Updated – Gold & Silver: “The Beginning of a Big Move”

Posted by David Morgan via Michael Campbell

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 David talks more about the following companies:  ENDEAVOUR SILVER CORP. – FIRST MAJESTIC SILVER CORP. – FRANCO-NEVADA CORP. – GOLD STANDARD VENTURES CORP. – SILVER WHEATON CORP. – SILVERCREST MINES INC. (Article begins at this headline below: Will Expert David Morgan Call the Bottom on the Metals Market Again? )


David Morgan, the author of the Morgan Report, told Michael Campbell he thinks that this recent move up in precious metals highlights that the consolidation is over, a significant bottom has been hit and we are at the beginning of a big move up.

Its been roughly 16 months now since Silver ran pretty much straight up from $26:00 to it’s intra day peak of $49.52 April 29th 2011. “When you get a run like that it takes usually a year or two to consolidate”. Given silver can pull back harshly after those kinds of moves “we became very cautious, warning that if you have to buy silver, buy some of it but not all of it” . 

It looks like the consolidation is over “We have based for so long”  and David thinks this is the real thing:

“There is no significant resistance to silver until we hit about the $32 level. Gold has also broken through some resistance. I really do think we are going to see some back and fills but we going to be higher by the end of the year. I’m looking for 35-40 silver by year end and Gold at the $1,800 level or perhaps higher”. 
 
While on Money Talks in February 2012, David was then looking for a very weak period coming through into this August 2012 period, Now that  the precious metals have bottomed here it gives him the assurance that the models he is using are performing well. One thing he looks at that “no-one pays attention to at all” is the bottom that occurred in the precious metal equities in May when the sentiment was so poor. “There wasn’t anyone anywhere in the sector that wanted to hear anything about a Gold or Silver stock. Or any resource stock for that matter. They were very very undervalued, in fact the equities relative to Gold Bullion were at the most undervalued they’d been in over 30 years”. 
 
David also saw a significant amount of volume but the prices weren’t moving “and that’s almost always short covering by the professionals”. The people that were shorting these stocks and making money all the way down decided enough is enough and took profits. The short covering by the professionals clue, plus with the sentiment being so bad, David concluded that this was probably the bottom for the precious metal equities. “That set up the bottom in bullion as the equities usually bottom 2-3 months before the bullion”. David put out to his subscribers his estimate of a bottom in the precious metal equities. and that a bottom in Bullion would be occurring in August, “a period of time that is seasonally favorable for precious metals anyway”. 

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Using Kitco’s numbers Gold is up 7% and Silver is up 11% for the week, both on good volume. “We are on our way. We will see some resistance on the way back up but with all this going on in the EuroZone and all of these unresolved problems, more and more people are waking up to the precious metals story”. 
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Short Term

September is a big month as everyone goes on vacation in Europe, we have the Dutch elections in September, the decision whether to give more money to Greece as well as the German constitutional ruling. So there is going to be no shortage of things that the market is going to be focused on. “On the German constitutional situation, basically Germany is the only country holding the EuroZone together, and if their judicial committee decides that they really can’t loan any more money to the EuroZone that will definitely cause all kinds of financial problems obviously”

“So there are a lot of things coming up including the US Election. You normally don’t see the Stock Market going down significantly during a Presidential Election year, the metals are usually held in check and a lot of that could not just happen this year. The markets are actually much more powerful than the plunge protection team overall. That doesn’t mean they don’t come in an manipulate the markets, we all know that they do. What I am saying is if you’ve got a runaway to the downside in the general Equity Market, which is possible, that after just a few days of a scare like that might cause a shifting in the markets through a QE3, or an action by the Chinese Central Bank. Normally markets actually predict the future, so the big move in Gold and Silver of the past week is probably anticipating a QE3 or some problems ahead. 

The big hint has been dropped. In Bernanke’s last meeting it was announced that every Fed Governor, with the exception of one,  was saying that we should loosen monetary policy further. “What gets to me is that QE1 didn’t work, QE2  especially didn’t work so let’s do QE3? In other words lets do what never works, add more debt to a debt based system that is drowning in debt. Basically under the Obama administration, the debt has doubled for every US citizen from roughly $60,000 to $135,000 per person in 4 years .Arthur Laffer had an interesting study of Government spending showing the tight correlation between lower growth and increased Government spending”.

Bullion or Equities

Bullion has outperformed the stocks. “There is nothing more generally negatively correlated to the stock market than Gold Bullion. However as I said earlier the precious metal equities were undervalued by the largest margin in the last 30 years. So if you are new or you already have your Bullion position I highly suggest you consider going into the precious metal equities.
 
David thinks that if you really want to catch up to the people that were buying Gold under $500  or Silver under $10, the equities are the way to do it.  I” want to underscore what I have always taught and will continue to do so that to hold precious metals you have to hold the actual metal first. Once that is established, if you really want to catch up to the people that were in earlier than you it is the equities you should focus on. We have beaten our brains out searching for value and found three equities on the speculative side and one mid-tier in 2012 and all of them are up as of this month. The last one that my staff discovered by going onto the property.is actually a silver company that pays a dividend in precious metals. With these smaller companies getting on the ground and seeing what is really going on is something that really pays off.
 
One thing David wants to emphasize is that he likes value. Given value is very hard to find in the Junior sector, they accentuate the mid – top tier company sectors. “We put serious money into serious companies, but we all like to speculate and you don’t just make a large bet on one single speculative stock but a small bet on several you can come out quite well. We have had several huge winners and we’ve had some dogs like everyone else, but  I can’t emphasize enough that if you are really serious about this sector now is the time. You buy when its low, you buy when no-one wants it, you buy when the market is quiet”. 

Especially important David thinks the older you are and the more money you have the more you should emphasize quality. Further a lot of these top-tiers that David’s company recommends and holds himself have options available so “when these things get overdone, you can write options or “rent” your stock for 3-9 months and take in a big chunk of change because there are high premiums on Gold Stock options”. David likes to take that option premium money and recycle it into the Junior Sector. “I feel better somehow if I pull out $10,000 writing options on my high quality stocks, and instead of taking a vacation with it recycle it into 3 or 4 Juniors my staff has researched and found.” 
 
When asked to recommend a Stock David’s reply was: “Look, the biggest money is usually made in the Junior Sector, there is really no ifs, ands, or buts about it. But it is very difficult to pick a single stock, so here is my stock. Sprott Resource Lending Corp.,  SILU  on the NYSE. It is basically a mutual fund that holds speculative situations and they hold a lot of warrants so it has a ton of upside. It basically mitigates the risk because its just not a single stock it is a basket of stocks and Sprott knows what they are doing, believe me”.
 
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In Summary

David Morgan’s Central Thesis is that on a longer term basis how can’t hard assets return to the forefront given that the relentless manufacturing of money devalues the purchasing power of that money. That hard assets will go up as it will continually take more devalued money to buy a hard asset. He points out that there has never been in history a time when you’ve had a non-backed currency, a pure fiat system, where it hasn’t been inflated away. That you’ve got that track record to rely on that this is the underlying fundamental driving force in the markets today. 
 
The deflationists argue that there is so much debt out there that as the debt collapse happens, as money is withdrawn out of the system, that paper money will actually usurp Gold and become more powerful. David “quite honestly I have never ruled out the deflationary argument entirely”. All I am saying is that I let history do a lot as far as telling me where the future is going to go and  there has never been a time in history where the Central Banks have had an opportunity to print money into oblivion and they haven’t done it. To think that they’ll not do it again this time is not a very high percentage bet”.
 
The most important factor David thinks that everyone is aware of is counter party risk. “You had the MF Global blow up and where do they put their people? They put almost all their people into PFG and what happens to PFG ? It blows up. It is a question of confidence and trust, and there is so much counter party risk out there the whole system is based on false confidence. To think they can print their way out of this thing is ridiculous, it has never happened and it never will”.  
 
David concludes thats why people are gravitating towards the precious metals. That people are going to find out, as they are currently finding out in Europe, that putting their faith in politicians is going to prove to be as absolutely disastrous as it has been for Greece, for Portugal, and is probably going to become in Spain and Italy. The list is a long one.
 
 To read about or subscribe to any of David’s services just go to the Money Talks Store and scroll down to the Newsletter section.  
 

Will Expert David Morgan Call the Bottom on the Metals Market Again?

by the Gold Report

David Morgan, editor of The Morgan Report, expects gold to top $1,800/oz and silver to top $40/oz by the end of the year and both to take off from there. In this exclusive interview with The Gold Report, Morgan shares the logic behind his predictions and identifies several companies set to benefit from the end of the precious metal doldrums.

COMPANIES MENTIONED: ENDEAVOUR SILVER CORP. – FIRST MAJESTIC SILVER CORP. – FRANCO-NEVADA CORP. – GOLD STANDARD VENTURES CORP. – SILVER WHEATON CORP. – SILVERCREST MINES INC. RELATED COMPANIES APOGEE SILVER LTD. AURCANA CORPORATION FORTUNA SILVER MINES INC. KIMBER RESOURCES INC. MAG SILVER CORP. REVETT MINERALS INC. TAHOE RESOURCES INC.

 

The Gold Report: What’s your current outlook on metals, the economy and the general market indexes?

David Morgan: My outlook is bullish on the metals both short and long term. I think that the bottom is in for the mining equities as well as for the metals themselves. More and more people will realize that there’s really no way out of this debt-based monetary system, whether it is about the U.S. reserve currency, the Eurozone or anywhere else on the planet that uses a fiat currency. There’s a problem here and it can’t be resolved. We’re going to see more pressures to the commodity sector in general, particularly the precious metals.

TGR: In mid-May you called the bottom in the mining shares and the bullion. What leads you to make such bold calls and maintain a high degree of accuracy?

DM: I use my own indicators that come from a lot of experience. A couple of other things also keyed me. One was that the sentiment was so bad that it was screaming we are “at the bottom.” Another was that there were a few days where the volume was very, very high and there was no real buying pressure. It was short covering. Short covering at a bottom is a good indicator that the smart money or the professional money is moving out of the market. In other words, they shorted for a very long time. They made their money, they’re getting out and are covering their positions.

All these factors led me to decide to stick my neck out, which is part of the job I do, and say that this looked like a bottom to me. My experience of over 30 years in this business tells me that it usually takes about three months to confirm a bottom. I’m pretty convinced that I did get the bottom; now it’s just wait and see another month or so if I’m correct on the metals themselves.

TGR: What prices are you predicting for silver and gold?

DM: I’m looking for silver to be above $35/oz and perhaps as high as $40/oz by the end of the year. I think we could see gold at about $1,800/oz by the end of the year. We still have four months ahead of us this year and with the fix that the global economy is in, a lot of people are going to come back into what they call the fear trade, and that will lift the metals. Once gold reaches a couple of upward resistance lines, you’ll see a lot of momentum players come to the market as well for a quick trade.

TGR: Last year you were predicting $75/oz silver. What’s changed since then?

DM: What’s changed is the deflationary scare that I also talked about. It just happened to go a lot longer. I changed my mind partway through. That’s one reason why you would subscribe to something like The Morgan Report, especially if you really want the most up-to-date thinking. Basically, we saw a big push from Quantitative Easing 2, where silver went from $26/oz to $48/oz. A lot of people thought it would keep going. I called that top at that time and thought that after it ebbed and flowed we might be able to build a base quicker than we have.

Once I was able to determine that the base building would take a lot longer than I originally thought, I changed my view and said we’re going to look at probably $35–40/oz by the end of the year, not $60–75/oz. Will we ever see $75/oz silver? Absolutely. I’ve always predicted that we would see $100/oz silver as a minimum. I still think that’s low but we haven’t been there yet. So, you have to first get to $60/oz and $75/oz silver before you get to $100/oz. I’m still looking for the top to be out probably three to four years from now.

TGR: What do you see going forward into the new year? Any particular price targets for silver, gold and the white metals?

DM: I’ll be a little more conservative than I was at the beginning of this year. I think in 2013, we’ll see silver above the nominal high of $48/oz. As for gold, for 2013 I believe we’ll take out the $1,900+/oz level that gold has already achieved. I’m looking for new nominal highs in both metals in 2013. I think we’ll get far beyond that but I don’t want to put a number on it at this time. I’ve wiped enough egg off of my face this year.

TGR: Taking a macro view, what do you see in the general/physical economy from a monetary point of view?

DM: The physical economies are not doing that well in much of the world. A lot of misallocation of capital has taken place. China is a good example; it has tons of real estate that can’t be rented. The prices are too high.

Food stocks, generally speaking, are in some cases lower than they’ve been for quite some time. Energy, food and water are crucial globally and there hasn’t been enough capital movement into those essential elements. A lot of nation states are looking at what they have in the ground or are growing on the ground and are coveting their own natural resources. In the book “Resource Wars,” Michael Klare outlines the scenario of nation states going to war to either take resources that they need or defend resources that they already have. I’m not predicting war but we already see increased competition for resources.

On the financial side, the political class in every country is doing everything that they can to make this a fuzzy, mysterious problem that they’ll blame on anybody but themselves. And, of course, they’re the main culprits because they have so much control over the money supply.

So, I see the physical economy dwindling, resource wars in our future and the political class pretending as if nothing’s really wrong. Everything is going to be happy tomorrow but tomorrow never gets here.

TGR: On to the mining side. Given the upheaval we’ve seen in Argentina, Peru and most recently in Guatemala, what do you consider the most mining friendly countries?

DM: Currently, I would say Canada. We just did a piece by David Smith in The Morgan Report about the overlooked silver mining ability of Canada and mines in general. The United States still is a good place, especially if you’re a foreign investor. We have a lot of recommendations in Mexico, but I never want to have too much in any one geopolitical area. Some of the Scandinavian countries would be fine. In Africa, you have to pick and choose based on what part of Africa it is. There are resources in Africa but they’re being developed as brand new. We really don’t know how well they’ll work out because there’s not much empirical evidence yet. South Africa is a mess and getting worse. I’ve stayed away from South Africa during this bull market even though I was very heavily invested there during the first bull market in the 1970s to early 1980s. There are some exceptions, but the risk is very great.

There is a report put out by the Fraser Institute that gives its take on the most politically stable countries for mining. I don’t agree with it completely, but it’s a good start. This is an art form and not something that is scientifically derived. Investors want to be careful about the geopolitical jurisdiction because no one can call them all perfectly. Investors should not put all their eggs in one basket when you’re in the resource sector. Either have some top-tier companies, such as Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) or Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ), that have assets all around the world or, if for investors picking their own stocks, use a service like ours to make sure that the investments are spread out geopolitically.

TGR: SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE MKT) has pretty much said it is going ahead with the aggressive expansion program over the next year and a half or so and double its metals production. What are your thoughts on this?

DM: I’ve always liked SilverCrest. This is one that we’ve had on the list for a long time. The market usually does what it’s supposed to but not always in the timeframe one would like. SilverCrest is undervalued. I believe that it is going to be a good winner for anyone who is in the stock. Doubling a mine’s production, even though it’s a small one, is quite a difficult thing to do. I’ve met with the management in Vancouver several times over the last few years. We’ve also had site visits. I like what SilverCrest is doing. I like the management; they’re very serious and know what the margins are. They know where to narrow the costs so the margins will increase.

TGR: Are there any more companies you like either in Mexico or in one of the other jurisdictions?

DM: There are two companies that I would like to mention and almost have to mention them together because both have been good to me investment-wise. First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) is great. CEO Keith Neumeyer has done a heck of a job with the company. Its stock suffered—to our benefit—because he kept giving production targets that he missed. I suggested to him, and I don’t know if he listened to me, that he underestimate production and when the company exceeds it, the market will pay attention. The market finally caught fire and it’s been a good stock.

I’d also say Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE) has a great team. Some consider the company to be fairly promotional, but you’ve got to promote your product and your company. Endeavour has basically done everything it has said it would.

Both of these companies are in high growth states and I like that. So, even though they’ve moved considerably from when they first were on the list at The Morgan Report, if you’re a conservative investor and the stocks are undervalued now, which I believe both are, you can still buy these stocks.

TGR: For the more conservative investor, are there any larger-cap companies you like?

DM: There are two that I want to talk about. Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) is pretty conservative. It has compounded about 20% a year. It’s run by some of the smartest people in the business and the company has a ton of cash. Franco-Nevada knows how to inject cash into certain projects so it gets a royalty stream and upside on top of the royalty stream. It’s now listed on the New York Stock Exchange.

The other one that’s been in the doldrums fairly recently and is coming out of them is Silver Wheaton. This company really knows what it is doing. It is buying streams of silver from companies all over the world. The contracts are fair to both sides in most cases. It’s really hard to be a company that knows ahead of time what the costs are for the silver going in, what Silver Wheaton pays and what the cash flow is coming out, based on the current silver price. So, you can actually do your own modeling. Investors are buying silver in the ground pretty cheap with Silver Wheaton. I like that model a great deal. I think it has a lot of merit to the upside.

TGR: Any companies in the U.S. that you would like to mention?

DM: Gold Standard Ventures Corp. (GSV:TSX.V; GDVXF:OTCQX) is one; it’s in the Carlin Trend. The people who run it are very, very knowledgeable. It’s a speculative situation—a high-risk/high-reward situation.

TGR: Any catalysts that you see coming up?

DM: Well, Gold Standard just put out some news and the market misunderstood it and the stock actually got punished for it. But on large projects, which this one has the potential to be, people don’t really understand drill results. When you have a disseminated project or an open-pit situation, it’s a far different model than a high-grade, hard-rock, narrow-vein mining situation. Grade is king. I almost always prefer hard-rock mining. But, some of these bigger projects are so robust, and with the mining techniques that we have now, they can make a lot of money. So, it’s right next to one of Newmont Mining Corp. (NEM:NYSE) mines. It could be a buyout. If you want a North American speculative play—everything else I’ve talked about is fairly conservative—you could throw Gold Standard Ventures out there.

The management is very savvy; CEO Jonathan Awde is young but he’s smart and he knows whom to hire. His geologist is one old codger and he knows what he’s doing. He’s been in that area practically his whole life. One of the richest guys in Canada has got a big bet on this company. So, there are a lot of things going for it that I like. I’m going to put a bet on this company, but, again, it is speculative, so I’m not going to risk a lot.

TGR: What is the best investing advice you have ever received?

DM: It sounds trite because it’s said and people don’t do it, but cut your losses and let your winners run.

TGR: It’s hard to do.

DM: But that’s one of the best because if you’re able to sell, you are doing the opposite of what most people do—most people sell their winners and hold their losers. No, investors should cut their losers and let their winners run because if investors have one stock that’s going to make 100 new highs over a 10-year timeframe, that’s the one you want to keep all the way up.

TGR: I think that’s great advice. Thank you for taking the time to talk to us.

David Morgan (www.Silver-Investor.com) is a widely recognized analyst in the precious metals industry; he 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, the author of “Get the Skinny on Silver Investing” and a featured speaker at investment conferences in North America, Europe and Asia.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

DISCLOSURE: 
1) Chris Marchese of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: Silver Wheaton Corp., SilverCrest Mines Inc. and First Majestic Silver Corp.
2) The following companies mentioned in the interview are sponsors of The Gold Report: SilverCrest Mines Inc., Franco-Nevada Corp. and Gold Standard Ventures Corp. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) David Morgan: I personally and/or my family own shares of all of the companies mentioned in this interview. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.


More About David Morgan and The Morgan Report

Seduced by silver at the tender age of 11, David Morgan started investing in the stock market while still a teenager. A precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems ahead and reasons for investing in precious metals. 

David considers himself a big-picture macroeconomist whose main job as education—educating people about honest money and the benefits of a sound financial system—and his second job as teaching people to be patient and have conviction in their investment holdings. A dynamic, much-in-demand speaker all over the globe, David’s educational mission also makes him a prolific author having penned “Get the Skinny on Silver Investing” available as an e-book or through Amazon.com. As publisher of The Morgan Report, he has appeared on CNBC, Fox Business, and BNN in Canada. He has been interviewed by The Wall Street Journal, Futures Magazine, The Gold Report and numerous other publications. 

Additionally, he provides the public a tremendous amount of information by radio and writes often in the public domain. You are encouraged to sign up for his free publication which starts you off with the Ten Rules of Silver Investing where he was published almost a decade ago after being recognized as one of the top authorities in the arena of Silver Investing.