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Nervous Fed Backs Away from Rate Hikes

David Smith Predicts Big Silver Move in Exclusive Interview

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

Coming up we’ll check in David Smith of the Morgan Report and Silver-Investor.com. Hear what David has to say about where the metals are headed in 2015, he sees some good times ahead of us in the silver market. Don’t miss my interview with David Smith coming up in just a moment after this week’s market update.

The arcane language employed in Federal Reserve policy statements is often referred to as “Fedspeak.” And on Wednesday, Fedspeakers spoke. The Federal Open Market Committee released the minutes from its most recent meeting.

Some Fed watchers were looking for the central bank to firm its resolve to raise rates. But policymakers delivered a somewhat more dovish outlook. They cited risks to raising rates too soon amidst below-target inflation levels. Expressing a willingness to keep rates near zero “for a longer time.” The Janet Yellen Fed is carefully calibrating its language to avoid upsetting the stock and bond markets.

Audio Clip:

Anchor: Breaking news, we now know that the Federal Reserve is worried about the stock market. Are they supposed to be? The just released minutes from the latest fed meeting flat out show committee members were concerned about market reaction when it finally signals a willingness to raise rates.

Fischer: I would expect that you'll see a hike sometime this year.

Plosser: The economy is not in a crisis anymore and we need to begin to raise the rates. And I think if we start sooner we'll be able to do it more gradually.

Fischer: But based on the data you would raise the rates, yesterday.

Plosser: Probably.

Anchor: That's (Charles) Plosser and before that Richard Fischer. By the way, it's important to note that those two members are retiring, maybe they're a little more free and vocal about preferring a rate hike sooner rather than later.

With the mildly hawkish members of the Fed on the way out, the doves are in charge. That should auger for a weaker dollar over time and bode well for gold and silver. The near-term picture, however, is fuzzy for precious metals markets.

This week gold prices are down 1.9% to trade at $1,207 an ounce. Gold attracted buying interest around the $1,200 level on Wednesday and staged a modest rally. But on Thursday, gold weakened in response to the Greek government’s failure to win approval for its bailout request from Germany. The euro fell and the U.S. Dollar Index rallied modestly on the news. Softening demand out of China ahead of the Lunar New Year was also a negative for gold.

It’s important to keep in mind that all the world’s currencies are creatures of government decree, backed by nothing tangible. So while these paper currencies may go up and down against each other, that doesn’t necessarily mean any of them are increasing in purchasing power. For example, the dollar index has bounced back and forth between 70 and 90 for over a decade, yet gold has nearly tripled in its dollar price.

Turning to silver, the futures markets got hit with heavy selling pressure this week. Spot silver looks lower by 5.7% this week, with most of the damage inflicted on Tuesday. Spot prices currently come in at $16.37 an ounce.

Both gold and silver are still holding onto modest gains for the year and may now be at important support levels. But there’s some cause for concern in the price action of the platinum market. Platinum broke down to a new five and a half year low this week, losing 3.8% to bring prices down to $1,164 an ounce. Unless the technical damage is repaired soon, further declines in platinum prices could be in our future.

On a fundamental basis, precious metals are becoming more and more attractive. Who would have ever thought that gold bullion, which yields nothing, would become a higher yielding asset than Japanese and European bonds? Well, that’s the unprecedented situation we’re in now, with central banks pursuing negative interest rates to try to stimulate failing economies.

Meanwhile, the S&P 500 notched a slight new record high this week. Gold often exhibits an inverse correlation to the equity markets. Stock rallies are fueled by hope. Gold rallies are fueled by fear. That may not necessarily be the case over any given time period, but it is a fact that the biggest up moves in gold have come during times when people feared financial turmoil, especially in the form of inflation or a currency collapse.

Speaking of inflation, on Tuesday outgoing Philadelphia Fed President Charles Plosser, who we heard from a moment ago, warned of the potential for hyperinflation. Not because of our runaway national debt or the likelihood of Fed officials monetizing it. No, Plosser is concerned about what will happen if the Fed’s so-called independence is eroded – specifically by the Audit the Fed bill now pending in Congress. That’s right, auditing the Fed will increase the risk of hyperinflation! At least according to Charles Plosser.

To be fair, he’s concerned about the prospect of Congress assuming more control over the money supply. And members of Congress might well behave more recklessly with the printing press than the small group of elites who run the Fed. That’s why the real solution to the problems caused by unaccountable central bankers isn’t political at all. The solution is gold and silver, as spelled out in our Constitution.

Auditing the Fed is just one step toward the restoration of sound money. But it’s an important step to take. The fact that Fed officials are united in their opposition to an audit suggests that they view transparency as a serious threat to the Fed’s institutional power. Something that should certainly raise eyebrows among those of us who are concerned about exactly what it is that they are doing.

Well now for more on state of the gold and silver markets, including a 2015 price forecast and commentary on what the unfolding global currency crisis is likely to mean for precious metals, let’s get right to this week’s exclusive interview.

Mike Gleason: It is my privilege now to be joined by David Smith, Senior Analyst at the Morgan Report and regular contributor to MoneyMetals.com. David we haven't talked to you yet in 2015 and I know you've been doing a bit of globetrotting. How are you?

David Smith: I'm very good. How about yourself, Mike?

Mike Gleason: Doing great. I wanted to ask you about some of your travels here in a moment but first I figured we'd start by covering some of the recent market events. It's been hard to pinpoint the direction of the metals market so far this year. We saw a real good start during the first several weeks of January. Gosh, silver was up 17% since the 2014 close in a very short period of time, but now we've seen some setbacks for the metals of February. They just haven't been able to sustain the upside momentum. What do you make of the market action so far this year?

David Smith: Mike, I would call it backing and filling. Seeing some of the declines of the last few days might make people seem kind of pessimistic but if you look at the bigger charts over the last six months as I was just doing today, I noticed that both in gold and silver, at least so far, the price action is confirming what we call the evidence of a bull market, which would be higher highs and higher lows. Even where silver is after a one dollar decline we had a few days ago, we're still at about a 50% retracement area from that $18.50 level down to $14.10 or so where it bottomed in November. Same with gold in a relative sense.

I think that's a good sign. When the bears come in force, they have a hard time tamping prices down and keeping them there. Then there are a number of other ancillary things that I think that I would call reading the tea leaves a little bit, little indications. We see more and more money going into the quality mining stocks, a couple of the royalty companies are hitting 52 week highs. A number of the other companies are doing well with that same kind of action that I mentioned of higher highs and higher highs, even when they have retracements.

This is just action that is preparatory in my view toward the next upward thrust. It may not start tomorrow or next week. But I think it's still in the cards and as long as these prices that we're seeing hold roughly where we're talking about today, I think we're going to be in pretty good shape going down the line.

Mike Gleason: We did see a nice bounce off of $1,200 in gold yesterday following the release of the Fed minutes, so that may be an indication of the bottoming there, but we'll have to wait and see if it holds of course.

Now the unfolding global currency crisis is likely going to be the story of 2015 in the financial world. Talk about how this is likely to affect the metals. If we do see a breakup of the euro, will the metals be the beneficiary or do you think that money will just flow into US Treasuries? For the most part, the dynamic at play in the currency markets is weak euro, strong dollar. While gold has done well against all other currencies, it's not keeping up with the dollar. What are your thoughts on all that?

David Smith: There are several different perspectives in putting that all together to answer your question, which is kind of multiple parts in a way. They all relate to one thing. I think even if we don't see a breakup of the euro, if we just see more weakness, you're going to see what I would call a Pavlovian US dollar response where a lot of the hot money goes to the perceived safety of the dollar. Most people that pay attention to what's going on realize the dollar is relatively safe compared to other currencies, but not safe compared to gold and silver.

The volumes that we see with record purchases of American Silver Eagles and massive purchases of gold and silver by India and China, these continue unabated and they seem to be apart from what's going on in this surface action of the prices on the charts. But the reality is, those physical prices are more and more going to affect where the surface prices are going to go as silver becomes and gold becomes a little more difficult to acquire in relationship to demand.

The thing is with the currency, this is really kind of fascinating, more and more people are starting to see this. Last year and so far this year, virtually every currency except for the US dollar has shown a break out in prices of gold and silver in relationship to those currencies.

In January I worked at a conference up in Vancouver, BC. I was aware that the Canadian dollar had declined quite a bit in the last year, but it really struck me. I even took a picture of it with my iPhone. One of the places that was selling the physical metal there, silver was going for like, I think, $18.50 or $18 US and it was $21 something in Canadian dollars, almost $22 (CAD). The gold, which I think at the time was going for maybe 1,300, it was like 1,550. The Canadian dollar was trading at about 82 to 85 cents US. Other people that are trying to buy the metals are paying a lot more for them in their relative currencies than people are that are buying them in US dollars. That is for now at least.

Mike Gleason: I've heard you say the Chinese are very secretive in terms of how much gold they've been accumulating. Yes we have the World Gold Council's numbers that show the amounts of gold being purchased by the world’s central banks, which of course is reporting that the Chinese have been loading up over the last few years, but do you have any sense that these numbers are understating just how much China – and Russia for that matter – have been accumulating?

David Smith: I really believe they are. A few months ago I wrote an essay for Money Metals talking about the four ways that the Chinese are accumulating gold. Most of those ways are kind of, if you want to call them secretive or not transparent or whatever – you wouldn't want to call them devious I guess – that's just part of their strategy of not playing their hand. They're good card players. You don't have to be devious to play a hand and not let everybody know what you've got. That's kind of part of the game.

They are keeping all of the gold that they produce internally, none of that is leaving the country. They're buying a lot of gold through different venues to bring it in, the physical gold. They're buying up gold mining companies or taking partnership positions in them in different places in the world. I fully believe that they're buying large amounts of the illegally mined gold in different places in the world where they can simply step in with a suitcase full of cash and pick up the gold at below market prices. All of those feed into that golden stream going into China where they're building more and more gold reserves, which someday will enable them, if they so choose, to have a gold backed yuan.

Mike Gleason: There's somewhat of a threat to national security I would think given all of this metal that is flowing into China. Eventually I have to think that this is going to really matter on the global scale when we get to a true crescendo of this currency war. We're kind of mortgaging our future a little bit, are we not by just letting so much gold go over there to our own peril perhaps?

David Smith: I think that there's a case that can be made for that because in order to cause us some financial issues, the Chinese don't have to suddenly declare a gold backed yuan, they can have certain things be traded in gold and they could do a lot of other things that would undermine the perceived strength of the US dollar. As I've said many times, the US dollar does not have to be dethroned as the reserve currency of the world in order to cause us some real constrictions in what we do.

All it has to do is be lessened as a critical force and maybe made first among equals with say the Chinese yuan slightly behind it. That would really crimp our style in terms of what we've done, for what several decades now, of printing unlimited dollars to finance whatever it is we wanted to do and have foreigners soak up those dollar reserves so that we can keep doing that. If we are constricted in doing that, where we can only print so much because the world has less ... or they’re less supportive of this, then that puts us in a position that's not a very good one and it can create inflation levels and all sorts of issues that we don't want to see happen in terms of our best interest.

Mike Gleason: Right now I believe we've got the Chinese New Year going on. Is that maybe hurting some of global demand for gold and maybe could explain a little bit of this week's price weakness or is that overstating it?

David Smith: They've been stocking up for that for some time. Part of that, a lot of their purchases seem to have been made for that. Mike, I would regard these things as noise because the really important stuff that's going on as the continual large purchases of gold and silver, especially by the Chinese and the Indians. Also there's the more and more constrained ability of the mining sector itself to increase its production.

Even when prices went up to $1,900 an ounce, the gold production didn't rocket higher because of that. With prices down where they are now, relatively lower and a lot of companies shelving projects or cutting back on expansion, all that's going to do is cause the supply going forward to be more problematic.

Mike Gleason: Yeah. That's certainly going to be an interesting dynamic to watch play out here. We were talking earlier off air about your recent trip to Argentina and some interesting interactions that you had with the people down there. Tell us about that because I found that pretty interesting.

David Smith: I took a tube of one tenth of an ounce silver rounds down with me. In some of my meetings with people whether it was in a restaurant or the taxi driver or some of the guides that we were fishing with or even stewardesses on the airplane, I would pass out some of these tenth of ounce silver rounds. It was amazing to me, these are people from several different cultures, not just Argentinians most of them were. When they would hold one of those little one tenth of an ounce pure silver rounds in their hand, they would start rubbing it between their thumb and finger. Their eyes would light up and they would smile and they were very appreciative just for one tenth of an ounce of silver.

I think even if they couldn't put it into words or they didn't know why it was so fascinating, they really got it. It almost makes me feel that the appreciation for true hard money, precious metals, is in our DNA. I've conducted that experiment with a number of people here in the United States and some of my friends, who I know hold gold and silver physical.

So you wouldn't think that if they hold – who knows how much they hold, maybe several thousand ounces of silver and maybe 100 ounces of gold I don't know. Holding that much and they still, if they have that much and they still have this one tenth of an ounce round in their hand, they're still really impressed. That tells me that something kind of important is going on there. I think as more and more people get the true picture, you're going to see that that's going to become much more common place than we've seen already with so many people that really don't seem to have a sense in our country of how important it is to have some of your wealth in precious metals.

The Argentinians sure get it because they've had their wealth wiped out several times in the last several decades due to massive runaway inflation.

Mike Gleason: We're thrilled that our silver rounds are lighting up the faces of people across the globe. That's pretty neat. The tenth ouncers are particularly nice. It's in a size that (still) makes an impression because of its silver of course, but it's not very expensive at the same time. We've heard many similar experiences from others who have given out silver. When you put some in somebody's hands, they generally get it. It's neat to see that relationship be made by somebody.

As we begin to wrap up here and since this is the first time we've had you on in 2015, give us your take on what you're looking for in the metals this year. What type of year do you see unfolding from this point on?

David Smith: As we seem to be finishing up as of last winter the four years of cyclical bear market within the larger secular bull market in the metals, it takes time when you fall down the stairs it takes time to get up and really get yourself going again as opposed to just tripping on something and not falling down. I think the recuperative process for the metals is taking some time and it's not surprising. The mining stocks have just been obliterated. Many of them, even the quality ones, are down 95 percent from their highs and the quality producers and royalty companies down 70, 80 percent. But at the same time, you're getting a lot of new volume and buying in there and the ETFs are starting to increase their holdings. I see all this as very positive.

Mike, one of the things that I think all of us in these markets, we'd love to see a vertical market and just cut through all the resistance and go up and up and up, but the thing is if you want a bull market that is going to be long lasting and not over before you can turn around and look at it again, what you really want, even though in a way you want it to happen quickly, you want it to take its time and build a very solid foundation and base. Then move upward and challenge a higher level a few times and fail and then get through that and then challenge another higher level, climbing what a lot of stock market watchers call a wall of worry. That's what's going to provide you with an enduring bull market and ultimately propel prices, not only much higher, but enable them to stay higher longer than if you had a moonshot that turns around and collapses within a matter of weeks or months.

Mike Gleason: With that said are you expecting pretty good things for the metals this year or do you think we'll knock on the door of some of those overhead resistance levels? What are you seeing?

David Smith: I really do. I think a critical level, and I did an interview last week on this, it's on David Morgan's YouTube, but I called it “Why $26 Silver is a Big Deal.” If you look at the charts, $26, $25 silver is a very important retracement level from the prices dropping down from almost $50 in 2011. When prices can surmount that area and build a base in that general area, then they can challenge without that much difficulty, I believe, the next level about 10 dollars higher around $34, $35 silver.

This is a stair step process. We haven't seen a strong challenge like that since prices began to decline. I think by the end of the year, I think $26 silver is a very realistic target. If we can build a base once we get there, then the next level of challenging up in the mid 30s would be accessible perhaps early next year. Then certainly right after that, I think relatively soon after that, you see a strong challenge of $50 silver. That would be very, very exciting.

I do think that that sort of thing is in the cards for us over the next 18 to 24 months, that whole scenario.

Mike Gleason: Lastly David, before we let you go, tell us what you've got in the works for your next piece for MoneyMetals.com. I believe you're working on something right now, correct?

David Smith: That is correct. I'm going to be talking about the idea of what I call a gold and silver seat belt and making that analogy about how important it is to have that seat belt and have it in place, just in case something comes up that you hadn't expected. Then I'll be sharing some of the insights that I've received being in Argentina with not only the people that I passed out silver to, but some of the difficulties they're dealing with with the Peso, which when I first went down to fish in 2009 was three to the dollar, about 35 cents, and now it's eight and a half to the dollar. They're having 25 to 30 percent inflation per year. That's the official rate.

You can buy Pesos on the street in the blue market for around 12 to 15 to the dollar. If you go down there as a tourist, or you buy something at the airport or you go to a restaurant, chances are you're exchange is going to be eight and a half. The reality is, if you can get on the street from the blue market, the Arbolitos, you're going to get twice as many Pesos. That's the kind of disconnect that's going on in regard to things in Argentina. Unfortunately it's probably going to get worse because the government just doesn't seem to have learned from the past several cycles that they've had at making very similar mistakes of printing very large amounts of money and trying to control prices and things like this. It's pretty sad for the Argentinians, but I think more and more of them are getting it figured out.

Mike Gleason: I'm noticing a theme there. I think we probably can relate to that sort of reaction from governments. That's generally what they seem to be doing when it comes to our currency, just printing more and more of it.

Thanks very much for your time. Excellent insights as usual David. We certainly look forward to talking with you again real soon.

David Smith: It's been great speaking with you Mike. Have a good day.

Mike Gleason: To check out any of David's fabulous articles, just go to the news section on MoneyMetals.com or just type in David Smith in the search box to get links to all of his work.

Well that will do it for this week. Thanks again to David Smith of the Morgan Report and contributor to MoneyMetals.com. Check back next Friday for a 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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