Interview Between James Turk & David Morgan
Interview Between James Turk & David Morgan on November 6, 2010
James Turk: "It is my pleasure to be here with my old friend David Morgan from www.silver-investor.com. David, what do you think about the conference here in Munich, the Edelmetallmesse?"
David Morgan: "I think it is very exciting; there is a lot of energy here. A lot of excitement in the markets, with 1400 $/ounce gold and 27 $/ounce silver. People are very very happy, myself included and I’m just very honored to be asked to speak here again."
James Turk: "Yeah, it’s a fantastic conference, it’s well attended, I have been speaking here now for several years and every year it seems to get bigger and better. Is it a sign, do you think it is the biggest of the conferences so far, that we are perhaps at a short term top or any kind of top in the metals?"
David Morgan: "You know, I really do a lot of technical work and we are more overbought now, than we’ve been since maybe two other times since 1970. So we are going back forty something years. But technicals are technicals. They are called technical indicators, the market knows more, before I left with this trip, I put out a video for my members that I want to see my trading and I said: “Look if we get above 25 you got to get back on board.” We are in a very short, in a very shallow correction and I think we may see a few more of those. I really think we could continue higher, even though I know we are parabolic and even although I know we are overbought. But the conditions have changed substantially and I think a lot of it has to do with what has been going on with this CFTC investigation."
James Turk: "Yeah, tell me about that. What are your views on that?"
David Morgan: "Well, I’m a little bit in the middle. I don’t believe you can manipulate the overall major trend of a market, but within the major trend you can certainly manipulate the price again and again and again. And that’s happened in the silver market and in the gold markets."
James Turk: "And the banks have been doing this in order to earn the advantage of the contango and the forward carry that they can earn on the price of silver."
David Morgan: "As an ex-banker you know that as well as me or probably better and also the short-term boys, the options traders can club her down and capture the option premium with their delta-hedging and there is a lot that goes into it as we both know."
James Turk: "Yeah, we’ve been seeing that every month and were the options at the end of the month get knocked down, so as few as calls as possible expire in the money. But you know I agree with you about this changing and one of the things I have sensed, I want to get your views on this, is that this is different from what we’ve seen over the past several, past 10 years actually. You know both gold and silver have been basically in up trends all decade long, but before the accumulators, the people that were buying physical metal, they were waiting for the price to drop 20% or more before going back into the market, after the price had run up, this time it has been my sense, since gold went over a 1000 $/ounce, that accumulators are right under the market and that they are following the market all the way up. It’s very very different and that is why these corrections are very short and very shallow. Is that your sense as well, that the accumulators are right there under the market?"
David Morgan: "So far I put out a video, I think it was early September and I was kind of smiling in my office and rightfully so. I said that, you know, the market has changed. It’s trading differently than it has in last decade, and it has. I think part of it has to do with what has been going on with perhaps the CFTC, the commodities future trading commission, looking at the trade activity in the market silver market, perhaps the gold market as well, because the open interest continues to increase and until the open interest reduces substantially, we never really know who the winners and losers are. In the last decade, what has taken place again and again, is that a large bank or banks have come in and sold silver on paper, gold as well, in a massive quantity and any market will move based on buying pressure or selling pressure. So if you sell 25 percent of the worlds silver supply in one trade, the price is going down no matter what and that was brought up in the CFTC hearing. What I believe or think, but cannot prove is that the CFTC is now watching for that kind of activity. So the open interest keeps going higher and higher and the banks may be reluctant to make that kind of a move for fear of what the repercussions could be, so now the banks could be in a position in where they have to cover on the way up, which hasn't happened, as you well know, for more than a decade. If that were to occur, these prices are small versus what could happen if you start covering these massive short positions in the silver or gold market."
James Turk: "Yes, I agree with you completely, it has been my view for some time now, that we are going to be seeing a short squeeze and that looks like what we've been experiencing right at the moment. It probably started actually in the low twenties, but with this breakout above 25 dollar, which with I agree with you, is a very important move and that big move up the other day when it went up 1.60 dollar, that had all the earmarks of being a short squeeze on it. The fact that the open interest has been continuing to grow, is that a sign that the shorts are reluctant to throw in the towel, that they are going to continue selling and selling until eventually there paper will be completely discredited and won’t sell anymore?"
David Morgan: :I don't think they will never sell anymore, you’ve got to remember who they are, they are mainly the large banking houses and they can create infinite money. But the problem is, at what point do they have to throw in the towel and say, you know thirty dollar, forty dollar silver. At what point does something give and I think really don't know, but what I do know is that these markets are very fragile right now, meaning that decisions are going to have to be made, I would say in a very short term, either the CFTC is going to come out with a statement in the next month or two, hopefully in the next week or two, and say: "the position limits are such and such and you have to reduce them to that level in the next two months". Were that to occur, they would have to seriously look at covering their positions on the way up. That's a possibility, there are infinite possibilities, but that's one that is likely."
James Turk: "Yeah, the CFTC is always bent over backwards to accommodate the hedgers, "quote on quote", supposedly a lot of these commercials are hedged. Do you think the CFTC will make an exception this time and say even the hedgers have a position limit?"
David Morgan: "I don't have my hopes very high. I mean, I’m a realist and reality is that, as Jim Willie said recently in one of his articles on silver, that basically the CFTC is more or less a lapdog for the banking entities that exist with such power, and they really might put out a small bite and a large bark, and that really not much will happen. That's where I lean, but there is always hope that someone will stand up and do the right thing, regardless of the consequences, which is what I would prefer to see happen, but as far as where I stand personally, I’m a bit doubtful for any real change to take place."
James Turk: "And in any case, the market is going to force change by having higher prices, bring silver to a more realistic level, whether the CFTC accommodates that by forcing the shorts to cover or not. At least that's my view, do you agree with that?"
David Morgan: "You know me, I'm one of the most free market guys out there and I always believe strongly that the free market will take hold eventually. That has been my case on the trend; you can't manipulate the overall trend, because free markets are greater. Would silver or gold prices be higher than they are now, if this whacking the markets down all the time were not recurring? Of course they would be higher right now, but in a way that's an advantage to people that understand how markets work and which potential gold and silver still have."
James Turk: "Yeah, I agree and it has been my point that silver and gold have been so cheap and that they are still cheap. Just continue to accumulate them, but don't accumulate paper gold or paper silver, but accumulate physical gold and physical silver, because that's where you really want to be. You have exposure to the price and you also have money that hasn't got any counterparty risk, so you're not putting your money at risk at some promise of a bank, a central bank or something of that nature. And you are a big advocate of physical as well, right?"
David Morgan: "Absolutely and I always have been. If things got really crazy, you would only go to one thing, and that's physical money metals, because everything else is dependent on a bank or a broker of some kind of electronic trading apparatus for settlement. And it's always got a counterparty risk of some type. So that doesn't exist when you own the real thing. I say: "If you can't touch it, you don't own it", I mean that has been one of my metaphors for a long time."
James Turk: "Yeah, physical metal is definitely the place to be. I want to ask you with your free market viewpoints, again the difference between physical silver and paper silver. What's the attraction of paper silver, why do people do it, instead of buying physical silver?"
David Morgan: "Well as you know, I'm pretty well connected from top to bottom in the industry and you know when I was in Singapore, some of these fund managers that I know quite well, you know they are, I won't say that they are lazy. It's just when you are moving millions in and out of the market, they are not going to mess with the physical market. They are going to push that button that says SLV and they are going to get in and they are going to get out, they are going to leverage it, they are going to margin it and they are going to do what they do. And for me to tell them how to run their business really isn't my place, although I try anyhow, and so I think that that is the main reason. It is convenience, and you know these guys are more paper bugs then I will ever be. You know, it's like when, what am I showing on my return for my clients on an annual basis and whatever. It's a lot easier for them to go into some kind of hypothetical, hypothecated silver or gold investment. I don't like it, but that's the reality."
James Turk: "If we get a short squeeze in silver, are we going to go into backwardation? Where the spot physical price is above the distant paper price of silver?"
David Morgan: "I don't think you've ever, I don't think that anybody who knows me, has ever heard me saying this word in the market before and of course by law I'm really not supposed to use the word, but I do guarantee you, you will see backwardation and it may not be a two day or a three day event, It may be weeks, not like ten weeks, but maybe like a week and a half, two weeks. We are so tight in the silver supply right now, almost every commercial bar that exists is held for one reason and for one reason only and that is investment purposes, not commercial use. So any commercial use that comes on top of the investment purposes that already exist, is going to force the price not only higher, but it is going to force it higher now, because it is required for industry, so I’m really very… you know like I always watch the market carefully, but I'm more at the edge of my seat right now, then I ever have been in a long time, waiting to see what is going to happen."
James Turk: "Tell me about the Sprott physical silver thrust. What kind of impact is that going to have on the market? You know that's just 500 million dollar of new physical demand."
David Morgan: "Right, so half a billion dollars is nothing in this world, it's really nothing, but it depends, all markets move on the margin. Now, if my work is correct and I believe it is, it is as accurate as can be and there is roughly 700 million ounces of silver in commercial bar form available, and there is 680 million, like two weeks ago when he just bought 20 million ounces of physical silver right at the limit. Now, I'm not saying that 700 million is the exact number, but I want to give the correct idea, if that's the last pool of silver that isn't already accounted for and it gets close to that, it could be that. Then obviously it's going to force the price higher. Especially if he says: "You don't get a year to deliver, you get one month or you know 30, 60 days" that type of thing. So I'm really anxious to see how the market opens up next week, with almost 27 dollar silver as we are doing this interview and what happens, do we get a limit-up day? We haven't seen a limit-up in silver in a very long time and there is really no limit on the front month of the spot contract. Basically, they will close their circuit breakers and cool of trading for a while, but you could get a situation of extreme backwardation, so people that are watching this understand what we are talking about. Where to get silver right here and right now is going to cost you a 35 $/ounce, but where you can get silver for next month for 30. So you've got to pay 5 dollars up, because you need it or your factory closes down and that is really what has happened in the past and I believe it will happen again."
James Turk: "Yeah, that's the big difference again between physical and paper. You know, we did a transaction for a customer back in august. He wanted 8 million dollars of silver in Hong Kong. We couldn't find 8 million dollars, it had to come from Europe, we shipped it out there for him, he wanted to store it there because he wanted to get some additional geographic diversification on his portfolio. So I mean, if the market was that type back then, imagine what it has been since then, with all of the additional physical demand. I had this view that the hedge funds are sort of targeting the shorts in silver because the shorts are vulnerable. They are vulnerable because of the CFTC hearings, the statements of Bart Chilton, the lawsuits that have been filed and as a consequence of them being vulnerable I think there is going to be a big short squeeze coming up. Do you see the shorts being vulnerable and the hedge funds maybe targeting for that reason?"
David Morgan: "Yeah, I considered that myself James. I mean, you outlined it perfectly. You're going to see such volatility and it's probably going to be most to the upside. I mean anyone that's waiting for that big pullback, and that could happen, and it will probably be a good one sooner or later, but I would not, I'm just glad that I'm as long as I am right now. I'm not going to add anymore for my trading portion of my account, maybe, maybe not. But honestly, this thing could go into the thirties, as you already predicted, before the end of the year and we could get into the forties before the end of the first quarter of 2011."
James Turk: "Yeah, and we've both been doing these series of blogs from time to time on King World News and I know we both have been bullish, but it was a little bit harder to be bullish back in the summer, when you know, we were the only two people out there beating the table to buy silver and that there was a potential for a short squeeze, but you know it is unfolding, I think, pretty much as we both expected it. Looking ahead a little bit, what do you think about next year?"
David Morgan: "I think next year is going to be predominantly up, I really think that from 2011 through 2013, you definitely want to be long the metals. I'm really averse to going short the metals; I'm not adverse to insurance. I mean, if you have a big portfolio and you want to buy puts for protection, you have to look at them for what they are, they are insurance and I have actually done that with my own portfolio and I don't mind spending the money, just in case there is some kind of whipsaw action or whatever and if I don't collect on the put, so be it. I've used them correctly as you should, but I think there now getting into the second phase from a psychological level. I think a lot of people that didn't take silver serious as a monetary metal have, since it got above twenty. And now anyone that takes a look at the market, even in a cursory way, is going to say: "My goodness, the ratio went from 68 to 1 on august first to 52 to 1 by the first of November, I better get on silver." Plus, it's more affordable you know, it's always being called the "poor man's gold" and not to sound arrogant in any way, because I'm really not super wealthy or anything. But the point is that more people are starting to look at silver because gold is at 1400 $/ounce. Yeses, I don't get that many gold coins for my 20 000 dollars, maybe I should buy silver. So that adds even more pressure to the silver market."
James Turk: "I mean it's even cheap from the point of view, if you look back to January 1980, you know the peak in gold was 850 $/ounce, the peak in silver was 50 $/ounce, so the ratio was 17. You know, gold at 1390 $/ounce was well above that 850 $/ounce peak, while silver at 26 $/ounce is still about 50 percent below where it was in 1980. So just on that basis, silver is cheap relative to gold and given the fact that you have much smaller above ground stock in silver than you do in gold, the implications are that silver is going to continue up performing as we go forward from here. I think eventually we are going to break that low in the ratio after the Warren Buffett accumulation was announced back in 1997 and early 1998, when we got down to the 40 or 42 area. It looks like we are heading well into the forties in this move, given that we were are at 52 already. So, maybe we next year we could take out 40 on the downside."
David Morgan: "It's funny you use that number, because I was thinking about that, just for the last couple of days. The last time on a channel analysis was 52 and we are there now and I'm just doing it now from my head, but 40 was my number. I think we will get to a ratio of 40 to 1 before we see this rally over."
James Turk: "So if we are taking 40 $/ounce silver, we are taking 1600 $/ounce gold, or there about."
David Morgan: "That's correct."
James Turk: "Okay, good. Any other thoughts on the silver market that you would like to add?"
David Morgan: "Yeah, one that you already kind of precluded and that is. You know, when you look back and of course history repeats, but not exactly, but silver did hit 50, yes it was an interday event, yes the Hunt brothers were heavily in the market, yes there were some Arabs with it. But look, the facts are what they are, it hit that price and at that time there was about 1.6 billion ounces more of physical silver then there is today. And at that time, there was really only US investors that were worried about a currency crisis or the inflation rate that was taking place during the Carter administration. So rather than say: "what is the silver price we are going to get to", I will reverse the question. If there is only one fourth as much physical silver for investment available today than there was in 1980 and it is not just a mister Hunt that is in the market, but you've got people all over the globe that can purchase silver now that couldn't in the 1970's and 1980's, and 50 was the old mark and you got like maybe five times as many investors, you have one fourth as much. Where do you think the price is going to end up?"
James Turk: "Well, my long term view is that by 2013 to 2015 gold is going to be 8,000 $/ounce and if you accept that, as I do, that the ratio is going to fall and go below 20, even if you take the ratio of 20, 8,000 dollar gold means 400 dollar silver. I think that is a very reasonable target. You know when I first did that forecast of 8,000, back in 2003; there were a couple of aspects to it. One is that in 2003, gold was about 350 $/ounce and it took 10 dollars in 2003 to equal what the purchasing power was of 1 dollar in 1971, so if gold could go from 35 dollars to 800, on an inflation adjusted basis it could go from 350 to 8,000. It is basically saying that history is going to repeat on an inflation adjusted basis. So I don't think it is unreasonable of a silver price of 400 $/ounce or perhaps even more, if the ratio goes even below 20, because I think 8,000 $/ounce gold is not an unreasonable target by 2013 or 2015. So bottom line, we're both very very bullish, both on gold and on silver, but particularly bullish on silver."
David Morgan: "Exactly."
James Turk: "Thank you very much David."
David Morgan: "My pleasure."