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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Silver Back up to $20?

Commodities / Gold & Silver 2009 Oct 23, 2009 - 02:17 AM GMT

By: David_Morgan

Commodities

Best Financial Markets Analysis ArticleAndy Sutton:  Hello everyone. Welcome to Contrary Investors Café for the Rocks and Stocks Report. My name is Andy Sutton and this week we have an exciting guest, David Morgan from Silver-Investor.com. I don’t think this really needs much preamble, so without ado let’s get right into the interview with David Morgan.


Everybody is asking the question recently and it’s a question I’ve heard a lot and it’s a question I know that the people are asking. Silver seems to be stuck in a little bit of a range here. What do you see as having needed to happen to get silver back up to that maybe $20.00 area? Everybody was real ecstatic when it got up to $20.00. What’s it going take to get it back up there?

David Morgan:  Well as trite as this may sound, it is a very good answer and it’s also the truth. What it takes in any market, whether it’s silver or a stock or commodity or whatever, is buying pressure. I mean the reason any stock or commodity goes up is because there are more buyers than sellers and of course the converse is true.  

What happens is it is a consolidation period that is pretty high level right now but not at the old high, yet gold is over $1,000.00 per ounce.

In silver right now you have about an equal number of buyers and sellers between the range we have seen recently. And this is very typical of all markets. A bull market is named bull for a reason. All bull markets shake off as many participants as possible, on the way up.

For example, say you were an ardent gold bug or maybe a recent one, and you were smart enough to buy gold under $400.00 and you watched it go up past the $1,000.00 level. Or with silver, maybe you bought it under $5.00 and watched it go all the way to $21.00 and now it’s sitting at $17.00. You might think, “I’ve always got a triple, I don’t think it’s going any higher. I should have sold it at above $20.00, but I didn’t; I’m selling now.” And so you’re out of the market. Once they enter a market and make a sale for profit, very few people will reenter the same market.

Now of course, it does happen. I’m not talking about professional traders or people on the floor of the COMEX. Those are not people I’m speaking about. I’m talking about your average individual investor, who gets left on the sidelines. Once that person is in this consolidation period and sells out, then the market takes off again.

Mr. Sutton:  How do you evaluate the precious metals markets, or even the mining shares?

Mr. Morgan:  I use both technicals and fundamentals. In the newsletter I stress the fundamentals, because most people can understand the fundamental case if it is laid out logic-wise as to why you would want to be in the sector. The technicals are a tool and they’re a good tool, but they’re not an exact tool. So people get a little hung up, especially when they first start trading. I know when I started trading so many decades ago, I looked at all the indicators.

It was confusing. I didn’t know which one had priority. Eventually I came around to looking at very few indicators, the very key indicators, and these give the best information. I think the fundamentals are the thing to stress and what we do know is that gold and silver never failed as money. The financial system is based on a lie at this point, where you can create money out of nothing! These types of systems have always failed. Will this one fail? I believe it has. Not totally, not completely, but it has failed.

In fact, if you consider it objectively and you look at the Federal Reserve’s own data, you will see what they have to say about the 1913 dollar. You will observe from their own numbers that the dollar’s now worth about $0.04. So if my child comes home from school with a 100-point quiz on which she correctly answered only four . . .

Mr. Sutton:  You wouldn’t be very happy.

Mr. Morgan:  I would say that was about as bad an F as you could get. In fact that’s a miserable failure. And yet we pretend the dollar is still worth something. Well in reality it is, but from a perspective of 100 years, we had a 96 percent failure, using their numbers. Again, just to drive home the point—that dollar (which is a weight of precious metal, but we all overlook that little fact) is worth just four cents. Yes, in some sense that is a failure, especially when you consider that the Federal Reserve’s mandate is to preserve monetary stability.

So to see the dollar get cut in half, when it’s worth $0.02 instead of $0.04, do you think that could have a devastating effect on us? You bet! And at the end of these great inflations you can see an acceleration of the downside, which is what I expect. But I don’t expect it quite yet, and going back to what we said just on the previous question, I think we have a few more months here where the dollar is going to move around. And once it breaks to the downside, I think you’re going see an acceleration, and when that happens, you’ll probably see a near simultaneous break of the silver and gold moving further to the upside.

Mr. Sutton:  That’s one thing I’ve noticed as well, particularly in checking out the dollar and looking at the indicators both fundamental and otherwise. It seems that the dollar doesn’t have much of a head of steam to go too much higher. And I’ll tell you what, that’s a really good analogy that you just made in how you can actually “assign a grade,” if you will, to the Federal Reserve. I mean really, the performance of the Central Bank is measured by the value of the currency that it manages. And they’ve done a terrible job.

And if you consider another 50 percent decline in the dollar, $0.04 to $0.02 doesn’t seem like a big deal over a 100-year period. But if you look at basically cutting people’s standard of living in half over a short period of time here over the next couple of years, that’s going leave a big mark.

Mr. Morgan:  Absolutely, and I do believe that’s what we’re facing. One of my themes in my newsletter a couple months ago was death of the dollar. And I don’t mean that the dollar is absolutely zero and it’s absolutely funny money, but what I do mean is that it ceases to be the reserve currency of the world. And once it loses that status, then it becomes nothing more than an internal currency where all our imported goods (which is almost everything we buy now—everything at Wal-Mart, for all practical intents and purposes) double in price. It is going to have a significant impact on us, and I believe very much that’s what we’re looking at over the next two years.

Now there are still some deflationary forces out there and it will continue. It’s an odd mix this time around, meaning that everything we need is going to cost more and everything that is non-essential is probably going to fall in price. For instance, you need food, that's going higher; you need energy, gasoline, and electricity, those are going higher. Almost all your commodities are needs—sugar, wheat, you name it—they’re only going higher, longer-term. Things you don’t really need are going to see price pressure.

Mr. Sutton:  David Morgan, appreciate your coming on Rocks and Stocks. It was a pleasure talking to you.

Mr. Morgan:  My pleasure, thank you.

Mr. Sutton:  Again we’d like to thank David Morgan for coming on CIC’s Rocks and Stocks. We’re certainly looking forward to talking to him in the future. Until next time, this is Andy Sutton signing off for Contrary Investors Café, Rocks and Stocks.

It is an honor to be.

Sincerely,

David Morgan

Mr. Morgan has followed the silver market for more than thirty years. He wrote the book, Get the Skinny on Silver Investing. Much of his Web site, Silver-Investor.com, is devoted to education about the precious metals, it is both a free site and does have a members only section. To receive full access to The Morgan Report click the hyperlink.

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.

David Morgan Archive

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