Building your Position during the Precious Metals’ Grind


Building your Position during the Precious Metals’ Grind
by David Smith

Jim Goddard: My guest is David Smith, Senior Analyst for The Morgan Report which you can find online at Welcome to the show David.
David Smith: Good to be back, Jim.
Jim Goddard: Metals right now are not really going up or down much. How can we deal with that psychologically and investment-wise?
David Smith: I call it the “precious metals’ grind”. It has been going on for several months. If you think of what happens when you’re grinding flour, it gets finer and finer. This grinds down people’s resistance, wears down the bulls, and enlivens the bears.
But if you believe that the support we’ve seen building over the last year is going to hold below where we are now, then you relax and just kind of keep an eye on things. If you haven’t added everything you want, you buy into weakness, something we’ve talked about many, many times on this show. You keep a little bit back in case the price to punch down through that support. If you believe that it’s a short term drop, then you do your buy at stupid cheap prices.
Jim Goddard: I noticed the decliners on the equity markets today. A number of them are gold mining companies. Not down a lot but all down consistently just a little bit. Is this a good time to perhaps take a look at those stocks?
David Smith: It’s interesting to see how the companies decline in price in relationship with the gold price. Lately what has been happening when gold has dropped, but the companies have dropped by a smaller amount relative to the physical. In other words, they kept their relative strength and that seems to be the trend going on now.
When you only concentrate on daily or even the weekly prices, you get a picture that may or may not be congruent with the longer term. So I looked at silver, which looks rather weak on the daily. The weekly doesn’t look too good either, but you keep going out and finally go to the monthly, the yearly and the five-year. What was interesting was when I got to the 25-year, I could see how this support between $26 and just above $18 that we’ve had – during the last three years of this decline in the cyclical bear market-how that’s still been holding.
In fact we’re a dollar and a half above those lows right now. So it’s still a sideways pattern. It’s not predictable right now, but the longer it takes to chew down into that support and the less successful the effort becomes, the more likely it is that we’ve seen the cyclical (and secular) lows and that you can have a very robust bounce out of that area.
Jim, next I studied the 25-year chart even more closely, and looked at what happened back in 2008 where silver had gone up to about $22. It had broken above the $10 mark in 2006 two years before, and had risen a little bit more than a double. But when we had the collapse in 2008, it gave up all those gains and pushed down to $9. A chartist looking at the monthly or even the two-year chart would say oh, the bull market is over, it’s broken through all the support. It took two years to rise, and now it has given it all back, plus more!
But then what happened afterward if you’re looking at the 25-year chart, is that nine was essentially the low. Thereafter, from 2000 – early 2009 up to 2011, a period of about 2.5 years – silver rose to $50!
So silver went up 500 percent. That could not have been predicted by looking at the short term chart. But it would have been given an indication if you looked at the longer chart when silver broke above the $22 high. Again, that was a technical indication that it was going to move a lot higher.
So looking at a long term chart can really smooth things out. It can never predict for sure where things are going, but it can give a solid indication as to where the price has been, and what might happen again under similar circumstances.
Jim: David, have some people taken money that perhaps they would have invested in gold and silver, and have put it into palladium, which has done very well this year?
David: It’s difficult to quantify that but I’m sure some of that has been taking place, and to a good effect. There are a couple of PGM ETFs which have been holding up well. There aren’t very many mining stocks you can play the PGM story, except for a very few exploration stocks with long development lead times. And there are a couple of producers. We’ve talked before about the primary North American producer, which has done well.
If you look at today with gold and silver soft, platinum and palladium have given back some gains too. But they’re still holding that relative strength. There are so many reasons to be bullish platinum and palladium that it seems to me, when you get a chance to buy a bit more stock, it makes a lot of sense in my book.
Jim: A lot of average investors had no idea about palladium. Even though it has made some major gains, they’re still surprised when I mention it to them that this is still a hot metal, because the much less expensive palladium is interchangeable with platinum in a number of catalytic converter uses.
David: Well, there are certain types of engines where palladium offers a better fit. They are interchangeable to some extent. I’ve read something last week which I haven’t seen further information on but that was pretty exciting to me. There was talk about a new type of catalytic converter, which by using more platinum – up to one ounce or even more per engine – which is a lot of platinum, will take all of the carbon monoxide away, leaving virtually no toxic emission from the operation of the engine and turning it into water droplets.
I’m sure they will get that down below one ounce over time. That’s pretty darn interesting. It would open up a new avenue for increased platinum usage. When you look at some of the toxic levels – just yesterday I read that at certain times of the year, London actually has more air pollution than Beijing, which as you know is one of the most polluted cities on earth.
All the big cities, to a greater or lesser extent, are facing the need to clean up their act so to speak. Clean up the air, because so many people are affected by the pollution, which causes many premature deaths.
I think PGMs are going to be used as an important facet of doing that, almost regardless of where their price goes because of this – you do a cost-benefit analysis and find oh, platinum is up 50 percent and palladium doubles. The benefit of doing whatever it takes in terms of their use to clean up the engines that are being used in these large cities is still worth it.
Jim: Where is platinum trading today?
David: We’re still in that same broad range we saw when you and I were talking about the breakout that occurred about six weeks ago -so still trading in a box formation.
Jim: I’m not surprised they said the air pollution in London can be worse than Beijing. The last time I came back from London – I hate to be gross folks, but I was still coughing up black chunks two weeks later.
The sky was the same color as the Thames, which you know is a nice chocolate brown color. The air quality there was not the best. Ironically some people are moving from Beijing to London because they think the air in London is better.
David: It looks like platinum and palladium are going to come in to help save the day. Good to be talking with you today on this Jim. We will see where things lead. Very interesting, methinks.
Jim: Thanks a lot David. My guest has been David Smith, Senior Analyst for The Morgan Report which you can find online at You’re listening to Radio. You can find us on Twitter, @TalkDigitalNet. Comments can be sent to [email protected] I’m Jim Goddard.
[Comments made on Radio are an expression of opinion only and should not be construed in any matter whatsoever as recommendations to buy or sell any financial instrument at any time. Available online at Radio is a production of Howe Street Media, Incorporated.

David Morgan is a precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems, and the key reasons for investing in precious metals.
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. If there is only one thing to teach you about this silver bull market it is this… 90% of the move comes in the last 10% of the time! Where will you be when this happens?


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