Interview Highlights (edited for readability)
Albert Lu: Gentlemen, thank you for joining me today. How are you?
David Morgan: Doing well, Albert. Thank you.
David Smith: It’s good to be speaking with you this morning, Albert.
Albert Lu: You two are the co-authors on the book, Second Chance, which I have here. Thank you very much for sending this copy to me. I really enjoyed going through it. But before we get there, I just want to talk about what’s going on in Zimbabwe because it was big news this morning when I woke up. They are literally running out of money in Zimbabwe since going off their own currency and largely being a dollar-based economy. They’re actually running out of money and they’re not able to make payments to foreign vendors. Would either of you two like to comment on what’s going on there?
David Smith: You know, it’s amazing. It looks to me like they’re playing the same movie again that they did a few years ago, only they’re fast-forwarding it much more quickly than they did and all the players get it. The external players that might put money into the economy are withholding more quickly because of a fear of nationalization, and the locals don’t trust the banks and don’t trust the government. And so, I would guess that the collapse will happen even more quickly than it did before.
And what’s amazing is when this first got started a number of years ago, the Zimbabwe dollar actually traded, I believe, at $1.27 initially; US$1 for $1.27 and went to, what, 100 trillion? So, pretty darn fascinating.
David Morgan: And I’d like to add on to that. I did a video with a precious metals dealer sometime ago. And if you search my YouTube channel, Silver Guru, and if you type in “David Morgan Hyperinflation Explained,” I think it’ll pop the video up. But David’s right. In an 18-month time-frame, the Zim dollar went from equal to or approximately equal to 1 US dollar. 18 months later, it was 100 trillion dollar bill. In fact, Albert, if you allow me just to bend over here for a second, this is the final product which is a 100 trillion dollar bill and these actually never got issued. Most people don’t know that. By the time the German printer had printed these up, the currency had collapsed. So—
And, the final part that’s most important is that it can’t print wealth. I mean the idea is that you got a lot of zeroes in your bank account and you have a lot of wealth. Wealth is actually what we produce. Money is a tool and some people get that confused. In fact, I could go on about where we are in the current administration and I won’t because I think we should get on with the book, but a lot to be said about history opinion itself.
Albert Lu: And it looks—just like you guys said, it looks like we’re in for the same thing in Zimbabwe, but this time it’s basically electronic bank deposits being the thing that’s going to be inflated to infinity versus hard notes, hard US dollar notes. And we’re going to see I guess more—I guess we’re seeing right now, right? Gresham’s law in action. Those physical notes are nowhere to be seen. People make their deposits and sure the deposits are there, but the notes vanish and I guess we’ll see the dollar prices of local goods just skyrocketing as they did in the local currency before. Any parting shots on that before we move on?
David Smith: You know, Albert, there is a video which I’m sure is still available on the internet, a heart wrenching video showing people panning for gold in this little muddy stream getting small flakes and those young enough to do that would somehow get a little bit of a subsistence. But people that were too old, if they could not pan, they would hire a young person to do it for them or they would starve to death. So tragic.
Albert Lu: Extremely. And this is a related topic. I should be talking about silver now. Once again, here’s the book, Second Chance, you called it, How to Make and Keep Big Money from the Coming Gold and Silver Shock-wave. Why did you write this book, guys? And where did the title come from?
David Smith: The idea was thinking of what happens when you have a tidal wave or a tsunami that hits the shore, and we use that metaphor and developed it fully in the beginning of the book and then carried it throughout the book. But the idea was that you have this first wave that hits and people think if they survive that wave, that everything will be all right. But the reality is, it may well be building for an even larger wave and sometimes a series of waves that would follow on and we would carry that analogy into what happened in 2008 with the near financial meltdown and the buildup that we’re seeing again because those problems that are systemic in nature have not been addressed for the most part and they’ve actually gotten a lot worse.
We can also then look at the sub-theme which is an investor who might have missed their chance or felt they did to participate in the first gold rallies and silver rallies that began in the early 2000s where silver actually went up in 2011 to almost $50 which, by the way, David Morgan called I believe within about 1 day at the top. He stated this publicly. And gold topped a little bit later in the year at around $1900. And then we have this huge rally last year out of a depressed state after a 4-year bear market.
So people may start thinking even today, “Well, I’ve missed my chance. I can’t buy the bottom” and they may end up watching the rest of this. But we feel that they have not missed their chance and that due to the strategies we discuss in the book in the background, they have an excellent chance to get on board this bull run, which we believe will be historic in nature, and participate fully and, furthermore, get off of it before they give it all back.
Albert Lu: All right. Let’s go to Morgan for some comments. Sir—
David Morgan: Well, the back of the book talks about 90% of the move comes from the last 10% of the time. And normally the Elliott Wavers, which I’m somewhat in agreement with, talk about this last leg, and the last leg I think began the end of 2015. We saw a pretty good 2016, gave back quite a bit of end of year. But still if you look at Investor’s Business Daily as an example, the best sector for year over year—in other words, the whole year of 2016—was gold mining sector.
So, we are going to see an acceleration at some point. I don’t think it’s this year, Albert, but I think around 2018 and onward, we will see this unbelievable rush into the precious metals and that leg is going to be near vertical at some point. You know, once that happens, it’s going to be a feeding frenzy because there’s going to be a lot of issues that come together at the same time. One loss in faith in currency, probably the US dollar, which translates throughout the sector, meaning the long bond, the treasury note and even cash. There will be pension funds that are failing. There’ll be all kinds of things about fear that will be driving the market and then there’ll be some greed involved as well.
So I think it’s going to be global this time. We already saw panic-buying in the 1980 bull market, January 21st gold peaked, and I think we’ll see that happen on a global basis, which means it’s going to be far stronger and probably much more erratic as far as price moves are concerned and we saw it previously.
Albert Lu: I love the analogy you used there with the tsunami. And one point that you made is if you’re out in a fishing vessel or something way out in the ocean, you may not even notice this thing pass right through you or below you, and I think that’s the case with this inflation that’s building as well. In fact, some people have benefited tremendously from it. But some other things about the book, great quote on page 56, guys. This is Rick Rule quoting Eric Sprott, one legend quoting another. It says, “Don’t be afraid to be right. This is when the A-players go to war.”
It’s been a difficult bear market. You guys talked about a sandpaper finale where it’s the—I guess the opposite of a V, you’re just grinding along the bottom. What do you see as a state of the bear market now?
David Morgan: You already said it, Albert. We’re grinding out low. I believe the low is in there. Others that have stated that we’re going to hit a new low and I’d say part of, you know, subscribers of mine say, “David, do you know if there’s one more low coming?” The hard fact is I don’t know. But all indicators that we use preclude that happening. We saw the bottom again and we are grinding higher and we have what’s called overhead resistance. We have people that bought silver, you know, in the low $20s that have suffered for months and once it grinds up to $22, $23, wherever they purchased it, they’ll break even. It’s a psychological thing. They no longer have precious metals for probably the initial reason that they bought it. They either bought it to make money, get rich or protect themselves or maybe all three. In most cases, ask your investors basically to sell to get even. So that will take place in the $20s or take place in the $30s.
Once we get above $26, we’ll probably see the market start to accelerate. The point I’m making is that overhead resistance holds back on market from moving quickly. So you’re only going to see this acceleration take place, barring some unseen event which could happen, once you’ve worked through all the overhead resistance and there’s a lot in gold and there’s a lot in silver and it’s months and months long.
So, again, 2017 will probably be grinding up higher than what we’ve seen, but don’t expect a big move that continues. You might see some big 1-day or 2-day moves, maybe even 3, but they will be quelled because there will be physical actually that comes in a market. Of course, the paper markets are still the leading force that has to be overcome at some point.
Albert Lu: We talk about the fear trade. Certainly, those are all good reasons, dollar debasement, especially we have probably a phase that we’re entering here where it’s fiscal stimulus, which is going to be backed up I’m sure by Central Bank printing. But people are getting sort of fear fatigue, you know. Many of us have been talking about accelerated inflation for a long time. We certainly have had inflation but not the pace that would really instill fear in people.
Do you guys see this as a fear trade or a love trade? It’s kind of an east versus west mentality. People in the east, meaning Asians, look at gold and silver as money and not necessarily a fear trade. How do you guys look at it?
David Smith: You know, Albert, I would say it’s, rather than a dichotomy, almost a continuum because as you mentioned, the Asian trade is largely a love trade, but it’s also a fear trade as well, for example, with the current dropping in value of the Yuan. Many Chinese are moving into the gold and silver space, and so—but they’re also doing it as a celebration for the New Year and for weddings and things like this. So, gold and silver have a continuum of usage in that regard. And you’re right, and I think this is something that kind of turns off millennials when they hear that the world is going to come to an end and what good is it going to be if you have gold and silver if we have social chaos?
But our view is that because of the supply-demand dynamics that are going on in the fear and the love trade, that we don’t have to have an end-of-the-world scenario to have massively higher prices for metals and miners. We simply have to have a continuation of all the elements which are already lodged into place. And so, in so many ways, I would argue that the cake is baked and you’re not going to have a big change in these elements that would contradict the phases that we have going here as it plays itself out over the coming years.
And so, it’s one of redemption in my view in addition to dealing with the fear and greed aspects which are always involved in the markets. And people could be afraid of what might happen that would not be good, but they can also be afraid of being left behind. And as the market chews through the levels that David has just mentioned of resistance above it, people that have not taken action are going to become afraid, not of the end of the world, of losing the opportunity to make big money. Double-edged sword within that one emotional continuum.
Albert Lu: Morgan, would you like to make a comment on that?
David Morgan: David did a great job. I think the fear and love in Asia depends on age. I think if you’re like 40, 50 or older, you have fear about what currencies always do, but Asians are well acquainted with the failure of government-sponsored currency. And I think if you’re 40 or younger, you probably don’t have that knowledge and you just buy it on the love side.
Albert Lu: Great points, guys. I want to talk about something you alluded to earlier, David Morgan, that is sort of the psychological aspects. I’m not a chartist by any stretch, but I do appreciate the sort of psychological significance of one’s cost basis. And—so that’s on one end. And the other side is what people call greed but I’ll just call it investor enthusiasm. When something starts going up, you know, you want to let a good thing roll.
In the book, you talked about an experience with the Harry Browne at a conference. This was back in 1980. Harry is one of my big influences and I was happy to read that he had kind of an influence on your thinking as well. He did a talk right during the the height of the silver enthusiasm. Can you talk about what he said in that talk and how it affected you and how it’s changed the way you view the silver market today?
David Smith: You know, Albert, I was at that conference and Harry Browne had been a real hero to me and I believe to David Morgan as well, although we didn’t know each other at the time. But, he actually said silver had gone to almost $50 an ounce a month or two before, and he said, “If it drops below $37.50, you should get out.” And so, I had followed his writings and also Jerome Smith—no relation to me—but Jerome had actually been the prime spokesperson for the silver story. He was kind of the David Morgan of the 1970s, and so I listened to Harry and was actually going to go out and call and stop losses on my positions. And then Jerome got up and spoke and he was discussing $100 silver, and so I let that emotion kind of push me back from doing what I felt I really should do and the results were less than stellar a few months later when silver did finally collapse. So, that was a tremendous learning experience for me, which I continue to think about today.
David Morgan: And I want to pipe in here. I got to know Harry pretty well the last couple of years of his life. And what’s real interesting is having dinner with him one time. He actually explained to me that Terry Coxon, who was his editor and also took over the Permanent Portfolio Fund at some point, basically prompted Harry. He said, “You know, silver has really made a great run here. You might think about selling it.” And Harry goes, “Yeah, you know, that’s probably a good idea.”
So, you know, it’s funny how these things happen and sometimes you get inside stories, sometimes you don’t. But, you know, that’s one of the reasons that David and I took the care and the energy and effort that we took because a lot of retail investors get married to an investment or the philosophy behind the investment, which is all paper currencies eventually fail. But that doesn’t mean you can’t take paper profits at the right time if you have some place to place them or you can contract and trade your silver directly for land, a car, a business, whatever.
But there is a time that it becomes overvalued. And when it becomes overvalued, no matter what the investment, be it a stock, be it real estate, be it a collector automobile or baseball card, I don’t care. When you get something overvalued, you should be looking to at least lighten up. We do not want to see anyone that reads that book do a round trip, watch it go all the way up and hold it and watch it come all the way back down. That’s a huge mistake and, unfortunately, again to repeat, too many retail investors will do that.
David Smith: This is so critical what David Morgan just stated. And this is one of the leitmotifs of our book. It doesn’t do you any good to make massive of amounts of money which many people will on paper, but then hold on to it when the whole idea of your premise changes. And there will come a day—we can’t tell you when that’ll be. It might be 3 years. It might be 5. It might be 10, but there will be some point in the future where the premise that we’re basing or bull-run on will have changed so much that this whole secular trend will change and it will be just like when Jerome Smith got up and predicted $100 silver.
But what he did not know and what David Morgan was the first person to articulate to me many years later, the reason for that mistake that he made is that the whole underpinning of his idea that we could only produce so much silver annually was going to be crushed by a new technology. And that will happen in the future for our premise today whether it will be mining asteroids or more use of nanotechnology or whatever that might be. But when that point happens, you don’t want to be long and strong. You want to have at least a portion of your earnings away from the market so that you don’t give it all back.
And we have a strategy, that no one else really has seen, that could help you do that because it goes with your psychological underpinnings when you’re in the market, not against emotions and psychology. That’s a critical, critical thing to consider.
Albert Lu: Yeah, great points guys and just a little added insight regarding the relationship between Terry and Harry Browne. I had dinner with Terry Coxon one time and he was telling me the story of how he got hired by Harry Browne way back. Harry advertised at—I think it was a California University, UCLA, I want to say is where Terry was. He was looking for an editor. Ended up hiring him, so you know, Terry goes up there to Vancouver where Harry was and Harry quickly discovered that, “Hey, this guy can do a lot more than just edit newsletters” and I think that’s when the relationship really blossomed and it’s a great story about him actually pointing the finger at the silver trade at the time.
I want to move on. I got a note here from the book, statistics that you guys threw out there and that is 32% of the passengers actually survived the Titanic. I didn’t know it was that high. Far fewer will survive a silver-gold crash when it eventually happens just because they don’t have control over their emotions and their enthusiasm. You guys are talking about how to intelligently manage this trade. I want to ask you about what a lot of people referred to as the Casey Free Ride or the Katusa Free Ride. What do you guys think of that as a strategy?
David Morgan: That’s something that we’ve advocated for a long time and, of course, you can call it Casey or Katusa, but it’s been around for a very long time and I would attribute it to whomever taught it to me. It might have been Jim Dines, I forgot, to be honest. But the point being that especially on these juniors, if you get a double or more, you should just sell half and ride the rest because these things are extremely volatile. And early on in the market, meaning the early 2000s, a lot of these stocks went up 10-fold. We call them 10-baggers (or 20 times called 20-baggers). And some of those actually had nothing more than a good promoter.
But, the sector was so hot that these stocks got momentum and people had to get in and they heard the story. I call them story stocks. Albert, it’s critical for what I’m about to say because I want to help as many people as I can, yeah, and for free. But the idea is you’ve got to be centered in this situation. You’ve got to be able to take these profits and you’ve got to be able to get your emotions under control. Without that, you’re not going to go anywhere. But what will happen in this next move is that those little penny stocks will come out in droves and about 98.2% of them will be promotions only who have no merit whatsoever because the greed will take over for the people that know how to pump stocks and there’ll be tons of those things coming out at the very top of the market.
So, buyer beware at that point in time because that will be one of the main indicators that I’ll be looking for to say, “Aha! We have got to start lightening up pronto.” The Blankety Blanks are coming out in droves. They’re pumping these gold and silver stories that absolutely sound fantastic and have absolutely no merit to them whatsoever. It’s time to get out of the market.
Albert Lu: Sure. David Smith, any words for us on this?
David Smith: Albert, we make a distinction in our book and in our own personal trading between core positions and satellite positions. And one of the things that can happen if you have a really good stock and you sell a big chunk of it and it goes up another 50%, it’s almost overwhelming that you feel you need to get back in. But if you have focused on selling the satellite stocks in terms of taking your Katusa Free Ride there and maybe a smaller portion of your core stocks, then you’ll maintain a strong core throughout the move.
And I would argue that there are times when to use the Katusa Free Ride and there are times to withhold that. For example, this last spring where the January 19, 2016, market you know made its inter-day low for the next 6 months. Some of these stocks went up 5 and 10 times during a 5-month period. And so, if you had immediately reflexively done that free ride, you would have sold most of your positions before the top in August and I think it would have been really difficult for you not to try to buy back in, which of course, would have been the wrong thing to do.
So, if you’re distinguishing between what you’d like to hold for a long time and the so-called story talks that David Morgan talks about, you know, you kind of work on those because they have huge swings within the trend. I think you’ll keep more of your core possession intact because as we get into the latter stages, and David has been emphatic about this for many years, that 80% to 90% of the entire potential for a secular bull-run will become available during the last 10% of the time in which that run takes place. And so you could have a stock that maybe the last run up into 2011 had gone from 90 cents to $10 and now it’s $2 and then it goes up again to $10, and you go, “Whoa! I’m getting all the way out of this.” And then it goes to $50 during the last 10% of the time and some of those stocks will do just that.
So you really want to be positioned to have some of that possibility for you rather than being a sold out bull just before that last 10% part of the wave that David Morgan talks about gets underway because it will be quite a ride.
Albert Lu: And that’s what makes it so difficult, I guess, is the potential for that last bit to skyrocket. You made an excellent point, David, about the quality of the issuers declining to the point where there’s actually no substance. I forgot if it was Graham and Dodd’s Security Analysis or The Intelligent Investor, but I specifically remember reading Benjamin Graham saying exactly this, not as it pertains to mining but just in general, that is when you get to the end of a bull-run, the quality of the issuers just goes down and down and down and that is your indication that something is about to break.
Albert Lu: Guys, I want to thank you very much. Just—before we close, just mention some other things in this book, lots of good practical tips. You speak to Americans who want to invest in foreign stocks over the pink sheets. There’s a section called Six Game-Changing Investments. That’s all right here in this book. Please go out and get it. Support these guys.
Gentlemen, thank you very much for joining me today. Before we go, I’ll just mention TheMorganReport.com is where you want to go to sign up for that newsletter. Guys, thank you very much for joining me and I hope we can do it again soon.
David Smith: We appreciate your time, Albert, and we look forward to speaking with you again.
David Morgan: Thank you for your time and taking the time to really read the book and understand, you know, the message here because it’s a message we’ve got some time with and David and I went kind of around the circle with it, but we’re pretty happy with the product we’ve produced and we’ve gotten some pretty favorable reviews so far.
Albert Lu: Very good job, gentlemen. I can’t emphasize that enough. And just a message for the listeners, don’t forget to visit me at my new home. It’s SprottMedia.com. Tweet at @AlbertKLu. Until next time. Take care.
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