David Morgan: Gold-to-Silver Ratio and Psychological Manipulation!Tuesday July 21, 2015 14:11
Palisade Radio Host, Collin Kettell: Welcome back to another episode of Palisade Radio. This is your host Collin Kettell. On the line with us today is a new guest to the program, David Morgan. David has been nice enough to join us here on video even though I am not set up on video. David, thanks so much for coming on the program.
Creator of Silver-Investor.com website, David Morgan: Collin, glad to be with you. Thank you.
CK: You are a huge advocate of silver. You are one of the most prominent names in the silver business. I saw a talk that you did several years back where you touched on the silver-to-gold ratio, and that is a ratio that has hit an extreme of late. That is around 75:1, if I am not mistaken. What do you see happening between silver and gold despite the market hitting a new low right now?
DM: Well, first of all there is a pretty large contingency within precious metals group that gold-silver ratio is meaningless. But it has got meaning because the meaning there is how many ounces of silver does it take to buy an ounce of gold? I mean it has absolute meaning in that sense. Beyond that, if you go back in the monetary history and you go like in our book, The Silver Manifesto, which shows what the ratios had been throughout history.
Really, from about 3200 BC to present day you are looking at the gold and silver ratio that has been basically under the 15, 16:1 ratio up until the last 120 years or so. The gold-silver ratio certainly means something. It means what the two are relative to each other if silver is outperforming gold or gold is outperforming silver.
It has certainly been since silver has been demonetized and remonetized when you see these extreme levels where you have seen actually 100:1 a couple of times. Right now I have always believed that basis of both precious metals serve basically the same function. Gold is money and more recognized as money than silver although the truth of the matter is silver served as money in places more often and far more transactions than gold within the monetary sphere.
The word silver and the word money are synonymous in the Roman’s languages. You say plata, you are saying silver, it also simultaneously means money. If you taught someone in Hispanic language that silver is not money you would have to say that plata is no plata. It would have no meaning absolutely. When we are saying silver is not money or money is not money and it would have no meaning.
Silver does have a large basis for being a monetary metal. Again, it has been in the last— really since 1965 onward where it was officially taken out of the money supply by the US government and as the years gone by it has become more and more of an industrial metal, and I certainly admit that. I mean silver is kind of a dual purpose metal. It is certainly an industrial metal as well as monetary metal.
Back to the ratio, when I said that silver bull market started it was September 2003, which is actually a little bit after the gold bull market has started. The ratio was roughly 80:1. Today we are in high 70s as you said. If you started at that point and, of course, you can always make figures work your way if you want. I am not trying to. I am being very honest here. I said this is the bottom. It is going to break out above the $5 level. It did and that ratio 80:1 is actually 75:1, so it has slightly done better than gold from that point in time.
Certainly, since the metals had fallen off it probably means new lows. Gold has done better. It has held more and that is to be expected. My 40 years in the commodity sector, and the precious metals particularly, silver is far more volatile and it swings much wider – higher highs and lower lows. That is nothing to be frightened of other than to know that that is the way silver is a smaller market.
I believe that the real ratio, the natural ratio, is about 10:1 or actually 9:1. That is how it comes out of the earth. There is nothing magic about that number. A lot of people think that that means that is what the true monetary ratio should be between the two. It is really not true. You can argue that platinum is about 15 times rarer than gold, therefore it is traded 15 times the price of gold, of course, that is not ever been the case. But it does give an idea of whether something is overvalued or undervalued. The fact is that silver is extremely undervalued. Gold is undervalued.
When the metals reassert themselves as safe havens or crisis hedges or a confidence boost, in other words the trust and confidence is lost in the system further than already has been. There is a run to gold. There will be a spillover in the silver. Because it is a smaller market and because it is more affordable, you will see the ratio narrow significantly.
Let us say from the 75:1 ratio, I expect it to hit below the ratio it has already achieved in this bull market, which is 35:1. I think it will go back to what is called the classic or monetary ratio, which is about 15 or 16:1. I actually believe that it could hit what the natural ratio is which is how it comes out of the ground, which is roughly 10:1. I think that is a possibility.
As an aside, Bunker Hunt passed away recently, and I am close to one of the trust managers for the Hunt family. He and I have known each other for years. Bunker actually believed way back in the 70s, I do not know what his case is now and obviously he is deceased, as I just said, but at that time he felt that the correct ratio between gold and silver is about 5:1.
I say all that to say this that the market knows more than any of us. But I know markets, and at 75:1 silver is extremely undervalued. It is a better buy than gold at this point in time, but it is more vulnerable on higher risk and because of that I think everyone should own both precious metals. But if you are young and aggressive you can handle the risk. Silver is by far a better purchase at this point in time.
CK: I appreciate the point you just made that just because silver to gold in the ground is 10:1 does not necessarily dictate that the price should be 10:1. That is a point that Rick Rule made while on the program about a month ago. With that being said the question I want to ask you is, has your research given you any answers as to why over the last hundred years we have gone so far away from the natural rate or the monetary rate of 15:1 and how we got to this point of being at 75:1 ratio?
DM: Well, the rest could look at it like conspiracy theories. The facts are that it has been demonetized. Most people have no idea that silver was once a monetary metal. They look at it as an industrial metal, sometimes even almost as a base metal. Its function is very, very important in the industries especially in the electronics world. There is a big surge of the use of silver from about the early 2000s or late 90s up to about 2005, 2006, and that continues but the efficiencies have gotten better, so that is stated more accurately.
If you go back to the late 90s the amount of industrial use of silver is about 35% of the market. Today it is about 50% of the market. These are round numbers, and so there is a big surge for 8 years or so. It has leveled off. The amount of silver that is used in the industrials is significant. It is over 500 million ounces a year. It continues to be that amount, but it has not really grown. Again, primarily due to the electronic prices: your iPad, your iPhone, your Android phone.
All these small devices they use small amounts of silver. There are so many on the planet that if you add them in total you are looking at a significant amount of silver. It has been demonetized. The value that the market places on it as something that is used in the industry, not something that is used as a store of wealth or protection of wealth, I think that is the main reason that the psychology is changed. Because the psychology is changed, the prices changed.
All markets move because of the margin. In other words, what is the utility value of anything? And the utility value is gold. I mean 95% or higher of all the gold that has ever been mined is above ground and still available at some price, while in silver that is not the case because so much has been used up. Silver is actually scarcer on above ground investment quality basis than gold.
Gold, depends which study you look, but, again, round numbers have got maybe five billion ounces of gold. Above ground almost all these investment form and silver you are looking at roughly two billion ounces in investment form. It is a smaller market and because there is some demand at the margin, meaning for investment, wealth protection, confidence, crisis hedge, safe haven, whatever you want to name it because of the monetary aspect that still exists. When that side of the demand equation increases you see silver accelerate and it will come back down and it could get back to the classic ratio, the monetary ratio.
But the problem, going a step further, with 15:1 ratio or 16:1 ratio, it has been both, was when Sir Isaac Newton, who was knighted or became sir, has not anything to do with his Physics knowledge, which was significant as we all know, is because the Bank of England was having so many problems and they were basically on a financial crisis, if you will. He put them back on a gold standard. When he put them back on a gold standard he basically righted the ship that was going down, and that was how he became Sir Isaac Newton. It was of that, not his physics knowledge.
And, of course, he was asked what would be the correct ratio? He said 15 1/2:1 because he looked out the window and saw that was what the market had determined at that point in time. But that is incorrect and it is hard for me to dispute with Sir Isaac Newton, but the point is that the market determines what the ratio is.
If we are able to say, well, the market we need both the monetary metals and the market will determine what it is, I am not going to fix it. It will not be fixed. Then we would have, for a lot of monetary history, a different ratio. It could be 12:1. It could be 20:1. It would vary. But anyway, I digress. Come back to the point. The main point being in summary, silver is undervalued relative to almost any other commodity on the planet by far. If you have got the conviction to buy into this market at these levels I would certainly recommend that you consider doing so strongly and also anticipate that it could go lower because we are probably in the lows in both the precious metals right now.
CK: I have heard you say in the past that silver is money and gold is used to for a storage of wealth. Pretty common sense analysis in that silver can be more easily traded because gold is in too big a monetary denomination for its size and hence for daily transactions. Silver makes a little more sense to use. That leads me to a question on if there is a major financial crisis and we go back to a system of using silver and gold and the fiat currencies collapsed. That would make me think that silver might catch a much stronger bid than gold.
DM: I think you make a valid point. But I would like to point out that I have somewhat changed my mind on that only because of the way the world works and the way things progress. Right now there is the ability to use a silver and gold backed debit card, and there are a few available. In that case you really do not need to worry about whether you are spending gold or silver because you are talking really nil grams of gold or partial ounces of silver or whatever for settlement purposes, and it is up to the depository to take that amount of metal out of your account.
From a practical perspective it is not as important as you just outlined, Collin, but it is still valid. Of course it depends on where you are in the world. I mean depending— if you are on the electronic banking sphere which is most of the world. But you could be in areas that, you know, flea markets or whatever, where the hard money itself would be more utilized and where silver, certainly, is more usable than gold plus the reasons you outlined. I mean the amounts of gold you are looking still would not know $1140 an ounce, whatever the price is today, and so you are looking at roughly 15.
Point well taken. I want to digress a bit further when Utah passed the hard money bill, which I call; I forget the exact title. It was legal in Utah to transact anywhere in the state as long as both parties were mutually in agreement. The only way I saw to facilitate that would be to use a debit card of some type. That a depository held the metal – gold or silver or both – and then it was transparent at the merchant level where you went in to XYZ store to buy an ABC product, and all he did was hand in the debit card because the merchants are very used to do that transaction. They would not know any difference. I mean the only difference would be in that you would be debited in metal instead of debited in fiat dollars.
That idea never really took hold in Utah or where with some of the founders that actually proposed the bill to try to promote that idea. But, again, it did not take hold. But it has taken hold in Spokane actually. A friend of mine heard me speak on that very topic and has done so. In fact I have got one in my wallet, and I use it on a fairly regular basis. Of course that leads to the next question: David, why would you be spending silver when the price keeps dropping? The answer is I am not. It functions both sides of the equation, meaning that I have the precious metals side of the debit card and I have the cash side of the debit card.
I use it as a store of value side which I do not touch the metals part and I use it as any debit card for any bank issue and just debit the cash side. But when I see an opportunity like I am seeing right now, I might move some of the cash side into more metal, to bring my cost down on the price of silver and gold, and then have it stored be able to use it in the future when the prices recover.
CK: David, you keep pointing out that the markets determine the price. Markets, at least overtime, are pretty efficient or is a pretty efficient vehicle that is hard for any single person to corner. Yet a lot of people are convinced that gold and particularly silver had been manipulated for decades even by the government or governments of the world. For others, it is hard to imagine that a group could hold such an important worldwide market in their favor for such a long time. I want to ask you how much of the price of gold and silver being where they are today is due to some type of manipulation?
DM: Oh, great question. I do not want to side step it at all. I think the best answer that I can give is to get our book, The Silver Manifesto, either in hard copy form, which I think is the best, because it is like a textbook. You could read and re-read it, highlight it, make notes on the margins, that type of thing. Or get the electronic version, which is cheaper. Go through the book starting with fractional reserve banking then you go into fractional reserve bullion banking, and then you can go into how paper paradigm works.
But markets have to meet supply and demand. The problem is keeping the price managed is that the supply that is required can be met for a very long time with the paper promise. In other words, an investor as an example, might buy a large quantity of silver and get a certificate that says that they have this much quantity of silver. It is held in this vault, and that is what they receive. The bank or the entity, whatever it be, might re-hypothecate that silver reserve, swap it out or loan it, or sell it more than once really. This has taken place in both these markets, gold and silver markets.
Having said that, I cannot neglect the fact that the physical market will eventually take over the price, and so no matter how much the paper paradigm works to keep the price at a certain level, because it is really adding a lot of supply. Meaning if you have the true physical supply and no paper supply or whatsoever, and it was the cash market only, it was dealt with physical realm completely you would have a different pricing mechanism than you have today. But when you can satisfy the demand with paper, which is just a promise to deliver in the future, then it will suppress the price because why? Because it increased the supply significantly, so that is the essence of it.
But having said that, you can still go down to your coin dealer and buy silver for $15 an ounce plus their markup, which might be 7 or 8% today, I am not sure. But as the market goes lower the premium used to go higher. The point being is that until that physical demand became sufficient enough where the physical supply could not be met, then you would see price pressure move to the up side.
You basically have two markets in silver and in gold as well. You have got the COMEX price, which is basically the paper price, and people, maybe 1% or less, will ask for delivery on that price basis. Then you have the other market which is the retail markets which covers everything from government minted coins, privately minted medallions, 1-ounce wafers, 10-ounce bars, 100-ounce bars, all that in both the silver and the golden world. That has a different demand dynamic, and because of the different demand dynamic you can see great discrepancies between the commercial bar form of gold and the commercial bar form of silver and the retail price.
In 2008, as you well know, Collin, we saw like $13.50 silver when the commercial bar form was under $9 and that was a wide spread. We are seeing that again today in silver market. The US Mint is “out of silver”. My exact words, not theirs. Point is that they are not going to make the availability of Silver Eagles until August.
This is something that is different in a lot of markets, let us say, so the amount of sales of silver on paper thwarts in the other commodity. I mean Ted Butler has probably been at the forefront of this, Ed Steer as well, where if you look at the ratio or the cover ratio is on all the commodities versus the physical realm and the paper realm what you find is that you might have a month’s worth of coverage in a certain commodity, but silver like six months. I do not have the numbers in my head. I have to look at the charts again.
The idea is very sound that silver, more than any other commodity, is satisfied by paper much more than physical. In other words, a ratio between the amounts of physical supply that exist versus the amount of paper that exist as “supply” in silver far exceeds any other commodity. That is something that kind of raises an eyebrow.
The last point I will make and I will try to be brief is the Silver Users Association. Recently, it seems some of these silver users, as Ted has said, silver abusers, and I agree, have left the SUA for whatever reason. They are very quiet about it. They do not make big fancy about it. But I think there is a lot of tension in the silver market for the last several years and I think the tension is starting to increase more and more.
I know it is difficult to say with the price being as low as it is. Nonetheless, with a small market, it does not take a lot of new buying pressure to force it, especially when you have this paper paradigm working so well for so long. When it starts to break down this thing could snap and it could accelerate the silver price rather rapidly. I know I have been in this market forty years. I have seen it move to the up side. I saw what happened with the Hunt Brothers. I saw what happened when the COMEX had problems meeting the demand. I saw where they went in and changed the rules.
I have gone through one time and that was back when silver was not really as well-known as an investment be what it is now. Certainly the Hunt’s had something to do with that. I am not trying to discount that. What I am stating is silver’s availability is much greater now with the general public than it was back then. Now it is a worldwide market whereas back in the Hunt Brothers days it was basically a US phenomenon only. This time it will be global phenomena. In the end love silver, love gold, too, and I have been buying a lot of gold recently. Getting back in history, most of the women store their wealth in silver bracelets in India. That has not gone away. All, again, the romance languages of South America use silver as a store of value.
CK: Well, that was probably the most level-headed answer I have ever heard in terms of conspiracies and manipulation around the silver and gold market; made a ton of sense without sounding too far off the edge at all. I want to ask you – silver and gold are both breaking down right now. New lows for the current bear market. You are tuned in closer than anybody. Nobody knows what is going to happen, but what is your sense of what is going on right now?
DM: Well, I want to back up slightly. You asked about the manipulation. The point of manipulation is psychological. It is where people that are true believers that held silver for a long time. I know a few of these people. In fact, several, and they are holding silver strongly from like the $30 level down to, say, $26. Once it broke below $26, they pretty much gave up. They might have held it for another year or whatever and then it hit $20s. I cannot stand it anymore. So you broke into psychology, which is very important in all markets: stock market, commodities markets, bond markets. I mean, basically, all based on faith and confidence except the metals that are one thing you can trust no matter what.
But back on point, yeah, so once you hit a new low then only the market knows how low is low. Personally, with gold and silver both breaking down as you said, while I will not give a number, well, I probably will. But the idea is, a bit of a short note, the summer doldrums are something that I have lived through most my life and it took me a few years to like get in synch with it that the fund manager gone in Europe. There is not much jewelry demand. I mean there is a lot of reasons why the precious metals are very dull and usually hit lows in the summer. August is traditionally the low month for gold, so this is not a surprise, all this pressure, the psychology is very negative, the sentiment is extremely low, so to hear a new low is not like a big surprise to me.
A lot of analysts said that a new low would take place. I actually interviewed one, put him in the Morgan Report. I disagreed that time but it looks like they are going to end up being right. Silver has entered the lowest at 14, 15 in the aftermarket or the Asian market. We are not that low yet. In other words, meaning that that low has not been taken out. But on a close-only basis in the US markets it is probably hitting a new low today. I would have to look, but we are doing the interview.
Regardless, I do not think we are going to see silver go to $9. My best guess would be like $14 maybe, I do not know. Gold, I have a hard time seeing gold under a thousand. It could. These metals can do anything on a temporary basis. That is why I do not want to get too excited about buying low. If you have got cash or you have been out in this market for a while, or you are getting back in or you have never thought you would buy the metals, and now they look like it is just too good an opportunity, or whatever your motivation is, I would suggest averaging in over the next few months so July, August, September, that type of thing.
I still think strongly that by the end of September or early October we are going to see a dynamic shift in the fundamentals of the market place as a whole. It could be driven by Greece. It could be driven by the bond market. It could be driven by the interest rate increase by the Fed. It could be driven by the European banks. It could be driven by a war or rumors of war. It could be something to do with the Middle East. It could be something to do with oil. I mean there are so many variables out there I certainly could pick one. Or I could just say a combination of those things come together in a synergistic manner that cause more uncertainty in the market place and there is a safe haven status available at gold and silver, and they start to catch that type of a modality where people are ready to start buying again.
I really believe that. I really think that we have just got a few more months to wade through this very difficult period for precious metals investors. But by the end of the year you look back and say, “Oh, finally, now I know the low was hit. But we do not know that yet. We do not know how low is low.
CK: My final question with you, David. I saw an interview that you did with USAWatchdog and the title of that interview was Major Market Crash Coming in September 2015. There has been talk from a few people, more so on the fringe, but talking about this concept of a Shemitah, with the cleansing of debts that happens every seven years. I have no idea if your concept of a crash in September has anything to do with that, but it certainly coincides with the same market crash dates that they are talking about. Can you talk about why you see a market crash coming then?
DM: Well, let us see about the crash. I am not sure that was what I said, although I think that was what Greg used on the title and that is fine. I do not have a lot of control. I do the interviews and then people will, you know, take it maybe out of context. I might have said crash, I do not know. I am not going to make any excuses.
I looked at it from the seven-year cycle, not the Shemitah cycle, which I became familiar with after I did the interview, or maybe just before, I cannot recall. But, basically, the stock market cycle and where you are in the presidential year, and basically intuition. It is kind of combination of cycle theory, which I am not a big proponent of, and how bad the sentiment was, of knowing that the lows usually hit in summer, knowing that there is usually strengths or the seasonality, which I do believe in, and the cycle theory which I believe in somewhat, and how long this market has been negative, and how high the stock market was relative to the value, and that the stock markets have a propensity on the seasonality of going down September or October, that was the main— you know I weighted that more than almost anything else.
Of course, gold is the most negatively correlated asset due to stock mark it. Based on all those things it is kind of a combination and I threw it out there because I believe it. I really think that is about as long as we can go in this bear market and this bear trend, although I still think it is a secular bull market for the precious metals. I think the stock market has gotten as high as they can get to at this point in time. It can certainly go a little higher here for the next month or so although that is to be determined.
Basically, all this stuff added up together and I say, “Look, I do really think September or October is going to be it.” Then, of course, more information came out from all different angles, Shemitah, certainly being one and well-recognized. In fact, Jeff Berwick did an interview with me I think a month later after the Greg Hunter interview on USAWatchdog, and asked me a lot about the Shemitah. Well, I have read both the books. In fact, one of the people that saw me at the Liberty Mastermind Conference, I think it was in Las Vegas, came up after the show and really wanted me to read The Harbinger. I never even heard of it; have not heard of Jonathan Cahn or anything.
He sent me the book and I read it. It was mostly about 9/11. But the Shemitah was not mentioned in there. It was kind of a fascinating book. In fact, this friend wanted me to say— was giving me the idea that I would know the exact date of when things would happen, which really is not true in The Harbinger, to my reading of it, anyway. But reading the Shemitah is pretty clear when it begins or when it ends, and what the past has shown. Probably off topic a little bit, but, still, for my reasons, and, yes, it does line up with the Shemitah.
Also one more thing I think is important. With my age and the amount of experience I have in these markets, there is something called a self-fulfilling prophecy. It is just what it says. If enough people believe something is going to happen, it will happen because enough will say, “No way, it is September. I am getting out of stock market; I am getting into gold or whatever,” because they have heard it enough times from myself and many, many other people. I am certainly not the only one. I mean look at Jonathan Cahn versus myself. I mean he has sold, I do not know how many books, and the amount of Silver Manifesto’s being sold and it does not even talk about this date. It is very, very small relative to what he sold. The word is out there and these self-fulfilling prophecies do occur. I have seen it in the markets before. That alone could take this market the directions that we all want.
CK: David, there are so many other questions I would like to ask you but we are running out of time here, so rather than extending this interview I will try and get you back on next month. For one thing, and we can save it till then, I want to get your opinion on mining equities. We did not even have time to get into that. In terms of your book, The Silver Manifesto, I do not need to ask you about it. You have already given us a great look into that content. You have a wealth of knowledge. Our audience should go to www.silver-investor.com and I believe the book is available through the website. David, thank you so much for coming on the show with us today.
DM: My pleasure. Thanks for the tough questions.