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Fed Chairman and "Systemically Important" Banks Nervous about Gold
David Smith: Silver Has Already Gone from Weak to Strong Hands
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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up our good friend David Smith of The Morgan Report and MoneyMetals.com columnist joins me for a wonderful discussion on the state of the precious metals, an exciting new silver backed cryptocurrency and when he believes silver will finally play catch up to gold’s rally. So be sure you stick around for my conversation with David Smith, coming up after this week’s market update.
As Federal Reserve chairman Jerome Powell testified before Congress this week, investors became more confident that they will soon see interest rate cuts. The Dow Jones Industrials traded up to a new record high while commodities and precious metals also gained strength on Powell’s dovish comments.
Gold prices currently trade at $1,408 an ounce, up 0.6% since last Friday’s close. Silver is up 0.7% this week and currently settles at $15.18. Platinum is putting in a weekly gain of 1.7% to check in at $827. And finally, palladium is off slightly from record highs put in earlier in the week. It trades at $1,547 per ounce, down 1.5% now for the week as of this Friday morning recording.
Well, Chairman Powell’s testimony was closely scrutinized not just for its economic implications but also for its political overtones. Powell cited “trade tensions” as cause for concern about the strength of the global economy. He clearly seemed to be blaming President Trump’s tariffs.
But if the tariffs are what ultimately move the Fed to cut rates, Trump will have finally gotten what he wants out of Powell. In recent weeks, Trump has stepped up his attacks on the central bank, calling it the biggest problem facing the economy, floating the idea of firing Powell, and suggesting his administration would match China’s and Europe’s "currency manipulation game."
Although many presidents before have pursued currency interventions and quibbled with Fed chairmen over interest rate policy, none have ever done it as openly and directly as the current one. Fed apologists in the media and in Congress view the central bank’s “independence” as being under assault.
The notion that the Fed ever was or could be independent of politics is a fanciful one. When a small group of people – appointed and confirmed by politicians – are empowered to make decisions that can make or break markets, economies, and elections, politics will inevitably intrude.
Fed chairman Jerome Powell may sincerely want to make monetary policy without regard to politics. But when political forces exert themselves on the Fed, he finds himself in an impossible catch-22. If he fails to cut rates, then the central bank risks becoming seen as the enemy of half the country as President Trump makes it his foil at campaign rallies. If Powell does what the President wants, then Democrats will accuse him of succumbing to political pressure from the White House.
Democrats used Powell’s Congressional testimony as an opportunity to get him on record in opposition to a gold standard.
Although Trump himself is not calling for a gold-pegged dollar, one of his nominees to the Fed Board of Governors is – or at least has in the past. Potential Fed policymaker Judy Shelton has written and spoken extensively about the gold standard.
Apparently seeking to discredit Shelton’s views, Democrat Jennifer Wexton prodded Fed Chairman Powell into weighing in on the gold standard.
Ms. Wexton: Chairman Powell, do you think that the US should go back to the Gold Standard for our currency?
Chairman Powell: Let me say I wouldn't... This could feasibly be considered commenting on a particular nominee who has recommended that, and of course, I will not do that. I will answer your question, but I want to make sure that this isn't interpreted in that way. So, no, I don't think that would be a good idea. The idea would be... Congress would have to pass a law and that law would say that our job with monetary policy is to manage the level of the dollar, stabilize the dollar price of gold, and we would then not be looking at maximum employment or stable prices. There have been plenty of times in the fairly recent history where the price of gold has sent signals that would be quite negative for either of those goals.
Ms. Wexton: Much better mission for the Fed is what you're doing right now.
Chairman Powell: Well, this is why every country in the world abandoned the Gold Standard some decades ago.
Ms. Wexton: Okay. Well, that reluctance or that desire not to go back to the Gold Standard is something that you have in common with the CEO's of seven of the world's globally systemic important banks-
It’s no surprise that “too big to fail” bankers who depend on special privileges from the Fed and other central banks don’t like gold. It’s hard to orchestrate multi-trillion dollar bailouts of the financial system when the currency supply is limited by gold.
Some see that as a disadvantage. Others see it as a distinct advantage because it discourages banks from getting too big to fail to begin with.
Chairman Powell claims that gold-backed money would prevent the Fed from pursuing full employment – as if all workers have monetary planners to thank for their jobs – and stable prices. Of course, by “stable prices” he means prices that rise at his target rate of 2% inflation. He means a dollar that steadily loses purchasing power over time instead of retaining it like a sound dollar would.
Sound money is inherently stable and inherently independent. It can be based on gold, silver, or even certain other assets with intrinsic value. If the dollar were defined simply in terms of grains of silver, for example, then monetary policy and the politics surrounding it would recede into the background. No longer would markets swing wildly based on the particular phraseology contained in Fed policy statements.
No longer would every incumbent administration push for easy money policies. Instead of counting on the Fed to devalue existing debt and pave the way to pile on more of it, hard choices would have to be made by members of Congress about paying down debt and embarking on a fiscally sustainable path.
The fact that politicians, central bankers, and “too big to fail” bankers all oppose a gold standard is a tacit admission that hard money would serve as an effective constraint on their activities.
Well now, without further delay, let’s get right to this week’s exclusive interview.
Mike Gleason: It is my privilege now to welcome back David Smith, Senior Analyst at The Morgan Report and regular contributor to MoneyMetals.com. David, thanks for coming on again and how are you, my friend?
David Smith: Oh, very good. It's great to be back again.
Mike Gleason: Well, David, as we start out today, and before we get into silver and what's going on with the white metal, let's focus on gold for a moment and the recent move we saw there as it finally pushed through the multi-year overhead resistance level of, say, $1,370 or $1380. It's now been consolidating over the last couple of weeks at or around $1,400. Talk about what you're seeing there with the yellow metal, why you think it was finally able to break out of that five year long trading range, and then where we're likely to go from here.
David Smith: Well, I think it was just a convergence of factors that all came together that gave it that extra critical mass to move through, and it did so decisively and, in closing above there around $1,365 or so, it was really, really powerful. And what I'm impressed by lately, I'm always aware that we could see a $100 drop before things get going again, but it looks less and less likely the longer it stays at a very high consolidating level. For example, it was up today around $15 or so. It just doesn't like to stay much below, say, $1,395. It likes to be above 14 (hundred).
And then also, there's another tale going on with the mining stocks. They are remaining pretty strong. All the good ones are giving up ground very begrudgingly. And so, what I think is going on is accumulation, not only in the mining stocks, but also in the physical metal itself. Maybe the retail sector hasn't caught on fire yet, but I think the big players are adding to their physical metal and that's, of course, going to be draining more and more physical out of the place where people can buy it at the retail level.
Mike Gleason: We talk a lot about the real interest rate environment. Obviously, there's now a lot of momentum for a reduction in interest rates, which obviously helps gold look a lot better as an investment. The big knock on gold is it doesn't earn you a yield, and you think part of that is playing into this recent move?
David Smith: Oh, I definitely think so. I was just reading, a couple days ago, that there are over 13 trillion dollars of negative interest rate paper that’s written in Europe in the Eurozone, that's just incredible where, actually, you pay people to take your money. And they talk about gold not earning interest, but another thing, nowadays with all this negative interest, you never have to pay people to buy your gold. It's just stunning and this is not going to end well, but it'll keep the fiction going for a while and, as long as they want to do that, that's just going to be a real tailwind for gold because, like you said, the real interest rate, when that changes in favor of gold, then it makes more sense to hold gold than it does paper. And it looks like we're going to be seeing basically flat to lower interest rates here about as far as the eye can see, and that means that we're going to see continued strength in gold as far as the eye can see.
Mike Gleason: Turning to silver, it's definitely been a laggard, and one of the big questions many are asking in the metals community is when will silver similarly break to the upside and confirm gold's rally? What is it going to take to get the white metal moving again, David, and will see this year’s long trading range in silver breach like gold's was recently? And then what are some of the reasons silver has been held down here? Let's get your thoughts on silver now.
David Smith: Well, the day, a few weeks ago, when GLD established the largest inflow in history, I think it was one and a half billion dollars in one day, people didn't realize it, but silver also had the second highest volume inflows in ETFs, in its history as well too. And what I think was happening with silver is it was going from the last of the weak hands to stronger and stronger hands. And so, the longer it stays down like it is and not doing too much, the longer that happens, I think the more explosive will be the movement. And I think, one of these days, it'll just pop up above these trim lines like gold did and suddenly, there'll be people going, "Good grief," and then it'll be off to the races. We'll need that investment group to come back in, but I think they're moving in and I think it's going to be pretty darned interesting.
And, of course, the silver mining stocks themselves have been pretty strong. So, again, like with the gold stocks, it indicates accumulation and it won't take too much to get it moving on the upside, and it may wait until the first week of September. I don't think it'll wait that long, but, if it does, it still doesn't mean that we've got a problem because gold and silver over time do correlate. They don't correlate every day, but the direction of movement tends to be very similar to the point of about 90%. If gold is going to be strong, say, over the next few weeks or so and silver is subdued, at some point, it will play catch-up and you'll probably see, and I remember this in 1980, '79, '80, you would see gold moving strongly for day after day and silver just sat there. And then, all of a sudden, gold would take a breather and silver would go for a week or so.
I think we'll see tag team going on, playing catch up between gold and silver, and that will become the leitmotif of the bull market as it gets going and you'll see that going on for months and perhaps years at a time.
Mike Gleason: We've got the silver to gold ratio in the 92 to one range right now. Where are you looking for that to go over the next several years? We're obviously at an extreme. I don't think we've ever seen it higher than about 100 to one, and I think it's been 25-plus years since we've seen it even this high. Comment on gold versus silver as an investment right now.
David Smith: Well, just by that alone (the gold to silver ratio) people have made a lot of money by speculating on the type of movement coming back into balance. And so at 90 to one, they would buy more silver and less gold, or they would sell some of their gold and buy silver, and then when it drops, say, to 60 to one, they'd buy gold again. And it went down into the high teens in 1980 and so this thing, it could go higher. It could go back and challenge at 100. Part of this is because it's an industrial metal first and an investment metal second, and it's the investment level that brings out the real powerful push on the upside. And so I think, once the investors start coming back in, I wouldn't be surprised to see this staying as high as it is. When we get into September, October, I think that'll start to see a change and then, if it's profound enough, it'll be a change that lasts for quite a while and it'll work its way down. But 90 to one is not normal, as you said.
Mike Gleason: Getting back to the mining sector, you follow that very closely, and I wanted to get a little bit of an update from you there. Mining stocks have often been a leading indicator for metals' prices. Those stocks have bounced pretty hard off the lows put in back in May. The GDX index is up about 25% this year, with most of those gains coming in the last two months, for instance. What do you think? Is this another false start for shareholders or is the long drought finally over here?
David Smith: I don't think it's a false start, and I look at a number of the ones that I have and, gee, they're 30, 40% above where they were last spring or last winter, and some of them are 70 or 80, some of the exploration plays that had really good drill holes. And so, usually, you'll see the big mining stocks go up first and then the juniors second and then the explorers third, but what I'm seeing now is that the best big ones are going up sharply and then the juniors, the good juniors, are going up. In other words, it's a quality thing. Quality, I think, is really important. And the good thing for people picking up stocks these days, mining stocks, is that a lot of the dead wood has been just blown away or doesn't trade anymore or went out of business or literally went to pot, they're selling pot stocks.
And so there are less bad ones out there now, but there are still some that won't hunt. There are some that are inefficiently managed. There are some that are just burning through cash, and some of them are almost like a lifestyle company where they keep issuing shares and drilling holes and never finding anything or never selling anything. And so you really want the quality and, what I talk about when I go to these conferences, when we're talking about the mining shares, I just say, "Look. Try to find somebody that's done it before." Now, there are cases where somebody new comes on the scene and makes a big discovery, but, generally speaking, somebody that's done it once or twice or three times, like a Ross Beaty or a Lundin or a stock-picker like Rick Rule, someone like that, they're going to be able to do it again. And so when they start a new project and they find a new brownfield project or they buy a shell company or whatever, keep an eye on what they're doing.
Rob McEwen is one of my all-time favorites in this sector, I'll tell you that. He's a quality human being and he's an amazing professional, and I have several companies that I either have stocks in, exploration stocks, that I think are really special, or even some producers, and I look and I find that Rob's got stock in that company. He does not sit on his laurels. He's doing a great job with his own company, but he's out there taking positions in others, whether it's a new way of looking at mining, a digital-type company, or a new type of geophysics that's going on, he'll have shares in that. Or there's one stock I'm following in the Red Lake district in Canada, which has some of the richest veins in the world. They're finding some great drill holes and darned if he doesn't have about 15% of the shares, pretty neat.
But watch the guys that have done it, and the ladies, there are a few ladies, watch the people that have done it before and, the odds are, they'll do it again.
Mike Gleason: You are involved with the LODE project. It's an effort to combine the advantages of cryptocurrency with the stability and confidence of physical metal. The tokens are backed by actual silver sitting in a vault, and we encourage listeners to check that out at LODE.one. We are all working to promote honest money. Cryptocurrency certainly has some promise, but I wanted to get your thoughts on a phenomenon we don't really understand in the Bitcoin world. A group of fairly prominent people in the Bitcoin community recently began taking shots at gold. Instead of finding common ground with gold bugs, they sound more like John Maynard Keynes when he referred to gold as a barbarous relic. Bitcoin was launched as a form of honest money and intended to take away power from the central bankers and free-spending politicians and those are the same reasons to promote gold. We think these people would do better attacking their actual enemies and not their friends. What is your view here?
David Smith: Well, I agree. I don't see any reason to be antagonistic toward Bitcoin in particular or certain other crypto assets in general. Bitcoin, at its root, is really a transfer mechanism. It enables you to transfer value. And so, if you think about it, transfer of value can be yuan to dollars and it could be gold to dollars or it could be dollars to gold and you transfer the Bitcoin and you buy the gold. And I believe Money Metals even has the ability to make sales with people who have Bitcoin. Is that not correct?
Mike Gleason: Yeah, we accept all forms of crypto for payment and we'll even pay people in crypto when they want to sell metal too.
David Smith: Yeah. So, it's just another form and it's not money per se, but it's the utility that gives it value and people see it as historic value. And, for example, I saw a chart not too long ago about Bitcoin in Argentine pesos, and I think it was about the middle of June, the Bitcoin exceeded the number of pesos it took to buy from when it was priced at $20,000 a Bitcoin in the U.S., and so it was like it had been about 140,000 Argentine pesos that it took to buy a Bitcoin when it was at 20,000. Well, now, it's worth 190,000 or 200,000 Argentine pesos.
It's really saving people that don't have access to the metal or that need a transfer vehicle to get it. It's really saving some of their wealth and keeping them, literally, sometimes from starvation at death's door because they could all those massive amounts of pesos, into a Bitcoin or a fraction, it can go down to six or seven places or eight places, I think, and then when they are in a place where they can buy gold and silver, then they can take their Bitcoins, just like they would at Money Metals, and they can buy the metal with it. I think they're complementary to each other.
And I think one of the earliest comments that I thought that was really valid was the whole idea of cryptocurrencies and Bitcoin in particular has started a discussion about what is money? People always just thought it was what's in your pocket, it's a currency, even though they know it's being inflated away and the purchasing power keeps dropping. And people are asking, "What is money? Is what I have in my pocket that keeps being devalued, is it really money?" And so they're saying, "Hey, there are other things and there are historically other things that were money, such as and gold and silver." So, it's kind of a virtuous circle. It brings people back, they start comparing what Bitcoin is, how that compares to money, and then they end up talking about gold and silver. It brings people back into that arena where they continually find themselves, and have done so for thousands of years in any time of concern about inflation or about societal issues or political issues, metals are always a safe harbor.
And the LODE project, being backed by silver, each AGX coin is backed by one gram of silver and each LODE token, which creates a silver mass, is backed by the gram of silver and it's stored in eight vaults around the world. And when these coins start trading, we had a soft launch this spring in Anarchapulco, but when they start fully trading we'll have a Visa type of card for our debit that you can use. You'll be able to speculate on the value of silver in relationship to buying AGX coins, and there'll be store of value. I think what's going to be amazing, it's hard to predict exactly how long it will take and what that footprint will look like when it gets out there, but I think of people in South America, like in Venezuela and in Mexico and Chile and these places, and Africa and in India, I think they're going to really like this idea of not only having a crypto asset, but one that's backed by physical metal and that can be redeemable upon demand at some place somewhere in the world in a different vault.
It's pretty exciting, and it's exciting to me that David Morgan, who's had this vision for his whole professional life, of somehow getting silver as money back into the public usage. And it's not going to end up in our pocket, but it won't to. It'll end up digitally on a card that we have. And in India, 100,000 people a day are opening wallets, which they put cryptocurrencies in, and so they're not going to need a big discussion about what are the benefits. They already know what it is.
And so this whole idea, it's going to involve more physical metal being sold, because every time an AGX coin is created and purchased, the LODE program has to go in and buy silver in the open market to back that. And so you'll have a new demand factor, which we've never had before, on physical silver in addition to more and more investors coming back into the market buying physical silver and gold. So, I think these things are going to come together in a way that will be a perfect storm for demand and a perfect problem that's going to be hard to solve for supply over time with silver. And I don't think the market is understanding what this could be like, and it could be a massive outlier that really knocks the supply situation out of kilter in relationship to demand.
Mike Gleason: Yeah, very well put. There's a lot of things that can converge here and really cause a massive supply shortage with silver. The mining industry, for what it's been the last several years, there is not a tremendous amount of exploration happening, which means there's not a whole lot of extra ounces. We still have lots of industrial uses for silver. We may have some serious demand coming from things like LODE and maybe some other projects with backing of physical precious metals. And then, obviously, as the dollar continues to devalue and paper currencies around the world, more and more people are going to get interested in this precious metal story as a true store of value and, yeah, it could get very interesting.
Well, thanks so much for time today, David. We always enjoy getting your insights. And, before we sign off, you've got a couple of speaking engagements coming up that I was hoping you would fill people in on. Talk about that, if you would.
David Smith: Yeah. At the end of this month, July 30th through August 2nd, there'll be a four-day symposium, the Sprott Symposium in Vancouver, BC. I'll be there on media day, on the first day, interviewing people, and I'll be helping a little bit at the conference introducing a few people that are doing workshops as the conference progresses and attending a lot of these myself. There'll be a lot of big names there, and some of the people you've interviewed, like Steve Forbes will be there and Jim Rickards, you've interviewed Jim. These are all high-powered people and it's a tremendous conference. If anybody can get up to it, I think they're really benefit by it.
And then around the middle of August, it's actually the, let's see, the 15th through the 17th of August, I'll be in San Francisco and I'll be presenting on the 17th of August there at the San Francisco Money Show. Looking forward to those two events plus keeping up with you guys and watching the price of metals, so it should be a pretty interesting summer. It's definitely not going to be a quiet one.
Mike Gleason: Yeah. It's already been an exciting one for many people in the metals community and I think it's going to continue to be that. We'll be keeping a close eye and look forward to catching up with you again before long. Hope you have some safe travels there and a good rest of your summer. Take care, David.
David Smith: You bet. Take care, Mike. Bye-bye.
Mike Gleason: Well that will do it for this week, thanks again to David Smith, Senior Analyst at The Morgan Report and a regular columnist for MoneyMetals.com, and the co-author, along with the aforementioned David Morgan of the book Second Chance: How to Make and Keep Big Money During the Coming Gold and Silver Shock Wave, which is available at MoneyMetals.com and Amazon. Pick up a copy today.
Mike Gleason: And don't forget to tune in here next Friday for 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.