Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up later in today’s program, we’ll hear from silver guru David Morgan, publisher of The Morgan Report. David has some fascinating things to say on the gold-silver ratio and where we’re at in the precious metals market right now. But first, here’s a special report on this week’s developments…
Well, the gold market’s extended stay near the $1,300 per ounce level has abruptly ended. After failing to respond last week to geopolitical threats to the U.S. dollar, gold prices broke down from a two-month trading range. On Thursday, gold tested a potential support level at $1,250 and managed to hold above it. As of this Friday morning, gold comes in at $1,255, down 3% for the week.
We’re seeing similar price action in the silver market, though the white metal is now straddling a more significant support level that has basically held since last August. On Thursday, silver prices briefly got pushed below the key $19 per ounce level. But again and again, we’ve seen buyers step up to the plate to buy whenever silver has entered this critical support zone. Silver managed to close slightly above $19 yesterday. Prices currently come in at $19.03 as of this Friday morning recording, with silver posting a decline of almost 2.5% on the week.
Precious metals are struggling to garner safe-haven interest among conventional investors as the stock market hits new highs. Investors are “all in” on equities, and then some. Brokerage margin debt has soared to new records. Total stock market capitalization as a percentage of the economy is back where it was in 2000 and 2007. In other words, we’re in bubble territory.
Coming out of the 2008 financial crisis, it hardly seemed fathomable that a third mania in U.S. stocks would begin. The really strange thing about this particular stock market boom is that there is virtually no confirmation of it in the real economy. And for the record numbers of people without full-time jobs, it feels more like a recession than a boom.
This is precisely the time when prudent investors should be hedging their bets on stocks. And gold and silver bullion are among the mix of assets that can protect portfolios against threats to paper wealth.
Salespeople for Wall Street and the banking system typically encourage investors to be 100% invested in paper assets. Sure, they might sell securitized instruments derived from gold and silver prices to people who ask about precious metals. But don’t be fooled.
The practice of substituting derivatives for real metal is widespread, as is loaning out brokerage customers’ assets or even pooling them with the firm’s assets. How much of this securitized gold and silver sold to the public actually exists somewhere in physical form is unknown. But there can be no doubt that the actual physical stocks of precious metals are dwarfed by the layers of paper claims on them.
A single bar of gold that sits in a central bank vault may be simultaneously claimed as an asset by a government even as it’s lent out to a bullion bank that may in turn be selling it into the market or writing derivate products on it that get peddled as investments.
This system of what might be described as “fractional reserve gold” works fantastically for the people who operate it -- as long as only a small proportion of all the holders of claims on gold actually demand delivery of their gold. When the nation of Germany, a very large holder of gold, recently demanded its gold back from Federal Reserve vaults, it was told it would have to wait. 7 years, to be precise.
Now Austrian officials are demanding to inspect their 280 tons of gold supposedly being held in a London vault. Proving that the gold exists is one thing. It may well still be there. The U.S. may still have all the gold it last reported to have in storage at Fort Knox. But that still leaves open the question of who actually owns it. Untangling the web of gold leases, swaps, and other claims on gold bullion stored within central bank vaults and futures exchanges would be a daunting task. If it were actually done, even on just one major facility, it could throw the gold derivatives market into chaos and launch the physical market like a rocket.
Needless to say, you should avoid precious metals derivative products altogether if your aim is to own real metal free and clear. If you do opt to store some of your bullion at a vault, be sure to do so only through trusted counterparties that aren’t banks or brokerage houses. Finally, insist on allocated or segregated storage where your bullion is kept in your name – not the firm’s – and isn’t co-mingled with other customers’ holdings.
Money Metals Exchange can help you identify a reputable bullion storage facility that fits your needs. We can also help you set up and fund a precious metals IRA or convert an existing conventional IRA into bullion through an IRS-approved IRA custodian. Check out the IRA section on our newly revamped and regularly updated website for more details. Or, as always, you can give one of our friendly and knowledgeable specialists a call at 1-800-800-1865.
And now, without further delay, let’s get right to our exclusive interview…
Mike: I’m happy to welcome back our friend David Morgan of The Morgan Report and Silver-Investor.com. David, it’s good to talk to you again.
David: It’s great to be with you, Mike.
Mike: To start, I want to get your comments on the seemingly never ending consolidation period we’re seeing in the metals here. What do you make of the recent movement where the trading ranges seem to be getting narrower and narrower? Are we going to see more dramatic moves soon?
David: Probably will, and I say that with experience because it’s like the fact that the tighter the movement is; in other words, as you just outlined, the more surprise there is to either the upside or the downside. It’s called a channel formation in technical terms. Once they break, it’s usually rather dramatic.
That’s the probability. It doesn’t guarantee it. I really think we’re pretty much near the end of exhaustion as far as how long this bear phase has been going on, but I also am aware the summer is usually a weak timeframe for the metals, so it could continue a few more months. That’s probably what we should expect.
I do really believe strongly that we’re going to see higher prices by the end of the year. With all that’s going on geopolitically; I mean this war drum just keeps getting beat louder and louder, so there’s probably an impetus geopolitically if not economically or a combination really that’s going to take these metals to a higher. Nothing significant, but it’s important, as I’ve outlined with people before, Mike, that we get above the $26.00 level in silver and the $1,550 level on gold.
Once that’s done, a lot of the psychology, this negative psychology that’s pervasive throughout the metals markets will go away and people will realize these metals can go up as well as down or sideways. They can go up and then we’ll get new buyers in the market.
Mike: Let’s touch on the topic of the gold to silver ratio, meaning the ounces of silver it takes to buy one ounce of gold. We don’t get into that much. Why is this an important measure to watch for you as a market insider and what does the ratio tell us?
David: There’s a lot of commentary around the gold/silver ratio. Some people say it doesn’t matter. Some people say it’s extremely important. There’s all kinds of commentary. The fact is it is a ratio that will determine whether or not silver is outperforming gold. When the gold bull market started, it started around 2000 and the silver bull market really didn’t start until September 2003. At that time the ratio was 80 to 1 and today it’s about 65 to 1. Since it got a lower number from 80 to 1 to 65 to 1, it means 65 ounces of silver to 1 ounce of gold.
Silver, even as we speak, has outperformed gold from that starting point. You can use statistics any way you wish. You could start the starting line anywhere you want. You could make silver look worse than gold, better than gold, whatever you want. I’m trying to be objective and I’m trying to say from the beginning of the bull market in silver what was the ratio and what is it now, so that’s important.
The other one that comes up all the time is whether or not we’ll get back to what I call the monetary or the classic ratio, which is 16 to 1. That was hit very briefly during the last bull market in 1980 and that was what the ratio is, or I should say was, when both gold and silver were money. And that ratio was established actually in the United Kingdom with the Central Bank of England.
Sir Isaac Newton determined the ratio should be 15-1/2 ounces of silver to gold and you couldn’t do anything surprising. You just looked at what the ratio was on the street and said “okay, that’s it”, but the ratio monetary really should never be fixed. The free market should be able to determine what the gold/silver ratio should be.
I want to move on from that, Mike, and explain a little further because people get ideas that may sound logical, but the facts are what they are. For example, platinum is roughly 15 times rarer than gold. So people say “if it’s 15 times rarer than gold, then it should be worth 15 times what gold is worth”. The answer is it’s not. Obviously it’s not. In fact, there was a time when it was selling for less than the price of gold, and it’s the market that determines it.
We could go on if we’re in a free market or not and argue that we’re really not, but none the less if we were truly in a free market the market forces would still determine the correct price of platinum versus gold. And that ratio would be probably close to the 1 to 1 we see now, or maybe (it would be) 2 to 1, something like that, but not what the natural ratio is, which is what it comes out of the earth’s surface at a ratio of about 15 to 1.
Look at palladium. Palladium is twice as rare as platinum, so 30 times rarer than gold, yet it sells for roughly half the price of platinum. So all of these numbers are nice to think about and they might give you an indication; in fact, I’ll go on record as saying I think palladium is undervalued relative to platinum. I think if you’re a really sophisticated investor; and this is something, you know, I’m not giving financial advice but it’s something I’m throwing out there, but you could do a spread of short platinum/long palladium because I think that spread will narrow.
All of these numbers are just that. The natural ratio is how they are in the ground. The natural ratio for silver to gold right now is roughly 9 to 1, meaning there is about 9 times more silver produced on an ounce basis annually than there is gold, and yet the ratio, as I said, is 66 to 1. It doesn’t mean the ratio should be 9 to 1.
All things being equal, maybe it would narrow toward that, but it isn’t and the market again if it were free would determine what the correct ratio is, and it would vary. There would be times when silver was considered to be undervalued or overvalued relative to gold, or you could even go as far as to say relative to platinum or palladium.
So hopefully I covered that. I think it’s something people can think about, but as far as knowing what the natural ratio and that absolutely determines what the correct ratio, or should I say price should be is incorrect. That’s not true because gold is bought for certain reasons, whereas platinum is bought for other reasons, same thing with the silver market. The market will determine the correct ratio.
For those that are followers of David Morgan, let me just say I think silver will outperform gold. It has already somewhat. I think it will continue. Do I think it will hit the monetary or classic ratio? I think it will. I think it could even touch the natural ratio at a point, but those are days far ahead of us now, Mike.
Mike: Yeah, we’ve seen the ratio double in just the last couple years. We got in the low 30’s there in the spring of 2011 before this big consolidation or correction period began. We definitely agree that we think silver will outperform gold. And I should remind our listeners I will be, actually as a special for those who want to trade gold for silver, if you swap the yellow metal for poor man’s gold,Money Metalswill pay the shipping and insurance charges on your silver purchase. So if you believe, like David, we’re going to see a decline in the GSR, that may be something you want to consider.
Now David, you’ve often emphasized the importance of the industrial demand for silver because silver has some remarkable properties that make it an essential part of an increasing number of industrial, technology, and medical applications. In fact, you were recently in Salt Lake City looking at one of those uses. Tell us about that.
David: Well thank you. Mike, it’s something I’ve been holding back on. It has to do with silver’s biocidal properties and silver in structured water. In other words, it’s commonly referred to as colloidal silver, although technically there are other ways to put silver into solution other than in a colloid form.
Anyway, it’s well established through the 15th century on what the properties of silver are, but yet whenever you’re talking about quote-unquote medical applications, you have the FDA out there saying you can’t say this or your can’t say that.
So I was invited, after reading this book, “Silver, the Most Precious Metal”, it was a book with a big water droplet on the cover of it and inside the water droplet was a bar of silver and the subtitle was “Silver is more precious than gold or money and here’s why.” And in reading the book, it’s because it preserves your health.
Two doctors, one was a researcher; he’s done many things but he’s primarily a researcher, and the other one was primarily a missionary, and so we did several video shoots talking about the applications that silver has when you’re traveling, if you have food poisoning, malaria, different diseases, different infections and on and on. We spent about four hours filming and these films will be available for the public at large in the near future.
I basically asked questions. I wasn’t giving any medical claims. I was letting the doctors do that, but it was fascinating. The time has come, I mean this MERS virus, MRSA situation, the H1N1; I mean all these things are out there. I’m not saying silver will or won’t do anything. What I am saying is the fact remains that silver is a huge biocide fungus-wise, yeast-wise to my understanding. Again, I’ll let the doctors back it up.
It really was fascinating and I was really glad to do it. I think it’s about time to take that extra little leap you might say and say look, besides silver being a great investment on a monetary basis and besides all these great industrial applications primarily in the electrical and electrons field, it also has these properties that could be used in medical applications.
One thing that’s interesting that you’ll learn from the Silver Institute, although they don’t broadcast it widely, is all this bottled water that’s out there. These are from the huge corporate conglomerates for the most part, and we know who they are without talking about the red can or the blue can. They use silver filtration in their bottled water process because of its properties, but they don’t want to advertise that because, they’re just telling you it’s spring water or mountain fresh or whatever the heck their advertising gimmicks are.
Back to you, Mike, on that, but thanks for bringing it up and again it’s something that I’ve been remiss in doing; I shouldn’t say remiss…I’ve been holding off because I really wanted to do it in the right context and it just came together for me where I had highly educated, highly regarded doctors that I was able to interview. Again, it’s not really David Morgan saying this. It’s David Morgan interviewing these guys that have been in the field, have witnessed this, have watched it, have worked with this on a daily basis for years. Really I felt it was a bit of an honor to be able to do the interviews.
Mike: Very interesting. If we see colloidal silver and similar types of applications for water purification become more mainstream, that would be a new segment of demand for silver that might come to market and actually might have an impact if it really takes hold.
David: I’ve got to interrupt you there. I asked during the interview what will it be like right now if instead of putting fluoride in the water they put silver in the water, and I say that tongue-in-cheek with a bit of a laugh but I’m somewhat serious too. It’s interesting to think about what the properties of silver are and how beneficial they are versus what some people think about the fluoride situation. Anyway, I had to sneak that in there. Go ahead, Mike.
Mike: Turning to Platinum Group Metals, you alluded to it earlier, good old palladium just keeps making its way higher despite the struggles gold and silver continue to have. Tell us a little bit about the difference with platinum and palladium and what you see for those metals moving forward.
David: As we talked about on the previous interview, we were lucky enough to get on the platinum/palladium story, particularly palladium, at the right time, which was just a few months back really. I said palladium would probably lead the group forward. There’s really four precious metals, gold, silver, platinum, palladium. The other white metals really are not used much for investment, but they are used for industrial applications, primarily in the catalytic converter field.
Palladium has equal properties, or maybe even superior properties to platinum and it’s cheaper, so the automotive industry uses a great deal of palladium. Depending on the economic conditions and how many cars China buys and produces, and the rest of the world of course, there could be a huge demand on the palladium market.
We see all the dynamics for palladium in particular; platinum as well, but particularly palladium, being very, very beneficial to higher prices. A lot of the palladium comes out of the nickel mine in Russia. This is well known and in fact it’s been stated many times that Russia pretty much could control the price of palladium. No one knows their exact stockpiles above ground, but the best information we could obtain and reading between the lines, it looks as if they are depleting their above ground supply.
So the dynamics are just strong, stronger and strongest toward the palladium market and it’s significant in the price. Also, if you look at the charts, I think the five-year high for palladium is about $855. Once we break above the $855 level in palladium and hold it for a few days or a couple weeks, what we really have is the breakout leader in the precious metals even though it’s a small, small market, but it’s an indicator. And as I’ve said in The Morgan Report, that indicates all these metals are going to be going higher.
So watch the palladium market for a clue as far as what’s going to happen. Palladium I think is going to lead the pack, but the others will follow. It’s an investment that isn’t for everyone. I’m sure you deal with some palladium. Let me spin it back on you and ask you a question. What are your palladium sales like? Is it 1% of what you sell in a year? Is it 2%? 10%? How much is there an appetite for palladium coins?
Mike: It’s picking up. I would say 1 to 2% is probably about what it’s at. It has come up slightly. We’re seeing more palladium than platinum just because of the fact it is getting close to that multi-year high. I guess as we’re talking here we’re within 1 or 2% of that now, that $855 number that you mentioned. It has certainly been more, but it’s still a pretty insignificant piece of the overall puzzle.
A great portfolio diversifier, those that have a good amount of palladium have been glad they have over the last couple years, especially given what’s happened in the gold and silver markets. Palladium has just held up remarkably well. As you mentioned, it’s driven by different fundamentals, which is why it’s a nice portfolio diversifier.
I know you’re putting the June issue of The Morgan Report newsletter to bed right now. By the way, listeners of this podcast will be getting a special deal if they chose to subscribe to The Morgan Report. I’ll get into that in a moment, but is there anything you’re working on in the June issue beside what we’ve already talked about that you’d like to mention?
David: A couple things. We went through and looked at the two silver studies that just came out in the last month and I think one cost $150 and the other one I think is more than $100. We certainly don’t give you all of the information that’s in that, but we give you a pretty good synopsis of it, so for newsletter that’s like 10 bucks a month, you just saved yourself 300 bucks to get the essence of these two reports. That’s part of it.
The other part is we took at “peak silver” and this is something like peak oil. It doesn’t mean you’re out of silver. Peak means the most amount ever mined. It’s a high number, and that’s in the future. We’re going to continue, all things being equal, meaning there’s no huge disruptions in the mining industry, we’ll continue to produce more and more silver for a few more years. We go through all of that as well.
I should mention, Mike, we are writing a new book on the silver market. This is basically the original book I had envisioned when I wrote “Get the Skinny on Silver Investing” way back when. That was under a different publisher and of course there were restrictions, no graphs, a hundred pages long, kind of dumbed down, etc. This one is free market. We get to determine exactly how long the book will be and what goes into it, so it will be much more comprehensive on the silver market.
So this is a bit of an excerpt of what will be in the book that’s still being produced, we’re still working on it, on peak silver. If you’re really into the silver market, this would be a good month, I think, to go ahead and get a subscription. Once you’re a subscriber, you also get the last two issues in the past to kind of bring you up to speed. Then, of course, you would get the current issue and the following eleven issues.
That’s what’s in the month of June for The Morgan Report. Thanks for asking.
Mike: Well, David, excellent insights as usual. We always appreciate your time and we’ll definitely catch up with you again soon.
As I alluded to a moment ago, we’ve just created a special offer forMoney MetalsMarket Wrap podcast listeners, the ability to get a no-risk trial of The Morgan Report newsletter plus free silver. For any listener that signs up for one of these refundable subscriptions today, Money Metals Exchange will ship you a free half ounce silver round. The information in The Morgan Report, it’s quite literally worth its weight in gold for anyone investing in or just thinking about investing in the precious metal sector. To take advantage of this special deal, please look below today’s podcast.
Well that will do it for this week. Thanks again to David Morgan. Check back next Friday for our next weekly Market Rap podcast. Until then, this has been Mike Gleason with Money Metals. Thanks for listening and have a great weekend.
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.
