Inflation Risks Rise as Dow Rallies, Gold/Silver Bounce Off Lows

Exclusive Interview with Precious Metals Analyst David Smith

Mike Gleason Mike Gleason
New Radio Release
May 2nd, 2014 Comments

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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.

Coming up later in the podcast, we'll hear from longtime Morgan Report analyst and new Money Metals columnist David Smith. David has some wisdom to share with us today on avoiding investment pitfalls and disciplining your mind to become a successful investor. But first, here's a special report on some fascinating developments in the markets…

Sell in May and go away? Well, some frustrated precious metals bulls apparently felt like doing just that as the calendar flipped to May on Thursday. Both gold and silver got sold off but recovered somewhat by the end of the trading day in the U.S. to post modest losses for the day.

Meanwhile, the Dow Jones Industrial Average touched its all-time high from last December. Prices couldn't break through and fell back slightly. The equities market may now face some significant technical and seasonal resistance.

The “Sell in May” strategy is one that some investors have applied successfully to the stock market over the years. Stocks have historically tended to put in their best performance from November through April.

The seasonality for gold and silver is a little different. They tend to be strongest from late summer through early winter. However, over the past couple years the seasonal patterns have seemingly broken down as seasonal rallies have been thwarted before they could gain much traction. Seasonal patterns are merely averages taken over many years. No single given year ever turns out average.

For now, gold is trying to hold onto positive gains for the year, while silver is wrestling with a critical support level near $19 an ounce. The price action in these first few trading days of May could be decisive for both the metals and the stock market alike. The Dow will either break above resistance and extend its bull market, or head lower and increase the odds that a major topping process is at hand.

Silver will either find price support near current levels and start gaining some clearance above them or break down to new lows, which would likely trigger a spate of sell orders in the futures markets, at least in the near-term.

As of this Friday morning, the metals are starting to rally a bit. Silver currently comes in at $19.50, now down only about 1.5% for the week. Gold now trades at $1,296 an ounce, good for weekly loss of less than 1% now as of this podcast recording.

Although gold and silver moved to the downside this week, Wednesday's Federal Open Market Committee policy announcement didn't provide much of a push or pull to the metals -- or any of the major asset markets for that matter. As expected, the Fed trimmed its monthly asset purchases by another $10 billion, to $45 billion a month.

The important number for investors is not the amount or pace of tapering. Nor is it even the actual Federal funds rate or when it might be hiked. Despite the financial media's obsession with Fed watching, it's not the nominal actions it takes that drive major economic or market trends.

The important number is the real interest rate. Is it positive or negative? In other words, does the lending rate offered by the Fed exceed the rate of inflation? Do the bond yields offered by Treasuries exceed the rate of inflation?

In both instances, real interest rates today are arguably negative. Now if you go by the government's core CPI number, which has recently been running at an annual rate of less than 2%, then longer- duration Treasuries offer slightly positive real rates of return. But as those of us who do things like buy our own groceries and pay insurance premiums can attest, the Fed's preferred inflation indicator understates the real-world inflation that most households experience.

Even setting that aside – even assuming investors today can get slightly positive after-inflation yields from bonds or certain blue-chip stocks – the question investors have to ask themselves is what is the inflation risk going forward. Since the Fed has vowed to do whatever it takes to maintain a minimal rate of inflation of around 2%, the best-case scenario would be that the inflation rate remains about where it's at and yields on stocks and bonds deliver marginally positive real rates of return.

The range of potential for the present rate of inflation to move from where it's at now includes virtually no downside but very significant upside. If government-reported inflation just returned to a more historically normal level of 4% to 5%, then bonds would get clobbered. Stocks would be vulnerable as well. Both asset classes are priced for near perfection.

Investors remain complacent about inflation risk, which is why gold and silver have struggled to gather any sustained upside momentum in recent months. Precious metals are selling at a discount relative to the inflation protection they offer. We believe silver is presently the most undervalued metal.

Current market trends bode better for palladium near-term, which currently trades at $816 an ounce – near multi-year highs. But silver appears to be the best long-term value at these levels. Its ratio versus gold, platinum, and palladium have been depressed as silver prices trade at major support levels. But in an inflationary environment, silver can be expected to outperform.

Look, the Fed may continue to taper Quantitative Easing. But as long as the workforce participation rate remains near generational lows, the Fed won't actually tighten. The risk is that inflation starts creeping up and expectations of higher inflation start setting in, feeding back into higher prices at the same time as unemployment rates remain stubbornly elevated.

Fed chair Janet Yellen has repeatedly indicated a willingness to do what she views as stimulating a sluggish job market with monetary accommodation, even if it means letting inflation rates run above target.

So how does one deal with the ups and downs in the investment world? Well our guest this week helps you make sense of it all, so without further delay, let's get right to our exclusive interview.

Mike Gleason:

It is my privilege now to be joined by David Smith, senior analyst at the Morgan Report. We're excited to get a chance to talk to him again today and also make a big announcement. David, welcome back.

David Smith:

It's good to be back, Mike, great to be speaking with you today.

Mike Gleason:

Just last week as some of you may have seen, we announced that David has agreed to be a regularly featured columnist for Money Metals Exchange and we're thrilled that our readers and customers will be able to repeatedly benefit from his commentary and insights about the precious metals markets. We've had David on as a guest several times on this podcast for the last year or so of course, but now, we'll be tapping into his 15 years of accumulated experience in these markets as he writes his monthlyMoney Metals column.

David, to give you some background, has investigated precious metals mines and exploration sites all over the world, in Argentina, Chile, Mexico, China, Canada, here in the US of course…many of the key places that the metals are produced around the globe. But not only does he have a deep knowledge of the precious metals industry, he's also a successful investor himself and has tremendous wisdom to share with our readers, listeners and customers. I'd call David both a student and a teacher.

David, your first major effort forMoney Metalswas a fantastic feature length piece on disciplining yourself to be a successful investor, particularly as it applies to the precious metals. You introduced this topic by talking about a secret investment tool that investors can use. One which can really either make your or break you. What is this secret investment tool and what compelled you to write about it?

David Smith:

You know, Mike, I really enjoyed putting this report together and it's kind of a distillation of many years of learning about things in the market, studying other people and I supposed it goes all the way back to the ‘70s when I participated in the first big gold and silver bull market scene. Some of the similarities that are going on and also, being excited because I think the implications for a bold move going from where we are over the next few years are even much more powerful reasons for that than existed during the time which I got started in the ‘70s, but the secret investing tool that I discussed is actually your mind.

It has such a powerful ability to either put you on the right side or the wrong side of the market and it's just something that I think any successful investor really has to account for if they intend to become successful and staying that way.

Mike Gleason:

You made the point that successful investing has three essential elements, studying the fundamentals, following a strategy and most importantly governing your mind. Could you elaborate on those points?

David Smith:

Right. There's usually two ways to look at the market visually. There's the fundamental market about the supply and demand, looking at the statistics for that and reading different reports and there's the technical analysis aspect where you look at charts and see where the prices have been and where they may go. It's very difficult to just do one of the other. It's helpful to do both. If you can mesh them together properly and understand that they offer clues, not guarantees, then you can try to take a position that has what would be a high probability of success.

Once you've really looked at the market and understood the particular market that you're looking at, it might be soybeans or wheat or gold, silver, whatever, platinum, palladium. Then once you really get your market so that you understand it, if you're going to take a position you want to decide how much you'd like to devote to it financially and it's called money management and decide where you would change your mind if you felt that you were wrong.

I think one of the most important things about money management in addition to deciding how much you're going to do is that no matter how excited you are or how certain you are of your analysis, you don't want to ever go all in at one time, because if the market drops from where you've gotten in and you've deployed all of the money you're going to use, then you don't feel too good about that and you can actually embolden one of the two twin dragons that they talk about in investing, which is fear, the other one being greed. But if you buy everything at one time and it goes down, then you know you're disheartened. But if you bought let's say a third of what you intended or if you did it over a month-by-month basis or a dollar-cost in average basis, these are all valid ways to go about it.

Then you're less concerned about the gyrations in the market and it helps to keep you much calmer in the market. If the price goes down, let's say you bought some gold or silver and it goes down, you go, “Well, that's great. I get to buy more this next time around” and because you're looking at the longer view and you still feel that your analysis was valid. It's really important to be sure that those things are going on and also that you're able to control your mind so that you don't become too emotionally involved.

The calmer you can remain when other people are not calm, which is quite often, what the market is doing when it's making wild swings one way or the other, the more likely it is to make rational decisions rather than emotional ones. You want to make decisions based upon analysis and fact rather than on fear and greed.

Mike Gleason:

You talked about the importance of keeping some funds in reserve to buy a stock or an asset class, precious metals or whatever it is so when things get really cheap, in other words you've got some powder dry as they say. Nothing is worse than seeing a great buying opportunity likely on unexpected one only to not have the funds available to jump in. That's something a lot of people suffer from, isn't it?

David Smith:

It really is and you know Mike, some years ago, my behavior was when I decided to go in on the market, I'd put every cent I had on it. If I had a few dollars left in my account, I thought that was too much in cash and what I found is that first of all, sometimes I was incorrect or I was right too soon. And then sometimes, I had an opportunity to buy either that item or something else at an even better price but I didn't have any money to do it.

Now, I do keep some money in reserve no matter how certain I am and it's kind of interesting, it seems counterintuitive but let's say that I have X amount of dollars in my account and what I bought starts going up pretty sharply, of course I would have a little bit feeling, “Well, if I had put all the money down, I could make more money going up” but any more, I don't feel that way. I'm just happy to have that extra money in because I'd taken a position. I don't want to be greedy and if it goes down and maybe if it goes a lot lower than I expected, I have the money to step in and psychologically, it really empowers me to feel calm to step in and buy more of that item at a better price because I didn't spend all my money at a higher price since none of us can predict the future with 100% accuracy.

Mike Gleason:

You eluded to it earlier but expanding on the investor's psychology and most specifically fear. Fear is really a two-pronged dynamic in the investment world, isn't it? I mean, you talked about how it creeps in and we're not only talking about the fear of losing everything but also the fear of missing out on an opportunity. Talk about how that often plagues us as investors.

David Smith:

That's really ironic because as you said, if the price is going down, you're fearful that it's going go down more that you're going to lose more but if it's going up and you don't “have enough” you're afraid that you are going to miss even more money. The whole idea of keeping your emotions within a fairly close ban is so important, I just can't stress that enough and the way the market is going now a days and with the … all the financial shows on T.V. and everybody jumping around and touting about what's going on and coming up with big reasons that they think the prices are moving and all the surprise movement.

Also this Mike, it wasn't that many years ago when there were pretty much regular trading hours which would happen late in the morning and end during the afternoon and that was about it and there were some overnight trading but now much. But now, do in part to the extra markets that have been opened certainly that global markets which are tied together around the world. Some place in the world at any given time in a day, the precious metals, as an example here, are trading and so where as it used to be at night time, it was pretty quiet.

You could have very large move taking place overnight that you can't get involved with or you can't deal with that and so that emotional piece of keeping calm and not deploying all of your money at one time really helps to keep things on an even keel. I remember one time not too long ago that silver was up almost a dollar in overnight trading. That's unusual but I think we're going to see more of those big kind of moves and that's why it's important to have things in hand so that no matter what happens, you don't feel like you're out there without any ore in your boat.

Mike Gleason:

I want to read a passage from your article here and then get your comments on it specifically as it relates to precious metals. You wrote,

“When the market moves in a broad sideways range for quite a while, prices are said to be in congestion. Since most people and just about any activity spend the majority of their time in a rather aimless state, the idea the prices would also frequently endure a broadly defined sideways movement makes a lot of sense. This seesaw activity continues until one side or the other - bulls or bears - are strong enough to force the price out of the prevailing range.

Generally, the more time spending congestion, the more important to move out of that range is likely to be, about this trader say, the bigger the base, the stronger the upside case.”

Talk about that as it relates to precious metals because we've seen a major congestion period here in PMs. Do you think we're at that point now?

David Smith:

Gold and silver have been a broad sideways trading range now for over a year and as we speak, the prices are near the lower end of that range. And we don't know whether that range is going to hold or will there be a drop down below that into another layer. My personal feeling is that if the prices do not hold, there's any spear attempt down into lower prices will be met with renewed buying and that that would be a short-lived phenomenon. But the congestion area, when you have a price that's trading sideways for a lengthy period of time, I've come to believe that it can be almost as damaging to a trader who doesn't approach it properly as it can be a situation where prices are rising quickly and they can't get all the position they want or are dropping quickly and they feel that they can't get out or they can't buy more.

The reason I say this is because people, most investors feel they have to be doing something all the time if they're going to be successful rather than doing what they can for that month or that particular position and then letting it sit there as long as the fundamentals and the technicals look good. It's almost like they feel, “if I buy more now, maybe I can force the price to go the way I want”. They know that's not true but it's just the idea that they get that momentary rush for making an extra purchase based upon boredom as much as anything else.

If you have to buy, then what you really want to do in my view is to try to add to your position when prices are near the lower end of the congestion range and maybe do a little selling near the top, but definitely don't do any buying near the top. Everybody has access to charts nowadays and you can see where those ranges are. Many times, they're pretty well defined and they give you an idea of where prices are going to hold. Not a guarantee but an idea and if you minimize your activity within that range or at least if you're going to be active, buy into weakness near the bottom of that range, you're going to be a lot better off not only financially but also psychologically.

Mike Gleason:

You have a good quote from billionaire resource and metals investor Eric Sprott that I want to share as well. He says, “If you believe you're right and the data says hold your ground, you hold your ground. Normally there's a pretty big pay day at the end.” Is that what we're looking at for metals investors right now? I mean, what would you say to those who might be losing their nerve after this consolidation period because patience is a difficult thing as you just mentioned? That's an important aspect. You do have to be patient sometimes and I think that's a very good philosophy for folks to be adopting right now given what we've seen.

David Smith:

I think what Eric Sprott had to say is very powerful and he certainly proven it in his own life. He's gone through four or five major moves like this where he has come up to the plate, has bought into weaknesses, has held on, has taken large calculated risks and it's turned himself from a lowly millionaire into a lowly billionaire. He's been and done and I think he has a lot to teach us. We're probably not going to be millionaires or billionaires in our own right but we can certainly make quite a bit of money and do it in a way that makes sense.

It's times like this when you're looking at the lower end of the trading range when I think you had to go back and ask yourself, “What are my core beliefs?” “What is my philosophy about this?” “Why am I buying precious metals and am I willing to hold them for a while?” What's happened over the last several thousand years when people bought gold and silver and now there is also platinum and palladium. What's happened is that they've been an insurance policy. They've been a wealth creation vehicle.

They've been a way to have liquid assets that are yours and yours alone that no one else has a claim on them, and they're a way to create a certain level of privacy in which you hold. And also, if there's a situation where if you really need them in an emergency they can be liquefied very quickly. I can't think of anything else that you could buy and sell as quickly as the precious metals because there are markets quoted for them almost around the clock anywhere in the world. And to try to unload a piece of real estate or just about anything you think of or a business versus just selling some of your metal if you needed it to put food on the table or something like this.

I think Eric Sprott is right on the money and he's certainly one of the people that I pay attention to and I seek to emulate some of the things he does.

Mike Gleason:

Well again, the article was a fantastic read, David. We're really, really excited to have you on board with us and going to be writing features for us monthly and we're really looking forward to that. I definitely urge people to check out what he wrote there. You can read that report by going to our website, and going to the News section. We'll also have the article that we just highlighted linked from the podcast page. You can stay up with his work and writings with us, and I definitely want to mention that we're really excited to have you once again.

David Smith:

Well I'm very happy to be on board, Mike and I look forward to speaking with you again and it's been great talking with you today.

Mike Gleason:

Well, that will do it for this week's market wrap podcast. Thanks again to David Smith of the Morgan Report. To follow David's work, please visit in addition to our website to read his monthlyMoney Metalsarticle, but you can get on the free e-mail list there at I strongly urge our listeners to go to that site and get on that list because the commentary and market analysis that David Morgan and David Smith and the rest of the Morgan Report team crank out on an almost daily basis is truly a must read information if you're invested in precious metals. Again, it's

Check back 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.


Thank you for joining us for this edition of the Money Metals Exchange Weekly Market Wrap. Be sure to come back next week, and don't forget to subscribe to our weekly podcast through iTunes. For answers to all of your questions, or to discretely and securely buy or sell gold or silver coins, bars, and rounds, call 1-800-800-1865. Our knowledgeable and no-pressure specialists are standing by between 7:00 a.m. and 5:30 p.m. mountain time, Monday through Friday. Visit us at or call 1-800-800-1865.

Mike Gleason

About the Author:

Mike Gleason is a Director with Money Metals Exchange, a precious metals dealer recently named "Best in the USA" by an independent global ratings group. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.