historian and we're excited to get a chance to talk to him again today, particular with all the recent action in the markets. David, welcome back, thank you for joining us again.

David:

It's great to be speaking with you again Mike, and you're right, there's a lot going on in the markets.

Mike:

Well, to start out, we've got the metals pulling back this week, but for the year they're all in positive territory. We've seem to have reversed from the bearish posture we saw in 2013, but prices have not moved up much yet. However, you've been most excited about the lesser known precious metals, primarily palladium for quite some time now. In fact, you revealed some extremely bullish facts about palladium on this very podcast, a little over a year ago. You told our listeners that palladium was looking to move higher in the near term and sure enough palladium has outperformed all of the other precious metals by a wide margin since then. What have you are you seeing for palladium and platinum going forward? Do you see continued out performance?

David:

I really do. I think that they are going to raise the precious metals higher, and by that I mean gold and silver. I think gold and silver will be strong this year, but they will establish a very broad trading range, which will go back and forth maybe in the late summer, but they'll be irregularly higher. All four of these metals are advancing now what seems to be the next big leg up in the secular bull market after a two and a half year bear market. We're starting to see not only with the metals themselves, the physical metals, but also the mining stocks. Higher highs and higher lows, and keeping that type of chart formation in hand, if that continues that's going to be a very positive development on the charts for all four of the metals, and especially the PGMs, most notably platinum and palladium.

Mike:

There's obviously a lot continued demand coming up for palladium with the automotive market, as we've mentioned before, but supply is continuing to be an issue. Of course, the whole Russian situation, I mean Russia's a big producer of palladium. Do you see the supply demand imbalance growing there for that metal?

David:

I really do, and as you know, the vast majority of platinum and palladium both come from South Africa and from Russia. We have one operation in United States that produces it, but I mean the overwhelming majority, we're talking 85, 90 percent, there's some from Zimbabwe too, but all three of those areas are very questionable politically. They have all sorts of issues going on. As you mentioned, we have the problem with Russia now in Crimea, but the supply issue was developing at a pretty good rate long before these political issues came up, and before the strike potential in South Africa.

What these things are doing, in my view, is adding further impetus to the demand piece, and for the concerns on the part of consumers, not only in the industrial states, which is where most of the platinum group metals are used. Not only in cars, catalytic converters for regular cars and diesels, but also increased in applications in the medical field, and also the investment pieces are becoming bigger too, most notably in Asia but in the United States. More and more people are stepping up to the plate and buying themselves some physical platinum and palladium, and I think they're doing the right thing.

Mike:

Switching to silver, we're seeing a very interesting and important shift in the physical market, that being the situation in India. The Indian government has imposed some draconian regulations and taxes on purchases of gold bullion, and that's caused a rapid shift in the buying habits of one of the most populous nations in the world, and one that has a historically has a huge appetite for accumulating precious metals. Talk about what's going on there in India, and what type of impact you think that will have.

David:

Early last year, the Indian government put a big surcharge, up to 10 percent, on imports of gold for use in gold jewelry, and then they had to pay a tax on the way out. India was the world's largest consumer of gold until last year, and so this tax that was put on there really put the kibosh on that for a while. But interestingly enough, the smuggling started on it, and as we're speaking it's just amazing how much gold smuggling is going on. They get a fraction of it at the airport that comes through, and in addition, what was really the more surprising was almost the instantaneous pivot that Indians made toward buying silver. They were already pretty good sized consumers of silver, but they just went through the roof, and last year it looks like they purchased I think around 20 percent. Between 10 and 20 percent of the entire world's production of silver was purchased last year, so they are veracious consumers of both physical metals.

In addition, as you know from your sales I'm sure, the American Silver Eagles last year set a record. They've been produced by the US Mint since 1986, and last year set a record for the total number of American Silver Eagles sold in one year, and this year it's just going through the roof. It continues to set new weekly records with most of the allocations going early on in the month, so it is quite fascinating. I think 2014 is going to be the year that really starts this disconnect between the physical prices and the prices that are paid in the abstract space with the leasing out of these metals, and the different types of paper promises that the entities of big banks and brokerage houses set up where people think they have physical metal, but they may not get it in the long run. This is going to be very fascinating this year, watching this take place, in my view.

Mike:

You said before that things can move very quickly, so obviously whether it's a black swan event, or what have you. A bank run, whatever it is. Things with the metals can move very rapidly when the wheels come off, is that part of the reason why you think this could be a pivotal year, and a big year for the metals?

David:

Yes, and we talk about these black swan events where some huge factor comes out of nowhere and surprises everybody, but I also think there's a more subtle thing that is taking place now, and it's going to become more and more of a factor as we move in to this phase, where demand at some point just completely overwhelms the supply. You can have quote "enough gold and silver somewhere," but if you don't have it where it's needed, the demand piece can overwhelm that and start a real run. We saw this in 2009 with palladium where it went from about $150 an ounce to almost $900 in just a few months because of the demand factor of the automotive industry, where they were afraid they weren't going to get enough, and they started stockpiling it.

I think when you see when the public more and more realizes that there may not be the gold and silver there when they want to buy it. Not only that, they're going to have to pay much higher prices and much higher premiums, then when that type of demand starts hitting the market, you're going to see more and more difficulty with suppliers being able to have the product for their customers, and that kind of creates a wave of its own. You could have a very pronounced shift in that regard that can push prices much higher without any black swan event even occurring at that point.

Mike:

Shortages definitely begat more shortages, as they say. We saw it as a physical bullion dealer last year. People were willing to pay huge markups for Silver Eagles just because they were in short supply, and they were willing to pay basically any price for them. We didn't advise that, didn't think it made a lot of sense, and that the other products had better value at that point. Definitely it can happen quickly, and things can change and shift, and when you see a shortage out there, that's when people start to really go crazy with physical buying, so I think we can certainly see that again at some point when it does finally start to move.

Turning to the mining stocks, you're obviously a student in that area, and the miners can be of course a leading indicator for the price of the physical precious metals. What do you see happening with miners right now?

David:

Well, the miners have started really moving up in a big way. They were really beaten down over the last two and a half years. What's interesting this time around, usually you expect the big companies to start moving first, and then the little ones start after that, the juniors and the producers, and finally the explorers. But this has been the opposite so far in the cycle, with the larger companies lagging by and large. They're moving up, but not as aggressively as the smaller ones, and the junior miners and the expiration companies, especially ones that have a viable project, they're the ones that are moving up most aggressively.

Even on days like this where the gold and silver is down sharply, the mining stocks for the most part are begrudgingly giving up those gains, and so they're really holding up quite well. I think that says something to the changing psychology and the sentiment underneath the market that has really starting to be much different than it's been in the past three years. Because those prices when they drop down are being supported by new buying across the board by institutionals, by large hedge funds, by large investors, and by generally the public themselves. They're just starting to dip their toes back into this.

Mike:

That's really the key, obviously, to get that speculative crowd or the big hedge funds starting to pile into the metals. That's really what can drive the prices and get things back to where they were maybe a few years ago. Is that what you're looking for?

David:

Yeah, I really think so. We're going to see, I believe, strong prices all through this year, and we may see some summer doldrums that can go into late summer, say after late April or early May of this year with sideways action, but I think it's going to really build up a head of steam late this summer, going into the fall. I think 2015 can be a real barnburner of a year on the upside for the metals, but they're going to improve quite a bit this year. When things are relatively quiet, that's the time when you want to come in and take your position. I know a lot of people that have bought physical gold, and silver, and platinum, and palladium over the last few years.

They are so relaxed about their purchases, especially those that didn't just go all in and buy at one price point, but they bought a certain amount over time. Maybe on a monthly basis, or if they had extra money or whatever, and they put it away. They don't feel any need to sell it, or they don't worry if the price is up or down that day, because that they can see that over time it tends to go higher, and it has been real money for as long as history's been written, especially gold and silver. When they get it, there's something that they feel good about. Not only that, a lot of that money is money you might have just wasted on something else, better than putting it into something that would retains its value and has real potential to go up substantially over the next few years.

Mike:

Very well put, it's definitely not the time to be selling, unless you absolutely had to have some cash, but those that hold on to it and are patient and realize that the fundamental picture for the metals still looks very very good, I think they'll be rewarded in the long run handsomely.

Well David, thanks very much for your time and your excellent insights, and we definitely hope to do it again in the future.

David:

You bet, it's been great talking with you, Mike.

Mike:

Well that will do it for this week's Market Wrap Podcast. Again, thanks to David Smith of the Morgan Report. To follow David's work, please visit www.silver-investor.com, and get on the free E-mail list. I want to strongly urge our listeners to go to that site and get on the list, because the commentary and market analysis that David Morgan, David Smith, and the rest of the Morgan Report team crank out on an almost daily basis is truly must read information if you're invested in precious metals. Again that's silver-inverstor.com.

Thanks again, David, we always appreciate it.

David:

You bet.

Mike:

This has been Mike Gleason with Independent Living Bouillon. Thanks for listening, and have a great weekend, everybody.

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