Ask The Expert - David Morgan - November 2022

Craig: Welcome back to the Sprott Money News "Ask the Expert" segment for November, 2022. Remember, this is where we bring in experts of the precious metals industry, hit them with some of the questions that you all have submitted, and get their responses. I'm your host, Craig Hemke, and joining me this month is David Morgan. Many of you will recognize David as a renowned expert, devoted his whole life really to the precious metals and to silver. His work can be found at themorganreport.com and he is an old friend of mine, an old friend of Eric Sprott, and an old friend of Sprott Money. Good to see you, David.

David: Craig, thanks for having me. It's good to see you.

Craig: Well, this is always fun. We've been collecting these questions over the last few days and my job is to simply just lay them on you and get your response. Before we get started though, I wanna remind everybody all of this content that you find either at sprottmoney.com or on YouTube or whichever channel you find it, is provided free of charge. So, do Sprott Money a favor, send them a little thank-you. The least you can do is subscribe or hit like on whatever channel you're watching this or listening to it. But don't forget, it's always a good time to be adding some physical precious metal and Sprott Money should be one of your preferred dealers that you always check when you're in the market.

In fact, as we record this, it is November. So we're getting ready for Black Friday at Sprott Money. Of course, big Black Friday sale can be found on their website right now. It runs through Friday, the 25th, and I'm sure after that then you can check their holiday gift guide for even more sales. So go to sprottmoney.com. Always keep them in mind anytime you're in the precious metal market. And David, I've been in the market quite a bit here and lately buying precious metal. I'm sure you have too after this big pullback we've had, but it looks like maybe we've turned the corner. That's a good lead into question number one, which is simply put, what do you expect out of the U.S. Federal Reserve in 2023?

David: Oh boy, it's not an easy one. A good question though. I think we're gonna see more increases in the interest rates. I have two thoughts. One is that the Federal Reserve has determined they're gonna just keep raising interest rates until something breaks. That's number one. I think the probability of that is less than 50%. The other one is just to continue to ratchet interest rates up as required, which means maybe they'll go up 50 basis points, maybe 25 basis points and then pause and then go up. But continue to put the pressure on increased interest rates so the suckers of the world continue to pour money into the U.S. Treasury market because anyone that knows anything, knows they are worthless in the near future. And they need to do that in order to implement the new system.

So you want the dollar strong as possible until the new Central Bank digital currency is implemented. You don't want the dollar to get destroyed, at least psychologically in people's minds before they get you into their new digital currency system. So, that's my take. And just to stab at it, because I'm sure there was kind of implied, "Well, when?" I think they're gonna continue through at least the middle of 2023, you know, ratcheting it up. I don't think you'd see any pause or anything substantive until the third quarter, but, of course, that's my best guess and I will use the word guess, Craig.

Craig: And of course, maybe something will break in the meantime.

David: Exactly. Yeah.

Craig: I entered this year thinking, you know, on the basis of last year, or I'm sorry, 2018, 10-year note got to 3.25, stock market fell 20%. That was all it took. Well, we've exceeded both of those this year and they keep on going.

David: Well, in a true hyperinflation, you know, stock market just go up, up, up and up. I mean the Zimbabwe stock market was the best performer a couple of years ago. But just because you're in the stock market, it's better than having money in the bank or in a money market, but it still doesn't keep you on par with the inflation. The only thing that does that from the Zimbabwe experience, Venezuela, Argentina, or the Weimar Republic is precious metals. It's the only thing. Everything else goes up, the stock market goes up, up, up, up, but it doesn't keep you on par with the depreciation.

Craig: Right, exactly. Well, it'd be interesting to see, but do you think at some point next year they stop and probably go the other direction and see where they go from there?

David: Yeah, I know. And the thing that's interesting about that I want to ask you is, you know, we all talk about the pivot and that's sort of like anyone that knows anything, knows that once they do that, it's game over for the dollar. It's like they're admitting we're, you know, so many have said QE to infinity, all we're gonna do is print to oblivion. And at some point when you get near oblivion, the currency is deemed worthless for all practical purposes. People just shun it, spend it as fast as they can to get real things.

And so, on that pivot, that's the presumption. It'd be interesting to see if/when that takes place. Again, my idea is they wanna get out of this current system and the new one ASAP, as soon as possible and not lose too much credibility because if they lose all credibility with the U.S. dollar, then how are they gonna transition? It will be much more difficult.

Craig: Right. Good point. All right. Let's move on to question two. I've been watching this on my side, watching copper prices. Finally, after 90 days, 120 days breakout above the 370 level trying to turn higher. Do you subscribe to this theory of Dr. Copper being a predictor of kind of the macro economy or the stock market?

David: I used to. I used to think and it worked for decades. I still give it some power, but I think oil is more important now. So I look at what the oil market's doing. Copper does give us some indication, but there's a little bit of a whole psychology behind copper now with the EV situation and how much is needed for electric vehicles. So there's a little bit of bias in it now. But I do look at it. I'm neutral. I wouldn't say I'm bearish on copper, but I'm kind of neutral on it.

My main thesis is the contraction in the global economy as the financial system continues to expand. So if you have more pieces of paper chasing a contracting economy, that means higher prices across the board. And that's exactly what we're seeing. So in a contraction, there's gonna be less availability to go into a new copper mining project, for example. Plus if you factor in the energy cliff and look at what the oil situation is real or contrived, it's still reality, which means less energy, which means everything gets hurt, especially highly-intensive energy programs like mining.

Craig: Yep. And that impacts physical supply. I don't wanna get to that. Well, you know what? I'm gonna shift up the questions. I mean, that was gonna be question four. I'm gonna move this to question three. As we record this on the 18th, news came out today of annual projections out of the Silver Institute projecting what we've talked about and maybe known about for years, which is a silver supply deficit. Even when you factor in a global mine supply, all of the recycling on just their base assumptions about industrial demand and investment demand, they're forecasting almost a 200 million-ounce deficit next year in silver supply. I don't know, is that even a question? What do you make of that, I guess is the question, David?

David: Well, it brings back to when I started, you know, the older domain, silver-investor.com and you know, we went around the world telling everybody, you know, how great the silver investment possibilities were. We've been in a deficit from 1990 to 2005 or 2006 for a average of 100 million ounces per year for 15 years, Craig. That totals 1.5 billion ounces. And we started somewhere around 2 billion, so we're down to 500 million ounces at the 2005, 2006 timeframe.

So if supply and demand actually worked and you had that much of a supply deficit going on for over a decade and you saw that pitifully small amount of silver above ground, you took the price to be skyrocketing. But if you check the price in 2005, it's not the case. It took 5, 6 years later where we got back to the normal high of 50 and stockpiles were increasing from about 2006 up.

So I am gonna answer a comment. So, 200 million ounces is double the annual deficit that was taking place in those other years. And I just did a Twitter, or did my weekly perspective. People can get on my blog and listen to it, but I focused on that. And I don't think it's gonna go for 15 years. It would certainly be interesting if it did, but it shows you the power of silver and most of that, well, it's really both cases. It's investment demand and its industrial demand. Craig, when we started with the projection of solar back, I think started talking about it in 2000 and then I re-upped my analysis in 2010, the projection was, you know, growth in solar. Right now, solar is about 10% of the industrial demand on silver. And a lot of that really cannot be recycled very easily because of the toxins that are in the panels. So, still very bullish, but I think it's very interesting to get this. And I again read the article, one more comment and, of course, Philip Clapick, who I know said, you know, "Well, yeah, and there's been a drainage off the COMEX and the LBMA, but there's still plenties." We'll see.

Craig: Yeah. Yeah. All right. We're halfway done. Let's go to question four, which had, gonna be question three until I shifted them up a little bit. In your mind, is it better...and again, not getting into investment advice, but for the average investor, is it better for them to buy individual silver miners or just get more blanket coverage with an ETF like the SDG or the SDGA, which is the Sprott-managed EFT?

David: Yeah. If I was gonna tell my, you know, sister or family member, picking individual stocks is tough. I'm good at it, not perfect, but I would actually go to a mutual fund, a good gold mutual fund. Yeah. You're not gonna get the... Or you could go for the ETFs. I'm not a real strong ETF guy, but either one. But definitely spread the risk. Get some professionals in there, let them manage your money and you're gonna ride the wave. And there's advantage and disadvantage. The advantage is that it's on aggregate. So, if the whole system or the whole trend is up in silver, for example, you will get gains and they will be leveraged. On the other hand, if you pick the correct silver stocks, you'll probably outperform. I've usually outperformed in a good year, you know, you name the gold fund, but you know, it takes work, you know? And there's entry and exits and you gotta be willing to take a profit and all that.

So I'd say for most people, just get a mutual fund or an ETF. I wanna make one more comment, and that is, there aren't any to my knowledge. Well, there's one, well, it's an ETF. I was gonna say, there isn't to my knowledge any silver mutual fund anymore. And back when I was younger than you, there was the Fidelity had a silver fund and Lexington had a silver fund. I believe it was the Lexington Silver Fund, as the way I would run. They had silver bullion and silver mining stocks, top-tier, mid-tier speculations. So, you basically got "The Morgan Report" if you bought the Lexington Silver Fund. And I do more than silver. I want to make that clear. I mean, I rebranded "The Morgan Report" because it covered all the resources, copper, lithium, cobalt, battery, metals, rare earths, and all that. But obviously, silver's still something I spend a lot of time.

Craig: Yeah. I wonder if when those mutual funds return, we'll have to make note of that. We're getting close to the top maybe.

David: I would say.

Craig: All right. Question five, this is an interesting question and I'm not sure if it's answerable, but I'm gonna ask you the question anyway. One, if you were able to remove all of the derivatives, all the unallocated accounts, and leverage, what would be the price of silver?

David: Well, obviously, that would be a guess, but it would be a cash market. And in the cash market you would, you know, determine the price on a daily basis. You know, someone that needs it for their... Samsung for example, would buy up their so many, you know, thousands and thousands of ounces in Elon Musk, etc. I think the leverage, I think is a round number, you know, looking at not the over-the-counters, which we don't really know, but I think we could be conservative and say, you know, 10 to 1 and we could argue it's a 100 to 1. I think you could use that factor. I think if you took silver's price and looked at it in real terms, meaning from 1980, the average price after the silver peak was $20 an ounce for all of 1980. And if you went out a year before that, the all-time high of silver was $6 in January 1979. January 1980, it hit 50, then it traded at $20 for the rest of the year. Again, three times the all-time high a year before.

So, I think if we look at it in those terms, Craig, we would say a nominal $50 is somewhere, depends on which CPI you use. I'll use the government's one, which is bogus, and that'd be around $150. So if we said that was the peak and we took a third of that, we'd be at $50. So I think it'd be north of $50, probably closer to a $100 or $150. But it's really difficult. But I wanted to go through that for my thinking. Well, "David said it's gonna be..." I hate that. I hate that because, well, "David said, well, David said what? How did David get to that number," right?

Craig: Great. I've been asked that for a dozen years, you know, what's the right gold price? And I don't know, because you're putting it in dollars per ounce and I don't know how many ounces there are. But if you don't know the denominator, how are you gonna be able to come up with a price? But, you know, you've been in commodities for so long, David. I mean, there are a lot of commodities that are priced just directly from producer to consumer. They don't have futures markets.

David: Right. Well, the egg and milk market used to be [crosstalk 00:15:15] exchange. We still eat eggs and we still have milk.

Craig: Yeah. And chickens. And I mean, you go through all kinds of markets like that. You don't have to have a futures market.

David: We do not.

Craig: So who knows what will happen in the end? All right. One last question. And I'm sure you're aware premiums on American Eagles are extreme. I've seen a lot of dealers buying them back from people at huge premiums. Then this must just be from a silver investor. Are there better options than sovereign coins and what is your preferred type of silver that you buy?

David: Yeah, I do think there's an arbitrage opportunity here. And, you know, if you go back to my 10 rules of silver investing, I talk about, you know, an ounce of silver is an ounce of silver. I mean, if you got a silver disc and it's stamped with Santa Claus on it and the back's got a sleigh, but it's 999 fine and 1 ounce, in essence, it's the same as an American Silver Eagle.

Craig: Right.

David: It really is. Now, people won't like to hear that. And there's reasons people buy Eagles. But at the end of the day, premiums usually shrink, which means you're gonna get paid approximately the same for that Santa Claus silver round that you will on an American Silver Eagle. Now, that's not the case right now and here, and I understand that, and I understand why because the demand side is so strong. But for me, many of my, you know members have asked what to do and, of course, I can't give individual advice, but I have said, well, if it were me, I'd do a 50/50.

In other words, if I had 10 Monster Boxes, I'd sell 5 at the premium, take that and put it into silver bars, you know, capture a lot more silver that way. And if you're wrong and the premiums continue to increase or stay high, you've only made...you haven't made a mistake, you made half a mistake, right? Yeah. Because you still have both. But to not capture the premium, in my opinion, is also a mistake. And the bag market, I mean, I'm thinking about selling some of my bag inventory because, you know, I've collected several bags over the years and they're sitting at about as big a premium as the Silver Eagles are,

Craig: Which again, and if you can multiply the amount of silver that you have by 25%, maybe, why not?

David: Well, I talked to one of my dealer friends yesterday and he talked about a million-dollar account that swapped bags for bars and it came out with 22% more silver.

Craig: There you go. That's about what the math is. So it's something to, again, it's very easy. Like, we talk about the ETF thing, you could just kind of passively hold it and that's what I do.

David: Well, it was a million-dollar account. Sorry to interrupt you, Craig didn't mean to. It was a million-dollar account. So now it's $1.2 million.

Craig: Pretty easy to do.

David: They made $220,000 on that spot.

Craig: Yeah. Take advantage of it. So, anyway, David, interesting times. And I'm sure as we get through the holiday season here and we flip the calendar, certainly looks like it's gonna be an interesting year in 2023. I remember thinking the only thing predictable about this current year was that it was gonna be unpredictable and volatile. Probably the same thing for next year. And it's always a pleasure to visit with you. Like I said, you've been an old friend of mine and of Eric Sprott and of Sprott Money. And so, it's always great to visit with you. And before we wrap up, tell everybody again about "The Morgan Report" and what they can find at your website.

David: Sure. It's themorganreport.com. Get on our free e-letter please and then go to the blog. And on the blog I put up most of the interviews I do for public domains and also over on the right-hand side, there's direct links to our LinkedIn, our Twitter feed, which are pretty active on Twitter. I have two people that can access my account. So everything that goes up on Twitter isn't necessarily from me, but most of the time it is. And that's it. I'm here to be of maximum service to others to try to get us through this financial conundrum, which of course is economy based. And as I said earlier, my take is, it's not the brightest economic system going forward, but humans are resilient, they're beautiful, they have something that's higher powered in my opinion. And we will get through and hopefully come through the other side better than ever before.

Craig: Yeah. The only word of caution I'd add, David, is, you know, people should avoid kind of fly-by-night flashing the pan types, you know, and you haven't been doing this very long.

David: Yeah. Right. There we go. Thanks for that.

Craig: How many years, David?

David: Oh, geez. Well, you know, caught the silver thing when I was 11 years old when, you know, coinage got ripped off. And I, you know, I started trade stocks at 16, but as far as silver's concerned, 1980, how old would I be...27? Around 23, 22, 23 is when I really got serious about the metals market.

Craig: So just a couple of years ago is all.

David: Yeah, just a few.

Craig: All right. My friend, thank you. And again, everybody listening, please thank Sprott Money for this content. Stop by sprottmoney.com for the Black Friday sale or for the holiday gift guide. And then be sure to check back next month, we'll have all the same content, precious metals projections early in the month, "Ask the Expert" and of course, the monthly wrap-up, yearly wrap-up, which might be kind of fun too. So, thanks everybody for watching. David, thank you for joining us, and have a great Thanksgiving.

David: All right.

Craig: And from all of us here at Sprott Money News and sprottmoney.com, thanks for watching. And you have a great Thanksgiving as well.