Ask The Expert

Ask The Expert - David Morgan - August 2020​

Headshot of David Morgan

August 20, 2020

This month we are joined by precious metals aficionado David Morgan. Each month David writes “The Morgan Report”, which covers economic news, the global economy, and how to make substantial capital gains by investing in the Resource Sector. He has authored or co-authored numerous books on silver investing, including Second ChanceGet the Skinny on Silver Investing, and The Silver ManifestoHis ideas can be seen in the movie Four Horsemen, a feature documentary.

In a wide-ranging and value packed discussion with host Craig Hemke, David answers seven of your listener-submitted questions, including:

  • Is now the time to shift from silver to something like platinum?
  • What will it take for banks to be held accountable for price manipulation?
  • Plus: what is the proper positioning in terms of the mining shares right now?

For the answers to these questions and many more, listen here:

Man: You're listening to "Ask the Expert" on Sprott Money News.

Craig: Hello again from Sprott Money News at sprottmoney.com. It's August 2020, and it's time for your "Ask the Expert" segment. I'm your host, Craig Hemke. And joining us this month is renowned silver expert David Morgan. David, of course, is the publisher of "The Morgan Report" and he's someone who has spent most of his adult life following the silver market. With everything going on in silver these days and the great run we've seen as of late, what a great time to bring David in. So, David, thank you so much for spending some time with us today.

David: Oh, Craig, thanks for having me, it's been a while and it was great to catch up a little bit off-air. I just like to start off, I know this is a Q&A but I'd just like to say a couple things to start off with. Number one, I do a lot of interviews as many probably listening to this know, and one of the things that's been kind of counted on lately is that an inflation-adjusted silver price of $50 in 1980 is equivalent to $600 by using the metrics of the CPI as it was calculated in 1980, and those are all facts. I don't argue facts, but the other fact is that that was a one-day event.

So I want people to put that in their thinking because if you think, you know, silver is gonna be $600 or whatever, that was a one-day event. So I think that it's much more efficient to look at it from a broader base and say, well, what was the average price of silver in 1980? And that number is roughly $20 an ounce. So the other side of that coin, Craig, is that silver did peak at $50 in 1980. Using the current CPI, I think it's like 150, 160 basis, the government CPI numbers. But that, again, that's a one-day event, but if you look at the average price of $20, I want to put that in the proper context because the highest price silver had achieved to January 1979, an all-time high, was $6.

And then over the last year from 1979, January to 1980, January, it went up eightfold and it went up to, you know, $48, $50. But when it averaged $20 for that entire year following the peak, that was three times the previous all-time high, which means that during that big run-up, the monetary demand is what drove it so high, it was fairly close to the time silver was demonetized in 1965 and a lot of those people in 1980 held silver as the monetary asset. So it's the monetary demand that really moves the silver market and that's important. Yes, we need to use it to analyze the market, but it's all about silver being money that moves the market. So that's what I wanted to start with. Thank you.

Craig: That's great information, David. And thank you for sharing that with us. Of course, we are gonna talk a lot about silver today. sprottmoney.com should be one of your preferred dealers for physical silver. All the great deals are found here on the sprottmoney.com website. And of course, you can call us anytime at 888-861-0775. Before we get started, David, could you just take a few minutes and tell everybody a little bit about "The Morgan Report" and what folks will find there?

David: Sure. Just go to themorganreport.com, get on our free email list and we'll just take it from there, that's the easiest way. I do a free weekly podcast and some of the interviews I do during the week, we also provide for you free of charge.

Craig: In a market like this, you're gonna need as much help as you can get. I've known David for years and I would highly encourage you to check out "The Morgan Report" and The Morgan Report website. David, we at Sprott Money have been collecting questions for you over the past several weeks either online through Twitter or through email. If you're ready, can I hit you with the first one?

David: Let's go.

Craig: All right, my friend. Well, I originally had this teed up as question number four but I'm gonna move this up to the head of the line because you referenced the late 1970s and the price action back then. Well, this question has to do with what happened in the late 1970s in a sense in that why has no one since the Hunt brothers tried to take on the COMEX silver market?

David: Well, there is an answer, a couple of answers to that. Number one, I'd say that Buffett did. I mean, Buffett took 129.7 million ounces and almost all of that came off the COMEX and that was 1999-ish, early 2000, so I would say someone did. But the real reason of...I've asked that question of, you know, the investment bankers, the bullion banks, some of the largest fund managers that I know, I don't know them all, but I know a few. Those that I know are the precious metals types, all right? And the answer is no one wants to be in the Hunts' position again. In other words, even though it would be fairly easy to do for any of these large sovereign wealth funds or a nation-state or whatever, no one wants to go before Congress, be sworn in, and be tagged as the person that cornered the silver market. So I think it's more fear of reprisal than the ability to do so with fiat.

Craig: And I've heard you mention before when this has come up, David, there are such things now as position limits?

David: And that's true, too. After the Buffett, you were allowed to basically only take 1,500 contracts which is 7.5 million ounces. We know that's not... Here, too, when you brought that up in your interview with Greg Hunter, but nonetheless, it's on the books. And of course, I like to joke because the reality is they don't really limit how much you can shore but they do limit how much you can take off and we know that's really not true either. Basically, if you are a hedging facility, which means bullion banks, by the way, I want to make that clear, too. A lot of people are under the misimpression that, you know, the gold mining companies hedge their product and the silver mining companies hedge their product. And the answer is yes, they do, but they turn their book or their hedging facility over to the bullion banks in almost every case. So if you think, you know, Newmont Mining is hedging their gold production, yeah, there's somebody sitting in their office but what he's doing is working with his buddy at a bullion bank to draw up their options structures.

Craig: You know, and I remember, David, about the last time we saw an update on the global hedge book for the gold miners, something from the World Gold Council a couple of years ago said the total amount of hedging by the gold miners, if it was all done on the COMEX, which it's not, would only be about 85,000 contracts. Well, how about the other 500,000 contracts that make up the open interest? So anyway, it's not just hedging, that's for sure. David, to question number two. The gold-silver ratio has recently fallen from its all-time highs. Is now the time to shift from silver to something more like platinum or maybe some of the silver miners?

David: Well, I like to have a mix, but, you know, I've been very consistent and he should have physical metal first, and if that's all you could afford or that makes you the most happy, then stay with it. Then if you do have that, you know, a sufficient amount for your individual case and you can move into the miners, I'd say no, I think that silver is probably still the best bet, the most liquid. And you'd probably not even needed to think about a swap back into gold until we get into, like, below $40. During this bull market, we saw $33 at the peak when silver hit its high of about $48, the end of April, early May 2011, so I wouldn't be in a rush. Platinum, longer-term, I'm not that bullish. Palladium is in kind of a squeeze and it has maintained that for quite some time and will continue as long as the auto industry continues to produce gas-powered vehicles, but that's gonna subside because we're gonna go to these driverless cars. A lot of the younger generation don't buy two cars, they have one, or maybe none, they Uber everywhere or they share rides or that type of thing. So the longterm trend for platinum, palladium, I'm not that bullish on it.

Craig: All right, let's move on to question three. This is a topic that Eric Sprott likes to address, it seems, about every week when we record our "Weekly Wrap Up" segments that you can also find right here at sprottmoney.com. There's been a lot of metal, a lot of silver allegedly flowing into the silver ETFs this year, primarily the big one, SLV. Is it possible, do you think, that the SLV has actually taken delivery of all that silver they claimed to have added here in 2020?

David: Well, that's a tough one. I mean, if you read the prospectus, and it's been a few years since I have but I don't think it's changed much because when they pay these high-priced lawyers to write that thing, believe me, they know what they're doing. Anyway, the point is that they could take the warrants, they could take the certificates and act as if it's the same as taking it physical, read the prospectus. So if you look at what's come off the warehouses, and I know, Craig, you look at that as often as I do, maybe even more often, really not that much has moved out of the warehouse stocks, but yet all this has gone into the SLV. So, what gives? And the answer is they probably just moved the paper.

Craig: Okay. Let's move on to question number four, David, and this is kind of timely because as we record this on the 19th of August, I recall seeing a link someone posted on my site today about a settlement between the CFTC in the U.S. and Scotiabank out of Canada for Scotia's involvement in the rigging of silver prices, precious metal prices in general. With that in mind, what will it take for the banks to be finally held accountable for manipulating the prices of the precious metals?

David: Well, that's the billion-dollar question, I don't have an answer. I mean, you know, the whole system is so corrupt. This is more of a big, big-picture answer. I mean, if you go back to the founding principles, basically what was written and discussed was, you know, this threefold party of, excuse me, threefold system, I'm gonna sound like AOC here. You know, you've got the legislative, the judicial and the executive branch. So if the judicial ever got corrupted, you're screwed, in plain English, and I believe it has been. And so, you know, the idea was the same rules, laws, and accountability for everyone. Again, same rules, laws, and accountability for everyone. Well, that doesn't hold true. If you're too big to fail, you're too big to jail.

So, unfortunately, we've seen some window dressing, in my opinion, about, you know, wrist-slaps and, you know, "That's a bad, bad boy, you know, you're gonna get fined," and this type of thing, but no real justice, in my view, has come to the fore regarding what's going on. And it's not just the metals markets, folks, it's really, it's everything. But I mean, the main thing is the interest rate market, I mean, when you control the bond market, you could control everything. And they, the elite banking establishment has been controlling the bond market forever. The bond market used to be our go-to truth meter about what was really going on in the money supply but that hasn't been true since I was a kid, you know, in my late-20s.

Craig: And it's especially not true these days. I mean, what is quantitative easing if it's not manipulation of the bond market and interest rates?

David: Precisely. If you can control the money supply and, you know, then you've got control of everything. I mean, control of the money is control of the people, I mean, it's that simple and they've gone on. The problem is they've got to have so many switches like "The Wizard of Oz" right now, Craig, that, you know, the curtain is starting to come open and they see, "Now, wait a minute, look at what he's doing over there." So, these things, these manipulations never last forever. I know I've gotten that question a hundred times at least saying, "Well, if they could do it now, they could do it forever," the answer is no, they can't.

Craig: Okay. Well, we're more than halfway through now, David, let's move on to question number five. This is, I guess, is kind of an international accounting question, if you will. It has to do with currency risk for the miners, how does a Canadian mining company, for example, hedge currency risk when mining in a place like Mexico?

David: You'd have to ask them, it's an individual basis but normally, they just do a currency trade like they would in any currency market, they pay in pesos and they earn in Canadian dollars. So they use that hedge and it's very advantageous to them because the peso almost always falls faster than the Canadian dollar. So their earnings are, you know, good because, you know, the actual amount that they're paying converting Canadian dollars into pesos is beneficial to them.

Craig: Hey, I'll just give you this followup question, David, what do you think of these companies like First Majestic Silver or Eric Sprott's own company in Nevada that these companies like to withhold their earnings and hold that money instead in the actual physical precious metal, do you think that's a good idea?

David: I love it. I mean, if you go back to kind of, when I got popular...I don't know if "popular's" the right word, when I got on the internet, you know, you had Goldcorp and Rob McEwen was holding physical gold along with the, you know, in their vault. And I thought, man, this is the perfect kind of mining company especially for, let's say, more conservative types that you have a gold mine and you have physical gold in the vault at the same time. I think it's brilliant, I love the strategy.

Craig: I'm with you, I hope more companies start to do that, that's for sure. All right. Let's move on to question six, this has kind of a jurisdictional risk component to it, you know, if you're gonna buy some mining shares, you better know what part of the world they're doing business in. Then, this is kind of a subset of that, questioner had seen an interview on TV where the head of Bass Pro Shops was lamenting that some mining was being done in Southwest Alaska and the environmental impact was impacting the salmon population there. So I guess what this gets to, then, is how does environmental risk complicate jurisdictional risk for a mining company?

David: Well, it depends on the jurisdiction, and this isn't a cop-out but let me just say under the...China has an exemption under the World Economic Council. They gave them a free pass so they basically don't have to pay any of these things, but in the United States and Canada and other jurisdictions, you basically have to do a rigorous amount of work with the EPA in order to open up a mine. Now, one example I know very well is Mines Management that was bought by Hecla not a few years back and it took them, like... They'd already had a permit, Craig, but then it lapsed when they had to, like, renew. So it's like having your driver's license at one time and it, you know, expired tonight, you have to go get another one. So it isn't like they looked at it, they permitted it, but they had to go through the whole, like, seven years to get the EPA to approve it.

So, let me just state, from my personal opinion, there are places on the planet that you shouldn't build a mine. I'll just say it flat out, I just believe that. I mean, the salmon thing, I know, I think of which one he's talking about. I probably am more or less on his side but I'm just guessing on which one of these he's referring to. But generally speaking, in modern times in the Western countries, when you leave the project, you have to put it back to exactly the same as it was when you walked on the property and mother nature was there all by itself. And in Mexico, it's almost ridiculous because most of the areas, the states in Mexico, if you had one plant that was on the property at the beginning of the project untouched, you have to replace it with two, which is kinda ridiculous. But the idea is that when you leave the project now, then it's returned back to basically the state it was before any humans were on it. Is that true around the world? No. Is it true in all jurisdictions? No. But I think it at least shows you the idea that we are much more conscious about our mining activities than we were in the past.

Craig: And now we've reached the end of the road, David, just one question to go. We had some questions about individual names. Rather than talk about specific companies, I thought we'd turn this question into kind of a bull market analysis instead. Most folks recognize we're probably in the early stages of a bull market given everything that's going on with QE to infinity around the world, the way currencies are being devalued and the way interest rates are falling. If we are early in a bull market, what's the proper positioning in terms of the mining shares, is it more toward the senior companies, the producers, maybe the juniors, or maybe even some exploration companies?

David: Yeah, that's a great one. And, you know, there's a rule of thumb basically that, you know, in the middle of the market where we were going sideways, you definitely want to be in the producers. I mean, we had Kirkland Lake on it, I think, $5 or around there and, of course, I think it went to $50. I mean, I know we made a 10-bagger when almost everything else was going sideways or down, but right now we are getting to where it makes sense to have a balanced portfolio of, you know, majors, mid-tiers and some speculative stocks. But I want to warn everybody I've been through this market once, as most people know my age, but having lived through one market, you get kind of stuff, especially the mistakes you made, I don't dwell on them, but you learn from them.

So I think when the cycle really gets going and what does that mean? It means, you know, I don't know, $40, $50 silver, $100 silver, I don't know. But near the end, you will see a lot of junior mining companies with fabulous stories that turn out to be nothing more than moose pasture. And if you don't know what moose pasture is, then drive out to North Idaho, walk around in the BLM lands, and you'll see what moose pasture looks like. So, you've got to be careful near the end of the market because a lot of people that are late to the party feeling that they missed the boat because they could have bought silver at $30 and now it's, you know, $75, will be looking for the cheapest penny stock that they could find that has gold or silver in its name, and a lot of those are scams.

Now, will it be as bad as the 1970s market? Probably not because of the Bre-X situation, required a 43-101 for Canadian miners to basically sign in blood that what they say about this project is, you know, can be proven. But believe me, in the over-the-counter market and some of the pink sheet stuff or whatever, you'll see it. There's gonna be crooks no matter, you know, what era we're in. So, that's just a word to the wise. If I sound like I'm ranty, and I don't mean to, I'm trying to protect people, but you're better off by having a balanced portfolio, you know, majors. And I know there's others that buy nothing but juniors but usually those people are extremely sophisticated in their financiers. They are financing these projects, that's a different thing than investing. The average investor that's buying a small-cap company has much greater risk than a financier has in that same company because of where they are in the cycle. So, there's a lot to it. I do my best to sort it out and balance risk with reward, and that's a great question and a good one to end with.

Craig: Hey, and before we go, David, please tell everybody again how they can find out more information on "The Morgan Report" and what's that website address again?

David: Yeah, the best thing is go to themorganreport.com, get on our free newsletter. But once you're there, I emphasize go to the blog, pull down the tab that says "Blog," you'll see, you know, articles that I write, some others that I think are well-written, I'll stick on the blog interviews like this. Then at the top nav bar of the blog page, there is a link to our Twitter feed, our YouTube channel, our Facebook, our LinkedIn, and whatever else we do on social media. So like, for example, you wanted to follow us on Twitter, if you go to themorganreport.com, pull down the blog, get on that nav bar and hit the Twitter feed, you'll be able to sign up and follow us on Twitter.

Craig: And one last thing, we're recording this on Wednesday, August the 19th. Just a heads-up that on Friday, August the 21st at 8:00 Eastern Time in the evening, sprottmoney.com is gonna be taken offline, why? Well, we're not leaving town or anything like that, we're just simply performing some maintenance and getting ready to launch our brand new website this coming Monday, August the 24th. We're really excited to be launching a faster, easier to navigate and easier to use website for all of our customers.

So please be sure to check back with us Monday, August the 24th. I think you'll find the new sprottmoney.com is exactly what you're looking for when it comes to an online precious metals dealer.

Again, we've been speaking to David Morgan, publisher of "The Morgan Report." It's been fabulous hearing from you, David, and I know everybody listening has benefited from you sharing your experience and wisdom with us. Thank you so much for your time.

David: Well, thanks for having me, Craig, and I appreciate the time.

Craig: And from all of us at Sprott Money News, at sprottmoney.com, thank you for listening. Be sure to check back in September for another edition of "Ask the Expert."

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About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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