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Precious Metals Soar on Falling Yields, Global Currency Turmoil
David Morgan: “This is the real move in gold and silver… it’s going to be multiyear.”
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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up David Morgan of The Morgan Report joins me to break down the recent move in the metals, explains why he believes the move is a result of something no one is talking about – and he also gives us some key levels for silver, as it looks to gather strength from here. So don’t miss another must-hear conversation with David Morgan, coming up after this week’s market update.
What a wild week it’s been for investors.
The threat of global trade wars and currency wars sparked big swings across all major asset classes. Bond yields dove toward historic lows. Stocks plunged earlier in the week before rebounding sharply by Thursday. And precious metals rode a huge safe-haven wave higher.
Gold prices eclipsed the $1,500 level on Wednesday for the first time in over six years. Meanwhile, silver pushed above $17 an ounce to record a one-year high.
As of this Friday recording, gold trades at $1,504 an ounce, up $62 or 4.3% since last Friday’s close. Silver is posting a weekly gain of 81 cents or 5.0% to bring spot prices to $17.07. Platinum is up 2.2% for the week to come in at $867. And finally, palladium is putting in a 1.2% advance this week to trade at $1,434 an ounce.
The money metals are becoming increasingly attractive as President Donald Trump ramps up his battles against China abroad and the Federal Reserve at home.
On Monday, the Trump administration formally branded China a “currency manipulator.” China’s central bank had moved to push the yuan lower against the U.S. dollar in apparent retaliation for new U.S. tariffs. The yuan traded at its cheapest exchange rate versus the dollar in more than a decade.
Curiously, the U.S. Dollar Index also traded lower this week against the euro and yen. Perhaps the Trump administration is engaging in some currency manipulation of its own through the Treasury Department’s Exchange Stabilization Fund and the International Monetary Fund. Treasury Secretary Steven Mnuchin called on the IMF to help put brakes on countries that cheapen their currencies to gain trade advantages.
A former Treasury Secretary, Larry Summers, said that we may now be at the most dangerous moment since the last global financial crisis ended in 2009. The circumstances are different today, but in some ways the risks are more extreme.
The entire world monetary order is at risk. President Trump is now explicitly ditching the “strong dollar” posturing of previous presidents. He wants a weaker dollar and hopes he can pressure the Federal Reserve into cooperating with bigger and more rapid interest rate cuts.
A shift toward a weak dollar policy could make foreign holders of U.S. assets nervous. Close to $7 trillion in Treasuries are now held by foreigners. If they begin losing confidence, the government will face a difficult funding problem.
For now, though, there are few other places for them to turn. Even though yields on U.S. bonds have been pushed down close to historic lows, they are still higher than those attached to the paper issued by other governments around the world.
These days it’s becoming harder to find sovereign debt that even carries a positive yield. The latest estimates are that $14-$15 trillion in bonds carry negative yields.
It sounds crazy – bonds that obligate holders to pay interest to the issuing borrowers. But some economists think the negative interest rate syndrome could eventually infect the United States.
In the meantime, Treasury holders face the prospect of earning negative real returns. That is to say, the yields they earn are at grave risk of falling behind inflation.
The yield on the 10-year Treasury fell to 1.7% this week. That’s below the Fed’s target inflation rate of 2%. With Jerome Powell and other Fed policymakers endorsing “symmetric” inflation targeting, that means they may let inflation run well above 2% for some time in order to compensate for recent periods of below-2% price level increases.
The entire Treasury yield curve is at risk of falling into negative territory in real terms. It may have already… depending on which inflation gauge you use.
Fortunately for precious metals investors, gold and silver tend to thrive in an environment of negative real interest rates.
When real interest rates on paper turn negative, there no longer is an opportunity cost associated with holding gold. Metals become attractive to hold as alternatives to depreciating paper – and tend to perform well.
Gold and silver bugs certainly have reason to be optimistic. Prices have broken out of large consolidation bases ahead of near certain additional rate cuts from the Fed and a formal shift by the White House toward weak dollar policies.
The one missing piece of the bullish picture is rising inflation pressures. Although price increases are showing up in some areas of the economy, there is no broad inflationary momentum taking hold. It will likely take a sustained rise in energy and food commodity prices before inflation fears drive mainstream investors to exit their negative yielding bonds and seek protection in precious metals.
The upshot is that the current bull market phase in gold and silver is still very young. Before reaching maturity, it will suffer some setbacks. One may be due after this recent run up. But the upside potential ahead is far more positive than the yield on any government bond.
Well now for more on this, including the reasons why my guest thinks we haven’t seen anything yet when it comes to this metals move, let’s get right to this week’s exclusive interview with the man they call the Silver Guru.
Mike Gleason: It is my privilege now to welcome back our good friend David Morgan of The Morgan Report. David, it's always good to have you on and appreciate you joining us today. How are you, sir?
David Morgan: Mike, I'm doing all right and it's good to be with you.
Mike Gleason: Well, David, I know we don't have a whole lot of time today, but I'm really glad we're able to speak to you this week because we're finally seeing some real fireworks here in the metals lately. And I wanted to get your comments.
I should mention that we're talking here on Thursday morning and we've got gold hovering around $1,500 and silver right at about $17. They both popped above those respective key levels yesterday, Wednesday. So first off, what do you make of this move, David? What's driving it? And the bigger question, will it be sustained?
David Morgan: Well, what's driving it is something that no one's really, really talking about. This is my opinion. Of course, you're asking for my opinion. A lot is the financial press, "Well, It's all about this trade war with China and the trade war is getting worse. And there's going to be more sanctions coming in," and on and on and on. And that may have something to do with it.
But first of all, the underlying fundamental is financial uncertainty. That's number one. But beyond that, it's really something going on in the physical market that no one's really writing about and I don't know enough about the state other than it's got to be part of it. The reason I say that is that the paper paradigm is very clear on how the markets move in the futures markets with trading this paper back and forth for contracts to buy and sell silver. And all they really do is set the paper price.
And of course the metals price goes along with that. I'm not trying to discount that very much. What I'm trying to state is that the paper markets dominate the price over and over again. And every now and again you'll get in a situation like this where something's going on, where something needs to be fulfilled and accomplished, and it hasn't been settled out yet.
So for an example, let's say there's some bank that's demanding a physical settlement in gold and they haven't received it yet. Once that's accomplished, you may, and most likely, see the market cool off and go more into some type of trading range where you're more apt to be able to look at the paper trades, more of what we call levels that we're used to seeing.
So, I think there's something out there. Whether that's occurring with silver or not, I doubt it, right now based on the fact that silver has been lagging gold so much. And there's a couple of gaps in the charts that will probably be filled, one, you haven't missed this move at all. If you bought yesterday at maybe the high, I don't know yet, and it goes down and let's say silver makes it all the way back down into the, I don't know, $15.50 range or something, you haven't missed much. Yeah, you wouldn't want to buy and see a loss right away. But what I'm trying to state is this, I'm convinced, is the real move. It's going to be multi-year. And silver and gold, at the end of three, four years from now are going to be substantially higher than they are today.
Mike Gleason: Certainly strong comments. You're always take a very level-headed approach and have not been just pumping sunshine over these last several years every time we get a rally. So, that's definitely something that we should all take note of.
Now, silver, you mentioned this, silver does seem to be underperforming a little bit vis-a-vis gold. And now we've seen the gold-silver ratio come down from, I think I saw it 93 to one, maybe about there, within the last few months. It's about 88 to one right now. So, silver has gained somewhat but maybe not quite like you would expect given a big bull move and given that silver should vastly outperform gold in a bull market. So is this seeming lack of out performance from silver a cause for concern?
David Morgan: Somewhat still it is. First of all, I like to see, I mean 80 to 1 at a minimum. And even there that's an extreme.
When I started the previous website – my website, I think everyone knows is TheMorganReport.com – I rebranded that for years now because I want everyone to be aware that I cover all the resource sector, lithium, rare-earths, et cetera, and not just silver.
But back in the older days with Silver-Investor.com, when I started that website, the ratio was 80 to one, and that was an extreme. And if you would have asked me, even, I don't know, three years ago, a couple years ago, "Will you see the gold-silver ratio above 80 to one?" I would've said, "No. I really, really doubt it" and I'm wrong. It's got to about 93, 4, 5, somewhere in that range.
So, to really be convinced that, and first of all, I'm convinced that we're in a new bull market, to be convinced that things are, let's say, going to show both metals really outperform many other sectors, the equity markets, the bond market, the real estate market, everything else, and take the dominating lead as this currency crisis continues, I want to see silver below a 70-to-one ratio. That would be ultimate confirmation for me, Mike that okay, we're well on our way, and we're not. We're at 88.
Silver has some work to do. Silver is, in my view, much more difficult to analyze than gold, but it can make these moves rather drastically and quickly as gold is doing. Of course, silver's done pretty good job here of late picking up some momentum and moving from the doldrums into the 17, which is still dirt cheap.
I mean, if you take an AISC, all-in sustaining cost, for some of the major silver producers, they'll tell you they're at $15 but they don't tell you is what their taxes are. So if you add those in, a lot of them are right at basically where we're at, in other words $17. They're just break even.
And for any company, what they're making dresses or corn chips or cola, you want as wide a margin as you can get commensurate with what the market's willing to pay for your product. And in the case of silver, these companies are still struggling at these levels. So, silver's got a long ways to go, as does gold, for the margins to be large enough for these companies to breathe easy and have a viable business and be able to have a cashflow that allows them to go out and explore further or retain assets or whatever. So, I see a lot of upside but I'm also anxious for silver to kind of show its wings and fly, and that type of thing.
Mike Gleason: Gold has risen to levels last seen in 2013 when it broke down. But silver obviously is nowhere near those levels, which was say the mid-20s at about that point. What is it going to take for silver to get back above that say into the $20 plus range and what are some of the key resistance points you're watching for silver between here and there and then beyond?
David Morgan: Okay. Well for, yeah, it does take more interest in the metals all together. Obviously there's a lot of interests coming in, but it's mostly institutional. It's not your retail (investors) at this time. I talk to many dealers such as yourself, Mike. And what I found out was a little bit surprising. A lot of this trading is going through, as I said, institutions which means futures trading and ETFs and a lot of the retail investors are saying, you know what gold's back to where I bought it, I bought it at this $1,450. It's there, I'm selling it back. So a lot of the retail investors aren't believing this rally is for real. And what they're doing is basically getting their money back. Not all of them of course, but so there's a lot of work to be done on the silver side. There is lots of areas of resistance on this.
Pulling up a chart as we're speaking, Mike, because I anticipated this. So there's huge resistance at $17, which is where we're at right now as we speak. Will it get through that? Yes. Eventually it will. Will it instantly? I doubt it. I think it'll come back and fill the gap. And I'm going to do an update for my paid members here, show them where a good entry point is. If they have stopped, if they want to get into this market or add to their positions, whatever. Normally I do that all through equities. I use the futures as a proxy for the overall market. Doesn't mean you should do futures. In fact, a dissuade anybody from using the futures market. It's just, that's where the price is set. So it's easier to analyze, and I can show them on the chart when silver gets to this level, that's a good time to start buying your top tier or your favorite junior or whatever you're going to do.
So, $17 to $17.25 is a pretty big area of resistance. After that, it floats up to really $19-20 pretty easily. So once we work through that level, Mike, you'll probably see an acceleration of silver from, I'm going to say $17.50 up to $19.50 I expect it to go to that level fairly quickly. It won't be like two trading days, but it probably won't take very long. Silver could surprise anybody, even me as far as how it reacts. It doesn't seem to ever do what you expect it to do. But regardless it will outperform and we do need to see a higher level. Once again, over the $20 level, I think the psychology will change and people will say, "This silver, not so bad." Now, they won't touch it at $15. I know you guys sell silver at all levels and every day and there's always purchases.
But, mark my words, you check the volume and activity at your business, how many people are calling in and buying silver (now) versus when it gets over $20, and I'm sure you'll be selling more at that level. People just love to buy the metals at a higher price. When I'm pounding the table saying "This is it."
Because most people don't want to put up with, the time, the patience that's required, if you bought silver at $14 at the end of 2015. Watched it rally all the way up to $21. I was convinced at that time where the bull mark was back in tact. And in a way it is, I mean if you look at gold from that perspective, that's where it bottomed and has had high or lows all the way up. Silver's chart doesn't look like that. Silver bottoms at the same time as gold, which is December, 2015. and it has not made high or lows all the way up. And we've basically stayed flat to about $15.75 and then it broke down from there and it got down as low as the 14s. So still higher than it was in December, 2015 but a messy chart, let's say.
Mike Gleason: Yeah, there's certainly some big, big levels above us and yeah, I agree. I think when we see silver, get that two handle again. I think that's when a lot of people are going recognize that okay, it's time to start moving and the smart people will do it before then.
Again, thanks David for fitting us in. I know we had a tight window here and it's been great to have you on. But as we wrap up though, I want to give you a chance to fill our audience in on any of the other markets that you're looking at here.
David Morgan: Sure. Always looking at the equity market and of course the bonds are the key and the currency markets – we looking at everything really. I think the stock market is showing some wear. It's been a bull market for quite some time. It's overvalued by any metric you want to use. I'm looking at that and see it get rolled over further. And then bond market of course is the key because this is the debt markets that everything depends on and how much faith there is in that is going to determine the future of the financial system. So, those are key currencies. As I've said many times you can see gold and the dollar go up. Dollar's making new highs. Gold's making a six year high. And I said "Watch." And of course here we are. There's a reason for that. So, I think that's about it.
I just close out, I got this email. “I’m a young guy, I have a high conviction, precious metal is the best place to be in the next three to five years. I'm in need of guidance of how to build a long-term precious metals portfolio. I want to fund this as soon as possible. I know you're not a financial adviser, but you offer services that will help me start a precious metal portfolio. I continue to monitor the market on an ongoing basis with your analysis, can you help me?” And that's almost precisely what I do. So, I will get with this gentleman and kind of reaffirm what he's already asking. Can you help me? Yeah, that's what our business is. So anyway, if you want to learn more, just go TheMorganReport.com put in a first name and an email address, be happy to put you on our free list. And you can determine from there, if you want to go further.
Mike Gleason: There's probably no better time to get in and get on board with services like The Morgan Report, and the great commentary that David and his team put out there. And, and just see what's going happen and what they have to say about these markets as we could be entering this new bull phase. I mean, you heard David say it, he's convinced we're in a new bull market and this is going to be an exciting time and the time that precious metals investors have been waiting for, for a number of years. So definitely urge people to take advantage of that and go to TheMorganReport.com it's truly great stuff. You have just heard what David was talking about. A great approach to all these markets and lots and lots of experience over the years. He's seen everything.
Well good stuff David. Always appreciate it. Thanks so much. I hope you enjoy the rest of your summer and I can't wait for our next conversation, take care.
David Morgan: Thanks so much Mike. It's great to be back with you.
Mike Gleason: 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 you can follow him on Twitter, it's @silverguru22. And if you haven't already, grab a copy of the book titled Second Chance: How to Make and Keep Big Money During the Coming Gold and Silver Shock Wave, which is available at MoneyMetals.com and other places where books are sold. Be sure to check that out. And check out the TheMorganReport.com and start getting wonderful commentaries from David and his team on a regular basis.
Mike Gleason: And don't forget to check back here next Friday for our next Weekly Market Wrap Podcast. Until then, this have been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.