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Metals Firm Up as Central Banks Nervously Eye Gold Vote

Don’t Miss Silver Guru David Morgan’s 2015 Forecast!

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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Well, this week we have another treat for you. Later in today’s program, I speak to silver guru David Morgan about how much longer he expects to see these oversold prices in the metals. Don’t miss my must-hear interview with David Morgan coming up in just a few moments.

Gold prices has spent much of the week flirting with a key level. The yellow metal briefly traded above $1,200 an ounce before settling back down to $1,194 on Thursday’s close, up about $4 for the week. On this Friday morning, gold has popped through the $1,200 level and currently comes in at $1,204, good for a modest weekly gain of 1.2%. 

So far this month silver prices are exhibiting a bit more weakness than gold, even as demand for silver coins among investors continues to outpace demand for gold. The bull market in investor demand for physical silver appears to be coming back big time at these bargain prices. We could see many records broken before year’s end. This week, silver prices showed a decline of about 1% through Thursday’s close but are getting a bounce along with gold this morning. Silver currently trades at $16.56, up now 1.3% on the week thanks to this morning’s rally. 

One force that is pressing down on silver and gold prices is the options market. A large amount of put option orders have been entered in the gold market at a strike price of $1,200. Traders who placed bets that gold prices would finish below $1,200 at the expiration of the November contract are hoping to be able to keep prices contained at least through next Monday. That’s options expiration day. Prices aren’t supposed to be manipulated to serve the interests of speculators, but everyone who follows these markets knows that abnormal forces are regularly brought to bear around options expiration.

$1,200 per ounce is also acting as a key level for platinum. Platinum prices found support at $1,200 earlier this week. The scarce metal currently trades at $1,233, still hovering at just slightly above the gold price.

Either the $1,200 level will hold as support for platinum, in which case we can expect gold to break out to the upside in the days ahead. Or the $1,200 level will serve as resistance for gold, in which case gold may go back and re-test its lows for the year and platinum could make new yearly lows. 

One thing that could move the markets over the next two weeks is a vote taking place next weekend in Switzerland. On November 30th, Swiss voters will decide whether to require their currency, the Swiss franc, to be 20% backed by physical gold. Although such a move wouldn’t cause a sudden run on physical gold supplies, it could give the gold market an immediate psychological boost. 

The Swiss central bank would have to buy approximately 1,500 tons of gold over five years if the initiative passes. Not surprisingly, the bankers and the politicians who don’t want to see their debt financing leeway limited by gold have fought hard to defeat the gold franc initiative. We’ll soon find out if the long-shot initiative shakes up the establishment; however, support for the measure may be waning in the final days before the vote. 

Here in the United States, our monetary establishment continues to maintain ultra-low rates while charting a path for eventual rate hikes. On Wednesday, the Federal Open Market Committee released the minutes from its latest meeting. The Fed was divided over whether to change language on when it expects to start raising rates. But Fed chair Janet Yellen and the dovish wing of the Fed maintained the official position that rate hikes will not occur “for a considerable time.” 

And the latest inflation data suggest the Fed won’t face much pressure to tighten anytime soon. This week’s Consumer Price Index report showed the CPI is now running flat at 0%, with rising medical costs being offset by falling gasoline prices. The recent plunge in energy commodities has deflation bugs chirping. But with crude oil prices now below production costs for many of the shale and oil sands operators, the energy market may soon find a fundamental floor. 

A majority of Fed members still expect inflation to pick up in the months ahead and move toward the central bank’s goal of 2%. When the inflation rate does start picking up, it’s not likely to stop at the Fed’s arbitrary target. 

The Federal Reserve has never shown an ability to accurately predict the economy or prevent financial crises from happening. More often, the Fed has been the root cause of financial turmoil by facilitating asset bubbles. That’s what it’s been doing in the bond market with Quantitative Easing. The great risk is that bond yields start to normalize, which could wreak havoc in financial markets. That, in turn, could reignite the precious metals markets.

Now for more on what’s head for gold and silver and what suppressed prices are doing to the mine supply, let’s get right to this week’s exclusive…

Mike Gleason: I’m happy to welcome back our friend David Morgan of The Morgan Report and Silver-investor.com. David, good to talk with you again. How are you? 

David Morgan: Mike, I'm great. Thanks for having me on the show. 

Mike Gleason: Before we get into the meat of what I wanted to discuss with you today, please first give us your take on what you're seeing in the market right now. What you make of the recent action, especially since we saw the big drop a couple of weeks ago. Are we nearing a floor? Do you anticipate testing the low $15 range in silver again? Basically, what's your assessment here, David?

David Morgan: I see a lot of smart investors because the U.S. Mint has been inundated with orders and the Mint isn't able to keep up with demand. That doesn't mean there's a shortage of silver. It means there's a shortage of Silver Eagles because the demand's greater than what they can supply currently. So that shows that at least some of the silver bulls haven't given up. So that warms my heart so-to-speak. Secondly, I talked to some of the larger dealers, such as yourself, Mike, and there's one that has both a retail and a wholesale side, which many of the bigger ones do. And they're basically running out of product. Of course, they'll lock in the prices, but this an outfit that a million dollar order was not a big event for them, and it is for a lot of mom and pop operations. So if someone came in with a million dollars and it cleared, they could walk out with a million dollars in silver, not a problem at all. A client of ours that we've dealt with over the years, dropped his membership for a while. He assessed the silver market, decided he wanted to get back in. Signed up and did a little quick consultation with me, and he went in to buy 6,500 ounces and he walked out of that place with 400 ounces, 61 100-ounce bars are due him and that's not the normal scenario for that particular dealer. There's nothing wrong with what I'm saying other than the supply's just tighter than the price, Mike. 

To answer your question fully, I expect a bounce here. I want to see what happens around the $17ish level and see if silver busts on through. If it busts on through it to the upside, then that means we've got a much stronger market than many of us anticipate. On the other hand if it stalls out and then falls, I expect the paper paradigm. The paper-pushers will push the price down the end of the year, like they have the few years in a row. But I also know there isn't much $15.00 silver out there. There's not much $16.00 silver out there and there's probably not very much $17.00 silver out there. So my overall assessment is this won't last much longer. 

Mike Gleason: We're certainly seeing supply tightness as well from the refineries and mints that we work with. A lot of it's production bottlenecks, as you mentioned. There's not necessarily silver shortages yet, but we are seeing some difficulty getting product timely. 

We've seen prolonged period of suppressed prices in the metals for quite some time, especially for silver and that's even before the recent take-down late last month and early this month. So I have to think this is going to have an effect on the mining industry about which you are an expert. What are you seeing out there? How long can we have prices at these levels and still have any sort of a mining industry? 

David Morgan: Great question. Real answer is it depends on a case-by-case basis. In other words some companies have better cash positions than others and some have better margins than others. But the industries as a whole is not much longer. I would give you a WAG, I think everybody knows what a WAG stands for, probably like six more months. You have these kind of prices for six more months, continuous, I think you'd see a lot of these primary silver producers go on care and maintenance.

Mike Gleason: It does take a while for these mines to get back up to speed once higher prices do come about, and they want to get back into it, and it makes sense to do so, but it's a switch that you can just flip and immediately start producing a lot of ounces again. It takes a while, right? There's a lag.

David Morgan: Absolutely there's a lag, and that's why many people operate at a loss, because they have to do an overall economic assessment, and they have to determine are they willing to lose $4.00 for every ounce they produce, but yet the startup costs, if they go on care and maintenance is going to be X amount. It's sort of like a break-even analysis. They have to determine how long can they lose money producing versus if they shut down and restart, what are the costs there. So it's a trade-off study. So it's not an easy answer to get to, but that's why you'll see people ask a common sense question. Well, why produce at a loss, just shut down? But it's not like it's a candy store or something, you can lock the door and the inventories going to be good for the next six months or whatever, and you come back in, turn the lights on, and you're back in business. It's not that way at all in the mining business.

Mike Gleason: I'm sure there are people out there that would point out that silver is mined primarily as a byproduct of other mining, so the price of silver doesn't necessarily drive a lot of business decisions for these companies who account for most of the global silver production, but even if we're talking about the silver-only producers, the 20 or 30% out there, what affect would it have if those companies bite the dust or shutdown? That's not a huge amount of the overall production, but it would still be a major deal given the very small margin there is on the supply front, would it not?

David Morgan: Absolutely. All markets move at the margin. It's the last bidder that gets the item at the auction, so it's bid up and up and up, if it's a desired item, an automobile, whatever. Whatever's being bid for. And it's the same in the free market, the little that we have left of these markets. But still, it moves up the margin, so every ounce that comes off the market makes the supply tighter and tighter, and you know, there's not a lot of incentive for some of the base metal markets, either. I mean, zinc from the high is down 51%, lead from the high is down 47%, nickel is down 70% from the high, moly(bdenum) is down 73% from the high, and even copper, “Dr. Copper”, the overall best looking for what the industrial demand is globally, is off 34% from its high. 

So all these markets, the ones I read primarily are contributors to the silver supply, lead, zinc, and copper, are off as well, so you know that a lot of those mines are not like putting out massive amounts. And then China looks like it's in a state where they are not going to be leading the economy with huge demand in the base metals for a while. They have a lot of internal problems going on financially with the overbuilt housing or apartments, etc. So this is a set-up, where the cycle that goes too low and too high is in a too low position right now, Mike.

Mike Gleason: You have more of an ear to the ground than probably just about anyone, and you're talking to these people all the time, and I know that you recently met with a number of the player's in the business at the Silver Summit last month. How did that annual conference go this year, and what is the sentiment out there right now given the beaten down paper prices for gold and especially silver?

David Morgan: Well, it's a great conference, but the attendance was definitely on the low side. The people that were there were realistic. I think a lot of them have conviction, companies included. I mean the investor side and the company side. We interviewed almost every company that attended, but the overall feedback that we received was that if it's like this next year, they're probably not going to come back to the Silver Summit. Meaning that the attendance on the investor side just wasn't robust enough for them to justify spending the money that it takes to fly in, set up a booth, put people behind the table, and answer questions, that kind of thing. On the flip side, I had about three companies say this is an incredible audience. Everywhere we go, we get questions and that type of thing, but this is the most astute audience we ever get. They ask the most in depth questions, and keep drilling down more and more information that you don't see anywhere else. So bright spot definitely for the Silver Summit, but again, attendance poor. I doubt that this is going on a whole lot longer. I think a few more months. I think 2015's going to be better, but the market knows more than any of us, and I've said that more than once.

Mike Gleason: You mentioned to me offline that the smart companies can be real opportunistic at times like this and get some great value in the mining world. Talk about that.

David Morgan: Well, there's one company that's been on the list of The Morgan Report as a speculation for a variety of reasons, but it had an energy and a metal side, and we got interested in it for the overall undervaluation of the overall company, and basically what happened was the mining side or the vanilla side got spun off for free so our shareholders if they followed us in got a very, very nice project as a consequence of buying the main company. That same company has gone back to the metal side. They kind of broke off onto the energy side. Now, they are bought one of the best deals in the silver industry that I've seen in a very, very long time. And we at The Morgan Report have been invited down to do an analyst tour, and it looks like one of us will go for sure. It may be me, it's most likely going to be David Smith and or Chris Markezay, and they will go, and of course, we do a little different than a lot of the newsletter writers. We do like a film expose on the trip so that the people that are members of The Morgan Report actually get to hit the play button on their computer and watch the interviews. You usually see what's going on, and this is a very, very great project. Though I think most important thing I can is that like a good investor, this company is buying silver for pennies on the dollar, rather than trying to do something else. They see the opportunity to buy silver in the ground for literally pennies on the dollar. So this is going to be something that will be very lucrative, I think, for this company, and also balances the energy side, which I like much better. And I think it's going to be something that our subscribers will be happy that they held on as long to the main company, because this is definitely going to add value to all the shareholders.

Mike Gleason: Switching gears here a little bit. There is a vote coming up that many in the precious metals and central banking worlds will be keeping a close eye on. I'm talking about the initiative on the ballot in Switzerland later this month, where they will vote on whether to require a 20% gold backing of the Swiss Franc. What are your thoughts there, what do you think will happen on that vote, and what ramifications do you think it could have, whether the vote is yes or no, and it's looking like a real toss-up right now from what I've heard.

David Morgan: Well, my thoughts are what I commented. I mean, it was disheartening to me, to say it politely, when the Swiss caught the Keynesian disease so many years ago and sold of a lot of their gold and decided to do this neoclassic economics, the Keynesian model and just print wealth, which is impossible. You have to develop wealth, you can't just print it. So now, to see them come full circle and come back to kind of their roots as a gold-backed type of situation, I think it's great. That's very personal feelings. 

As far as will it pass or not, they say it's a toss-up. If it passes, I think you'll see the gold price go down almost immediately. The reason for that is to break the psychology of what just took place, because the paper paradigm is still strong by the central bankers that they will make sure that there's lots of paper sales going on to look as if the referendum doesn't mean anything for the price of gold, but that would be a temporary thing. Of course, you get a lot of mainstream news and mocking bird press saying “oh, the referendum passed, but gold was down four days in a row, blah, blah, blah, blah.” However, it would mean a great deal, psychological, because it would put to the world stage is that not only is gold important, but probably the best aligned to the gold community in Switzerland. And that would reverberate all through the Europe, and it would resound around the world, as well. So if it were to pass, you might get, though, as I said, something you might not expect. I've been in these markets for forty years. I've seen it time and time again, where common sense would tell you that the gold price would have to go up and such and such, and it doesn't. And there's a very clear reason for that, and it's psychology. But again, in the longer term, it would be a psychological shift. It would be very, very positive to the gold community, and the world financial system at large.

Mike Gleason: Definitely give credit to the Swiss there for even making this choice available for its citizens. I have to think that one of these days, all the other nations are probably going to be forced to have a gold backing of their currency to restore confidence when things finally do tip and fall. 

We're nearing the end of 2014 here, a year that has not been good for metals investors. What are you looking for as we head down the home stretch, and then what do you expect for 2015 for gold and silver?

David Morgan: Well, I’m still optimistic. I mean, there is a possibility that we might, as I said earlier in the show, Mike, see you know, silver, see gold over the $1,200 level, and just keep going up, and silver breaking through the $17 level, and keep going up. I don't rule that out. Used to be that we had a seasonality that the medals did really good near the end of the year every year, but that's been broken the last three or four years, and I expect that's probably going to be what happens again this year, but we have to wait and see to know for sure. 

Moving beyond, the next month and a half, what we're going to see is probably a pretty good shot in January. All the tax loss slowing and everything that takes place at the end of the year, it's been such a poor year, as you said. You're going to see the wash out, which I think we're already seeing, or maybe it's behind us, we don't know, yet. And then it's going to pretty good rebound in January, and I mean, it's going to carry through. I look for 2015 to be a year where I thought we'd be this year. I thought we would see a shift where the global economy kind of wakes up to the fact that this recovery isn't for real, and something's got to be done. Like you said, Mike, this run to gold, however you want to term it, is going to start in a greater population base. In other words, more and more people will be waking up to it. But that didn't happen in 2014, but I'm almost certain it will in 2015. These things can only go so long, and the pendulum can only swing so far one direction. 

So I'm pretty positive about 2015. It won't be hugely positive as far as running up against the old highs. I don't see that happening in 2015. But I see this wash out completion, I see a new based being built, I see the massive selloff that took place at $26 silver and $1,500-ish gold being breached to the up side, and that becoming the floor again, which was before for both metals for so very long. And once that's established, then we'll have a psychological shift, and people that have been coyly watching the market and maybe got out or weren't sure or were smart enough or lucky enough to get out and hold their cash for their metals for their portfolio will start to come back in. So I'm still very optimistic. I mean the basis for why you would buy precious metals haven't changed. I mean fundamental facts remain the same and they're stronger than they've ever been.

Mike Gleason: Yeah, I couldn't agree more. 2015 being a good year would certainly be a welcome sight for precious metals investors, and yeah, I hope we get it. Well, excellent insights, David. Thanks as always, and we hope to catch up with you again real soon.

David Morgan: My pleasure, thank you.

Mike Gleason: For those who haven't yet signed up for The Morgan Report, we have a special offer for Money Metals Market 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 out a free Silver Eagle. The information in The Morgan Report is quite literally worth its weight in gold for anyone investing in, or just thinking about investing the precious metals sector. To take advantage of this special deal, please look below today's podcast.

Well, that will do it this week. Thanks again to David Morgan. Check back next week 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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