Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up David Smith of The Morgan Report and MoneyMetals.com columnist joins me to discuss the dearth of exploration that’s taking place in the silver mining industry and what that may mean for the supply of physical silver during the coming mania phase of retail buying he says will one day be upon us. David also offers some advice and a warning to those who are suffering from the widespread investor complacency we’re experiencing in today’s markets. So, don’t miss another fantastic interview with our good friend David Smith, coming up after this week’s market update.
As gold prices firmed on Thursday, the U.S. Senate weighed the issue of pegging the currency to a gold standard. Not surprisingly, the mere mention of gold ruffled the feathers of some Senators.
More on that in a bit. But first, let’s review this week’s price action in the precious metals markets.
As of this Friday morning recording, gold prices check in at $1,583 per ounce – 0.7% higher for the week. Silver is essentially unchanged on the week to trade at $17.79 an ounce. Platinum is off a slight 0.4% since last Friday’s close to trade at $967. And finally, palladium is putting in a weekly advance of $99 or 4.2% to trade at $2,430 per ounce.
The metals have had to contend with a rising U.S. dollar versus foreign currencies, a familiar story. The Dollar index has risen steadily since the beginning of the year and got an added boost from fears over the China virus outbreak.
The USDX is now close to taking out its 2019 high, although it may be getting overbought near term.
We have already seen most major commodities including copper and crude oil come off their coronavirus lows. A reversal in the dollar would likely add fuel to a recovery rally in raw materials. Since economically sensitive commodities got hit much harder than precious metals, they would also likely snap back more strongly – at least until they work off their oversold condition.
Meanwhile, gold continues to serve its function as a core safe-haven – holding quite well. It has stair-stepped modestly higher this year. While succumbing to some selling at the beginning of the month, gold has been far less volatile than other assets.
Gold remains the ultimate money, as former Federal Reserve chairman Alan Greenspan has acknowledged. And President Trump’s nominee to an open seat on the Fed Board of Governors would perhaps help revive gold’s standing in the monetary system.
But first she has to win approval by the U.S. Senate. Prospective Fed policymaker Judy Shelton faced a difficult task in trying to explain her unconventional views to Senators who are steeped in conventional thinking when it comes to monetary policy.
A sore spot for many of her Senate interrogators was Shelton’s history of supporting a gold standard. Reactions on both sides of the aisle ranged from confusion to concern to hostility.
On the Democrat side, Senators Sherrod Brown and John Tester led the attacks on Judy Shelton:
Sen Sherrod Brown (D): Ms. Shelton is not a conservative. She's far outside the mainstream. She's off the ideological spectrum. For three decades Ms. Shelton has been a prominent advocate for returning to the gold standard.
In making the case for Ms. Shelton's nomination, her friend, James Grant, wrote in The Wall Street Journal, "With the nomination of Judy Shelton to the Fed the discussion is tilted to gold. Gold is money or a legacy form of money Ms. Shelton contends, and the gold standard is a reputably and superior form of monetary organization."
Sen. John Tester (D): The gold standard, also in The Wall Street Journal let's return to the gold standard. You hope that Vice President Pence would hasten a return to the gold standard. You talked about a new Bretton Woods would be held in Mar-a-Lago. If that isn't advocating to returning to the gold standard, I mean what is?
Sen Sherrod Brown (D): The American dollar is the world's reserve currency. It should stay that way. We want it that way. We agree that it should be that way and we're proud of it.
On the Republican side, Shelton has the support of Senate Banking Committee chairman Mike Crapo. But at least two Republicans appear reluctant to support someone with ties to sound money principles.
CNBC Reporter: At least two Republican senators say that they are still on the fence over whether to support her nomination. One of them is Republican Senator Pat Toomey of Pennsylvania who was worried that her views on currency wars could be dangerous.
Sen. Pat Toomey (R): I'd remain concerned that she is an advocate for using monetary policy to devalue the dollar.
CNBC Reporter: And the other one is Senator Richard Shelby of Alabama, who said that her views on issues like the gold standard make her an outlier. You said you were troubled by some of her writings. Do you remain troubled?
Sen. Richard Shelby (R): Concerned.
CNBC Reporter: Now if either of these two Senators vote against her, that would sink her nomination in committee. So, she does have the support of the Chairman, (Sen.) Mike Crapo (R), who said that she is highly qualified to serve.
Even if Shelton manages to get confirmed, she would only be one voice on a seven-member board. And while she hasn’t disavowed her past support of gold, she has more recently come out in favor of lower interest rates and a weaker dollar – in line with President Trump’s priorities.
The Fed will probably never enact any restraints on itself when it comes to its abilities to create currency out of thin air. Whether it’s gold, or gold and silver as the Constitution prescribes, or a basket of commodities as some monetary reformers have proposed, trying to impose any kind of objective currency standard to tie the hands of central bankers is bound to fail.
The problem is the central banking system itself. As long as interest rates and inflation targets are centrally planned, the central planners will prevent true market discovery and innovation from taking place as they rig prices and prop up malinvestment within the “too big to fail” banking system.
Sound money advocates don’t necessarily believe that gold and silver are the only viable alternatives to fiat money. But the precious metals would likely play a significant role in any truly free-market monetary system where the confidence of currency holders must be earned.
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, it's good to talk to you as always and how are you my friend?
David Smith: I'm just fine and it's great to be back, Mike.
Mike Gleason: Yeah, well it's been a handful of months since we had you on, and I've got a lot of topics to discuss today so we'll get right into it. Now to start out, here we are about a month and a half into the new year. Metals prices perked up in December but haven't really done much since that first week in January when it looked like we were about to head to war with Iran, which was a short-lived crisis thankfully. But in our view, markets are incredibly complacent, David. Stock prices just keep moving higher and higher. Nobody seems to be worried about risk, this despite there being plenty of reason for concern. To name a few, we've got a virus outbreak. There continues to be extraordinary activity in the repo markets – officials still haven't really bothered to explain what's going on there. And Brexit is finally happening. Maybe we're missing something, but it really feels like markets ignore all this stuff completely.
A decade ago, the fed pumping hundreds of billions into the repo markets would have been a major market-shaking story. Meanwhile, one of the EUs largest economies having exited the trade union, raising questions about whether the EU can survive a story like that, would have been making serious waves. But the life cycle of these sorts of stories just keeps getting shorter and shorter. We're to the point now where the impact of a major geopolitical event can be measured in hours, if there is any impact at all. So, what do you make of the complacency in markets?
David Smith: Well, Mike, I agree with everything you just said and it's really amazing that no matter how big an item is, people just slough it off. They seem to feel that the central banks have their back almost no matter what. If they can, if you have an 800 points drop in the Dow over two days, why the Fed is going to come in and step in and pump it right back up again. Of course, that's what they've been doing. But to make that your strategy I think is really pretty dangerous, and it works all the time except for the last time and then you get wiped out. I really think it's worth being cautious, and not only that, but in terms of buying metals thinking, Oh, I'll wait until it does something. Well, it's time to do it when it's quiet. That's when you want to be involved, not when you're competing with a bunch of other people.
Mike Gleason: Yeah, certainly. Good advice, it's going to happen in the blink of an eye most likely when things do finally go off a cliff and hopefully, we don't see that. But it does seem like it is inevitable, based on all the debt in the system and all these unintended consequences of all the money printing for well over a decade now. Of course, going back beyond that, but certainly the massive spike we've seen since the great financial crisis and the central bank's response since then.
How about the coronavirus David? How might gold fair in the event that the pandemic either continues to build and then how might it fair if it doesn't develop and ends up flaming out?
David Smith: Well, the demand for gold seems to be there no matter what, whether it's fear or love or both. I was just reading yesterday where the gold jewelry purchases in China were down because of the coronavirus, but the gold bullion purchases were up. So, people are still buying the gold. They're not going to stop buying it just because of what's going on. In fact, you could make an argument that they have more disposable income to buy gold now since they're not traveling as much. So, I suspect that's no small factor because people want to hoard the gold and have more of it. I think that's going to be just one more event driver, pushing things forward no matter how quickly this thing gets resolved, and no one can predict it. I mean, I'm not going to try to predict it.
It seems like things are better, but oftentimes these things blow over in a few weeks or a few months. But this could be something that's totally different, and we just don't know. And I think the hang your hat on the fact that it's going to be like all the other short term disruptions in the market, I think that's pretty risky.
Mike Gleason: Yeah. Certainly we don't really know what to believe when it comes to information coming out of China regarding the pandemic. Who really knows? Maybe it's far worse than we are being told. A lot of people seem to think it is, and others think it's not that big of a deal at this point. I guess, time will tell ultimately. Hopefully it isn't something that spreads to the rest of the globe or here in the States. That would be pretty bad news.
Well, silver has obviously been a real laggard in the precious metal space, David and the gold to silver ratio has stayed in the mid-eighties level for a while now. Has silver's under-performance been a cause of concern for you?
David Smith: Not really. Silver likes to sit around and make people impatient, wish it would do something. On the charts, it loves to break down to its supposed to support zones and then turn right around and move up. I'm not concerned. When it does decide to go, it can move so quickly that you can't even get ahold of your hat. People that want to accumulate should be doing it now sensibly and they shouldn't be trying to pick the exact turn or when it's going to become alive or whatever because silver is known as the restless metal for more reasons than one. Many, many times people that thought they could figure out what it was going to do and when it was going to do, we're left standing at the gate. So, I would suggest people not get overconfident in that area either.
Mike Gleason: If we look at last year, actually silver did almost as well as gold. I think silver was up, what 14 or 15%. Gold was up about 18%, so it that gold silver ratio didn't widen dramatically. We just have been stuck in that that eighties, mid-eighties to one range. What do you attribute silver being a laggard to David? Is it this push-pull scenario with it being both an industrial metal and a monetary metal and the market can't decide what it wants to be? Is that what's going on there?
David Smith: I really think that is an element in it and because it is an industrial metal versus an investment vehicle or actually sound money. And the thing is what it really takes to get silver going is an influx of buy orders from the retail space and from people that are accumulating it, in that regards. I haven't seen a chart like this because I don't think it's possible to design one where you, for example, there was a build in gold, which X amount of gold has gone into central banks and to ETFs and things like that. But a lot of gold didn't go into any of those things. It went into private hands, which is difficult to figure out where it went. I think that same thing is going on with silver, but there's no chart to show them.
Some of the biggest funds in the world have stated lately, categorically that they feel silver is the most undervalued asymmetric asset that you can buy. And I don't think they're just talking their book. I think they're buying their book. They're going about it in ways that you and I can't define, and picking up physical silver, and that’s taking away from the supply. And at some point, there'll be a client where that becomes obvious to people what's going on, and that's where you're going to get a big jump in the price. So, waiting for that to happen, you could see a $5 move in the price while you're standing there looking at it over a couple of days, when it becomes obvious to the market. I just think it's penny-wise, pound-foolish to try to wait until you see it and think that you can define that and get on board in time to even catch a part of that move.
Mike Gleason: Yeah. I want to get more into supply with you in a moment when I ask you about some of the mining situation there, but first sticking on the retail side of things, I wanted to dive into some of the recent numbers that we've been seeing from the sovereign mints in terms of bullion sales. What did you make of the recent U.S. Mint sales on Silver Eagles? Then comment on some big numbers we saw from Australia's Perth Mint in terms of gold sales over the past a couple of months. Talk about the data you're seeing there, David, if you would.
David Smith: Well, I think the sales of American Silver Eagles in December were paltry to say the least. I mean it was just that, I think it was like, I don't know whether it was under 100,000 or something like that and then all of a sudden it was what, 3.4 million in January, and it just shows you how quickly those sales can turn on a dime. Trying to define that is just, it's just impossible. It seems to me if you just go against the herd when it's low, you buy more and when it moves up and you realize, “Hey, I did the right thing,” And the Perth Mint, they were selling enormous amounts of gold in December. It wasn't just all from one country, but a lot of it was coming from Germany where, and I actually wrote about this in the current essay for Money Metals as part of the essay, where the German government had moved on, and I guess it's law now, where you, if you bought under 10,000 euros worth of gold, you didn't have to report it. But now it's 2000, and three years ago it was 15,000 euros.
So, they've taken it down by about 90%. You can only buy one and fractional ounces of gold without going through a bunch of paperwork, and making sure that everybody in the world knows what you did. Because you want privacy, doesn't mean you're a criminal or you're going to do something illegal. It means that it's not everybody's business what you do. Now these poor people in Germany and many of them lined up around the block of these stores, and most of them didn't get any gold. Now they're stuck with, no matter what happens, they can't buy more than about an ounce of the time without doing a bunch of paperwork and getting permission from the government.
You can imagine when gold is several times higher than it is, which I believe will be the case in the next few years, you'll be able to buy a fractional ounce and be under that 2,000 euro limit. So, it's sad for them, but it’s the ruling idea of government wanting to be more and more in your business, and I say that sort of thing continuing around the globe.
Mike Gleason: Another reason to get it here while you can, and still be under the radar. That's one thing that's thankfully, we don't have to deal with in the States when it comes to reporting or the government being aware of what it is that you're doing. But who knows, maybe we get some politicians in there that want to become Big Brother when it comes to all kinds of things in that realm. Maybe, that's another reason to be buying it now while you can and do so somewhat anonymously.
Well, you follow the precious metals mining sector very closely, obviously. So, I wanted to get an update on what's happening there. In general, do you miners being profitable at these gold and silver prices? I mean, on average, what is the all-in cost of production for an ounce of gold and silver? Obviously every mine is unique, based on the quality of the deposits and lots of other factors. But we're curious about how profitable you think the industry might be, assuming prices stay right about where they are today.
David Smith: Well that's a double-edged question or I should say, there's a way to answer it in several ways. One has to do with how efficient a particular miner has become in the last few years at lowering their costs and keeping labor under control, the expenses and things like that, and having projects that actually do well. A couple of companies that I follow have actually sold their base metal silver projects and they now, are working on gold, silver only. It takes a lot of money to separate out the lead, zinc and copper from a silver deposit. And if you have one that's high grade silver and not so much of the base metal, by definition your costs, getting that silver out of the ground is going to be lower than if you have to go send them all to the smelter and separate each of the components. That's one thing.
There are a couple of companies that I follow that are using new, more effective methods of silver recovery. So their cost is down and they're making money now, even at these prices. They'll be a practically cash power houses if we, not if, but when, we see silver above $20. They've been working really hard to make these things happen. One company went from a recovery of 65% of their silver to about 95%. That's an enormous improvement. And that all goes to the bottom line. The companies that are doing a good job in that regard, they're the ones to really watch.
Mike Gleason: Why are there even fewer primary silver producers then there were a few years ago? And what does this mean for the ability of silver supplies to handle future demand spikes in the investment space, which obviously as you mentioned, can turn on a dime… what happens when that that comes, and there just isn't the supply? Talk about that from the silver mining perspective, and the lack of primary silver producers.
David Smith: Well, sometimes you hear something that really strikes a chord and you kind of knew it, but when you hear somebody that's really got the gravitas that really strikes home. Last fall at the Silver Summit in San Francisco, I was a moderator on a panel with the three different silver companies, one of which was Peter Megaw of MAG Silver. Dr. Megaw, probably has discovered more silver ounces of more high-quality deposits than anyone else on the globe. He's got just an incredible sense, not only an academic sense, but an intuitive sense about where good silver deposits are found. And he made the comment that about 75% of the silver comes as a byproduct of copper and base metal production. In fact, the company and that I follow in China, a Canadian company that produces silver there, their costs of silver is like $5 a an ounce to produce, but 40% on an average quarter, 40% of the production is actually lead.
They're a primary silver producer, but an awful lot of the production of metal is lead. Because most of it comes from base metal, we get a big silver spike and the demand is out there and the supply starts dwindling. There are relatively few, I mean there are literally a handful, with some fingers left over of primary silver producers that are… and they're juniors, they're not 10, 20, 30 million ounces silver producers, they're relatively small… and they're the only ones that can step in to fill that gap. When things really get going, they're not going to be able to fill that gap. So there's no way that these very few relatively small companies are going to be able to make a huge difference, when that crunch comes. And that's what people should understand, there's no way to ramp it up. It isn't like, Oh you open another copper project and suddenly you've got hundreds of thousands of tons of copper available. It's not like that in silver. That is something really to pay attention to, I believe.
Mike Gleason: Not to mention that it takes a long time to even get mines up and running. There's so many environmental issues, permitting and so forth just to bring a mine up to speed to the point where it can even be producing, and then that can take years in many cases, right?
David Smith: It's not unusual to take eight or 10 years even on a small project… raising the money, finding how much silver you have so that you can write an I43-101 Compliant Report and, and making sure it's feasible. I mean, there've been a couple of cases that I'm aware of, where they went ahead, the company went ahead before they had really looked at the feasibility statement, trying to take a shortcut. Sometimes that works. You save a lot of money. They found out that their project has a fraction of what they thought it had when they started, and they had built a mill and everything, and they went bankrupt. It's high-risk out there. You've got to know your stuff and you got to be lucky too.
Mike Gleason: Obviously, with silver beaten down and just grinding sideways for the last five, six, seven years, what has that done to the exploration of these new silver projects, what do you make of that?
David Smith: It's done the same thing it's done for gold. The majors have put less money into it. They've gotten rid of a lot of their exploration staff and some of these other people have gone to a small company to try to do their own thing, and it's just a frittered away that resource. I was just listening to Frank Holmes at the VRIC last month in Vancouver and he said that the cost of finding an ounce of gold… and I have to believe it's somewhat similar for silver… is 2.8 times as much, it costs 2.8 times as much money to find an ounce of gold as it did 10 years ago. Even if it's half that for silver, which I imagine it's probably pretty close to gold, if it costs one and a half times as much as it did 10 years ago, that's a lot more money to put into finding that ounce of gold or that ounce of silver.
When people hold these coins or these bars in their hand and they really should, they should really think about how wonderful it is to have that .999 or .9999, four 9s fine gold or silver in their hands, what it took in terms of money and effort and sweat and toil and time and energy to get that into their hand, and they should really feel privileged to have some.
Mike Gleason: Yeah, I like that. Very well put, and obviously we can see what can happen in a supply shortage situation. Rhodium or palladium, those markets have been going parabolic here. We have a true supply shortage in those markets at least that actually matters.
Well, finally David, as we begin to close here today, what are some of the key levels and gold and silver that you're going to be looking for both to the upside and then to the downside, and then assess for us what you think 2020 will hold for the precious metals, and what type of year you think it will be as we begin to wrap up here today.
David Smith: Well, technically, on the upside you’ve got resistance at $18, 19 and 20 and that could even take a while to get through or it could just cut through it like a knife through butter. But that will tell you something, if it does. I think of the real realization is going to start dawning on people when silver gets above $20 and stays there for a few days, and then you've got a band of resistance, you really don't have too much resistance between $20 and $26. And I think it's very possible that by the end of this year, silver will challenge $26. I'm not saying it'll get there or it will stay there, but that is a huge, huge ceiling of the selling supply that was broken some years ago on the downside, in which created the beginning of the run clear down into the low teens for silver. Once it hits, gets to $26, and gets above that and forms a bit of a platform, the lights are going to start going on around the world that hey, this is for real.
This is not just another bear market rally, and we'd better get ready for some action here. Then I think you're going to see a fairly quick challenge between $26 and $50. Whether that will happen next year, it's very possible. Certainly, over the year after, but I believe we're going to all-time highs in silver over the next few years and it's going to be in three digits eventually. And you referred to the palladium chart a while ago, I think that kind of action is going to be what we'll see some years down the line in silver, where it's just to an elevated level and people think, "Well this is it. It can’t go any higher.” And it acts like it's a pop and all that, and suddenly it breaks through that high, just like palladium did about $1,100. It's going to go and go and go and suddenly palladium, now it's about $2,300. Who would've ever believed that would happen?
Not only that, but that you could watch it for months at a time and you could still be selling some of your metal. I think that the same thing is in the silver's future. I think that the price that it gets is going to shock people, and they're going to say, "Why in the world didn't I buy silver when it was under $20 an ounce, because I wasn't buying something like a boat or couch or something like that. I was just trading on the form of inferior money, fiat money, which loses value all the time for real money and something that can never go to zero, and it's an industrial metal to boot. And I didn't buy it. I can't believe I didn't do it or I didn't buy more.
Mike Gleason: Well put. We'll leave it there for today. Good advice and I couldn't agree more. Well, thanks for the time. As always, David, I always enjoy the conversation, and we'll continue to watch for more of your great articles as they become available at MoneyMetals.com and until next time, keep up the good work and take care of my friend.
David Smith: Thank you and I have greatly enjoyed our discussion. Have a great day.
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 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.
About the Author:
Mike Gleason is a Director with Money Metals Exchange, a precious metals dealer recently named "Best in the USA" by an independent global ratings group. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.