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.