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Ask the Expert – David Morgan (December 2013)

By Nathan McDonald 5 years ago 2353 Views

In this exclusive interview, David Morgan answers questions from our readers about the gold and silver market and his outlook on the economy.


Sprott Money News (SMN): Thank you, listeners, for joining us today on the Ask the Expert. My name is Nathan McDonald of Sprott Money News and we are very excited to have the pleasure of speaking with David Morgan today. David Morgan is a widely recognized analyst in the precious metals industry and consults for hedge funds, high net worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, author of Get the Skinny On Silver Investing (Morgan James Publishing, 2009), and featured speaker at investment conferences in North America, Europe and Asia. With this, I am pleased to welcome David Morgan. Hello, David.

David: Good morning. Thank you.

SMN: David, as we know, Janet Yellen will soon be taking over the position of Fed Chairman. You yourself have recently referred to Janet Yellen as “Supersonic Yellen”. Now, I think I know why you're referring to her as that. But, can you please explain to our listeners why you chose that name for her.

David: It's a bit of humor on my part. Hopefully, you can get some insight into my humorous side if you want to consider that. I'm pretty serious, but I do have a sense of humor. The big adage with Ben Bernanke was “Helicopter Ben”, and he caught that moniker quite early after becoming Fed Chairman. The idea being that he stated that if need be he would drop money from helicopters.

Well, having somewhat of an aircraft background earlier in my adult life, I was quite familiar with supersonic aircraft. So, the idea was that if Bernanke was willing to drop money from helicopters, and helicopters are much slower paced than a supersonic aircraft. So the idea was that if you think Bernanke was willing to drop a lot of funny money around, just wait. Yellen is ready to do that at a much higher rate.

That may be counterintuitive to this idea that keeps getting put forth about tapering. But, nonetheless we're going to write quite a bit about Janet Yellen, her background, and what her belief system is in the January issue of The Morgan Report. We'll go more in depth on that topic.

SMN: Yeah. From her background what I can understand is that she's incredibly dovish.

David: That's true. She's a big believer in the Phillips curve. There are lots of things we don't have time or detail to go into. We're still formulating the report right now.

But, no one need to get the report to understand what you just said. She is probably one of the most dovish on the Federal Reserve Board, and now as the head of it her mandate will probably carry even greater weight. And, the idea that printing your way out of the problem is an idea that she really holds dear. This is me speaking for her in a way, but nonetheless she has a track record, belief system that I can basically verify. Again, we'll be doing that in the next issue of The Morgan Report.

SMN: David, you alluded to this, but lately a game that the Fed has been playing is “taper on, taper off. In my opinion this is nothing more than MOPE, management of perspective economics”. In your opinion, do you believe that the Fed will ever be able to taper, or do you now see us stuck in a QE to infinity?

David: Well, I'm not a semanticist, but I do like to choose my words carefully. Could they taper? Yes, they could. Will they? I doubt it.

They could do some cursory market appeasing taper type of thing. Maybe they would do a certain class and say well the subprime mortgage, we're only going to purchase this many instead of that many, or some superficial, again, appeasement to the marketplace to give the perception to some less sophisticated investors or the market itself that they're taking a "hard stand."

But, the reality is no. They're in a box. They have to be, as Richard Russell has said so many times, inflate or die. Therefore, the reality is, regardless of what they might do as window dressing or some superficial this or that, they've got to keep printing money. And, that will continue.

If the Fed's printing money, of course it's the US government that's borrowing money from the Fed, the private banking consortium. Of course, the main purpose is to keep the banks from failing. These banks are very solvent now for the most part with all of this QE that's taken place.

But, I think the real question becomes if the situation that exists now is that bailouts are not going to take place any more, and bail-ins are the only solution, then that is something I think for all of the listeners or readers of this need to consider. If the Fed is not going to directly bail out these too big to fails, and the next course of action would be to bail-in, again, take a look around. This is something, I think, very concerning.

I've been a bit ahead of the curve kind of all through the cycle. Not that I've gotten everything right, none of us do, but it was interesting that I wrote about the banking system and that when you sign a contract with a bank, that money that you believe is yours on deposit is not really. Read the contract. I wrote that the same month that I think Eric Sprott had talked about something similar in one of his interviews.

It was slightly thereafter that the Greek tragedy, I'll call it, came to pass where this bail-in situation took place. I think that was a huge wakeup call, because I think a lot of people were unaware of double account bookkeeping, whatever you want to call it, that one person's asset is another person's liability.

When you have a bank deposit it really is only as safe as the contract you have in place. The contract basically says that once you deposit "your money" it is now "the bank's money" and bail-ins can take place.

I don't want to alarm people, but I want to make them aware. I don't like the fear card, but the reality of today's world is you really have to wake up. You really have to think through the worst case scenario, and then back off from there and make a sound decision.

SMN: Well, you're in good company there, David. Jim Sinclair, who I recently interviewed, talked extensively about bail-ins. Eric Sprott has. I know you have. Do you think that the rules changed when the bail-ins happened in Cyprus?

David: I don't think they did, because there are many things. The contracts are fairly clear. Of course, they're legalese, and in my view meant to be rather confusing. But, if you get through them and re-read them or have some help, regardless, it's pretty clear what the intent is or what the availability of the bank to do is.

What wasn't clear was what the amount would be. But, the idea that this money on deposit is yours for the asking but the legal situation is that it's the bank's money was clear.

So, what took place was the idea that well we're only going to take this much. No, wait, we might take this much. No, we're going to take even more than that.

This is where it gets very tenuous, because you're at risk. You're at risk in everything in life. Let's be adults here. Things happen in life. But, when we're talking about your life's savings, or part of your savings, or whatever, it's something to consider. It's something that I think that you, the listener or the reader of this, should pay attention to.

Educate yourself. I like the idea of listening to others and verifying for yourself. Verify these things. Just because I write it and I have high integrity doesn't mean, 1) I don't make a mistake or, 2) oh it sounds Dave's too far out there or whatever. No. Investigate. Research. Do your own homework and verify for yourself. After all, it is your money.

SMN: I agree. Once people start going down that path of investigating for themselves and just not believing everything they hear, especially on the mainstream media or even what we're talking about right now, then these people seem to find a way. They can find out things that, say, you don't know, or I don't know, or some other expert doesn't know. Then, that can come to light.

David: Exactly. I refer to it as surprises in life or surprises in a financial system or whatever aspect of life you want to investigate. I'm very clear on the mandate that I've put out there. That is I believe that the monetary system has been in crisis ever since August 15, 1971 when Nixon took us off the international gold standard.

From that point until this, I've pretty much advocated that, I'd like everyone to be awake and aware of what the historical precedence is, meaning all fiat currencies always have failed. That's the bottom line. That's as fundamental as you can get. And, to take appropriate action based upon that fact.

My recommendation or my suggestion would be to put about ten percent of your liquid net worth into precious metals, and then go about your business. That, I think, is a very conservative approach.

If you're really hyped up about it then 20 percent's probably a better figure. But, I haven't advocated anyone to dump everything that they have into gold and silver. But, unfortunately in my opinion many people that really are awake and aware and learn the basis of what we're speaking of tend to think, “oh, that's about the only place to be”.

I wouldn't argue against that. The problem is that if you're in that asset class totally, and you have a two or three year correction like we've been experiencing, a lot of these people are just giving up and throwing in the towel. Whereas if they had a more moderate exposure that was, say, 20 percent as an example, and were building cash or had diversification, they probably wouldn't feel the pain as badly as those that have jumped full in.

SMN: That's very true. It's probably easier for younger individuals to take the curves, because they have more years. They don't need the money as quickly. But, I definitely can see how people ready to retire, the recent market action has probably hurt them a lot.

But, David, moving on, in light of all this talk about bail-ins and money printing and the endless QE, conventional wisdom would say that precious metals should be screaming higher. So, why do you believe that the precious metals have been beaten up so badly this year? It started in April. Do you believe that the prices are being manipulated lower?

David: I do believe they are. If you take a hypothetical example, you could go into the futures market and sell short for, let's say, several million dollars and move the price down $20, $30, $40. Then, turn around and go into the physical market and buy it and save yourself maybe ten times as much real money or cash that you used to move the market down.

As interesting as that sounds, think about it. Where has the flow of gold been going? It's been going where? It's going from west to east. It's going from the Anglo-American access to the new big kid on the block, and that's Chindia as Frank Holmes says, China and India primarily. Russia's involved, so are the BRICS (Brazil, Russia, India, China, South Africa). That is the obvious truth.

The manipulation thing is very difficult to prove. Nonetheless, I think it's very interesting that if you look back at Adrian Douglas' work from GATA, he showed the LBMA and what the open and closing prices of gold was historically over years and years and years. And, it's fundamentally impossible to have that kind of delta year over year, day after day, and not be manipulated.

There's no random walk that could ever account for what's taking place in reality. I think that's strong enough proof. That would be one of the most important arguments to bring into a court of law.

You could get a bunch of mathematicians that don't have anything to do with the precious metals market and ask them what the probability of that kind of a spread between the open and the close in one market, and gold is, and to verify that the probability is so astronomically impossible that that proves beyond a shadow of a doubt or beyond a reasonable doubt that it's manipulated.

But, I think we should move on. I don't mind talking abut the manipulation. Let me add one more thing, and that is the idea that a lot of people have, or my perception that a lot of people have are, “I’m staying away from the market, it’s manipulated”.

Number one, almost all markets are manipulated. So, get over that. Number two, that the one market that will probably blow up before any others would be the gold or silver market, and it looks like it's gold. I mean the idea that Germany wants its gold back from the Federal Reserve of New York and it cannot get it for seven years, is right in your face. Something is drastically wrong with the physical gold market.

SMN: Yeah.

David: And, this is proof. I think that's all the proof I need to verify what myself, Sinclair, and many of the other proponents of sound money need to verify the truth here.

SMN: Yeah. It's almost laughable with the facts presented, especially with the CFTC announcement and how they decided that there was no manipulation. That makes me laugh.

But, moving on, David, I'm going to change the subject a bit here. It's something that nobody seems to be able to escape lately, and that's the topic of Bitcoins. The crypto-currency seems to have taken center stage due to its meteoric rise in price. Some are even calling it digital gold. What's your opinion on Bitcoin?

David: My opinion is similar to Peter Schiff's. I think the best thing to do would be to refer to Peter and go to the YouTube channel. [15:06] I think almost everyone that's listening to this or reading it will be familiar with YouTube. Type in “Peter Schiff Bitcoin”, or “gold versus Bitcon”, and I'm sure you'll be able to pull it up. My argument's pretty much in line with his.

On the other side, I think you should look at Max Keiser's take on Bitcoin and get both sides to balance the perspective.

I'm free market. I think if you want to do the Bitcoin situation, do it. I mean I'm not going to tell anyone how to run their lives.

There are a lot of advantages to Bitcoin as a fiat system over the current one. But, the only truth that concerns me somewhat is that it is not a specie currency. In other words, it's not a tangible money, just like gold and silver are.

If you take a worst case scenario as a thought experiment and you look at everything that takes place in the financial world, it's basically a bunch of digits moving around. When I sell a stock on the Internet it's basically a code that goes to the ebroker that sells the stock and puts the digital money into my account, and I get a statement at the end of the month.

So, if anything were to happen to that process either electronically... In other words, if there were some kind of electrical failure in one part of the country or whatever, or there were some natural CME event, or whatever, if something like that happened there's no way to escape out of the system.

Whereas physical gold and silver are about as basic as you can get and historically for thousands of years. So, that is a wealth, as long as you can go touch it, that really is preserved forever and ever until you either spend it or pass it on to a family member, or trust, or whatever.

I am an advocate of fund freedom. If you want to do the Bitcoin thing, great. I kind of like Jeff Berwick, The Dollar Vigilante's take. I think he's an advocate of doing both. I'm okay with that.

I thought about getting into it to be able to take subscriptions in Bitcoin, because I have something that I can market and then take those Bitcoins and deploy them into something that I need for the business or whatever. But I think it's a little overdone. I know it's limited.

I think the market will decide. The markets usually decide these things. It looks to me as if it's in a bit of a bubble. I'm usually pretty good at calling tops, although I'm usually a bit early, and I learned that the hard way. I'd rather sell early into a bubble than late, because once it has peaked it's really hard to get out at a decent price.

I love to sell into strength, and that comes from a very strong commodities background. If you look at my trades in the silver market, I've caught every top on the way up. I caught the $8.50 or $8.60, I forget the exact number, top which was just way, way back in the beginning, then the $21 top and the $48 top. I sold into strength in every one of those.

I don't really look at Bitcoin that much, but buyer beware. That's what I would say. Buyer beware. Do your own research. Make up your own mind.

I think there will be some kind of hybrid system at some point. There probably will be some kind of electronic currency.

And, there's one now, really, that's kind of similar to that, and that's a silver and gold backed debit card that a friend of mine has started here in Spokane, Washington where I am. That is certainly not going up like Bitcoin. It's based on the price of precious metals. But, it's precious metals backed and it's also electronic, because you can go into a merchant with this card and it's transparent to the merchant. They just swipe the card and get the information off of it, and you're debited either on the cash side of your account or the precious metals side of your account.

I think that's a little bit more practical than the Bitcoin. But, I don't want to speak too much about it. I've already probably said more than enough, because I'm not that familiar with the internal workings of the Bitcoin system.

SMN: That's something I wrote about a lot recently. I've actually personally been involved as an entrepreneur with Bitcoin since 2011. I see it very valuable on a merchant standpoint. It is a fiat system, though. There's no denying that. I can't see it replacing gold and silver at all. But, I could see a form of hybrid system like you said, a digital gold that's actually backed by something.

But, moving on, there's never before in history... We're talking about fiat systems with Bitcoin. We're talking about fiat systems in general. Never before have all countries in the world been on a fiat system. So, how do you believe that this Frankenstein experiment is going to end? Do you believe that central banks will be able to hold it all together and steer away from the cliff's edge? Or, do you think we've already gone over the cliff and there's no turning back?

David: That is the question. That is the multi-billion dollar question. If you go back in the early days in the archives of the Silver Investor website, you'll see my earliest writings, maybe 1999, 2000, very early where I said this is what concerns me the most. That never in recorded history has the fiat experiment been a global or worldwide phenomenon.

Because of that fact, that means that basically as the dollar goes so goes the whole world. Not that there won't be pockets here and there, or whatever, that might do better than others, but the reality is that this extreme, that the one world currency, the dollar, for the most part, because it is the reserve currency, as it goes so goes everybody.

So, do I believe that we've gone over the cliff or not, and is there turning back? Really a tough one, so opinion only. I'll preface it one more time, opinion. But, you asked my opinion.

I think we did go over the cliff. I think we went over the cliff in 2008. I think that everything that's happened since then has been a backing and filling and, as you call it, MOPE, where the perception of reality is being managed as carefully as possible by the mainstream media that we're back on track and everything's going to be okay.

But, the reality is, the factual truth is that these banks have been reliquified but at the expense of the population. Because when the federal government borrows money in any country it's only based on the productive capacity of the citizens to pay back what they borrowed. I mean they don't come to you and ask you if they have the right to borrow more money and if it's okay if you have to lower your living standard to pay it back in the future, do they? No. They just go ahead and do it. So, that's the reality. The banks are being brought back to life, so to speak, at the expense of the populace regardless of the nation state we're talking about.

And that derivatives problem that took down the 2008 financial crisis... It really is 2007. But, I don't want to get too technical here. It manifested in 2008 and has only gotten bigger.

The banks have gotten fewer. So, the problem has gotten actually worse rather than better. Not to say that if there was another 2008 that these banks aren't liquid now, because a lot of them are. They've got more fiat to buffer the situation.

But, no, the reality is that nothing has really changed. It is over the cliff. And, it's sort of like the cartoon. I might lose some people here. I forget the name of it. I think it's called the Road Runner or something. There was this Wile E Coyote, and he'd run over the cliff with this anvil or something. Then, it would be suspended in mid-air. Then, he'd look down and realize there's nothing below him, and that suspended animation would break away to reality. He'd fall a mile down or whatever and crash into the ground.

That's sort of my take on it. We are at a situation where we are over the cliff, yet we're in this sort of suspended animation managed perception that everything's okay, we're back on track, look at this, and look at that. Not to say that there aren't areas that are doing better than they were. Certainly, there are. But, not in such a significant way that we're really coming out of this.

SMN: I agree. When they print that much money there are always going to be certain sectors that are going to outperform others. Because that money has to flow somewhere.

David: Exactly. The stock market's going up. I don't deny that. There are a lot of corporations that have pretty strong balance sheets and a heavy cash position, and they're doing rather well.

If you go back to my fundamental analysis, back to the early 2000's, I said we're moving from a decade, or decades, from things we want to things we need. Meaning that the commodities sector was going to continue in a megatrend and this stuff that we don't need... I mean no one really needs a second, third, or fourth house. I'm not against real estate investing. All I'm saying is that it became a bubble and it wasn't the place to be. Whether it remains the place to be in the next five to ten years is to be determined.

But, we certainly need to eat. We certainly need to clothe ourselves. We certainly need shelter and that type of thing. So, we've seen this massive boom in the commodities sector and, of course, it's fallen off in the last couple of years. I don't deny that. But, I think the megatrend is there.

Food doesn't become unpopular. It's a requirement. Clothing can be superficial, obviously, but the root basics are that you need food, shelter, water, et cetera. So, that means generally the commodities sector is a place where we need to have things.

Whereas the greater iPhone or greater iPad... I own them both. I don't want to be a hypocrite here. But, the stuff that we don't necessarily need to survive is things that are going to have a problem. I want to be a little more succinct on that. I think the idea was really that anything that's based on leveraging borrowed money is something to be very leery of. Housing, I think, is a perfect example.

Basically my big push was, in the early 2000's, to not only get into hard assets and the commodities sector generally speaking and out of things that were debt based. So, if you had mortgages that were debt based of course this was counterintuitive. Because almost everyone said David if you're saying there's going to be money printed inflation, inflation will bail me out.

Yes, that was, was in the past, true during the inflationary 1970's and up to 1980's, and I lived through it. But, at that time we didn't have China as a competitor. We didn't have people that were willing to work for $2 per day. As we've seen, the labor force has basically been decimated in North America and moved into the east.

That means that this what we used to call incorrectly cost push inflation that gave everybody a cost of living adjustment and allowed them to let inflation bail them out, borrow money, and invest it, and then inflation would make you smart, that was gone. People had a really tough time getting that message out. I probably didn't do as good a job as I would've liked to.

This is not about being right and wrong. This is about thinking about the reality of the world that we're living in. My take was to go ahead and just be like a cash only investor. Not that I don't use leverage and derivatives, because I do. I want to be clear. But, I do it in a rather conservative way, and I always have stops on.

In other words, I protect myself. And, a lot of times at this point it's, like, covered. In other words, I can sell or rent my silver, or gold, or whatever for a certain length of time, and if I'm wrong it's already covered because I own the physical reality of that.

So, it's not like I'm playing with something that doesn't exist. I'm "playing" with a portion of something that does exist. A lot of times in this market of being down for the last few years, it's been a prudent thing to do actually, because unfortunately this market still looks like it's struggling to find an exact bottom.

SMN: That's right. I know you're a big advocate of this. If you didn't do that, if you didn't play with this certain percentage, you could've missed out on a lot of gains.

David: I know I say it probably too often about getting something out at the $48 top, but psychologically it's very helpful when you do that. Secondly, I'd been beat up early in my life being metals head.

The reality is, look, silver is volatile. Silver is much more volatile than gold. And, I think the correct approach to any market is to understand that market. I feel I have a pretty good feel for the silver market, and I'm sure several would agree and probably some that would disagree.

Regardless, I said look, the best way to do well in this market is, and this is from my personal take, to know ahead of time what's going to take place and never miss a trade. That's impossible. That's not realistic. Is to look at when it's overvalued and that type of thing to sell a portion of it and hedge your bets kind of thing.

So, that's the approach that I've taken all the way through this market. The only regret I might say is when I did get out at the top in the end of April 2011 I didn't keep rolling that over again and again and again as I probably could have. But, what's done is done. Reality is fundamentally it's actually never been better to get into the gold and silver market as it is right now.

SMN: It definitely seems to be overextended on the sell side. But, David, talking about natural resources and accumulating assets, there's a country, obviously, that's been doing this for quite a long time. It's made a lot of news headlines doing it. That's China.

China's doing everything that they can to accumulate natural resources. This includes both gold and silver. At the same time, they are also encouraging their citizens to buy precious metals. In the meantime, western central banks seem to be happy to just hoard their gold reserves in a futile attempt to keep the precious metals artificially depressed.

Do you believe that the torch is going to pass from the west to the east? Do you believe that China is preparing itself to replace the dollar as a reserve currency? Or, do you think there are going to be some other system or other event that unfolds?

David: Again, an opinion. Factually, you can go back into my earlier work. That's in the public domain, so you say something you can't take it back. Certainly, you can change your opinion on things, and I have.

No, I've said the big push would be from west to east. I did talk about the gold backed Yuan, and I did that very early. I was one of the earliest writers to write about that. I don't believe, this is again my opinion, that actually China wants the responsibility of the reserve currency of the world. That's my opinion. I think that they're very happy to accumulate a great deal of gold, maybe tie the Yuan to gold. But, I'm not certain that they, again, want the responsibility. This is again my take.

They see the problem with being the reserve currency the United States is currently under. So, I think they are more apt to say look, we want to use our currency as a sovereign nation to trade with other nations and circumvent the dollar. Of course, they've done that very eloquently over the last few years and continue to do so.

They keep distancing themselves from the US dollar. So, I think that it could be where currencies are as they are now, floating against each other. The Yuan continues to gain strength because they've cut the tie to the dollar. There isn't really a reserve.

The other part of the question is do I think possibly that we'd be in another system like a hard back - gold or silver backed, currency or some tie to it. The answer to that is yes. I doubt silver will be tied to the monetary system, although it really would be very, very good if it were. Because the best system, at least historically, is a bimetallic system where you have gold and silver without a fixed ratio. But, that's topic for another time.

I think you'll see some kind of gold cover clause with the new currency. There's probably still a push by the Anglo-American axis to have a one world currency, but the contra to that is basically the BRICS countries. Again, as I said, I think the Yuan could be a stand alone currency as an alternative but not necessarily a reserve currency.

Really, the reserve currency of the world that's worked the best is gold as the reserve. It's basically similar to the Bretton Woods system. The reason the dollar was as good as gold and sound as a dollar, those archaic sayings, was that you could exchange US dollars for gold at one time up until August 15, 1971.

But, the US did what it's still doing which is printing more pieces of paper versus the amount of gold they held. Of course, now it's exempt because of closing the gold window. Nonetheless, too much of anything decreases its value, and certainly there are enough US dollars in the system to decrease the value.

We're not seeing that take place because the amount that's been printed under the QE one, two, and three is sitting on banks' balance sheets. It's not going out into the general populace to cause any price inflation.

SMN: Some would say that we've never truly ever gone off a gold standard. What do you think about that?

David: I think that there's a little merit to that. Let me explain. I think if you go back into history, and I haven't done this in a while, for years actually. But if you go back about a decade and you look at the BIS, the Bank of International Settlements, that's the bankers' bank. They accounted in one thing and one thing only, and that was gold. That's the only thing they accounted for, gold.

Now, if you're talking about the central bankers' bank, you're talking about basically the monetary powerhouse of the entire globe. The only thing that they care about is how much gold you have in a nation state. I would certainly say that that somewhat carries merit. The problem is that we really don't know who owns what because of all these swaps, interconnections, hypothecations, and rehypothecations.

I'm going to go off on a tangent here, but it's on point somewhat. I've always thought what would be the event. No one knows. But, if it ever came to light that there is no real gold in Fort Knox, and of course there's a lot of conjecture about that.

If somehow there was a Senate investigation or whatever, pick your idea, and it came to light internationally that “oh no! we opened up the curtain and we saw the wizard, and the wizard is naked. There's no gold at Fort Knox. The US has no gold reserve at all.”

If that were ever to come to light I would think that the US dollar could take a huge plunge. Because the perception, maybe not the reality, maybe the reality, is that the US still has a large gold hold, around 265,000,000 ounces of fine gold.

I doubt it, but again, the market's perception, I think, is that yeah. So, you could look at different currencies through history and basically, like it or not, gold bug or not, gold plays an extremely important part in monetary history.

SMN: I believe what you just said, David. I don't think they have all the gold they say they account for, either.

What do you think's going to wake people up? Because right now it seems that people are very happy, the average person anyway. Most people in the precious metals community seem a little bit more intuitive to look into details. But, it seems like the average public is very happy just to believe whatever the government tells them. What do you think is going to wake people up?

David: I think it'll be a slow wakeup call. I think it'll be a series of events, or reality checks, I'll call them, that take place. I'll give you a few examples.

Going to the gasoline station and having to wait in a long line. Or, going to the gasoline station and the high grade is out but only medium grade exists. Or, diesel isn't there. In other words, a disruption in the production chain in something as critical as energy.

And, food. going to the grocery store and your favorite brand of XYZ, you name it; bread, peanuts, pizza, I don't care what it is, all of a sudden that's not carried any more. Or, the price of that particular item has gone up substantially. Or, the size has been reduced substantially. Or, again, the shelf is bare. Like, you used to carry this here. Well, that's out of business. Or, they don't carry it any more. We're not going to stock it. The markup is too high.

I think there'll be kind of subtle little things like that. The general populace will start to realize that things are costing more. There are not as many choices as before. There are disruptions that are coming about in my Internet service. There are disruptions in the energy supply. There are disruptions in the food supply.

Those will be things that'll cause people... Because that's on the ground stuff that people do on a daily basis that, awake or asleep, they still will kind of get a wakeup call, so to speak, if they see a disruption. I think that's what'll take place.

On top of that, of course, us that are more awake and more aware will be questioning when is the next bail-in coming and what country is it going to be. And, probably, hopefully. preparing ahead of time until that, in my view, eventuality does take place.

SMN: Once things do begin to break down they're definitely going to get more desperate. With all that said, David, where do you see gold and silver going in the short term? Where do you see it in the long term? Let's say in ten years, where's everything going to be? And, within a year, where's everything going to be?

David: Within a year I'm upbeat on 2014, but not extremely so. I mean the breakdown point technically in gold was about $1,550 and in silver $26. Both the metals are under those levels right now.

I think both metals will be above those levels in 2014, but not significantly so, although I do have to give the caveat that anything could accelerate. If there's some big disruption somewhere, some gold delivery that doesn't take place, or silver, or something along those lines, then certainly the market could accelerate. But, I don't see that in 2014.

And what was the other part of the question? Sorry.

SMN: Where do you see it longer term?

David: Oh yeah. Longer term much higher in value. I don't like to give a paper price although I can. I'm on record back in the early 2000's saying silver would make it to $100 an ounce, and I think that's very realistic.

Again, I think it's the value. I'm along the lines of Mike Maloney and others that you don't want to focus too much on the paper price, although that's what everyone does and rightfully so. Because if you sell metals you're only going to get it for currency. You're going to take that currency, and it's either going to be a greater amount or a lesser amount than the currency you put into the investment.

You really want to look at the value, what does an ounce of silver buy historically, and what does it buy today. That is the gauge you should use to determine whether or not it's fair valued, undervalued, or overvalued.

If you look at gold, the old adage is, of course, a fine men's suit. You want to look at an ounce of gold, does it still do that? Or, if it buys ten suits then you might consider the fact that it's overvalued on a historical basis.

That's the way I'll be looking at it more than the paper price.

I think it's going far higher. I think you're going to see gold overvalued and silver overvalued, and I think in an extreme way. As I just outlined, I think you'll see where an ounce of gold doesn't buy one fine man's suit, it buys 10 or 50 or some extreme metric. I really think that's where we're going.

I think we'll get there before ten years. I think ten years from now... I'm an optimist really. I might not sound it after I've been painted with the doomer broad brush, and in some cases that'd be valid. But, I'm a realist is what I am. I'm in the reality of what's going on in the financial system. And, things are getting worse, not better, in my very studied opinion.

Regardless, I think ten years from now we could definitely be on the upswing. There are a lot of things out there, like the nanotech world, what's going on in the energy frontier as far as being able to perhaps upgrade the system as a whole and use energy sources that are worthwhile.

I'm not talking about solar and wind. I'm not against them, but they're really not very efficient. But other areas that might deem higher energy flex density where people have more energy available on a per capita basis, the better that is the higher living standard you have. That's pretty easily proven.

Ten years out I'm pretty optimistic. But, I think getting to ten years out is going to be very trying over the next few. I'm looking for round numbers, if you want them.

I think $5,000 an ounce gold is probably realistic. Depending on your view of silver, if you're super optimistic like me and you think it could follow a ten to one ratio you could use that number. Or, you think the current 50 to 1 or 60 to 1 ratio is more appropriate you could use that number.

I think we're probably going to get to a minimum of the classic monetary ratio of 16 to 1 and as high as 10 to 1. I'll be consistent here. I wrote about that many years ago. So, if you saw $5,000 an ounce gold then that would imply one tenth would be $500 silver.

But, let's get past $50 again. I want to be very practical. People ask me all the time what's the ultimate price. I say let's be practical. Let's see it above $26. Let's see how it trades. Let's get it back above $30 and see how much interest are in the metals.

I'll go on the record as saying this. I know markets fairly well. You're not going to see too much buying by the nonsophisticated money at these levels, unfortunately. But, what you will see once you see silver and gold work their ways higher, once you get the gold above, I don't know, pick a level, $1,500; $1,600; $1,700, there'll be a lot more interest in it.

And there'll be a lot of money spent on the metals once they break to new highs. You'll see a lot of money come into gold above the $1,900 level, and you'll see a lot of money come into silver above the $48 level.

Unfortunately, that's really... It's not too late, because I think they're going far higher than that. It's not nearly as advantageous as buying today. But, the interest in the market today is at a low, and that's how lows are made.

SMN: It's funny how it works in the market, how people like to buy assets when they're going up and getting overpriced, and they don't like to buy when they're on sale.

David: It's a herd mentality, I think. It's psychological. I was not that good in the markets early on because I was so logic based. You do your analysis and you determine what the true value of something is. be it a stock or a company I should say, and it's partly true. I mean that's part of analysis.

But, what's greater is to learn the psychology. People really don't like to be lone wolves. There aren't a lot of us that are. There aren't that many mavericks in the population.

So, people to be truly independent thinkers and really not care what others think of them and go out is unusual. Most people are, again, herd mentality. So, if John, Joe, my brother in law, and sister are doing it then I can join in and do it. In other words, it's like a herd or pack mentality.

That's why you get these moves as everyone's jumping in. Because when the guy at the water cooler says yeah I just bought my gold, my broker this and that, yeah I got a good discount, and on and on. They're babbling and babbling. So be it. I'm free market. Do what you want to do.

But, that kind of catches fire. John bought gold. John's a smart guy. He's driving this car. Hey, I'm going to buy gold, too. It kind of accelerates. Those things take acceleration phases. That's what I call them.

Like right now, you haven't asked me, but tell everybody for the record, we're in a distribution phase of the general stock market. Not that it won't go higher. It probably will. But, the professionals are distributing what they picked up much earlier when no one wanted it, their stocks. They're distributing them to the retail investor, the unwary public. Because the public is being told by the mainstream media and others that the stock market's the place to be, because all this funny money primarily has gone into that arena.

But, the pros are selling their stuff. Like I said earlier, selling the strength. Strength is still in the stock market. You've got to have somebody to sell it to. You want the market to continue to go up, so you distribute into somebody that's willing to buy at these high prices. Letting it go somewhat higher, and then when the bottom falls out, caves in, you aren't holding the bag. The public is.

SMN: Sadly, it does seem to be a rinse and repeat cycle. What you just said seems to happen over and over again. But, in conclusion, David, can you please tell our listeners more about The Morgan Report and any upcoming speaking engagements that you might have.

David: Certainly. The best thing to do on The Morgan Report is just go to the website themorganreport.com. I suggest if you're interested in all that we do to get on our free email list. It's pretty easy. If you're a first time visitor there's a one time popup window. We just need a name. You can make up a pseudo name. We don't care. We just need a valid name, and that gets double opt in. In other words, we validate that that's a true email.

Our free email list allows you a one time only 30 day free trial to the members section. So, you actually get to come in and see the member’s only portion of the website for free for 30 days.

Not to sound too promotional here, but it's pretty overwhelming to most people. I know what my peer group does in the industry, and I know what we do. I can compare apples to apples. I'm biased.

But, I was a newsletter junkie in my twenties. I read a lot of these guys, and I saw what they did and kind of the damage they did as well - meaning that they put too much money into rank speculations, I'll call them, and not enough money into sound companies.

So, when I started I didn't want that to happen to any of my members. If they follow what I do, put serious money into serious company, good sized money into good companies like mid-tiers, and speculate efficiently - meaning money you can afford to lose into these speculations, well chosen.

And, no one's got a good hand on these. I mean I've got a good hand relative to my peer group, but no one gets them all right. You can't. You could buy a basket of them and you could do quite well.

Now, having said all that, obviously I want to be sincere and true. That is that most of these companies are off considerably from where they were. But, a lot of them are top-tier. Although they're off, you haven't lost 90 percent of your wealth. Whereas a lot of my peer group that were weighted differently than The Morgan Report they're off 90 percent of their portfolios.

No one wants that. It's tough. It's been tough. I do believe, especially if you're brand new, someone that's waited, or just now inherited some money, or whatever, there are lots of scenarios in life, and has the wherewithal to be a lone wolf or to buy at the bottom, now I think is really the time. I think that we're probably at a bottom. I think silver actually has bottomed already. I think the key reversal at the end of June is the low. But, we'll see.

SMN: Thanks for that, David. Thanks for all your insights today. This was an extensive interview. You covered lots of subjects, and our listeners, I'm sure, are going to be happy to hear everything you have to say. Check out The Morgan Report. It's a great report that's put out monthly. David does a great job with it.

Thank you once again, David, for joining us.

David: My pleasure. Thank you.

SMN: Thank you.

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