Mike Gleason: It is my privilege now to welcome back David Smith, Senior Analyst at The Morgan Report and regular contributor to MoneyMetals.com. David, it’s been too long. How are you my friend?

David Smith: It’s been a while and I’m happy to be back, Mike.

Mike Gleason: Well, David, for metals investors who got started after the 2008 financial crisis, it has not been an easy ride, as we both know. Prices rose sharply between 2008 and 2011, driven by the crisis and the Fed’s response to it, 0% interest rates and massive amounts of money creation. Then the metals markets began to flounder. Some of the safe haven demand for metals dried up as the equity markets recovered and fear dissipated. Price rigging and suppression in the futures markets has progressed from conspiracy theory to conspiracy fact. Metals prices are not being set in free or fair markets, so it is not easy for some investors to hang in there. But the reasons to own metal are still there, bigger than ever.

So, now might be a good time to review some of them. You talk a lot about precious metals role as insurance. Would you mind going over how metals act as a form of insurance for our listeners, David, as we start out today?

David Smith: Well, there’s several iterations of the insurance piece. As David Morgan of The Morgan Report always talks about, you buy the physical first and you buy that for insurance first and profits second. But if you look back, and a lot of people would not even believe this until they saw the chart. But gold held since 2000, has doubled the appreciation of the stock market, the overall stock market.

So, in spite of the big plans that we’ve seen, that we saw from $1,900 down to about $1,050 and then the move in 2016, we had, which gave most of it back and gold ended up for the whole process from that point, down about 45%. Silver down about 70% from 2011. In spite of that, the metals are still using their role as insurance of helping you diversify, of helping contradict other price changes in investments you may have and then, providing liquidity for you. So they, historically, have done that very well, that role of insurance and they continue to do so.

Mike Gleason: You talk about metals as a source of liquidity. What do you mean by that?

David Smith: It means that if you need money, if you have some kind of an expense you need to deal with right away, you can sell the gold right now at any gold operation, any salesmanship. Whether it’s a jewelry store or an operation like Money Metals and you can get your money for that to pay that expense.

You can’t do that with property. You can’t do it with real estate, in general and collectibles and things like that. So, it gives you a real good opportunity. I always like to tell people from time to time, when you buy gold and silver, you don’t think of it as buying something like a car or a fishing rod or a camera or something like this. You’re exchanging one form, of which I would argue is inferior money, fiat money that’s not backed by anything… you’re exchanging that for a form of historic sound, honest money. You’re not making a purchase per se. You’re making an acquisition of a greater ability to have a financial element that can do really well for you and offer diversity.

Mike Gleason: Kind of leads me right into my next question. You’ve described why metals are a good alternative to saving dollars in a bank account. Elaborate on that if you would and why an investment in bullion can be considered a type of savings.

David Smith: Well, one of the advantages over having fiat money, that amount of money in the savings account, is that it’s yours. Nobody else has a claim to it. I think even today, most people that have bank accounts in the United States, which is most people, I think they don’t realize that when they put that money into their account, the bank really owns that money. Granted you have the FDIC insurance up to $100,000 per calendar, this sort of thing.

But the reality is if they choose to use some of that money because they’ve gotten in trouble investment wise or for some other reason, they can take that and you can have a hard time getting it back. So the money’s in your name in a sense, but it’s really not yours, where you can get ahold of it. Not to mention, if you try to take out a significant amount, you go and try to take out $1,000, they ask you what you want to do with it, as though it’s any of their business. There shouldn’t be an assumption that you’re going to do drugs or do something illegal. It’s your money and if you want to take it out and give hundred dollar bills out in the street, that should be your business.

Mike Gleason: Yeah. Not to mention if you want $5,000 or $8,000 in cash, good luck. Call a day in advance. Make sure they’ve got that money there when you come in because often banks don’t even have that much of the paper money that they’re dealing in. It’s kind of scary actually when you think about it, in terms of what could happen if we do get some kind of a crisis and you have a run on the bank, for instance.

David Smith: Not only that Mike, but there’s actually a reporting form that banks have to fill out if you try to get out $10,000 or more at one time, or if you take out lesser amounts, such as 2 or $3,000 and then, maybe $4,000 it’s called structuring and their assumption is you’re guilty until proven innocent and that you must be wanting to do something nefarious for it. This whole idea of standing on the head, the idea that you’re innocent until proven guilty, is being turned around and I just don’t like that attitude either.

Mike Gleason: Switching gears here a little bit. One of the interesting things about silver as an investment that is very unique and different than other asset classes right now, like stocks or real estate, is that at present value, silver would need to triple in price just to reach the nominal all-time high of around $50 an ounce that we hit both back in 1980 and again, in 2011.

You would have to think that if it did get to $50 again and we could see it break through there, that could be off to the races, like palladium, for instance. That market keeps going higher and higher, now that we’re in this uncharted territory. But silver still needs to triple just to get back to that all-time, nominal high. Comment on that if you would, and touch on what a tremendous value proposition there is in silver right now, as a result… because you really can’t say the same about other markets and other sectors or investment classes right now.

David Smith: Well, silver is one of the few metals, that has not traded at all-time nominal highs. Granted it hit almost $50 in 2011. But as you’ve mentioned, it’s dropped since then and it hasn’t gone to say, $60 or $70 or $80. Whereas gold, which traded at $850 in 1980, hit $1,923 in 2011.

So, that’s not an inflation adjusted high, but it is a nominal high, as you were mentioning. And I really think what’s going to happen, it’s hard to predict the future, but I think there’s a real good chance of this happening. I think we’re going to see, silver over the next couple of years, move up pretty sharply and at some point it’s going to challenge $50. And when that happens it might have to bang his head against that resistance a few times. But when it finally breaks through, I think it will be a lot like palladium.

If you remember palladium when it was trying to go through $1,000, it played around and it did $1,050 and $950 and dropped down to $800, this type of a thing. Then it went up and it just tick, tick, tick, tick against the top and all of a sudden it broke through and it wasn’t a $100 move. It was just $5 or $10 and then, it just kept going and going and going. In a very semi gradual. It was not a vertical run at all. It was just a solid movement that was always contained on the downside and moved on up.

If you think about it, if you go back and you look at the move between $1,050 and where it is now over $1,500, it almost takes your breath away, how far it’s gone and how quietly it’s done it. And people have watched it all the way and who knows how much farther it’ll go.

But the point is, I think when silver gets above $50 and builds a bit of a base, I think you’ll see $75 or $80 silver very quickly and it’s going to be three digits, in my belief. And I believed this since the beginning, we’ll see three digit silver at some point in the next few years. And one of the things about waiting for prices to go where you thought they were, is by the time you decide to do something about it, it’s already there and the risk is a lot greater. Or it may be inconvenient for you to do it and you don’t do it at all and you get to watch the whole darn thing.

Mike Gleason: Getting back to palladium for second here, David. We’ve talked with you a lot about that metal over the years. Several years ago you were on this very program and telling people that, that was a great investment opportunity. We were still in the triple digits, well below $1,000 at the time and it’s been a fantastic play for the people that followed your advice.

Just comment about where we are right now. I mean, how high can it go? I guess, is the first question. Then also, if you would comment about this potential breakdown in the futures market in palladium, this physical shortage that we’re seeing and how that potentially could be a precursor to what we might see one day in the gold and silver markets.

David Smith: The palladium breakdown, they really do have very small supplies. Most palladium comes from Russia or from South Africa or from Zimbabwe. And the deficit has been building for several years. It’s really pretty interesting because an awful lot of what palladium is used for in catalytic converters, which I believe tends to be a regular (gasoline powered) cars as opposed to diesel engines which platinum is more frequently used for. They can be substituted, but you can’t just change it on a dime.

Rick Rule was talking about this not too long ago and he said it could take a couple of years to retool to get back over, so that the palladium that is now being used could all can be utilized as platinum (instead). So, in terms of where the price could go, it could go up another $500 to $1,000. But the risk is absolutely enormous, at this point, to try to buy it now and personally, I wouldn’t recommend it.

I think platinum because it usually is $200 or $300 above gold and is now well below it. It’s about $850 versus gold at $1,300 and this has persisted for quite a long time. At some point, the bull market in palladium will be over and the platinum market will do catch-up. But I remember when the last time this happened, which is, I think about 10 or 12 years ago… might’ve been a little farther back… but Ford Motor, they panicked, and they bought a lot of palladium. And they ended up selling and a $1.5 billion loss a few months later. So, whether you’re a manufacturer or an investor or whatever, the market is pretty high here and it could go a lot higher. But when it finally turns around, it could be really interesting to watch on the downside.

Mike Gleason: Some of my recent podcast guests have been talking about that very dynamic. I think it was Craig Hemke at TF Metals that pointed out that, back then in the early 2000s, when palladium shot up like it did and Ford Motor Company and the other automotive manufacturers started to hoard the metal, Boris Yeltsin in Russia… of course, Russia controls a lot of that supply and is the main producer of it, like you mentioned… he bailed out the market and supplied a lot of physical palladium, at the time. It seems somewhat unlikely that we’re going to get the same type of cooperation from Mr. Putin. So that’ll be an interesting market to watch.

How about rhodium, David? We talk even less about that market, but that’s another one that has seen some pretty attractive gains. It’s not maybe as white hot as palladium, but it’s still performing quite well. Any quick comments about rhodium?

David Smith: Well, rhodium is a real esoteric market. It’s a very small market, even compared to platinum and palladium. Especially palladium, which are not big markets. It’s my understanding that most of the pricing takes place by appointment. I do know that, for example, you can buy a 1-oz rhodium bullion bars.

I think there’s about a three or $400 deficit when you sell. So that’s a pretty big spread in both directions. But it’s used for some of the same things platinum and palladium are. To me, it’s fun to watch. But, in terms of getting deeply involved in it, not so much. I’d rather do silver and gold.

By the way, there’s so many things that are pointing towards this buildup of a very, very strong gold and silver market over the next several years. One of the things I read just a couple of days ago is that silver purchases in India, not gold, but silver have reached a four year high. That’s been almost under the radar screen because people focus on how much gold India buys, which is quite a lot. But silver is absolutely maintaining a very, very strong upward trend in purchases in India. And last year, 30% of the world’s production of silver was purchased by the third quarter by India alone. So, we’re going to wake up one of these days and we’re going to find out that there’s a whole lot more buying pressure across the board for both of these metals than we thought was the case.

Mike Gleason: I wanted to ask you about your expectations about how well the metals will work as an investment or its ability to generate returns for investors over time. The metals’ role as insurance and is a better form of money or perhaps more important reasons to own them. We’ve already discussed those, but let’s face it, most people buying gold and silver are anxious to see profits on their investment. That is what they have missed in recent years and it is frustrating.

But there’s little reason to think that the next several years will be a repeat of the past. You and I were speaking offline about the potential set up right now, in the metals markets. That we’re looking at potentially some good gains over the next few years and maybe instead of, maybe what was a little bit of a false breakout in 2016 when we had a nice rally. It could be a little bit different this time around. Give us your thoughts there.

David Smith: I really believe so. I’m deeply involved in the mining stocks as an analyst for The Morgan Report with David Morgan, I do a lot of work on my own, a lot of investment. I buy a lot of stocks that I don’t write about… they’re not on our formal allocation table…. something that I happened to get interested in. I hold a couple of stocks, for example, now that they’re mining in Japan or exploring in Japan and they’ve done well lately.

But I think what we’re facing here, and I get it when people say, “It’s been so depressing the last few years. I bought the metals and they either stayed flat or they declined.” And I understand why people have given up, some who’ve been at it for 30 years. But the thing is, usually before the biggest opportunities is when the day appears to be darkest.

I can tell you honestly, and I’ve told this to several of my friends, I’ve been involved in the metal since the mid-70s. In the 1970s, I did mostly physical and futures in the metals. The period between 1980 and about 2002 was 22 years of pretty much an unremitting, bear market in gold and silver and especially silver. It went from $50 to a little under $5.

I can tell you honestly, that the time between 2011 and say last fall, was more difficult for me emotionally, which is a period of about seven years or so, seven a half years… it was more difficult than the 22 years I spent waiting for another silver bull market. So, I understand that what’s going on. But I’m telling you, I look at these charts and nothing’s ever a guarantee, but I think the probabilities favor a market over the next three to five years, maybe longer, but certainly at least about three years, that I think will absolutely shock people when we end up seeing where things are in just a few years. There are so many things that indicate that the risk-reward, in addition to the probabilities of a very strong, sustained secular move, is right ahead of us.

Mike Gleason: Yeah, we talked about it before, about how this is not a time to lose your nerve. The reason why you bought gold and silver in the first place, that being just a ridiculous amount of debt and credit all over the economy, those reasons are still very much there today, if not even more out sized and more out of control. Golden and silver didn’t just become a bad alternative to paper money over the last few months or few years and people need to keep that in mind. You want to continue to hold it as a hedge against what may be coming. And I think we both agree that it’s not just a matter of if, but when the wheels finally do come off.

Well David, thanks so much for your time today and for your enlightening comments as always. We always enjoy catching up with you and hope we can do it before long. I hope you enjoy your weekend and we’ll talk soon. Thanks very much.

David Smith: Very good Mike. You have a good weekend.

Mike Gleason: Well that will do it for this week, thanks again to David Smith, Senior Analyst at The Morgan Report and a regular columnist for MoneyMetals.com, and the co-author, along with David Morgan of the book Second Chance: How to Make and Keep Big Money During the Coming Gold and Silver Shock Wave, which is available at MoneyMetals.com and Amazon. Pick up a copy today.