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David Morgan: Silver Supply Crashed in Shutdowns, Investment Remains Robust
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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 discuss a range of topics including the recent disruptions in the paper-based precious metals futures markets that caused some major bullion banks to lose their shirts -- and how it may be a telltale of a change in the pricing mechanisms for gold and silver.
David also shares why he believes we’re in the beginning stages of a massive financial system reset and why people need to be bracing for a lower standard of living in the days ahead as inflation heats up. So, don’t miss a jam-packed interview with our good friend David Morgan, coming up after this week’s market update.
Precious metals markets are finishing out a choppy week of trading that saw prices make little net progress through Thursday’s close.
As of this Friday morning recording, gold prices are up a slight 0.4% for the week to trade at $1,747 per ounce. Meanwhile, silver is showing a 1.0% weekly gain to come in at $17.84 an ounce.
Turning to the PGMs, platinum is now up 1.5% on the week to trade at $838. And finally, palladium prices are down 0.7% since last Friday’s close to bring spot prices to $1,984 per ounce.
Bullion premiums have been drifting lower in recent weeks after spiking earlier this spring. That in part reflects a waning of fear among investors… and a hope for markets and the economy returning to normal as we head into the summer.
But make no mistake, these are NOT normal times. Not with some parts of the economy still locked down. Not with the Federal Reserve embarking on an unlimited Quantitative Easing program that will dwarf all others that came before it. And not with the fabric of American society being ripped apart by radicals who are bent on erasing history and fomenting a race war.
Police officers in large cities across the country are bracing for a summer of continuing violence, property destruction, and unrest at the same time as many are looking for new jobs. Militant anti-cop hatred in the streets and a lack of support from mayors and prosecutors will leave many cities with hollowed out police departments that are unable to protect the public from crimes.
With these dangers simmering, volatility spikes could return to markets in the weeks ahead.
Summer – which officially begins on Saturday – is usually uneventful in the precious metals markets. Trading volumes tend to diminish, and demand for jewelry and bullion products tends to soften ahead of the seasonally stronger fall period.
But in a year that has been like no other in so many ways, we wouldn’t necessarily count on this summer being a typical one for gold and silver markets.
Investors will have to brace for a number of broad risks.
For one, the U.S. dollar could take a big hit as the government continues to add to an unprecedented budget deficit, the Fed piles on more trillions to its balance sheet, and the U.S. relationship with China turns increasingly adversarial.
Senior Chinese officials warned this week that the U.S. dollar’s privileged status as world’s reserve currency is in jeopardy. Although China has not yet acted to dump the bulk of its dollar holdings, it is continuing to forge various new trading partnerships with other countries that could gradually dethrone King Dollar.
Meanwhile, Jerome Powell and company at the Fed seem to be doing everything they can to undermine the purchasing power of the U.S. currency. They are openly calling for higher rates of inflation as they pump up the central bank’s balance sheet to $7 trillion and counting.
The Fed’s QE and repo market injections are likely to slow somewhat compared to the record pace seen earlier this spring. Since the stock market has been closely tracking the directional moves of the Fed’s balance sheet, central bankers may need to give it another boost if they want to keep Wall Street’s rally going.
They have already stretched and skirted the legal limits of their powers by purchasing corporate bonds and subsidizing small business loans. Perhaps they will soon begin buying up stocks, real estate, and other assets as well.
If the COVID-19 virus continues to spread and prevent the economy from firing on all cylinders, we can expect more stimulus programs from both the Fed and Congress. Heading into an election, politicians will be trying to buy as many votes as they can with handouts and promises of delivering even more handouts if they are elected.
Politicians today resent the historic role of gold and silver in the monetary system, which once served as a restraint on their ability to spend. But the more our currency moves away from the strict limits imposed by sound money, the more important it is for savers to move some of their wealth out of U.S. dollars and into precious metals.
Amid this dangerous social, economic, political, geopolitical, and monetary environment, physical gold and silver are likely to shine in the months ahead.
Well now, without further delay, 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, we appreciate the time, great to have you on again and how are you?
David Morgan: Mike, I am well under the circumstances and actually, I'm feeling pretty good today. Thanks for having me on. It's always fun to be with you.
Mike Gleason: Yeah, certainly great to have you back. Well David, let's start with the big picture here and ask to hear your thoughts and get your take on what's going on in the world today. Since we last spoke earlier this year, we've now got a full-fledged global pandemic, social unrest, massive unemployment and huge amounts of government stimulus and money printing to try to combat that, a movement now to defund police departments… a widely covered autonomous zone in your home state there, that has come about in response to this. Certainly lots going on in the world, to say the least. So comment on what you're seeing and then where you see this all going, David. Let's start there.
David Morgan: Well, you outlined it well and summarized just about everything. I'll just add on that one, we really don't know the ultimate outcome. Obviously, the trend change has taken place. It's part of what I call the reset. Overused word, but the reset is a reset, not only in the financial system, but a reset of probably the pricing of almost everything… real estate, commercial real estate, food, communications, you name it down the line.
Obviously, the supply disruptions through this pandemic thing has been substantial and it will not come back to 100%. So, there's going to be a general contraction in the economy. They're still in debate whether or not it's going to be pushed more toward globalization or global interaction versus the other, which is more localized… local food production, more localized government, et cetera. It's that direction I'm almost certain, not that the globalist won't push really hard for implementing their plan as much as they can. But I think the physical economy has broken up to such a level that they really can't put it back together.
So, I don't know how far I want to go further with that, Mike. I just think it's a sad situation. It was inevitable without CV (COVID-19). We were already moving that direction. People probably already forgotten that the financial system was absolutely collapsing before our eyes with the repo market, where the federal reserve was putting in billions in the overnight loans because of a trust factor – these banks not trusting loans for 24 hours based on what the collateral was.
So, we were already there, this CV-19 was the needle that popped the bubble, but it isn't the total cause. It was much, much deeper than that, a long time coming as I and many others have outlined and you've got many guests on your show explaining similar situations. I'd say, let me sum it up by saying that, be prepared for lowering standard of living pretty much across the board. That's our new reality.
Mike Gleason: Yeah. And with all that said, in our view, there is literally never been a better fundamental case for buying gold and silver than there is right now. The Federal Reserve, which you alluded to and Congress are completely off the chain in terms of printing, borrowing, and spending.
The Fed is buying back junk bonds and ETFs. There's no limits to what they're willing to do. You talked about the repo markets and how they had to step in there to sustain that market. But somehow, the U.S. dollar seems to be holding up okay. The metals are performing fairly well, but there certainly are no fireworks, at least not yet. What do you make of this? And then, when do you think we'll see these extraordinary fundamentals start mattering and showing up in the price of metals?
David Morgan: Well, reality dawns on people slowly and then all of a sudden. I mean, the general public is not familiar with the financial system and how it actually works, to sense that something's wrong. They are, even in a casual way, pretty much aware that the Federal Reserve is pounding out fiat at a frequency that's never been seen before.
If we just go back briefly and touch on 2008, look at what was produced. I think it was a roughly 4.3 trillion by the U.S., 5 trillion by the European Central Bank and 5 trillion by Japan. And that sort of, and I say sort of, got us through the 2008/2009 crisis, to the point where we are now and that amount of funny money that was put into the system to keep it going, pales in comparison to what's going on now.
So we are facing probably an inflationary depression at some point, but I want to make the point that the dollar is actually one of the most trusted financial assets that you can have. And this goes right along with John Exter, Exter's Pyramid, that you can look it up, where people seek safety.
And the safest thing most people know of isn’t gold because they don't know it. They don't understand it, they haven't been educated about it. All they know is that it exists. And as far as they're concerned, it's nice to have a wedding ring made of gold and that's about as much as they know.
Having said that, dollars are where they're most comfortable. So, you're going to see, as we are, a big push into the U.S. dollar as the money of last resort, except it isn't. And it isn't because if you studied history, monetarily, like I have, you have, most of the listeners have, we know that all fiat fails.
So, there'll be a run in the dollar and probably see them both go up together for a while. Then there'll be this bifurcation, meaning that the dollar price of gold will continue to accelerate, even as maybe gold is ... excuse me, the dollar is doing better relative to all other currencies, but it will fail at some point.
So, we're going to be in a very difficult stagflation where most the world, Americans included, are going to be struggling to get the currency de jour, the currency of their country to pay their bills and maintain their lifestyle. And at the same time, there's this flood of printed money that's going out everywhere, that dilutes what they're able to obtain. And so it's going to look really like a deflation at first. I am convinced of that. And the extra funding money will be going into the assets of probably the stock market, which it seems to be the main place right now.
I hope I'm not confusing anyone. It's basically not that confusing. Just realize that we are going to see hard times ahead. And if we do, and I believe we will hit an inflationary depression, don't think too much about the inflation part. Think more about the depression part because in an inflationary depression, the currency becomes worthless or near worthless. In a deflationary depression, the currency becomes more valuable. So, for a while, we'll see it act that way, that the currency is more valuable because there's so many people out of work or working part-time or not getting their job back that they once had.
So there'll be a struggle there and it will look as if its deflationary depression, it is not. In the background, we have an inflationary depression. Once that mindset takes place in the marketplace, meaning basically the financial markets and everyday purchases. I mean, the people still have the power. If everybody decided to stop buying product-X, they'd be out of business literally overnight.
But back on point, you'll see the inflation in the food sector almost immediately. I'm saying at least six months to a year out, you could see food prices double… maybe in a year, year and a half and that's a huge increase. And Americans only spend 5% of their disposable income on food. But if you're in the Philippines, 40% of your income goes to food. So, think outside of the U.S., how much food is a major factor in a normal person's budget?
And this is almost irrefutable, the amount of destruction through the food supply chain has been astronomical and hasn't caught up yet. We have reserves, there's still stuff in the supply chain. And it probably won't be all that apparent for a few more months, Mike. But once it becomes apparent, the general consensus of opinion will be, “Uh-oh, there's inflation. Food prices keep going up and up and up.”
Mike Gleason: Yeah, well said. There's been a theme with a lot of my guests here over the last several weeks, where we're going to see periods of deflation. Then we're going to see big periods of inflation and people need to be prepared to ride that wave because it will probably oscillate between one or the other.
We don't need to spend a whole lot of time on this, but I did want to ask. We saw some trouble brewing in gold markets in March and April. There was a huge premium being paid in the COMEX futures for gold versus London spot markets. Some of the bullion banks lost huge amounts of money in March. They got caught short physical bars and had to pay up to get metal they needed to deliver.
Some of these banks, including Scotia, have decided since to close their metals trading operations. Now the bullion banks have had an extraordinary record when it comes to trading metals profitably. And in our view at least, that is in large part because the game has been rigged, but they got nailed hard this spring. Explain to our listeners how the banks got caught. And more importantly, give us your thoughts on what this might mean for paper gold and silver markets moving forward.
David Morgan: Well, I want to stay as factual as possible. So number one fact is they're all over leveraged. I mean, they basically run a fractional reserve gold and silver system. It's just like going back in history where the Goldsmiths held the gold and gave you a certificate for it. And they noticed that only about 10% of the population ever wanted the gold back. They're very happy to take a certificate and trade that in the marketplace. So that gave them the ability to print more certificates than actual gold in existence.
Same story, just more sophisticated. So what happened was, there was a huge arbitrage opportunity because of the physical supply. And of course, this was told to be the inability to ship physical gold due to flight restrictions and that type of thing. There's probably some truth to that because I am well-connected as you know, and I did talk to some of the refineries and there were flights that they could not get metal from the refinery into the United States.
So, the arbitrage took place, which usually will rectify the market at some point. And it has been since, but Mike, you're right – and you might want to add onto it – but the fact is there was an arbitrage opportunity, existed for a long time. Physical metal finally did make it into New York. And basically, the two markets were back to "normal."
Mike Gleason: Yeah, we have seen it return to normal, essentially in gold. Silver now does have a pretty big spread between London and U.S. futures. And we're starting to see that a difficulty of getting commercial bars to satisfy the contracts here in the U.S.
Speaking of silver, what's holding it back? And no one is more knowledgeable when it comes to silver than you are, so why hasn't it been unleashed yet in terms of the price, do you think?
David Morgan: Well, at the risk of sounding like a broken record, primarily what holds it back is the inability to have a free market in silver. That's one. Another one that isn't talked about often enough is what is the real price of silver? And well, wait a minute, David, what do you mean? And here's what I mean, the COMEX sets the price and that's the real price. But really what it is, is a paper price for a contract to buy silver. Most of those contracts are never exercised.
But if you buy silver in the European continent, for the most part, there's a 17% Value Added Tax. If you buy it almost anywhere outside of North America, there's either a Value Added Tax or a premium that's substantially larger than you get in the gold market. So, if silver were treated like gold, and there was a across the board, worldwide 3% markup between the bid/ask spread on silver, you would see a vast amount of physical silver investors moving into the market because the availability and the pricing mechanism would be normalized or not broken. It's broken.
And so metals investors, primarily through the rest of the world, as I'm stating, look at their pocket book. And they say, well, geez, if I buy gold, I only have to overcome a 3% premium and I'm in the money and I'm ahead. Whereas with silver, it's a 17% VAT on top of a premium that's larger than the gold premium. And so I've got to see like a 25% move in silver just to be even, I don't want to pay that big a premium.
So, there's a huge detriment to buying physical silver outside of the North American continent, for the most part. And even in Mexico, where there's a great deal of silver, spreads are more reasonable in South America and Mexico relative to the rest of the world. So, there's going to be a day where with the algorithms that can be written, that there will be a world price of silver. That will be what the retail price or what I like to call the honest to God price, of silver really is when you factor in what the actual purchase would be in let's say, Germany and France and the UK and Australia and Japan and India. And you could take all those and average them out on a weighted basis and find out what the real price is silver.
So, that's one that isn't talked about very often. And the last one is coming back to the paper price, fortunately or unfortunately, there has enough physical silver for most of the time, to satisfy the true physical demand. So, let me explain, in 2008, during the financial crisis, a lot of silver investors with some really big names. In fact, I just got a phone call from somebody. I digress, but he was at a level of a bank that you wouldn't believe if I told you. And of course I'll keep it anonymous, but when he bought silver, he bought at the bottom and he bought enough to be substantial.
Let me come back on point. There was a huge premium disparity for physical silver in the retail market. We've seen that again now. And Mike, you know as well as anybody, you might want to add on to my comment, where if you really want the metal you're going to have to pay five, six bucks, maybe seven, eight. I mean, it's varied. I know the premiums are falling back to more normal to get physical silver.
What's interrupting this time, is that we didn't see it in the 2008 crisis, you could buy, in fact I did buy three 1000 ounce bars, basically off the exchange. But this time, even the thousand ounce bars seem to have a bit of, I'll call it a problem, for you to get them quickly. And that of course has got my eyebrows raised, but I don't want to make too much of it. I like to see more data, but as you stated a moment ago, there's this spread between the London market and the COMEX on commercial bars.
So, until that squeeze happens, where the physical market basically can't keep up with the demand and we're there, but I don't want to project too far because the few times it's happened, it has fallen back. Then this whole paper paradigm nonsense is going to go away and you'll be pretty much in a cash market. Doesn't mean that the COMEX closes down and quits putting out a price. They probably won't, but it'll be a joke. It will become a laughing matter because people will say, well, if you're stupid enough to sell your silver at $17.50, when I have to buy it for $25, good luck. I'm not selling it until it hits $25 at the minimum. The only reason anyone would sell it back to anyone else would be because they absolutely were desperate, needed the money or something like that.
So, I think we're getting to the end of their game of manipulating the market through this paper paradigm that has worked so well for them for so long, only there's been enough physical of backup their nonsense. But I think that they are reckoning, that I've talked about and many others for so long, is approaching.
Mike Gleason: Yeah. Wouldn't that be nice if we get true price discovery for once and no longer the ridiculousness of these paper derivatives setting the price for a physical commodity. And I think you'd probably see that coiled spring effect take place if it did finally unwind and we had the physical market setting the price, instead of the paper market setting the price.
Sticking with silver here, we've been reading about global mine production being severely disrupted due to government mandated suspensions of mining operations in response to COVID-19. Something like 66% of silver output has been taken offline as a result. Talk about this and what it may mean for the silver price down the road.
David Morgan: Yes. Well, as you know, Mike, I do a weekly perspective and that was one I did this a couple of weeks back. I continue to learn more about a lot of things. And of course, silver still fascinates me. And so I started looking into what was the effect of this shutdown on all the metals. And to my surprise, I didn't realize that silver was the most. Silver was at 66%. I backed it up on the video I made a with the data showing on the screen. And uranium was 33%, so uranium being the second most hurt by the shutdown, was only half as bad as silver.
So, that will spill over. How much remains to be determined because even though supply has been curtailed, demand has been curtailed for the industrial side, but not necessarily investment side. The investment side is really quite robust. So, what will happen, as already stated, we're going to see more and more investment demand come into both the metals and eventually move into the silver market because of so many factors. It's more affordable. It's undervalued, even relative to gold. And it may become more accessible through the Blockchain.
And I don't want to be too one way on this because I am affiliated with a certain silver backed cryptocurrency, there are others but this will be a way for, going back to earlier in the conversation, where someone in India or Japan or the UK can buy real physical silver through the Blockchain system, without all this nonsense of VAT and all the rest of this stuff, which will be a huge boon to potential silver investors, that I do think there's a pent up demand. I do believe again, I'll repeat that if you had as much access to the silver market, as you do the gold market on a global basis, there would probably be a lot more silver investors out there than there are presently.
Mike Gleason: Yeah, well said. I couldn't agree more on that. Well finally, before we let you go, give us any final thoughts you may have. Perhaps summarize the answer to the question, why metals and why now, because I know you have a lot more to say on that question and then anything else you care to comment on as we begin to close today?
David Morgan: Well, thank you for that. Yeah. In summary, I try to be a realist. I don't want to be too big of a Debbie Downer, but the reality is we are going to have a lower lifestyle. We are going to have to adjust and you're going to have to be mentally prepared for that. On top of that, the metals have shown throughout all of recorded history, that in times of uncertainty, it's good to have some.
You don't need to put your life savings in the metals. You don't need to sell all your real estate holdings and buy gold. I'm not advocating that. But I am advocating, if you are awake and alive, you do need to have a hedge, which means you need precious metals. How much? Well that's to be determined by you. But primarily, most people in the industry would recommend somewhere in the 10% range to be a sufficient amount for most people.
And that would take the gold and silver markets to heights that would be unimaginable because the whole financial system basis today, there's less than really 1% in the gold market. So you would see, if it went to a 10%, a factor of 10, going into gold based assets. And silver represents like .02% of the whole financial system. I mean, it's so minuscule that it's almost not worth talking about. Of course, it's important, it's essential, it's mandatory. It's something that cannot be lived without it.
We couldn't have modern technology without silver. You can live a pretty similar life to what we have without gold in the mix. But without silver, this lifestyle would be nonexistent. You wouldn't be able to have the communications, the computers, the touch screens, flat screens. I mean, all this stuff that depends on the silver market.
So I think I'm so very bullish for a number of reasons, but you don't have to be so bullish that you overdo it. Again, 10% is probably best for everybody to have, for most people. There are others that are over-weighted in metals, I'm one, it's my specialty. And I do see an advantage to be over-weighted in the sector, but that's me. For the general person, 10% is not very much as far as, you have 90% that could be in stocks or bonds or real estate or a partial owner of a business, or whole life or whatever, and still have enough that if something were to go awry, which it is happening as we speak, that precious metals position would actually rescue you financially from everything else going down substantially.
Mike Gleason: Yeah. You make a great point about how, if we go from say less than 1% ownership or approximately 1% ownership in precious metals to 10%, my gosh, what that would do to the demand and the supply-demand situation for physical metal. After all, they can't print gold, they can't print silver like they can with paper money.
Well, good stuff, David. It's always a pleasure and we appreciate your insights, once again. Now, before we let you go, please tell people about the Morgan Reports and tell them how they can get on board with you and follow you more closely.
David Morgan: Sure, Mike. The easiest thing is go to the main landing page, which is TheMorganReport.com, all one word. You can sign up for our free newsletter. Interviews like this, I'll send you in your email box. Also, I do a weekly perspective each week, which is a wrap up of the entire financial markets. And I usually do a video that shows you the screens. Some of the stuff is mainstream, Bloomberg Reuters, some of the mainstream type of press that they don't really put in your face, but I do because this contraction, as I said, has been going on for a long time before the CV needle punctured the balloon.
Anyway, I try to be succinct. I try to make it like 10 to 15 minutes total. I always try to wrap up with something about the precious metals, one or the other or both. And also my main thesis has always been to get people to think critically on their own, so that's available. You can look me up on Twitter. I have a YouTube channel.
If you go to the blog, which is TheMorganReport.com/blog, over on the upper right hand legend, you have all the icons for Twitter, YouTube, LinkedIn, everything I'm on. You can just click those from that page and it'll take you right to the Twitter feed or right to the YouTube feed or right to the LinkedIn feed and be able to watch videos that I've posted to Twitter, as an example.
Sometimes you guys put stuff out that I think, everyone ought to read this article that's in the precious metals market, so I'll put it on my Twitter feed. And this is for people that want to go a bit deeper, but I do recommend, I do a lot of work for free, that if you want to stay in touch, go to the blog, I'd say two or three times a week. And if you're lazy, just sign up for the newsletter, we'll pretty much mail it to you every weekend.
Mike Gleason: Yeah. Well, thanks again, David. I'm an active follower of you on Twitter @silverguru22, for people who want to do that. You always put out excellent stuff and enjoy reading the things that you're finding there, either original content that you're putting out or great little news articles or videos that you're finding and people should definitely do that.
Well, all the best to you. Appreciate the time, stay safe and healthy and have a great weekend, my friend. We'll talk again soon.
David Morgan: All right, Mike, thanks for having me, same to 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 also follow him on Twitter, it's @silverguru22 and if you haven't already, grab a copy of his 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 grab a copy of that.
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.