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Secretary of State Warns Forces “Bubbling Out There” to Supplant U.S. Dollar

Interview with David Morgan: “Only So Much Silver Available” at Current Levels

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

Coming up we’ll talk to our friend David Morgan of The Morgan Report. David has some important things to say about the silver market, the supply situation, and a new technology that could be a major game changer in the mining industry. Don’t miss my interview with the Silver Guru, David Morgan, coming up after this week’s market update.

Well, this week brought some significant developments in the markets. The stock market broke to the downside while precious metals caught a safe-haven bid and rallied.

On Thursday, the Dow Jones Industrials closed below 17,000 after falling 358 points on the day. The move took out the Dow’s January lows and brought the blue-chip average to a fresh new low point for the year. The technical breakdown in the Dow could portend more trouble ahead for stock market investors.

Clearly, some investors are now rotating out of stocks and into precious metals. Gold spot prices advanced $40 through Thursday’s close. As of this Friday morning, gold trades at $1,150 an ounce, up a healthy 3% on the week. Gold emerged from its summer doldrums to become the premier safe-haven asset to own – at least for this week.

Silver meanwhile has had quite a volatile week. The white metal sold off on Tuesday but rebounded strongly on Wednesday and Thursday to turn positive for the week, it is now giving those gains of the last two days back this morning. Silver is now down slightly overall for the week, coming in at $15.20 an ounce as of this Friday morning recording. Down about 0.6% since last week’s close.

The Platinum Group Metals are now mixed, with platinum up 3.3% to trade at $1,028 an ounce while palladium is off slightly based on this morning’s pullback, down 1.9% now to trade at $609.

So the question is, have we finally reached a major turning point? We undoubtedly have… in some respects. China’s surprise devaluation of its currency last week certainly changes the dynamics of the global currency wars. The move sparked volatility in global financial markets, and that volatility is continuing to unfold. Ironically, China’s efforts to depreciate its currency against the dollar has so far caused the U.S. dollar to actually weaken against the other major currencies.

Traders in the foreign exchange markets can see that China’s bold move to depreciate the yuan will only encourage U.S. policymakers to do likewise and try to weaken the dollar. Or at least prevent the dollar from rising. The Federal Reserve now finds itself in a bind over whether to raise rates in September. Doing so would make it a political target as the campaign season heats up. Raising rates would also risk rattling already vulnerable equity markets.

In any event, the global currency wars will continue to escalate. And more nations can be expected to move away from the dollar in international trade. None other than Secretary of State John Kerry recently warned that the U.S. dollar could lose its status as world’s reserve currency.

John Kerry: We turn around and nix the deal and then tell them, "You're going to have to obey our rules on the sanctions anyway." That is a recipe very quickly, my friends, business people here, for the American dollar to cease to be the reserve currency of the world which is already bubbling out there.

Secretary Kerry tried to point the finger at critics of the administration’s deal to lift nuclear sanctions on Iran. But as Kerry seemed to acknowledge, forces are already “bubbling out there” for other reasons to undermine the dollar’s preeminent status. Chief among them is the fact that the U.S. government has used its privileged position to accumulate massive debts that would collapse the currencies of other, not so privileged nations.

The current world financial order, with the unbacked U.S. dollar at the center as reserve currency, has been in place for over 40 years now. Ever since President Richard Nixon ended gold convertibility for the dollar, the world has been on a fiat dollar standard.

But no currency regimes last forever. At some point, a new world monetary order will emerge. It may be based on a more decentralized model of bi-lateral relationships with world powers, of peer-to-peer digital currencies gaining prominence, and of gold-backed currencies rising as trust fades in digits and flimsy government guarantees.

Alternatively, the new world monetary order could take the form of something akin to a world currency issued by the International Monetary Fund. If the IMF assumes the role of bailing out one bankrupt government after another, it could require the adoption of a new world currency as a condition of getting bailed out. In fact, the IMF already has a plan at the ready for the next financial crisis.

Those of us who believe in free markets and national sovereignty would surely not like to see a global body take charge of our money. If we were still on a gold standard, we would not be vulnerable to such a calamity.

But regardless of what currencies fail or what new ones emerge in the years ahead, gold and silver will continue to serve as the ultimate money for those who are wary of unbacked paper promises.

Now, for more on what’s ahead for precious metals investors, let’s get right to this week’s exclusive interview.

David Morgan of SilverInvestor.comMike: I’m happy to welcome back our friend, David Morgan, of The Morgan Report and Silver-Investor.com. David, it’s always a pleasure to talk to you, how are you?

David: Mike, I’m doing well. Thank you for inviting me.

Mike: Well to start out, of course, I want to get your thoughts on some of the price action we’re seeing here in the metals. Now gold did make a new five-year low earlier this summer as it fell through $1,100 and broke below the low point from last November which it held for nearly eight months. But silver meanwhile has not fallen below its low from late last year and has continued to find strong support whenever it dips into the $14s, something we saw again earlier this week. So what do you make of the action in silver? Is the fact that it hasn’t broken down the new low is an indication that last November’s low was, in fact, the low or the bottom for this cyclical bear market over the last few years? What are your thoughts there?

David: My thoughts are to try to be consistent here first of all for the record and anyone that follows me fairly closely knows two things. One, I do a lot better at calling the tops than the bottoms, and I haven’t missed a top but have missed the bottom, I admit that. I’m very careful. When I called a bottom, I recall at the $18.17 spike low a few years back (and silver has a propensity to do a spike low and I’ll explain that in a moment) that was a very big spike low. And that low held for 14 months in a row, so it looked fairly good for better than a year, but once that level was broken to the downside, we’ve seen these new lows. And we've got a similar situation as you said late last year -- and it was $14.15 in the aftermarket or the Asian markets or the after-market, however you want to think of it -- and we have not breached that low.

The second point is that believe it or not it’s not always the case, but the whites lead yellow meaning that silver peaked before gold. Silver peaked end of April, 2011 and gold didn’t peak until September the same year. If that holds it would suggest that silver will bottom before gold does which if this low holds and I’m suggesting that it will, I’ve said this is it, time will tell. I could be riding another 14 months along again. I don’t know, the market does, but I really do. The way it’s acting, and that’s the point, is one silver has the propensity to do spikes and then it moves up, consolidates and then starts to build a base and start moving higher from there. Gold is showing a pattern similar to that, silver is certainly doing that right now as we speak.

The other thing is sentiment, sentiment is worse than I’ve ever seen and the vast majority within the precious metals community, commentators and et al, meaning not only the commentators such as myself, but many that follow the commentators and the people that respond to the blogs and that type of thing. The majority, from my finger in the wind analysis here, is that almost everyone expects a new low / is expecting another washout before the move up and because the majority thinks that that’s what’s going to happen, it probably won’t. That’s been my experience. When everybody’s on one side of the boat look out.

For a variety of reasons, instinct, whatever, and certainly I’m not addicted to being right. I’d love to make every call perfectly, but no one can do that. I really do think this is it. We’re seeing better volumes and we also have to remember at these lows, spike or otherwise, there’s only so much physical available at those prices. It’s like any market, it moves based on supply and demand and there isn’t an infinite supply of silver at the $15.50 level.

There’s some amount that is available and once that amount is purchased and taken off the market then the next bid might even be lower, but it won’t be filled because no one’s willing to part with silver at that price. So then the bid comes in higher and no one’s willing to meet that bid, so the bid moves higher. So people say “okay, I’ll take $16” for this amount and there’s so much available at the $16 level and then that’s all bought up and leads the market. Then the next bid, someone might offer it at a higher price. Someone that’s bidding says “I need it. Okay, $16.27, I need it, I got to buy it, I’ll buy it.”

That’s how the markets move. I like to explain that because a lot of people just get the idea that there’s an infinite supply in the marketplace at any given price level and that’s not at all how the market mechanisms work. So I don’t want to be overly confident certainly. When I made the $18.17 call I wasn’t smug about it believe me, silver surprises even me. But it was disappointing because that was a level that was below production for many mining companies, but then we got this huge oil wash up. I’m not trying to make excuses, I’m just trying to explain why fundamentally it drove the price down.

That was because we had this huge drop in oil and oil is a huge component in the mining industry. And because of that then the all in sustaining costs for mining dropped substantially because the oil costs are one of their main components to mine, dropped substantially. It was kind of a windfall to the mining industry if you will. So fundamentally, and manipulated or not, that’s a fact: that lower oil prices helped the mining industry in a significant way. That’s a long explanation to “is the low in”, and I’m saying yes. I’m saying the low is in.

Mike: Before we dig a little deeper into the mining industry, so to speak. I wanted to ask you about the gold:silver ratio. I know you follow that very closely like we do. Now back at the most recent top in 2011, it fell to 32 or 33:1 and now we’re nearly 2.5 times that today. I believe it’s 74 ounces of silver to buy one ounce of gold. What is the importance of the gold:silver ratio and what is that telling you right now?

David: There’s two things. One, there’s a lot of people that say it means absolutely nothing. I can make a very logical statement that means a lot, this is a fact, not opinion. The gold/silver ratio tells you which one’s performing better than the other vis-à-vis the other metal. In other words, a lowering price gold:silver ratio like 33 (to 1) says that silver has outperformed gold substantially and if the ratio rises it says that gold is outperforming silver, so that’s a fact. There’s something about the gold:silver ratio that’s truly meaningful to everyone.

That’s number the number one point. The other part is opinion. What it’s telling me is that we’re pretty close to a turning point. The bottom that I called in September of 2003 was the bottom and we moved up from there. That ratio’s 80:1. We’re very close to that now. I doubt we’re going to get back to the 80:1 ratio, however, it’s possible. Silver again could surprise anybody including yours truly. Regardless, I think any time you can trade gold for silver above in the 70s or higher. In other words, you can pick 70, but I would choose more like 72, 73 and do it over time like let’s say six months to even a year if you want that long.

I think it’s a very smart move because if you’re a gold only person even and you temporarily move your gold into silver and the ratio drops from let’s say 74 to 50 you could trade that silver back into gold and establish a far bigger gold position with basically one or two moves. One move from gold to silver and one move back from silver to gold. That’s one thing that I like to do. I don’t do my total holdings, but I do play that ratio in the physical realm as well as in the derivatives markets. But it is a measure, it’s something to pay attention to, it does have meaning to me and I do believe if you look at it from an historical perspective it has a lot of meaning because the gold:silver ratio really was under 16:1 for a few thousand years.

It’s only been in the last hundred or so that it’s gone above that level, so certainly that doesn’t mean a lot to someone that’s my age or even older because it’s fluctuated so wildly. But if you look at it from a big, big picture it’s why did it go from hundreds after hundreds after hundreds of years, go for thousands of years at 16:1 or less, so why is it so far above that now? I’ll leave that as an open question for people to think about because there’s lots of ways to attack that question, but I don’t want to give the answer, I want people to do their own research.

Mike: As we turn back here towards the mining side of things since there’s practically no one better in the industry when it comes to covering the mining sector than you. I wanted to ask about the current state of silver supply. You touched on that earlier a little bit, but one would think that this prolonged period of depressed silver prices would start causing a significant reduction in mine output. I know we’re starting to see reports coming out on that, so what’s the latest on supply, David?

David: It has cut back in several areas, but we’re talking percentages of a 750 million ounce amount on an annual basis from all global mining activity. If you’re looking at a three percent move up or down, three percent of a big number is still a big number. So yes, we’re off in most areas, but some actually have increased. But rather than a number crunching perspective and overall outlook is a lot of these companies are making it barely, some are out of business, some are looking at ways to continue mining at a loss or its cutting their losses. Basically, a lot has been done to mitigate the problem, but you can only do so much.

At the current time the mining industry really needs a boost and it needs some higher prices. If those don’t come in the near term then you’re going to see more, especially on the junior sector, a consolidation and/or getting out of the business which we’re already witnessing, of course. In summation, the mining industry at large is hurting significantly.

I’d like to just read something from the top and then I’ll go to the bottom. If you look at one of the biggest concerns in the world on the mining sector, “Anglo American, to cut 53,000 jobs, a mid-commodity route. Anglo American said Friday it will shed tens of thousands of jobs in the next couple of years and might put up more assets for sale as it battles an accelerating slump metals prices that has dragged its shares down to a 13-year low.”

Now the reason I emphasize that is because when the “bigs” like that have to lay off 53,000, I think their total workforce is about 125,000 just from memory, I think it’s roughly a third of their workforce. These are dramatic and this is not a decision that’s made lightly over a Starbucks. “Oh, I think we should lay off a bunch of people.” These are very weighted, very heavily considered movements in a large corporation, not that you wouldn’t consider carefully in any size corporation.

This is a harbinger of what is going on in the real world of mining and then again drilling down to the small juniors. A lot of them are out of business, a lot of them in Vancouver which is the incubator of exploration in the world, have left the industry, have moved into the marijuana industy, have moved into offices. Like three small companies share one office space with one secretary. They’ve done everything they can and these guys are pretty good at it. I know a lot of people throughout the sector from the junior industry to the top miners. Regardless, across the board, Michael, it is hurting and I don’t see it getting better for a while.

Even if gold shot up to say $1,200 next week and from that point moved up slowly grounded higher. We hit, I don’t know, $1,350 by the end of the year and then 2016 it really starts to move and we’re back to $1,550 and then it accelerates. By the end of 2016 we’re at $1,780 or whatever. Even if that were to take place that doesn’t mean that Anglo American is going to stop their 53,000 layoff. Now that’s over a two-year timeframe and it might end up being 25,000 people, but when they make a decision to cut they’re going to cut, there’s no doubt in my mind.

Again I’ve probably belabored that somewhat, but I think it’s very important to not only be factual, be accurate and back up what you say. Oh, my opinion is this and my opinion is that and certainly I know people value mine, but as you said we don’t take this industry lightly. I’ve devoted my life to it, so because of that I want to be very accurate which means I want to be able to cite certain articles as I just read to make certain that people understand this is not an off the cuff statement that I’m just making because I’m selling my own books, so to speak. This is because the facts are right in front of us and I want to make a determination that people understand totally and completely what’s going on.

Mike: One of the things about mining is and you mentioned that there a moment ago. You can’t just flip a switch and all of a sudden have massive output after prices might go up. There are so many costs involved in these mining operations. There’s so many demands for cash when it comes to exploration, testing, permitting, legal, environmental studies, of course, labor, machinery, it goes on and on. It’s really difficult to succeed at and as you mentioned it’s not just something that you can immediately have significantly more output when prices go back in your favor.

Now one thing that may really help a lot of minors is an exciting new technology that may make it much easier and quicker for a small company to start producing. I understand last week you spent some time personally inspecting this and you will soon be reporting your findings to the subscribers of The Morgan Report, so they can get in early and potentially invest in that game-changing technology if they desire. Now without revealing the company name because I know that’s something for your paid subscribers, what can you tell us about the situation and potential breakthrough that may really help to reduce some of the costs for these miners?

David: First of all, I need to be very clear. The first statement, I’ll say it slowly is I own shares in this company. I also know the principal quite well. He and I’ve known each other for probably a decade. He told me and part of our staff, I think it was three years ago, it was at least two, about the concept. I thought, wow, this is very smart and why didn’t I think of it kind of thing. I did spend all of last week down in a location in the Southwest and I witnessed the whole thing, so I’m convinced the proof of concept works.

The other emphasis that needs to be made is that it only works in a gravity feed situation. The other caveat is it would only work for a small-scale operation. This is not something that would be used for one of Newmont’s mines, for example. Although it could be used in let’s say a mid-tier to generate cash flow while the main plant or mill was being built, so it does have uses from a very small operation to let’s say a mid-sized operation. Again let me restate that the proof of concept I’m convinced, you put in crushed rock into the hopper that’s ore bearing and out the other end you get fine gold.

The situation at the test was significant enough to be excited about it, but like anything the old adage that grade is king means a great deal to this system. And while I was there we actually took a tour of an adjacent mine that was … I can’t remember exactly, 30, 40 minutes away by road and it had significantly higher values in their tailings than the test area. Of course, I’ll be reporting on that in this upcoming September issue.
And so you could subscribe to The Morgan Report and learn all about it and see the videos. Our premium members will see a rather lengthy, edited video of the whole process with myself, some of the principals there talking about it. We even have a segment of this person I’m hinting about, talking about how much the game-changer he believes this technology will be.

Mike: Well it does sound incredibly exciting and it’s always so neat to see a company come up with a technology that has the potential to be a game-changer and it sounds like it may be coming at a perfect time for the mining industry, but thanks for sharing about that.

I know folks will need to subscribe to The Morgan Report to get all the details in your upcoming September issue and we, of course, strongly urge folks do that. Not just for this particular info, but everything that David and his staff are putting out there at The Morgan Report. It is truly first-rate stuff as we’ve said before.

Well David, thanks so much for talking with us again here today. It’s always enjoyable. It was great to have you here at our offices earlier this summer and I look forward to catching up with you again real soon.

David: My pleasure, Mike. Thank you.

Mike: Now as we’ve done in the past we’re offering a free Silver Eagle bonus for anyone who signs up today for a risk-free trial of The Morgan Report. Our listeners can access this special offer from this week’s podcast playback page at MoneyMetals.com. As you just heard from David this is going to be a fantastic time to take advantage of this special offer and learn about what David was just talking about.

Well that would do it for this week. Thanks again to David Morgan, the publisher of The Morgan Report. 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.

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