David Morgan follows up on
the precious metals.
Interviewed by Butler On Business September 2014
Alan: Silver has been under pressure. We saw a little
bit of a pop when Mario Draghi did his thing last week. This is an
environment where precious metals should be off to the races and yet it’s
been down for gold… they are taking gold out to the woodshed.
David: As far as I’m concerned, and this is not about
being right, or being stubborn, this is about my analysis, right or wrong. I
really think this is the month where we are going to turn around, meaning
that the bottoms for both metals could be tested. Silver broke below the
$18.17 low that I have been talking about for a long time. The next level of
support is the $17.50 area.
Coming back to finding the bottom—At times the powers that be will do
their best to find it. So for example when the bullion banks want to
determine where the bottom is, just like back in the Rothschild days - read
Jesse Livermore’s book or do some market studies and verify this, you don’t
have to take my word for it. You will sell into whatever you want to buy. In
other words, you may want to do some short covering in the silver market, the
silver market open interest being quite large right now. Which means all the
bets – silver going lower are open.
And so right now, the bottom I think is being sold into, in order to
pressure it down, to see how much it can take, how much it can be forced
lower. When it can’t be forced down any more - and that point will be
reached- then the open interest will decline and the short positions closed.
Again we’ve already seen it once, at the $18.17 level, we got that huge
inter day turnaround, which is known as a Key Reversal! You’ll see that the
smart money, the boys that really run this thing, will start to cover. But
once they start to cover, they know that the momentum changes. The momentum
changes from going down to going up. And I really think, Alan that we are
going to see that happen this month. Then will the price jump significantly?
Probably not.
Significant enough in that we’ll see silver at the end of October at
perhaps $20 or so, maybe something like that. Percentage-wise from current
levels it will be significant.
Whether I am correct – or not- no one knows with absolute certainty,–the
question is how much more downside pressure can the market take before there
aren’t any more people to sell to at these prices? We’ll just have to wait
and see.
Alan: David, I had a contributor, Andy Hoffman over at
Miles Franklin and he’d given them a shout out a couple of weeks ago as a
good place to buy gold. Andy was saying there’s been a total disconnect
between the paper gold and silver, and the actual physical stuff-so much so
that there’s far more paper than there is metal to cover it.
David: It’s always been that way. Percentage-wise it’s
probably greater now than it’s been at other times in history but that’s true
of all the markets. I mean, I want to be objective and fair, but although the
basic commodities hedging system that was originated I think was done with
good intent, over time it has actually brought about unintended consequences.
Because now all the markets have become nothing more that big speculative
casinos. But the cover ratio in all the commodities is greater than the
physical reality -- and that’s true of wheat, corn, soy beans, soy bean oil,
etc. But for silver, as far as a coverage ratio goes, it’s extraordinarily
high. I mean, it’s off-the-charts high relative to the other commodities. So
Andy’s right, and Andy and I have been at several conferences where he and I
have been speaking about this to the audience.
But I just want to be clear that this is true of the paper market – I
mean, let’s look at the big, big picture. Let’s get away from metals for a
minute, let’s look at the overall derivatives. The derivatives market dwarfs
everything else. Most derivatives revolve around interest rate structures and
the interest rate structures are tied in with the zero interest rate policy
which furthers the exponential problem that we have.
I was looking at Chris Martenson’s crash course last night. Repetition is
the mother of learning. I don’t know everything and I like to review the
facts from time to time. I forget the person that wrote this quote, so I’m
going to paraphrase because I’m not going to quote it exactly. He said, “one
of the greatest fallacies of the human race is not to understand the
exponential function”. What that means is that compounding is the eighth
wonder of the world. Once you get to a certain point, the compounding appears
to accelerate and that’s the problem. The system is set up to fail due to the
exponential function.
We’re in that acceleration phase right now. The money supplies are going
to continue to grow because the debt continues to grow. And this can’t go on,
it might be another seven years, another five years, I doubt it can go for
another three. So we’re going to see the debt problem accelerate, meaning
that it’s already built into the system, it’s part of the system, it cannot
be changed, that’s just the way it’s structured.
The quote from Chris Martenson’s presentation is correct--so few people
know why compounding the debt is so dangerous. There has been something like,
three thousand eight hundred paper currency experiments that have failed. To
think that this one won’t fail in some manner is preposterous.
Now will it fail to where you can’t get anything for a bushel of dollars?
No. Will there be hyper-inflation? I doubt it. But it will be a life-changing
event where your middle class lifestyle is gone. That’s what I’m trying to
get across and unfortunately it’s falling on deaf ears again. It reminds me
of when I was “shouting” at the bottom of the silver market around the 1998,
’99, 2000 time frame. I just felt like I was shouting to the wind. Very, very
few people were paying attention. Again, it’s not about being right, it is
about human nature.
History repeats. The facts are that this debt problem is a worldwide
global phenomena, everyone is tied together, as the dollar goes so goes
everyone. Whether or not the BRICS can circumvent the dollar and extricate
themselves from the monetary system when this thing blows up and be sovereign
in and of themselves… perhaps. I don’t know, that remains to be determined
and obviously they are trying very hard to make that happen or at least it
appears that way. But in the long run, as I said, it used to be the adage,
“As General Motors goes, so goes America,” well, look at what happened to
General Motors, take a look at Detroit. And I say the bigger analogy now is
“As the US dollar goes, so goes the world”.
Alan: Great analogy. I always say if you want to see what
happens to a country when it loses its manufacturing base just look north to
Detroit. When I first started in the gutter guard business, Detroit was a
vibrant city with a lot of business, and now it really is a ghost town.
Alan: David, what would it take in your view to begin
what the Austrian economists referred to as the crack up boom? They’ve
printed so much money, you know that the dollar will not be the lone fiat
currency to survive. We may have a currency called the dollar twenty years
from now but it certainly won’t resemble, at least in terms of purchasing
power the dollar that we have today. But the Austrians believe in what they
call “the crack up boom” where in just a short order of time everybody loses
confidence in the currency and it basically collapses. Do you predict that is
going to happen to the US dollar?
David: I think so… I think that’s the essence of it–it’s
a trust or confidence game. But I don’t think it will come from the public. I
think it will come from some other entity. In other words it could be a hedge
fund, it could be a nation state, it could be a sovereign wealth fund, it
could be a very large investor, but it will be something along the lines of
an exit out of the bond market (U.S. dollar obligations) where the system is
caught off-guard. The Chinese have just about ended buying new US debt; it’s
been that way for quite some time. And to a large degree, they have switched
from buying debt to buying gold. That’s been going on for quite some time.
And they’re doing it slowly; they are doing it the way a professional does.
They are moving the market slowly over time so that they can continue to buy
at the same price and not rock the market. That’s what I’m talking about,
rocking the market. Where there’s such a large sale that all of the
psychology changes from everybody wanting to buy the US debt to wanting to
sell the US debt.
Again, to use an old analogy I’ve used before, it’s like a flock of birds
flying along very happily going one direction, They are all in formation, everything’s
great and all of a sudden out of nowhere, for no apparent reason they take a
hard left and all of them follow - they just make this abrupt change. That
abrupt change is what I’m talking about. I think that will happen. When, I
don’t know. It will probably be someone that is trying to exit the U.S.
dollar market,– where they are trying to just get out but it’s still a larger
volume than normal or something along those lines. Or maybe there’s a
computer glitch that triggers a nation state releasing money, or to a bank or
computer hack by some entity. Or else it may be some, quote unquote
“terrorist group” spooking the market, so the hedge funds say “Oh my God, if
we have an electronic failure here I’m getting out of the U.S. Bond.” And
they sell, sell it all at the market. we see these big market sell orders
going through that could trigger others to see it. Then that selling begets
more selling as massive offsetting builds extremely quickly. It could be that
simple, and I think something like that could take place.
Alan: Ever since Mario Draghi made his announcement last
week, the dollar has been off to the races on the upside when compared to the
Euro, but it’s difficult to say it’s just against the Euro because of what
we’ve seen with the precious metals. I’m perplexed. We made a 52 week high
last week because Mario Draghi cut interest rates one tenth of one per cent,
and then increased the size of the negative interest rate depositors have to
pay?
David: That’s what I’ve been explaining, as you go back
to John Exeter, who was President of the Federal Reserve of New York. The New
York Fed and he had an upside down pyramid, and I was probably one of the
first to bring this to the attention of the investing public years ago. It’s
been updated by Trace Mayer of runtogold.com. Look at Trace’s updated chart.,
It’s actually a better analogy than John Exeter’s because in John’s day we
didn’t have the derivatives problem that we have now. In fact there were
some, but relatively few options out there.
But if you start looking for liquidity and people get scared, they move to
safer and safer investments. So they get out of the riskiest ones, and then
they move down toward the inverted base. Moving down the pyramid, the one
step before reaching gold and silver is the dollar. But basically you go to
safer and safer investments.
The safest thing for most people is dollar bills in your hand. If there
was going to be a bank failure and they’ve got $4,812 in the bank- they had
it all in cash under the mattress, in a safe or buried in their back yard,
they’d feel a lot safer because if there is a bank failure they’ve got a
tangible thing, a greenback, that they can go out and spend. Right now
everyone’s accepting that, in fact it is being more accepted: the dollar is
strengthening, as you just said. So this is the step before their loss of
confidence in that piece of paper. Once there’s loss of confidence in the
future value of that piece of paper -that’s when there’s the big run to gold,
as Trace Mayer’s website says in its title, runtogold.com.
That’s just the way it works. I can’t change it, but I think it’s
important to know this. Since you’ve asked this question, the reality is that
we haven’t taken the discussion to this level- this amount of depth before.
It’s complicated because basically, for the public, it’s a matter of
perception. The perception is, “I’m safe because I’m in dollars.” And that’s
probably 99% of the population. There’s probably only one or two per cent who
would say “I’m safest in gold.” But it doesn’t take a lot of people who get
educated in a hurry once the dollar starts to fail to say, “Oh my goodness,
what do I do?” Then they look at things again, they lose confidence in the
“paper promises” in their wallet, and they literally “run to gold”. So I
think we’re getting closer. If you look at that upside down pyramid, you’ll
get a better feel for what I’m talking about. Again, it’s simply part of the
process. You really can’t skip that step.
So I’m not that perplexed by it. I understand and accept it, but do I like
it? No. I really would feel a lot more comfortable right now if silver was in
the $30’s and gold was in the $1600-$1700 range. That’s actually where I
think the precious metals should be, minimally at this point in time. With
all that’s going on in the geopolitical realm, with the war factions going
back and forth, these sanctions against each other, the euro basically under
pressure, the trust factor, who’s trusting who, this NSA thing… all these
things are still out there, and nothing’s gotten any better.
Look at how much more difficult it is in world affairs today than it was
during the 2008 financial crisis. Things have become more difficult and
complex. In reality the stock market has gotten better and better and the
propaganda machine has gotten stronger and stronger. If you believe the
propaganda out there, people who hold views like mine are ridiculous. Why
would you listen to me? - sounds like a broken record doesn’t it, I’ve heard
it before and on and on. The boy who cried wolf, you know. I do feel that way
sometimes. I feel why should I waste my time because maybe this is going to
take place further out than I ever dreamed, maybe this isn’t going to happen
in my lifetime. But I really doubt it’s going to hold together for all that
much longer. Again, coming back to the reality, why? Because an exponential
function is at work and as such it simply cannot be stopped.
Chris Martenson does a great job on his latest Crash Course video series.
He states something along the lines of… if you take a drop of water and let
it double every second. If you walled off Yankee stadium, and put that drop
of water in there, how long would it be before you were in the top seat and
you were flooded out? Well, if I recall correctly, it would take 50 minutes.
But even at 45 minutes, you’d only have the depth of a couple of feet of
water inside the whole Yankee stadium. So with only five minutes left, it
would still look like you were pretty safe. You’re thinking, “There’s the
whole stadium down there, the water’s only a couple of feet deep, and I’m way
up here in the top bleacher…” But then it accelerates (due to this being an
exponential function) and over the last five minutes, the depth goes from
being a couple of feet of water, to completely filling the whole stadium. That’s
the power of an exponential curve- that’s the power of speeding up. That’s
what I’m talking about, and again that’s built into the system. See: https://www.youtube.com/watch?v=iIwyMif5EOg
It cannot be changed, it won’t be changed, and no matter what the
propaganda machine throws at you, that is the reality. It will
accelerate. It is accelerating as we speak. I have no doubt that we are going
to see this thing take place in the next couple of years, at the longest. I
really don’t see this thing going on for five, six, or seven years longer. It
just can’t. The exponential function is what it i. We’re 17 trillion dollars
in the hole. Look, it took all the presidencies from the Founding Fathers to Bush
to get us to like 8 trillion in debt, and then it doubled from 8 to 17
trillion under Barack. This shows you clearly that things ARE accelerating.
Is it Barack’s fault? No, I’m not blaming him; I’m just saying that
regardless of under which administration it happened, that’s the power of the
exponential function. So when it goes from 17 to 34 trillion, where does it
stop? At some point the people holding US debts say, “This is never going to
stop, I must do something, I will go to cash.”
Then, when cash doesn’t work, they head for the bottom of Exeter’s and
Meyer’s pyramid and literally “Run to Gold”. At that point, the problem for
the majority of people, is that there will simply not be nearly enough gold –
silver to go around. At least at anything close to what we’ve come to think
of now as a reasonable price.
David Morgan
Founder: Silver-Investor.com
