Fed Struggles to Regain Credibility, Claims Rate Hikes Still Likely

Mike Gleason: I'm happy to welcome back our good friend, David Morgan, of TheMorganReport.com. David, it's always a pleasure to talk with you. How have you been?

David Morgan: Mike, I've been well and thank you for the interview.

Mike Gleason: We've seen some very positive and encouraging market action in the metals this year with silver up close to 19% year-to-date, and gold up 18% as we're talking here on Thursday morning. Although, the precious metals are pulling back sharply this week. Assess the market action so far here in 2016, and talk about what's driving this recent pullback.

David Morgan: Well, early on, I stated that we would see a good 2016. I still believe that. Obviously, we got off to a great start. Gold had its best first quarter in like thirty-five years, and that's not me saying it. That is like Reuters, Bloomberg, mainstream financial media. That's a fact. However, that's based on percentage terms. In other words, it's had a huge run up on a percentage basis, but from a very low level. And the same thing with silver. So one, they were just really oversold. It's been way overdone as far as time duration. I mean, silver's been in the doldrums for almost five years, gold around the same amount of time, slightly less.

Time wise, it probably was due. Sentiment wise is very difficult, because even though fundamentals are important, and I look at them very carefully, technicals are a tool that is useful most of the time, I use that as well, but the hardest thing in any market is to get the psychology, because that's what really drives markets. Markets are based on what people think the future is going to portend, and based on that, you're going to get a move in a market.

Because of that fact, what we've seen is a sentiment change, and it's only because the market was so washed out, particularly the mining shares. The mining shares were at a mathematical formula I don't really want to go into, but if you go by what the probability is of them to be that low relative to their true value was unbelievable. Certainly a good time to buy, but you had to have some patience. Obviously, all that's come up. And so the real reason that it's coming off now is believe it or not a couple things. This is more opinion than fact because how do you put psychology on a chart? Or, how do you put psychology into a fundamental analysis? You don't. But when you have forty years in this market, and not only this market, but the markets. I mean, stocks, bonds, and all this stuff. I mean options, ETFs, whatever. So the idea was two things for me. I called it. I said to my subscribers that one, I saw January as a given. You'd see a strong move up in January, and probably into April, and maybe through April.

This was kind of ongoing as I issued each report for the month, I extended that, because I had better data to work with, and also on the premium service, where I actually use my voice in the charts and whatever else I'm going to show to the website members. And I showed them that sediment was too high, and the Commitment of Traders was at an all-time high relative to the year 2000, and that I thought this was it. That was at $18 silver, and $1,300 on the gold. Lo and behold, that's what's taken place.

I will not tell your listeners what I think the bottom is going to be. I say, "think," because no one knows. My members know. Also, there's a lag. Because the shares have gotten really ahead of themselves, I also warned everyone to please don't let all these profits slip away, because I just put out an update on the blog that what we really have in the shares, and these are top shares, a lot of them, not just little, small companies, have gone up the equivalent of silver going from $15 to $45. These shares have gone up that much in a percentage basis.

Where do you think your business would be, Mike, if silver had gone from fifteen to forty-five? I mean, almost anyone that's ever bought it over the last five years would be sitting on a profit, except for a very few that paid more than forty-five, which would only be for a few days. So everybody would be singing the praises of silver right now. That, of course, isn't what took place. We got a nice gain. We got a twenty-percent gain. We got, basically, touched under $14. We're sitting toward I think sixteen-and-a-half or so. I haven't looked, but I looked just before we got on the show. The mining shares have just been on fire. Now they are starting to sell off, and they will continue to do so. However, when the bottom in silver and gold take place, which isn't going to be a new low, in my view, I really don't believe that's going to happen, the shares will sell off, but they will not go to their lows. They will hit an intermediary point and then they will start back up.

Mike Gleason: Yeah, certainly, you got to think it's constructive. You don't want to see markets go straight up in the air. It's good to see some backing, and filling, and some sideways consolidation, and corrections. I think that's a healthy market, and we're certainly getting that here now.

Now expanding a bit on the mining shares, in your book, The Silver Manifesto, you advocate starting with a core position in the physical metal itself before looking at things like mining stocks. Now, we need to point out that while gains in the miners can be exponential, the losses can also be crushing. But as more and more money flows into the paper based gold and silver instruments, whether it's the ETFs or the mining stocks, it seems we could really see this thing feed on itself and run higher. And instead of the 100% advance that we've had this year in the gold stock mining index so far, we could see it run up to 200%, 300% or higher. How should an investor approach the mining sector from an investment point of view? Because your flagship newsletter, The Morgan Report, is focused on this very subject.

David Morgan: Right. Well I go into great detail. I've never put it in the public domain, although I probably could, but anyone that's followed my work, more than just a cursory level, in other words, listen to more than maybe three interviews, I basically do, and I'll repeat what you said, Mike, is you have to start with the core positioning. You need to have physical metal, or else you're really not a metals investor. I'm very hardcore about that, and I'm not a bullion dealer, as you well know. Then, after that, you want to mitigate risk with the reward. The best place for that is top tier, unhitched, cash rich mining companies. Then, you go in the mid-tier, and then you can speculate. That's how we run The Morgan Report from its inception. That's your best ability for the average investor, even a sophisticated investor, to make the most money with the least risk. And of course, there's other methods that you can use. But that's how you do it. That's how you employ it.

Now, when you are a website member, I have the flagship, read this first document called, How To Use The Morgan Report. I go through a hypothetical, "If you have this kind of liquid net worth," and I give a number, "then ten percent of that would be devoted to the sector, and you would have this much in gold coins, this much in silver coins. You'd have this much in the top tier." So I go through it in an example now. Then, of course, I state not one size fits all. If you're young, no kids, no responsibilities, huge income, you might devote a little more to this speculative side, that kind of thing. So how to build a position that's going to be very, very beneficial to your financial health when this next leg really goes. And every time that I give this information out, one out of ten will either comment, or call me, or usually email me and thank me that it was a well-reasoned approach.

The problem is people hear me, or others – there are others out there, many of them are very good – but they decide that precious metals is the only way to go, and they allocate too much to that class. Not only too much to the precious metals, but some just go into the shares only and the wrong kind of shares. And so these are problems that I want everyone to avoid. Of course, again, coming back to my responsibility, I outline it very specifically. I probably overdid that, Mike, but it's important to me because I don't want to drill on about me, I want to make this about your questions, but I made all these mistakes, at a much younger age. And because of that, I learned from my mistakes. I don't want anyone that's working with me, that subscribes, that I have any influence on, they don't have to do what I say, but I'd sure like them to listen to make up their own mind.

Mike Gleason: Well, I'll certainly sing your praises. You've always had this fantastic way of maintaining a level head throughout the last few years. You're not just pumping hype all the time. And I’ve always respected that about you. You've been there, you've done that, and I think all that experience people can really gain a lot from, so kudos to you on that.

So once again, and sadly, the news this week and the big driver in the markets has been the Federal Reserve and their rhetoric. Comments about how the Fed was this close to raising in April, came out the other day. That certainly hurt the metals markets, as the tone has turned hawkish for the moment. The on again, off again interest rate raising program is apparently back on for now, and the prevailing thought is that we'll see them raise the Fed Funds Rate in June.

David, to me this is just so ridiculous how the markets can continue to hang on every word the Fed utters. One has to wonder just how much longer they're going to be able to cry wolf on raising interest rates, and then come up with a reason to not do it at the last minute, just as they have at every meeting since that paltry 25 basis point hike last December, which was the first hike in nearly a decade. What are your thoughts on the Fed, its credibility, and where they go from here?

David Morgan: Well, it goes back to our initial opener – to psychology. Every time the Fed makes this pronouncement, this rhetoric, good word, then you get this knee jerk reaction, and it's all psychological. I think it's really contrived, not only what's contrived out of what the Fed utters, what Janet (Yellen) has to say, or one of the Fed governors, but also what the mainstream will do with it. They basically have the most money so they can move the markets the easiest. And I think it's basically contrived at this point. Going further on to discussion, because most people that listen to shows like yours are awake and aware, they know what's absolutely meaningless. So I think the Fed has lost credibility, not only with the people that really are savvy investors, because most savvy investors have a position in real assets, not necessarily precious metals, although most do, but oil, or real estate, or something tangible.

Most beginners are usually not as well diversified. In other words, they're not as seasoned as an investor. They don't have as much experience. Doesn't mean that some of these young guys or girls can't just really rip it, and some do, but back to what you said. This is at the point of crying wolf. I think the Fed's really been discounted quite a bit. I mean, if you look at what's happened, and Mike, I'm not telling you anything you don't know, I'm just addressing myself and the listeners. The dollar has been shoved off to the side more, and more, and more. It continues to be so with the BRICs and the circumventing the SWIFT system for settlement on electronic transfers, and what the Asian Infrastructure Investment Bank is doing and plans to do to really build infrastructure and build things that are of value to the human race.

The dollar's losing clout, so the only way that they can make the dollar look good at this poinand I've written about this, and I'm kind of standing alone here, is to do this interest rate increase. Of course so talking about it moves markets. Whether or not they actually do it, well show me, don't tell me. So they're losing it. Really only way they can gain, I wouldn't say credibility, although it might have some increase in credibility, is to actually raise rates again. I don't rule that out, as bizarre as that sounds, Mike. Again, I'm one of the few that thinks this could happen. I'm not saying it would happen, but if everyone is getting out of the dollar, and all of these other currencies are in negative interest rates, and you're in positive, where do you think the money's going to flow?

And that's actually, if you analyze it from my perspective, means that that's how desperate they are, because to get people that are getting out of the dollar, such as China, for example, selling like a trillion dollars worth of treasuries in a very short amount of time, and not moving interest rates up. How does that happen? Well, it happens because these markets are so manipulated, that's how. But nonetheless, this is what's taking place, and so to get credibility back into the dollar, then it's like a third world country, or an emerging market currency. It's like, "Well look we're paying ten percent interest." Look at what Deutsche Bank's doing (laughing). Sorry for the laugh, but it's well earned. I mean, Deutsche Bank is so desperate, and they're just teetering on the very edge that they're giving us five percent return if you put some cash in with them.

What I knew back in the 80s was that when the interest rates went to like 17% to 20% on the short to long range on the U.S. debt, on the T-bill to the treasury bond, people didn't really think that an interest rate is a function of not only return, it's also a function of risk. In other words, when you borrow money from the loan shark, he doesn't charge you 2%, he charges you 20%, which means it's a very high risk investment. And I saw the risk, and was basically over-educated, because I thought, "This might be it. This could be the end of the dollar."

Of course I was dead wrong. The best thing you could have done was to cash out of gold and go into the bond and stay there for thirty years plus, which is where we're at right now, which means we're at the opposite end of the spectrum. Right now what you want to do is you is you want to short bonds and go long gold. Will that be the trade for the next thirty years? I doubt it, but the biggest trade out there will be shorting the US debt market.

Mike Gleason: Switching gears here a little bit. When we spoke in early March, we talked about how gold was outperforming silver, and you were a bit concerned at the time by that, because we do like to see the whites leading the yellow. Now, silver played major catch up there in April, and we saw the ratio go from as high as 83 to 1 in February, all they way down to about 71. It's now about 76 as we're talking here, thanks to this week's pullback, which has bumped it up a bit. What is this improvement in silver's performance versus gold tell you, this week's pullback notwithstanding?

David Morgan: Well, the confirmation was very key, and it happened, as you said. And I was concerned, and not overly. I felt silver would eventually do it. It had me kind of on the edge of my seat. What it says when the ratio starts to move in the favor of silver, which it has as you outlined, it's another confirmation that we are in the beginning of the bull market again. So you have the confirmation of price action, you have the confirmation of mainstream financial press touting gold to the positive, you've got the confirmation of the gold, silver ratio dropping in favor of silver. So these are more and more hard facts, not opinions, that people can rest assured that the worst is behind us and brighter days are ahead of us.

Mike Gleason: Our mutual friend, Steve St. Angelo, at the SRSrocco Report, put out a great article just recently, highlighting the massive amounts of North American coin demand between all the sales of the Silver Eagles and Silver Maple Leafs. There's literally not enough silver mined in the U.S. and Canada to supply the ounces needed to just mint these two sovereign coins on an annual basis, which is a huge difference from where we were ten or fifteen years ago. The U.S. has recently become a net silver importer, and you have to wonder just how much of the white metal is out there based on the surging demand, not just from coins, rounds, and bars, but also from the industrial side of things. So what's the latest on the supply demand situation in silver? Are we going to start seeing a shortage, David?

David Morgan: Not for a while, in my view. It's a very studied one. In fact, Mike, I did a webinar for free and for fun for everyone called “Is There A Silver Shortage.” I went through it. Anyone that signed up for the webinar was able to attend that for free. If they weren't on the call, then they missed it, and we moved it into our members only part of the website, so any website member can see that. Steve and I are close, but the truth of the matter is, it depends on how you look at it. I mean there's two ways to look at it.

The Silver Institute looks at it one way, and CPM Group looks at it a different way. Before I get started there, I want to digress and say that we are going through both studies right now. The Silver Institute, I think, is $225, and the CPM one, is I think, $160. You're looking for those two prices combined for about what an annual subscription of The Morgan Report is. We don't only read them, we study them, and we analyze them, and we put that out in the June issue, so that's what we're going to do.

You'd be saving yourself, even if you're that interested in the silver market, which The Morgan Report does much more than the silver market, Mike, as you know, but certainly it is one of my main studies, so we're going to go through it for everybody in the next issues. But having said that, the way CPM looks at if you're in a silver shortage or not is our above ground stocks of silver building or dwindling. And they're building. The above ground stocks are building higher and higher and higher. If you go back to the low, which I did in this webinar, the low point was in 2006, and there was about 500 million ounces of fine silver above ground. Now, ten years later, we're at about two-billion ounces above ground, so we've gained one-point-five billion ounces in the last decade.

So CPM says we're not in a shortage, that the above ground silver supply's growing. If you go to what Steve writes about, and the way The Silver Institute looks at it, they'll tell you that we're in a deficit. From the way they analyze the market, they have every right to say it that way, because what they state is that if you look at total demand on an annual basis, versus total supply, which means mining supply and recycling combined, then that number is a lower number than the total demand number by like 120 million ounces, and therefore, on an annual basis, you are in a deficit. Where's that 120 million ounces going? It's going into the above ground stockpiles. In other words, it's going into the pockets of investors, be them individuals or be them sovereign well funds, or nation states, or whatever. Although, no real nations buy silver for monetary purposes, but it's the investment demand. So is that a deficit? I'd say yeah, it probably is, but does it add to the above ground stockpile? The answer is yes it does.

Mike Gleason: Yeah, interesting answer. I guess maybe one of the follow ups on that is that silver might be going into strong hands right now, and it's going to take much higher prices to pry that silver out of those hands. I guess you could maybe make that case as well, but it's all part of the discussion.

David Morgan: Let's inspect that case, if I could jump in again. I mean, this may worry some silver investors because they don't really understand markets that well, excuse my arrogance, but it's true, because first of all, if you thought it through, you’d never buy gold. I mean, gold's always adding to the above ground supply, every year, and yet you'll see in articles that gold's in a deficit. Again, by the metrics I just outlined it is. What it really means is like any investment, it's not so much what the supply is, it's like a stock. We can use a stock as an example. It's not so much how many shares are issued, it's how they're held and what the float is. So if IBM, for an example, has got numerous shares out there, but a lot of them are held by institutions and individuals, and the float is the amount that's willing to be sold at today's price. If that's very small, then any supply or demand change will have a pretty strong effect on the price.

So I just want to outline what you're saying, because it's very important. This is how markets move. What's interesting particularly about silver, and investments in general, is it's counter-intuitive. The higher the price goes, the more people hold on. Why? Because they don't know how high is high. They're going to either hold what they have and wait for the price to continue higher, or buy more on the way up, which is a momentum play, which is how most of these computer programs are constructed now. So there's a lot that can happen regardless if it's above ground stocks are building or not. I'm just trying to be honest here. I'm just telling the truth, letting people know, because there's a lot of let's say ... I don't want to say it's misinformation, but it's not well explained information on the internet. Is that a fair statement, Mike?

Mike Gleason: Yeah, certainly. Then, of course, the investor psychology piece that you talk a lot about is very hard to quantify, and one that you do have to account for. Bu it's difficult to pin down as to exactly which way that's going to go.

David Morgan:Let me get in again. Where it's going to go, it's going to go in the financial record books. That's where it's going to go. It's going to go to a place that even silver bulls like me, I wouldn't say never dreamed of, but because of everything that's gone on in the financial system et al, at large, with the Fed, and all other central banks, the European Central Bank, what's going on, and the only mitigation to that, of course, is the BRICs. What they're trying to do to mitigate the problem of give an option to the financial community at large, which means the world, with an alternative to the Anglo American dollar, denominated financial system. When this this cracks further, and it's cracking as we speak with Deutsche Bank, as I mentioned a moment ago, there's going to be a run to gold like you've never seen before.

What does that mean? It means that there's only maybe less than 1%... and it's hard to get a really good number. I've seen the numbers and they're like a fraction of a percent, but I'll just use 1% as an example. So if 1% is invested in gold, and there's 99% invested in the bond market, stock market, real estate, and everything else that you can invest in, and another 1% wakes up and wants to get in the gold, because they want to sell their real estate, or they want to get out of the bond market, or the stock market's going down, this is going to take that float, that small, small amount that's available, and it will be bid up into the stratosphere.

So it's really difficult to put a paper price. Then, if you have a synergy effect, where people are dissing the dollar at a point where they really don't want to use it for settlement anymore, because there's another Bretton Woods type of situation being talked about, not necessarily taking place, but the financial markets are in such disarray that gold can't be controlled anymore, that'll add fuel to the fire. So you can see where I'm going. I'm stating that I believe, and I don't know, it's not a fact, it's a strong opinion, a very studied opinion, a very thoughtful opinion, that that's where we're going to go. We're going to go into this place, and it's not going to last long either. I don't see it happening in 2016. Although, I think everything fundamentally and foundationally will be set up this year. And I think looking back from a perspective of let’s say, two or three years out from now, you might be able to pinpoint it to like September 2016, and say, "Wow. That was the place when Deutsche Bank did this." I'm just using them, I'm picking on them, but it could be any of these major banks.

Or financial institutions, or derivatives markets, or so many ways that this could happen. And that's, "Oh my goodness, that's where it happened. That was really the precursor that set off this huge run to gold." Of course the run to gold is a warm up to the run to silver, because once gold starts taking off, and it may lead, and it may not, but I believe it will, then people will panic. And people that can't afford gold because now it's moving to $2,000, $3,000, $4,000, $5,000, people will say, "Oh my goodness, I've got to get myself something." Silver's the next best bet from that perspective. And there's a lot less of a float in the silver market than there is in the gold market. Although, that could vary, but that's the idea.

Mike Gleason: I know you always said about how the biggest move, 90% of the move can come in the last 10% of the time period. That's absolutely something that people should keep in mind when it does go. I think it's going to go quite quickly.

Well, great stuff as usual, David. We always appreciate hearing your thoughtful analysis here on the Money Metals podcast. I'm sure we'll be talking again real soon. It's shaping up to be a very interesting year. We've got the Presidential election coming up. There's obviously some craziness going on there that's likely to drive markets, more Fed policy decisions, unfortunately. Lots to talk about.

Now before we let you go, please let folks know a little bit more about how they can follow you there at The Morgan Report. You've alluded to that already, but this is a great time for people to dive in deeper into the metals. Please let people know how they can get on your email list, and also about some of the things that you're doing there at The Morgan Report, those webinars and so forth.

David Morgan: Yes. Just go to TheMorganReport.com and get into our free email list. It's on the right hand side of the page. All we need is your first name and your primary email address. When you do that you will get our update information. You will also be kept abreast on at least a weekly basis of these type of free webinars that I'll be doing. In fact, the next one I'm going to do, I'm pretty certain, will be that 90% of the move in the last 10% of the time. Don't lose faith, the biggest gains are ahead of us. I really believe that. I can prove it happened. I can prove the past. I cannot prove the future. I could be wrong. I'll say that publicly, and I've said it for years. But markets always accelerate at the end. You can look at the tech wreck, you can look at the housing bubble. This is how markets move. The metals markets are no different, other than the psychology of the metals markets is different.

Because, as I said before, and it's probably overused, but there's no fever like gold fever. Most people believe in God, or they don't. There are some atheists out there, that's fine, I'm free-market, you want to believe there isn't a God, that's fine with me. But remember, gold is God with an L in it. It really touches everybody, even people that diss it, people that continually downplay it. It does affect them. What's going to be interesting is some of these financial hosts that are more, let's say, establishment than me by far, that have dissed gold the whole way up, when they start talking about, "You should own a little gold." That will probably be the time where were approaching that $10,000 level that Jim Rickards talks about. That might be time to look for an asset change. That's going to be difficult too, but we're here to help. We'll be writing about it, and Mike, again, thank you for the interview.

Mike Gleason: Well, David, thanks so much. We really appreciate it. Hope you have a great weekend. Take care and we'll talk to you again soon.

Well, that will do it for this week. Thanks again to David Morgan, publisher of The Morgan Report. To follow David, just visit TheMorganReport.com. We urge everyone to sign up for that free email list to get the great commentary on a regular basis. If you haven't already, be sure to check out a copy of The Silver Manifesto, available at MoneyMetals.com and other places where books are sold. It's the foremost and authoritative book on the silver market that you will find anywhere. Be sure to check that out.