This week we talk about the impending return of the gold bull, and David reminds us that there is no fever like gold fever! Other topics of discussion are the mining equities and metal price manipulation. You don't want to miss this year end wrap up, with David's predictions for 2016 and beyond!
Palisade Radio Host, Collin Kettell: Welcome back to another episode of Palisade Radio. This is your host Collin Kettell. Returning back on the show this week is a favorite guest of our audience. It is David Morgan with TheMorganReport.com. David, welcome back to the show.
Author of The Morgan Report, David Morgan: Collin, it is great to be back. Thanks.
CK: Okay, thank you for that, David. Let us start off with talking about kind of a wrap up of 2015. The year certainly did not shape up positively for gold and silver investors and the gold and silver equities. It was a rough year. But maybe, just maybe, we are shaping up for good 2016. Let us leave predictions till the next question, but just give me a wrap up of what you saw happen in 2015, the macros that played into kind of what happened with the metals and also touch on the interest rate that we just had.
DM: Great! Well, we had a disappointing year as far as I am concerned. For the metal, that is another disappointing year among the last few. However, it is what it is. We started off the year last year actually, 2015, we started off the year kind of with a bang. We came out of the chute in January with a pretty decent move in the precious metals markets but it lasted a very short time and then it was basically all over.
The metals actually performed best the first half of the year, 2015, than they have the second half of the year and that applies to gold as well. But, basically, going back a couple of years lost what I call the positive psychology of the market when silver broke the $26 level and gold broke the $1550 level at the same time and on extremely high volume, definitely a takedown as far as I am personally concerned. By the way, we go through that in (my book) "The Silver Manifesto", where a lot of people ask about the silver manipulation. I do not have time, Collin, to go through all the ins and outs. But if you are really interested in silver manipulation you owe it to yourself to buy the book because with that knowledge - you may have to read it two or three times, or just Xerox it or copy or scan that chapter, then you would be armed with data-driven material that would definitely give you an advantage if you are on the manipulation side. We are trying to be as objective about it as you possibly can.
Back on point, we got a pretty good rally in the gold markets. It has just been kind of a big disappointment when they broke the support levels in the April 2013 time frame and here we are couple of years later. It has just been big sideways move from that drop down where silver actually was supported around the $19 level. I called it bottom at a spike $18.17 held that for fourteen months and then it broke below that level. Since then we really had a hard time to get back over $18. We have only done it once and to go over $19 has not happened in quite some time, basically for the whole year.
Gold had similar pattern. Gold, of course, is more widely held and considered more of an established investment than silver is. Certainly a similar pattern but not percentage wise the loss that we've seen again on a percentage basis. Technically, it looks like it could be bottoming here both gold and silver under their respective 200-day and 50-day moving averages. I do not know if it is a bottom here, personally I have added to a silver position in the physical realm, basically below the $14 level. We are seeing a volatility coming in Collin, the volatility to a market, meaning that we are down fifty cents one day and up fifty cents the next day, down fifty cents the next day and up fifty cents the next day, that kind of volatility is very common in a market that is about to turn direction. I am not saying that it will or it is, it could be. Certainly, volatility, even it is going to trend sideways for a while, adds interest into a market because the day traders, the momentum traders, the high-frequency traders, etc. all look for volatility in any market. They are sort of agnostic, they do not care. They do not have any fundamental thoughts about gold and silver being an honest money or financial assets or safe havens or any of that stuff. They basically trade whatever is moving.
Long winded, that was where we were, and I think you wanted to ask where we are going. I will just segue into that. first of all with of my favorite sayings, or one of them is, no one knows the will of the market, I think that we will see a much better year in 2016. But I want to add the caveat that I just finished the silver summit late November 2015 and almost to a man all my peers and colleagues were of the opinion that we had another year in the precious metals where it is to be in these choke holds. No one gave specific prices but they all were of the idea that we would be at low levels in the metals for another year.
I have a different view. I think that we will do better this year coming up 2016 and depending on interest rates and primarily the equity market will give us impetus to see more moves in the precious metals or not. If we see the general equity market measured by the DOW, the S&P or both and they start to falter and you see some money coming out of that market with no more place to go. There are several places, of course, these days but gold is the most negatively correlatively asset to the general equity market. So if you see a fall in equity prices you can rest assured that some of that money is going to find its way in the gold market.
That is what I see happening. I think that we have this kind of two big names out there that have different thoughts we have Martin Armstrong looking for $23000 or something, the higher stock market in other words. You've got Harry Dent I think looking at about $5,000 or $6,000 so of the opposite view. Am I in the middle? I am more or less in the let the market tell us mode, but from all the technical indicators and sentiment, and links to the market I figure the downside more than the upside for the equity market which again favors gold. Silver, gold on steroids, Jim Sinclair has sort of monitored the silver market. Certainly it has much bigger moves up and down. I think that you are going to see silver do much better in 2016.
Now people want prices and I think they deserve to hear price levels. If you look back to what we just talked about, Collin, and say, well you know David silver, really, has not done much positively price wise from about the $19 level and it too was taken down below the $19 level somewhere around August, September 2014. If you take that into account and charts are not always symmetrical. But I have been looking at these things for like 30 years. I have been in the markets for forty years. I do not catch on the technical side till I have had about ten years in the market. There is something to these charts even manipulation shows up in the chart. I mean what I just said about that is a big sell-off, it is there. You can see it. You can see the move. You can see the volume. Those are the two most important things when you look at a chart, so it cannot be disguised. In fact if I was in the courtroom, I would use the chart to show the courtroom and the jury. I would put my point with charts, but at least partially.
Anyway, back on point. What I am going to tell you is what I believe and it is going to take some backing and filling and some work to get back above the $16 level. And when that is achieved there is a lot of resistance between $16 and $17 in silver. If you look at the chart and see we are very bullish, it will take about half the time which is about six months or maybe three months to work through the $17 and, of course, you have to hold that level until $18. Once you get to $19 on and on. The overhead resistance is pretty significant. I do not look for huge moves in 2016 with the caveat that it could and talking out of both sides of my mouth and I don't like to but I need too, and that is express what can happen in markets and that is if there is a huge equity sell-off there are some financial problem out there with a major bank or brokerage house or banking situation or something happen in the foreign exchange markets, or, more likely takes place in the debt markets, not only in the junk bond market which is already getting a bit fluttery
I am not that concerned with it at this point in time. But if we see a large sell-off let us say in the Treasury market or something on those lines then certainly you can see a rush into the precious metals. There is no fever like gold fever, and there is no run like a gold run except for a silver run. I do not want to leave that out because there is the possibility that all the technical stuff that I just said turns in to be rather meaningless because these markets are so small and things can change rapidly. When we think about flock of birds with the lead bird changing its mind or whatever it does it takes a hard left and they all follow that kind of herd instinct that takes place instantly does take place and can take place in financial markets. Whether that happens in 2016 the answer is I do not know and my leaning is it will not. I see more of a grinding up for the precious metals. It is a long winded answer and I am not overly enthusiastic, but I am somewhat positive and I would really be shocked to see silver hold in the $15 range for a year or below, $14 to $15. I would be absolutely shocked to see gold under $1,100 level for a year. That would shock me. I just do not see that.
CK: Well, let us talk about probabilities because after four years of a bad market it would only make sense that we are probably bottoming out here. The chance for next year as you said is slightly positive. But you are armed with a lot of data driven arguments and there are always ways to make credible cases with objective observations. What could cause silver to go below $14, maybe shoot down to $10 or $11, or gold go below a thousand next year? From your historical analysis, is there any precedent to say that that could happen?
DM: Well it could, I've already done another interview that was recent within the last couple of weeks, maybe three, where I said you could see gold hit the thousand dollar level or below. First of all just to review all markets move by buying pressure or selling pressure. Since it is leveraged markets since the Comex within the CMA, you have to understand how these markets work. I know almost everyone that is on this program knows. I just want to review because I know there are new listeners. So when there is a bid-ask spread on a commodity. We will just use gold as an example, but this applies across the board for the commodity market is that someone is making an offer and someone is saying they will accept it or not.
If there is buying pressure what that means is a lot of people want to buy and not many people want to sell. For the order to match then the person who wants to sell that is reluctant to sell that price gets bid up. For example, you would have $1,200 gold and gold is moving up so say "I don't want $1,200, I will take $1,205", One Thousand Two Hundred and Five, so it goes up five more bucks. Someone says "I will buy it at that", the other person says they will sell it at that, the market moves up. Continue that scenario.
It goes the other way, obviously, on a sell. There is more selling pressure than buying pressure. Let us just use I want to sell silver at $14 and someone else says "I want to buy it at $14", then the order is matched. Then someone says, "Well I do not really want to buy it at $14. I think I want to buy it at $13.95." Then the next offer is at the market, for example, is not only sold off at $13.95. But you have to use a little common sense. You have to ask yourself, "Well, who in their right mind would want to sell silver at $14 an ounce?" Certainly someone that mines it that is going to cost like $15, $16 does not want to sell it at that. Most people in the retail market would say if I can buy it at the cost of the best mining companies in the world I would be buyer, not a seller. Thought for the listening audience is who selling at these levels and why?
But, anyway, back to the point. The overall pressure certainly could be more selling on paper to drive the price lower so that selling pressure I outlined a moment ago takes place in a very thin market which means there are not many participants. That is the case in these last seven trading days as we are doing the show. What we have seen in the past is that the lowest price for the year comes on the last trading day of the year, which I think would be the 30th of December. But you asked me in the beginning at the new year. The answer, of course, is yes it could take place at that time. Normally they sell at- I have witnessed in the last several years, maybe the last three to four years, is the sell-off to the last trading day of the year, then you see some short covering of positions as soon as the new year starts. That is what I expect to happen but it could it happen in the new year? certainly. It basically depends on which way the paper paradigm is going to move the market.
I know that people do not like to hear this but as the way markets certainly it is the way the precious metals move particularly it's the way the silver market moves because there is more paper per ounce in the silver side than any other commodity out there at least to my knowledge. It certainly has the more influence, but the physical market absolutely will have the most influence and it has already exhibited that a couple of times. As we all know from the 2008 crisis, silver was bid up in the retail market by about 30% premium. We just saw that recently when silver moved from roughly the level a little higher than the level we are now up to $16. I was hoping we are going to see more strength than that but once this four to eight week backlog took place in the fall of this year, once that was satisfied then the premiums went back to normal. We saw the market fall from the spike up past $16 all the way back down to where we are now basically making some new lows.
CK: David, one could argue that the gold stocks or the precious metals stocks are priced as if the underlying commodities were much lower than they actually are. I guess that can be attributed to investor fear about where gold and silver might go in the coming months and years. I want to ask you, back in the '80s when gold blew off and hit its high of $800 something the gold stocks actually continued to stay in a bull market for a good amount longer than after when the gold price peaked. Even looking back four years, the gold and silver price kind of peaked and started to come off before the stocks did. Do you have any indication of what next year could look like for the stocks if we do just get a flat or a slightly upward market as you had predicted earlier in the interview?
DM: Great question. First of all, in a bull market the equities do lead the metals. Also, the ratio is about 3 to 1 or better if you are in the stocks. The beta on the equities is much greater than it is on the metal, but that just means volatility basically. If I was asked what is the best value? Is it gold is it silver or is it the underlying equities? The answer is undeniably the underlying equities, but you have to be careful. I mean what we have taught at the Morgan Report for years is the big money in big companies, mid money in the mid-tier companies and speculations are just that money you can afford to lose.
If you adhere to what we teach and these are all outlined in the Morgan Report. It gives a sample of how to invest in the metals for first time how much to put in the physical, how much to put in the equities, In the equities side how much to put in the top-tier, mid-tier and speculations. We go through that whole thing for everybody. It is something that I wish I could force people to read because we get questions.
Anyway back on point the equities, they are totally undervalued. It is where you are going to make the most money. Certainly they can go up without the underlying metals going up. For example, this speculation against speculation that I like so well that I am invested in at a cursory level, meaning money I can afford to lose. That situation it could go by itself if gold was flat or even got lower than it is now. Why? Because first of all in this gravity feed system, they can mine gold at about $400 an ounce. What is the margin if you can mine it at $400 an ounce? Well, if it is at a thousand that is a $600 margin. That is pretty high. Is this thing significant for Barrick (NYSE:ABX)? Is it significant for Newmont (NYSE:NEM)? Is it significant for Anglo American (OTCPK:AAUKY)? No. But for a small miner it is very significant.
Yes, the equities can go in and of themselves, if there is some stabilization and upward pressure on the gold and silver prices, then the equities will advance substantially. I do not have the numbers in front of me but I just did them yesterday and my memory is good, but basically the 3 to 1 ratio holds. In other words, Collin, I was just looking at what all the metals across the board did in 2015 and waiting on the next report so I can announce it on my update. But gold was off I think 10%. The HUI was off 30%. That type of thing.
It goes on the upside as well. If gold goes up 10% you can expect that the HUI would go about 30%. That takes a lot of ability to go against your instincts to buy these type of equities at this point in time. It is really the way that big money is made. It is the way that most people, psychologically, have a hard time to do. It is I think one of my contemporaries has said hold your nose and buy anyway. It's that type of thing. But I would suggest buy quality. Why buy a fixer upper in the real estate market when it is very, very cheap but you have to put money put money into it before you can sell it, when you can buy a house in another neighborhood that is absolutely pristine there is no blade of grass out of place, at a very big discount. It is much easier to move it. It is the best of the best. That is what I would strive for people to do.
I know I am kind of contradicting myself on this special report. That is a special situation. That is something I will put outside of what I am speaking about. But, generally, you want to get the best of the best so strive to get a really solid portfolio performance going into 2016. As those things perform you can sell them, you can write covered calls. There are lots of ways to invest. You really need to kind of discover your own abilities and your own methodology to investment. A lot of people like to buy and hold; that is what they are taught. Some people are more aggressive; they like to trade part, which is what I do. Other people like to find stocks that they can use for income which would be dividend-paying stocks that also have the ability to cover calls for an example.
There are lots of ways to make money in a market. You just have to be aware of them and comfortable with them. Of course, for example, the income side on covered calls, that is something that you need to be taught or learn from somebody. It is really not that difficult and you will be outside of your comfort zone. Doing it the first couple times because basically what you are saying is I want to rent my stock for the next three months for this price. By the way, if it gets such and such a price I have already committed in advance and you get to buy my stock at that price. But in the meantime you got to rent it, so it is actually a conservative type of investment. I used to do it more than I do now. I did not mean to go down that rabbit hole too far, Collin. I know your background and your dad's background so I probably took the listener way off track. But the idea being that you want to start with the best and work your way down.
CK: Oh, yeah. I think what you are getting at is that in a sector that is historically quite speculative in a normal market, there is really something for everybody right now. You look at something like Nevsun Resources (NYSEMKT:NSU) and just talking round numbers. But they have about $500,000,000 in cash and a $500,000,000 market cap paying 6.5% dividend. Abitibi Royalties (OTC:AIBIF) we talked to a couple of weeks ago on Palisade Radio, they have as much cash as market cap and they are selling covered calls and their large positions of Yamana (NYSE:AUY) and AngloGold (NYSE:AU). And then if you want something more speculative there are plenty of those out there right now, but across the board they are all cheap. It is a market for everybody to look at right now. David, I want to ask you if you have anything else to add for our listeners or something you are looking forward to in the new year with the gold and silver sectors? Go ahead.
DM: Well, first of all, I want to wish everyone listening, a Merry Christmas, if that is your situation. I'm not trying to be too politically correct. Obviously, I know a lot in the Jewish community so Happy Hanukkah to them. I am pretty honoring of other people, places, and things so let me just say Happy Holidays.
I want to thank you for what you talked about back up on the covered call writing. Also I want to interject one more thing about this gravity feed gold situation that is for any of your listeners that are in a junior that they really believe in, that they know that it has good grade gold like, let us say, three grams or so or maybe higher, let us say a tailings situation on the project that is easily accessible. They owe it to themselves to get this free report, but more importantly to pass it on to their management because this is brand new, not many people are aware of it. I want to make it available to your listeners because, again, a "game changer" potential for the small miner. Because they can go in to a situation where they do have gravity feed gold and basically self-finance, because the way this company is set up is they strike a deal in each individual case salaries are set fifty-fifty cap situation or that's just a way to think about it, and the company is getting profit from their gold with very little dilution, basically, none, so they can take those funds and utilize them to restore the Treasury, pay off debt, pay their... boy I'm trying not to be too funny here, but in some cases that is the case. Back to what you said, to reassert there are some in our community that are very negative for miners.
First of all you cannot get physical without having a mining company, so let us establish that very obvious common sense fact first. On top of that there are many companies that are very cash rich, have very strong treasuries, have very good positions right now to buy up assets in the ground 10c on the dollar kind of thing. Do not give up on this sector. I think a balanced view is always the best view. If you swing too far one way or the other you are liable to overlook too many things. Certainly I like them both. I have always taught to own physical first, but the equities have the best values as we said earlier in the show.
I don't have much more to add other than remember what this season is all about regardless of your persuasion. It is really about what it means to be human and giving it is better than receiving and I truly believe that. I did not know it when I was very young. I do now. Just think what you can do out there in your everyday life. It does not have to be material gift. Maybe it is just being present in front of that person that you are getting that latte from. Maybe it is that person at the grocery store that is checking you out that is having a bad day and just give him a smile.
These small things although it sounds small really mean something because we all account of that in each and every day of our life. If there is something that you can actually give out free, a smile, a nice comment that is sincere, that type of thing. I think we lose sight of that. I think we have just gone too far especially these financial, I'm not going to say shills because it shows type of man you are. But I think we need to remind ourselves, and this season reminds us all of that. I just want to remind everyone that I am reminded that that is what this is all about it is not about necessarily how we can increase our financial worth although that is part of my business, but also has to do with how it can we increase our human worth so I will end with that.
CK: Well, thank you for that, David. I agree. I want to say Merry Christmas and Happy Hanukkah from Palisade Radio to all of our listeners. It has been a huge year for us and thank you for all the support.
DM: It is truly my pleasure. Thank you.
Seduced by silver at the tender age of 11, David Morgan started investing in the stock market while still a teenager. A precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems ahead and reasons for investing in precious metals
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.