David Morgan | We Need To See Gold Pull Silver Up This Time

In this interview, analyst and newsletter writer David Morgan shares his outlook for the precious metals market and what he looks for to confirm a breakout.  David also discusses his approach to investing in the miners, where he thinks speculators can profit from the US-China trade war and the battery metals he is most bullish on and why.

0:05 Introduction

1:28 Is the precious metals rally sustainable?

3:55 What silver/gold ratio would confirm a precious metals breakout?

9:08 What to make of repeatedly incorrect stock market and gold predictions?

13:54 What type of mining investment are you focusing on now?

16:24 How you approach drill hole discovery plays?

20:05 What is the best way to profit as a speculator from the US-China trade war?

21:32 What battery metals are you most bullish on and why?

TRANSCRIPT:

Bill: Joining me today is David Morgan of The Morgan Report. He’s an analyst, newsletter writer, and an investor himself. David, let’s start off with the question as the precious metals have been rallying, can we see this precious metals rally be sustained?

David: That is the question, isn’t it Bill? I think so. The reason I say that is I’ve been at this a long time, and there’s certain rules of thumb that come to you over time, and some you learn from others, and some you develop on your own.

What I’ve determined over the years, especially in the metals, is if you have an area of resistance, and you get to that resistance level and it fails, usually on the fourth time to that resistance level, if it passes through it, it moves up, and especially if it’s on good sized volume. That’s it. Then the old adage that’s used very often by commodity traders is, “Resistance becomes support.”

The $1,300 level for gold was pierced in January of this year rather substantially. Me being the optimist that I am, I thought that was it, and I was wrong, and we moved down. After that, I told my subscribers that, “I’m wrong. We’re probably going to have to hit it two more times, two or three more times. Then fourth time through, it probably will hold.” That’s exactly where we are right now. We went through the $1,300 level like a hot knife through butter, got up to about $25 passed that level. We’re off a few dollars today, as we’re doing the interview.

I’m pretty certain now, with the trade war, and a shift in thinking about the stock market, the equity markets look weak. They’re definitely in a down trend. There is a correction going on in the stock market. Gold’s the most negatively correlated aspect to the stock market. I’m fairly confident, Bill, that we have seen it, and it is going to sustain.

Of course, that is one area, $1,300 is psychological more than anything else. It’s a round number. The real effort will be the $1,350, $1,360 level. Why do I say that? All my work is technical, although I do look at it, I don’t focus everything on it. I think fundamentals are equally, if not more important. Nonetheless, all these trading algorithms use technical work. That’s the level where the momentum players will start coming back into the gold market.

Bill: Yeah, I’ve had a number of commentators on this show say that $1,375 level is crucial, and that we could cruise up to even $1,450 from that $1,375 level. When you look at the silver to gold ratio, it’s been extremely high of recent. What do you look for in that ratio, to confirm a precious metals breakout?

David: That’s a great question. First of all, I’m a bit disappointed in silver, to put it politely. I’m trying to keep from laughing. It’s not funny, especially for someone that’s pretty involved in the silver market. We look at all the resources at The Morgan Report. In fact, I’m possibly going to be interviewed tomorrow on Fox Business on the rarest elements. We were the first on that area.

Anyway, back to you. We’re at a 26 year high on the gold/silver ratio, somewhere around 89 or so. I’ve only been doing The Morgan Report on the net for a little more than 20 years. When I started, I firmly believed the 80:1 ratio is where it was when I started The Morgan Report on the internet. That was it. I really felt that we wouldn’t see that again. Obviously, again, I’m wrong.

What I look for, really for confirmation, I don’t have the charts in front of me, but I’ve looked at it in the past, and I’ve got a number in my head. It’s probably varied because of moving averages and all of that, but 72 is the number where I, in the past, have said once we get there, that’s confirmation. It may have moved up to 74, because these things change daily.

I really am not happy with where it is, but it is where it is. I do and have been saying for quite some time, Bill, that we need to see gold pull silver up this time. There’s no if’s, and’s, or doubts about that. I think we will. We need to see the confirmation. I’m a big believer that, just like the Dow theory, that the transports have to confirm the industrials, that silver has to confirm the gold.

Now whether or not that plays out through history, remains to be determined. Most of these metals move together. Not always. I mean palladium has been the star performer, very few people are even interested in that market or participate in that market. I called that one correctly at the bottom. Got out about a year early, but making money isn’t a bad thing to do. Nonetheless, these generally move together. The gold/silver ratio needs to come down for me to be convinced that this is a sustainable rally.

Bill: How do you look at the gold/silver ratio, in terms of timing the top of a precious metal cycle? I kind of have in my mind 40 ounces of silver to one ounce of gold, for being somewhere close to the top. What are your thoughts here?

David: Yeah, it’s a real tough one, because it’s not consistent. I mean the peak trade that you could have made so far by swapping gold for silver, or silver for gold, depending on where the ratio stands is 35. I think 40’s a great number, Bill. I’ll go with your number. I think that’s pretty close. I have said in the past, and I want to be consistent because people throw this stuff up at me, and that’s fine.

If you go back to some of my earliest work that’s still available on the web, you’ll see that I said in the top of the market, which I still think is ahead of us, you could see a ratio go down to what I call the monetary ratio of 16:1, or maybe even a 10:1, which is basically the natural ratio. Silver and gold come out of the ground at about a 10:1 ratio, it’s really 9:1. I said that was possible, I didn’t guarantee it, I didn’t say it was for certain. I said it was possible.

You’re right, I think 40:1 is something, which is if we take that number and we’re at better than 80:1, what that says to everyone is that silver will outperform gold about double. If you get an X percent gain in gold, you get a 2X gain in silver, not only the metal itself, but if you look at the mining equities, silver equities sell at a higher multiple than gold equities. Don’t ask me why, it just is that way. It’s always been that way. There’s leverage in the silver market, that’s greater than what’s in the gold market.

Bill: I’m interested to get your thoughts on what to make of what might be considered outlandish predictions, in terms of a stock market crash, and gold going to the moon. There are certain individuals, where if you actually look at their track record, over the last five years I could point out about once a quarter, where they say, “In three months, gold’s going to the moon,” and yet to this day, if I pay attention to what they’re saying, they’re still saying the same thing about, “This is the crash. This is the big rally upon us.” Obviously, I’m skeptical in just the tone of my question here. But how do you approach those that propagate such ideas?

David: I think I’ll take a Chris Duane approach, “listen to all, follow none.” When silver hit the $50 level or was approaching it, and I won’t name names, but there was a very prominent, and very smart, and well-respected analyst on the internet. I called the top for my subscribers, because they pay me. After I called it for them, then I think within a few days, I had called the top publicly in an interview like yours, Bill. I got a rather curt email from him, saying I was doomed. I have lost all my credibility. Silver’s going to at least $100, my career was over, blah, blah, blah, blah, blah.

I called it to within three days of the exact top, but I never got a followup email saying, “Doggone it, I was wrong and you were right. You’re the man,” or whatever. That’s okay. I didn’t expect it or whatever, I didn’t have any expectations. This shows you what can happen in a feeding frenzy, buying frenzy, a parabolic move, that type of thing. These are people that know what they’re doing.

I do follow my own work. Having said that, I still think it’s possible, I can only use the word possible, that like Mike Maloney, that we have seen in recent monetary history, where we get the 1:1 ratio, where the price of gold equals the price of the Dow. Does that mean it’ll happen this next big upturn? I don’t know. It’s something I bear in mind. I do believe there is the possibility of a substantial correction in the stock market over time.

Timing things is extremely difficult. When I do an interview like this, people will hear it, “David’s been right or wrong,” or whatever. First of all, I’ve been right on every top. I hope I get the biggest one correct or nearly correct. Bottom’s I’m not so good at. I’ve certainly failed a few times. I don’t pay a lot of attention to those predictions, kind of a broken record.

There’s a certain percentage of gold and silver bugs, that when they hear individuals talking about, “It’s imminent. It’s this month. It’s going to happen. It’s going to be the biggest thing in world history. You’re never going to see anything like it in your lives. Fasten your seatbelts,” and so on. It gets them excited, and it’s what they want to hear. You get some following there.

Me, it’s show me, don’t tell me. The way I trade, I never trade and haven’t for years, based on where I think the market should go. I base it on what the market tells me to do. Believe it or not, a lot of people use what’s called channel analysis. I don’t, I use horizontal lines. I learned this years ago. One of the best traders in the world and I used to do some workshops together. Courtney Smith is his name. I have certain levels that if, and only if, a commodity, let’s just say silver or gold in this case, breaks through that resistance level, like the $1,300 level I just spoke about as an example, and it holds it for three days, I call it the three day rule, and the volume is above average, then and only then are you allowed to go on.

In other words, silver or gold could go from wherever it’s been recently, down to $1,200 or $1,150, or whatever. If you have these horizontal lines, it’s got to go up through it, hold it, then you have an 85% probability, which gets everything in your favor. Some people are reticent to do that type of trading, because it’s like, “You didn’t get the bottom.” That’s exactly the point, we don’t want to get the bottom. That’s an amateur’s play. We want to get the trend in our favor, and have the momentum working our way, and then and only then do we want to enter the trade.

Bill: When it comes to mining investments, I’d like to get your thoughts. I know that your specific mining stock picks are for your subscribers. Generally speaking, what genre of mining investment or type of mining investment are you focusing on right now?

David: A couple of things, I can give a couple. One, if you ever want to just take a top tier, cash rich, well run, almost guaranteed to go up over time, all stocks in all markets go up and down, Frank of Nevada would be one of my top picks. One of my longest holdings, so I’m somewhat biased. That’s sort of a buy and hold. Legacy stock you could sleep at night and not have to worry about it. There’s one for everybody.

Another one is Kirkland Lake, I mean it was our top pick on our ratings scale most of the year. It’s the top pick still in Investor’s Business Daily. It’s leveling off here. I think it’s time to take profits, or at least partial profits on it. If you look at that stock, what it’s done over the last year, and if you were a subscriber to The Morgan Report, you’d have a smile on your face. If you’re sitting with silver and gold in your portfolio, you’re actually, let’s say, more than a hedge position, which I would recommend at 10%. Say you’re willing to go that extra mile to say 20%, the other 10% should be well chosen equities in my view. It doesn’t have to be just gold or silver, although we look at those metals as much as we do the battery metals and everything else that we cover in The Morgan Report.

The other one, Bill, is a speculative situation. It’s basically a technology stock. This is a reagent that’s going to replace cyanide. It’s a very, very interesting story. No one’s really covering it, except me in The Morgan Report. There is a technical analyst that writes about it from time to time from a technical perspective only. Which being somewhat technical myself, I downplay. Why? Because it’s a micro cap stock. Technical work in very, very, very small companies is not very advantageous. Can it be useful? Yes, but it’s not nearly as useful as something that’s a well-established New York Stock Exchange Stock like Coca-Cola, or something. Their technical analysis has a much more likelihood of giving you entry and exit points. Whereas a small micro cap stock, there’s just too much. If I write it up, or even if I do an ad campaign and say, “Here’s this stock that’s better than any-

Bill: You create the chart.

David: Yeah, you can create, exactly.

Bill: One thing I wanted to ask you about, David, was drill hole discovery plays. I’ve listened to a number of your interviews over the years, but I don’t recall, and I haven’t listened to every interview, you talking much about discovery plays. Do you focus on that in your letter at all?

David: Very little. I was a newsletter junkie in my youth. I’ve been on the money scene for years and years. It’s been almost an obsession for me. In my youth, I call it my early 20s, I lost a fair amount of money, even in a pretty good gold market, by buying these penny stocks too late in the cycle. I determined that most of them were just stories. There wasn’t really anything there.

I have to do that, and in fact this is what I just mentioned, this technology stock is a penny stock. I do cover them, but I am not in that part of the industry as much as many others are. I mean this is basically what the newsletter industry for the gold stocks does, is they do tons and tons of these little micro cap stocks, that there’s so many things wrong with them, as far as market capitalization. They can be moved around pretty easily because they are so small. These stories are over the top, but the copywriters are so good at playing your psychological buttons. I read some of these ad copies and it’s like, “I want to buy this stock, and I know what the company is, and it’s not worth investing in.” But they sound so wonderful.

Do I cover some? Yes. I have a discovery stock.

Bill: I guess I should clarify. What I meant was specific, the drill hole plays, when Mariana Resources there in Turkey had their big hit, or you had Great Bear Resources a year ago have their great hit. Then you say, “It looks like they’re on to something,” and then you give the recommendation once you know there’s mineralization there.

David: Yeah, I have done that a few times. Normally, I do it as a trade. Usually what happens is you get a very strong up move. Sometimes you’re only in for three days. It just depends. These things can overreact pretty easily. It depends where you are psychologically. I mean early in the market, between say 2000 and 2005, I mean there were a lot of companies that had no merit whatsoever that did very, very well, because they had gold in their name, and there was so much money coming into the sector, they just moved up with the whole sector.

It depends where it is, but certainly, when you look at what happened with Aurelian, I mean that was a situation where you could have come on, never owned the stock, got that drill, if you understood what it was, that’s it, get in, get out. Certainly, I can do that, I have done it, but I don’t do it that often. I don’t specialize in it, but I try not to miss anything. I’ve hopefully answered your question, Bill.

Bill: Yes, thank you. This next question I asked Rick Rule in a recent interview, and he said it was a good question, but he’s still contemplating the answer. Let’s see what your thought is. What’s the best place to speculate in the current US/China trade war? As a speculator, where might you be able to profit as a result of this economic conflict?

David: I think it is in the rare earth elements. As I said, I’m scheduled to be interviewed on Fox Business tomorrow. The problem is it’s a situation where it’s like an options play, you want to be long and short at the same time. I think the market is really going to move, but I just don’t know which direction. I say that not to joke, I’m serious.

If the Chinese acquiesce to this trade deal or there’s some compromise that’s favorable to let’s say us, or them, or it’s reached, then you would see probably the REEs back off. If on the other hand it escalates, then you could see some of these REE companies move substantially higher. I just don’t know which way it’s going to go. If you look at Linus Corporation as an example, which is one of our picks back in the other cycle, when the REE was the place to be, let’s say, several years ago. It was a moneymaker for us, and now if you look at the chart, it’s done quite well.

I don’t know. I know the sector, I just don’t know which direction to go. That’s my take on it.

Bill: Battery metals, you have your new letter, it’s called The Coming Energy Boom, is that correct?

David: Correct.

Bill: What are you most bullish on when it comes to battery metals and why? Also, you can share about your letter.

David: There’s a free webinar, it’s not The Coming Energy Boom, it’s comingenergyboom.com, as far as getting the free webinar. I’m looking at everything. There really wasn’t an energy letter out there that I could find that covered … There’s some that cover the exotics, or the new stuff like wind and solar. Then there’s a bunch of, not that many oil and gas. I wanted to cover oil, and gas, and solar, and really exotics, like the battery metals and such.

I’m partial to both probably cobalt and vanadium. I think lithium is overplayed. Certainly, it’s going to play a role as we go forward, there’s no doubt about it. I think there’s better ways to store energy, and I think it still remains to be determined. I don’t want to give a that’s it, “Well David, you said with Bill, power is back, in June of 2019, that it was vanadium, and it’s not.” The answer is I don’t know, it remains to be determined. I think there will be something that’s going to come to the fore, that’s more efficient, better suited, longer life, more efficient than lithium. The possibilities for what I see currently, subject to change, would be cobalt or vanadium.

Bill: Where do you see the demand coming for vanadium? The vanadium redux battery is used for large scale energy storage, hydro, wind, things like that. You see the demand coming from hydro, and wind, and solar, or do you see the vanadium redux batter actually being down-scaled and put eventually in electrical vehicles?

David: I see that possibility. As I said earlier, listen to all, follow none. I think it’s possible. What’s interesting about technology is it’s continually improving. If you look at, I don’t want to bore the listeners, but you look at what a cellphone looked like in the initial stages, and it was kind of this clunky thing, about as big as or almost as big as a shoebox or something. Now you’ve got these things in your hand that are like 100, 200, 1,000 times more powerful, that they’re so small you can lose them.

It just depends on what takes place. One thing about the free market is it does not always pick the best product. You say, “Wait a minute,” but it really doesn’t. Sometimes what happens is something becomes popular, and it becomes popular and that becomes the best choice in the market. Although perhaps the competitor was actually superior, it just didn’t get the advertising, or it didn’t get the, I’ll call it popularity, that the other product did. You’ve got to be a little bit careful there.

I do like your thinking, Bill. I think it’s a possibility, and I like it. I like the idea that we have a lot going forward. Energy from solar and energy from wind is not that efficient. The big problems with both, as everyone knows, it’s not consistent, so you have to store the excess energy when it’s available. Sometimes it’s not, and that means some type of battery. Batteries don’t hold the charge that’s put into them, they drain out. There’s a lot to be accomplished going forward.

I’m not anti-renewables, but when I write in The Coming Energy Boom, I’m very careful to let everyone know that subscribes, the best way to analyze these markets or these let’s say companies, is energy, we return on energy invested. It’s not a question of money, although people … I’m a finance major. It’s like, “This much money, you get this return on capital. You’ve got this internal rate of return,” and all these things. You look at it from a purely monetary aspect.

That’s really not the best way to look at it. Because when we’re talking energy, it’s going to take a certain amount of energy to make a solar panel. Then once that panel is made, you’ve got a certain amount of energy to transport it to the location. Then you’ve got energy to place it into the roof of the building, or make a carport out of it, or whatever you’re going to do.

There’s a lot of energy involved before you ever get your first watt of electricity out of a solar panel. If you don’t think in those terms, you’re really not thinking very clearly. I want to make that clear to my readership. Some of these things that might appear good or become popular, or kind of a fad or whatever, may not be as lucrative an investment as they sound, because again, there’s this let’s say push or psychology toward renewables.

I’m not against them, but most cases … In fact, in all cases that I’m aware of, none of them are the solution for oil at this time. I’m not saying there isn’t one, but you really can’t find anything that has the density of what a gallon of gas has for that volume, to produce the amount of energy you can get out of it. It’s very inefficient.

Bill: As you were talking, I was just recalling what Steve St. Angelo at the SRS Rocco Report says. He’s always talking about energy return on invested. Without belaboring the point too much, he talks about the oil that’s needed to mine gold and the energy that needs to go into mining, even the precious metals. Are you consistent with some of his thinking on this matter?

David: Absolutely. It’s interesting you bring up his name, he’s going to be on my Mastermind on Wednesday. I don’t agree with everything he says, but his general thesis is absolutely correct, and you do have to look at it in those terms.

This sounds a bit bizarre, I don’t want to lose any credibility, but I am an open-minded person. There is a possibility that there are energy sources. First of all, I know of a few, I mean I’ve written about them in The Coming Energy Boom. One would be thorium, although there’s a controversy about this salt reactor, whether it’s viable or not. It’s been tested and proven. Thorium could probably power everybody with energy to spare, but it’s not popular. The hydrogen thing is a little tough. Even though it’s abundant, it’s really hard to store it and transport it, and other things. Thorium is kind of like a solution, and there could be other ones.

There could be ones that I won’t voice right now, because I haven’t looked through them deep enough to have an opinion yet. Is there a possibility for something to replace oil? The answer’s yes, there certainly could be, or there is in the thorium case.

Even nuclear, which is certainly a hot topic, I forget the kid’s name. I say kid because my age, but Wilson is his last name. He’s been on the TED Talks, and he’s got this idea of doing modular nuclear in a very safe way. These are ones that you could just put on an assembly line and produce. They produce enough power for, I forget, a neighborhood, or two, or three, type of thing. I thought it was an extremely smart way to go. Much safer than what we have now. Less costly. I mean we just punch these things out like widgets.

There are solutions out there. I’ll put on my conspiratorial hat slightly, but in my opinion, there is a great bias towards the oil and gas industry as it stands currently, and resistance to anything that might usurp that power.

Bill: As we conclude, there’s investors and speculators listening to us. What would be your parting advice for the second half of 2019?

David: I think be open-minded and watch the markets carefully. Be prepared to see a shift. I think you will see, by the latter half of this year, where gold good, stock market bad. Meaning that I think we will see that $1,350, $1,375 level reached, to the upside, probably on good volume, and just start to see a shift. When people start losing money in the equity market, they’re going to look for, “Where do I put this? Where do I move to?”

Really, in my opinion, there’s not many places to move to. I mean the bond market really isn’t that safe. If you’re not in the equities, where are you going to go? The answer is pretty much gold. I mean there are other places, but gold I think will get stronger and stronger interest as the equity markets continue to deteriorate. I think that they will, but again, we’ll have to wait and see what the market says.

Bill: I’m speaking with David Morgan from The Morgan Report. David’s new energy letter, you’ve heard us talk about the battery metals. If you want more of David’s insights, you can go to comingenergyboom.com. David’s other website is themorganreport.com, and you can find his precious metals, mining, and more insights at that website as well.

David: Bill, if I might interject, when you get to themorganreport.com, I have a little blurb on there about this electronic waste cyanide situation. You can sign up for a free letter there on that website.

Bill: Excellent. I appreciate you joining me today, David, and I look forward to catching up with you later in the year.