Morgan: Significant Seasonal Strength In Q1 2012 For Silver, Gold Unlikely
GEOFF CANDY: Welcome to this week’s edition of Mineweb.com’s Metals Weekly podcast – joining me on the line is David Morgan – he is, as everybody knows – the expert when it comes to all things silver. It’s been a fairly interesting ride for silver over the last year or so. We saw it run up almost toward $50 – it came back quite strongly since then – and since then it seems to have been fairly range-bound. What do you make of what’s gone on?
DAVID MORGAN: Just to go into review on the silver market for the year 2011, we started out the year under the $30 level – actually touched down into the $27 or so, at the end of January or so, and then we moved up into the $30 level – had this huge move from roughly $26 or so all the way to almost $50. What’s important to know about that nearly doubling of silver from the end of January to 1 May 2011 is under what context did that move take place and my readers know, and maybe those that follow my work carefully – because I’ve said this in the public domain a few times – silver had actually done pretty well at the $30 level and had sold off at $26 or so level and then QE2 was announced. And after QE2 was announced is when you saw this doubling through the months of February, March and April, and I am not saying that QE2 was solely responsible for this doubling in the silver price – but what we can say as an absolute fact, is in recent history meaning history of the time of my generation or one or two behind it, is that nothing in the world performs as well under a hyper inflationary scenario than silver – it does even better than gold. Now those aren’t my words, obviously they’re coming out of my mouth, but the basis for that fact is a book written by Professor Roy Jastram called “Silver, the restless metal” and he wrote that book after completing “The Golden Constant” where he looked at what gold does during all types of scenarios – inflation – they don’t call it stagflation – or deflationary depressions – and what he discovered was that gold actually did just fine during a deflationary scenario. So the question arose, well what does silver do? And the answer to that question is that we don’t know for certain because it acts differently during different periods of time. But what he concluded in that book was that silver does the best under a high inflation scenario. So that’s where that comes from for me. Moving on back to what happened in 2011 once we get near the $50 level we got a huge sell off all the way down to about the $35 level and it went extremely rapidly and I think it’s best for all listeners and readers to realise that all markets go down faster than they go up. They go down faster than they go up… so we went roughly from $35 to the $50 area from basically March and April – a couple of months – but we came down from that $50 level to $35 – in other words the same amount, but on the downside, not the upside – in a matter of a week or so. So this is the type of movement you get, not only in the commodity sector, you get it in the stock market, you get it in many markets because once the selling pressure builds and there’s more sellers than buyers, then the buyers are not up to be had, so you get sometimes you actually get gaps in the chart which all that means is that there’s no one willing to buy at a certain price. And that is the way these markets move. So once silver bottomed around $35, it moved for several months through the summer and built a base between $35 and $37 or so, then it moved up and built a base above $40 for several months and at the time it was building a base around the $40 level, gold started to go parabolic similar to what silver had done earlier in the year. And as that was taking place from roughly the $1,550 level, all the way up to the $1,900 level, I was concerned, not fundamentally on gold or silver, but technically. And sure enough gold got over bought on a temporary basis. I’m not saying that it’s not worth more than $1,900 – surely it is – it’s just in the time frame or in the context in which it got to $1,900 concerned me, technically. Sure enough gold sells off – well when gold sold off silver was hanging around the $40 level and then got whacked right along with gold and moved from around $40 all the way down to under $30 temporarily. And since that time until now – the end of the year, what we’re seeing is silver has built a base above the $30 level and continues to do so.
GEOFF CANDY: If we look at that though, there has been some comment around perhaps precious metals should be doing a little bit better than they are, given all the turmoil we are seeing in Europe at the moment – all these summits we’ve been seeing, and indeed the market was I suppose placated somewhat at the end of last week, but there is concern that perhaps this is just another temporary measure.
DAVID MORGAN: I believe you’re correct – it’s a hard call, because here’s the way I see it – the metals probably did get ahead of themselves on a temporary basis – $1900 gold and $50 silver, and now they’re back and consolidating and we have these wide trading ranges and I’ve coined the term basically that these markets will scare you out or wear you out… scare you out are these big, huge drops that are very rapid like we just spoke about – or wear you out where you get these long consolidations where silver and/or gold do not make new highs and the fundamentals keep getting better and better. That’s where I believe we are, and I also believe that the traditional seasonal run for gold and silver, meaning the first quarter of the new year which would be January through March and April of 2012 will probably see some strengthening in the metals, but not nearly the seasonality that we usually expect. And the reason for that is we’re seeing a liquidity squeeze right now throughout the global financial sector and in a liquidity squeeze what you need is cash. Now silver and gold are the ultimate cash but that’s only known by probably 1% of the world’s population. The other 99% of the world’s population looks at pieces of paper with presidents’ pictures on them or if you’re outside of the US, different types of currencies that represent the ultimate liquidity. And in all fairness, they’re correct. The majority is you’ve got to go to euros, you’ve got to go to dollars, you’ve got to go to pound sterling, whatever the denominator is of that currency, so there’s a rush from any asset – real estate, stocks, bonds, even metals, and especially paper metals into the monetary base or the ultimate monetary base which is the currency. And that puts a lot of pressure upward in certain currencies like the US dollar because right now it’s perceived to be the safest and so that scenario I believe is an intermediate term situation which puts pressure on the gold and silver price and also puts pressure upward on the currencies, especially the ones perceived to be the strongest and safest.
GEOFF CANDY: If we look at expectations for 2012, clearly at a macroeconomic and a macro-political view there is concern, or there’s comment perhaps around the potential for QE3 or some form of quantitative easing in Europe if we do see the ECB eventually coming in as a lender of last resort, there is perhaps still concern around what’s going on in the US as well – if that were to happen or firstly do you think that’s likely to happen, and if so what is that likely to do for metal prices?
DAVID MORGAN: First of all I think it’s actually happened because this “operation twist” has basically given the Federal Reserve the ability to monetise bad debt globally which means they can buy the bad paper of the banks of the Eurozone and give them the best perceived paper available which is United States Treasury bills. It’s just that it’s called “operation twist” and not many people understand it – they’re not really realising that it’s QE3 in disguise. Now if a QE3 type of announcement were made or perceived by the markets, then you would probably see precious metals make a great leap upward. But fundamentally as Jim Rogers and Jim Willie have said, just look at the data. The data is quite clear that this monetary easing has continued. Now I’m well aware of the fact that if you look at M3 which isn’t presented by the US government anymore, but there are other people that still gather the data, that we have seen a contraction in credit in some areas. So I don’t want to talk out of both sides of my mouth, but if you look at the monetary base – in other words M1, it continues to expand. The credit markets are contracting in some areas, which only makes sense because there’s no one out there that can borrow that wants to borrow, and the people that are credit worthy that can borrow, don’t want to borrow any money. So you’ve got this freeze up in the credit markets, but at the same time you’ve got this liquidity squeeze going on for cash now. So hopefully I’m making sense – it’s a fairly sophisticated argument but it isn’t really that hard to understand and this is what’s taking place. So the metals are fundamentally getting stronger, as I said earlier day-to-day, and yet there’s fear in the market – there’s a rush to cash and the metals are going to take, I think, more time before they start to move upward in paper prices over the longer term.
GEOFF CANDY: Just to close off with then, if we look at the gold-silver ratio is that something you follow and if so, what is your view of where it should be long term?
DAVID MORGAN: Well something I do follow and there’s a lot made of it – it seems to be one of those hot spots or talking points that gets a lot of emotion involved around it, but very simply and factually, and objectively, the gold-silver ratio is simply a ratio that tells you which metal is doing better versus the other one. Is silver doing better than gold – is gold doing better than silver? That’s all it really tells you. So factually when I started saying you should buy silver and prefer to buy silver over gold, the ratio was 80:1. As we’re doing this interview, the ratio is roughly 53:1. So in the context of when I was pounding the table to buy silver at an inflation adjusted basis, it was an all-time low in history and the ratio was about 80:1, I’ve been proven right from that context. Is silver a better buy at 53:1 than gold – opinions vary. Mine is very strong – I believe that silver is a better buy than gold in a 53:1 ratio and I also believe the ratio will narrow more and more as time goes on. As gold continues to go up in price, and we consolidate further as I expect, and we move into new high ground for gold, it’s going to get to a price point at some time, that varies individual to individual. But the basis generally will be that gold is too high a cost for me as an individual investor to buy, silver is a better value for me – I’ll buy silver. And most people that make that decision won’t be looking at the ratio going from 53:1 to 40:1 to 35:1 – they’ll only know one thing – that I get more coins for my investment in silver than I do in gold – gold costs me too much, I’d rather buy silver. And as that takes place, I expect the ratio to narrow and to be consistent, I believe that this ratio will narrow down to the level of what I call the monetary or classic ratio which is 16:1 and could even go to the natural ratio of how silver is dispersed in the ground versus gold which is roughly 10:1 – it’s a bit less than that now, but if you go back throughout recorded history, the ratio used to be around 12:1 in the ground and now it’s really about 8:1 regardless. I have said in the past you can see it getting to the 10:1 ratio, however, that’s my opinion. The fact is it has done better than gold from what I call the bottom of the silver market and whether that trend continues or not remains to be seen.
GEOFF CANDY: and lastly we saw Eric Sprott coming out saying that the silver producers should be buying some of their gold and having it on their books – is that something that you would go along with?
DAVID MORGAN: Absolutely and I don’t want to take too much credit for this, but I certainly was one of the first to advocate that kind of situation. I was speaking with Rob McEwan of GoldCorp back when he was heading that company at the Chicago Natural Resources Conference about a decade ago, and having a brief chat with Rob and saying “it’s wonderful what you’ve done for GoldCorp by banking gold for your shareholders, I sure would love it if some of these silver companies did the same thing”. And I kind of behind the scenes, you might say, advocated that with various silver companies. The only one that took me seriously and took action on that was Silver Standard way back when Robert Quartermain was the CEO of the company – they actually did do that. I am in favour of the idea but I am also a very practical man and I doubt if many silver companies will take it to heart. But I like the idea very much.
GEOFF CANDY: David Morgan is the founder of Silver-Investor.com. That’s it for the rest of the year – from Mineweb.com we hope you’ve had a fantastic week and indeed, a great 2012.
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