If you look at history, money’s been, whenever we say this type of thing it’s like salt or  cow hides. That’s all true but in thousands of years, it’s always boiled down to gold and silver. Those are people’s choices. Then there’s the legal aspect of money, which is what governments do or the banking cartel. I study all that. I started to become really interested in precious metals, because precious metals have always been the soundest way to perform economically for the greater good of everyone.When we go off of that greater good for everyone on to a, let’s say, a slanted system that favors the rich in the banks, then there’s usually a big disparity in income.

Then there’s usually some kind of a problem that manifests and we go into a new monetary system that goes back to sound money *inaudible*. Then it morphs back into an unbalanced situation. It goes kind of back and forth. That’s a very broad brushstroke but that’s the essence of it. When I learned that, I started delving more and more into the precious metals as an investment class and over time spent most of my research time, what I’ve written in book form, lectures, everything else revolved not just in the precious metals, but the resource sector at large.

At this present time and through most of the last several decades, I’ve looked primarily at the precious metals. They could call us gold bugs and call us silver bugs, whatever they’d like. But the truth of the matter is sound money is sound for reason, honest money is for honest people. When we have this problem that we’re now witnessing when we try to print our ways wealthy and enable the upper echelon to prosper at the expense of everyone else. It has consequences. There’s a price to pay.

Robert Leonard  3:37

I’d say you’ve clearly had a pretty successful career as an analyst and as a consultant for some of the most advanced money managers in the world. The audience of this show isn’t quite as advanced as that, generally the listeners are newer investors just getting started.

Let’s take a second and talk about and make it easy and understandable to the audience and all the millennials listening. I want to mention that I also fall into this category. I haven’t spent a lot of time studying commodities, especially not silver so I’m going to be learning throughout this conversation as well.

Let’s start off with a discussion about what a commodity is. What exactly are commodities?

David Morgan  4:11

That’s a great place to start.

Commodities differ from stocks in the fact that they’re needed goods. The commodities market is divided into several sections. There’s what’s known as the agricultural commodities, a slang term is the AGS.

AGS revolves around, I won’t name them all, but give you the idea of like the corn market, the wheat market, what we call the bean market, which is soy beans. Then there are subsets of that like soybean meal and soybean oil.

Then you got the meats which are hogs, pork bellies, which is bacon, cattle and live cattle. You’ve got the food stuff of any type you could think of in let’s say, the most basic form. For example, wheat instead of bread.

Then you have the precious metals. There’s a class. It’s gold, silver, platinum, palladium. Then you have the financials, which is all this stuff on paper with treasury bills, T-bonds, T-notes, interest rates and all kinds of things. It just goes on and on.

Then you have what they call the soft. The softs are like cotton, which obviously cotton is a huge market for clothing. You have others like coffee, cocoa and sugar. Basically anything you need and anything you consume usually falls in the commodity market.

The thing that most commodities industries like to point out is that commodities never go to zero. A company can fail. If you have a stock certificate of XYZ company, that company could literally go bankrupt and your stock certificate isn’t worth the paper it’s printed off. Whereas sugar may go down and hit a 30 year low in price, but it’s not going to go to zero.

The problem with the commodity market isn’t commodities. It’s the way it is structured for investment. It’s highly, highly leveraged.

This is a place where about 99% of the amateurs lose their money than the 1% of professionals who win. It’s not an area to really invest in, per se. It’s like being a very good football player and then going up against the NFL. You’d be a lot better off being a very good football player and playing at the high school level.

So I teach equities primarily but there are ways to invest in commodities through the equity markets that are a lot less risk and almost as rewarding or sometimes more.

Robert Leonard  6:33

Let’s talk about that a bit. When it comes to these commodities, how does an individual investor like those listening to the show and myself, how do we actually buy and invest in them? Is the best way through an ETF?

David Morgan  6:44

These days, I think probably the best is an ETF. Being an honest money advocate, I mean, you can actually buy physical gold and silver coins, which I do advocate but that’s just for a portion of your savings. If you’re interested in the AGS, for example, you’d be far better off doing an ETF.

The thing about an ETF that most people don’t know, is what they were designed to do. The way that the financial markets are structured is that a section seven license, a stock broker, is not allowed to sell a commodity. He can only sell a stock. To get around that rule, they structured these exchange traded funds that put basically commodities in them, but they sell you a stock certificate for that commodity. There’s an ETF for silver. There are several, actually. The best known and largest is the SLV.

As a way for these stockbrokers basically to participate in the commodities market, so it’s something that’s relatively new. I remember when the gold ETF started and it was my goodness a gold ETF. That’s amazing. Will there be a silver ETF?

I mean, it sounds ridiculous now looking back. It’s been 20 something years, but I remember the time people asking me, “Do you think there’ll be a silver ETF?” “Oh, yes, there will be a silver ETF.”

As I mentioned, there are several now, but ETFs have their place. An ETF is easier to execute. You don’t have to have commodities… Ticker commodities account, you’ve got to sign a bunch of forms so you understand the risk. Nobody reads the forms so highly leveraged. I am repeating myself because it bears repeating: if you really want to take a shot in the dark and end up losing your money, get a futures account. Get a commodities account.

You’re much better off to start learning how to walk before you enter the marathon, right? So you’re much better off doing the equity markets and ETF is a good way to do it.

Robert Leonard  8:39

For those who don’t know, you’ve mentioned it a couple times, what is leverage?

David Morgan  8:43

Leverage is where you get to put up a part of the money, or the total purchase. The best way to explain it probably to the millennials is a mortgage is a leveraged investment.

So if you buy a house that’s $200,000, and you put down $20,000, you put down 10% on it, and then you borrow the money, and you pay off that mortgage over 15, 20 or 30 years. That’s leverage. If the $200,000 house goes up and doubles in five years to $400,000, what you say to yourself is why put up $20,000 and that$ 20,000 if I sold this house would now bring me back $400,000 less than the $20,000 I put up so I’ve got $180,000 gain on a $20,000 investment.

That is like a nine bagger. I mean nine times on my actual money. The rest of the money that was used was borrowed.

It’s then the same thing in the futures market. You could control 5000 ounces of silver for the price of maybe 500 ounces as an example. But once you put up that money and you say silver is going up, if it goes down, now every dollar that got multiplied by nine times gets multiplied by nine times on the other side.

So now your broker will call you up and say, “Hey, you owe us $1 times nine.” You can make up numbers, but the idea is correct. You put up $2500, the market goes against you, you might get a margin call for $5000.

The market then gets you three days in a row, now it’s $5000. You got three days to wire some money or you’re out. We’ll sell you out. So you can get sold out and still owe the brokerage house money. I mean, it’s a very tricky game, not for amateurs. Not a place to be for most people.

Robert Leonard  10:35

Leverage can be a great tool, if it’s used correctly, but it can… What people forget is that it cuts both ways, right? It can be great when things are going well but when it’s going bad, just like David just explained, it can really go against you. That’s what you often see in the options market.

I’m going to ask David here in a second what is the futures market but a lot of people listening are probably familiar with options. We’ve had Kirk Duplessis from Option Alpha here on the show. We talked about it and it’s very popular with millennials,  options trading. It’s very similar to that.

David, what exactly are futures?

David Morgan  11:01

Futures are just what it says, it’s a price of a commodity in the future. What is the price of gold in December 2020 versus what is it in November 2020? The answer is on all commodities, it’s usually the interest rate spread in the financial market.

If the interest rate is 1% per year, then you’ll see that divided by 12 is the futures price. Not always, but that’s generally what happens. The idea being that there’s the carrying cost of money so if you’re carrying the cost of cattle, carrying across the gold, carrying the cost of soybean meal, you’re going to pay more for it in the future than you are right now. That’s called contango, I don’t know how involved you want me to be, it’s a discussion.

There’s a difference between what you would pay now and what you pay in the future. If you’ve got a year to December 2021 rather than December 2020, or a year out, a year in a month, and then that interest rate is going to be basically what the interest rate spread is in the financial markets. You’re going to look it up.

It’s funny people that don’t understand futures. I remember, a professor is actually teaching a different topic. He expect and *inaudible* to do in six months, it’s the financial spread of *inaudible* didn’t laugh at him. I didn’t even really say much. It’s just that he didn’t understand why the price in the future is always higher than the price for the near months, or the spot month is what it is called.

Spot month is a month to end. Right now we’re in November so this is the spot month. Spot means you walk up and you say, “I want to buy lumber right now on the spot.” And what is the price and that’s the price, you’re going to pay that day to whoever has that ability to give you the lumber that you want or any other commodity.

Robert Leonard  12:56

You mentioned that you don’t necessarily think ETFs are the best way to invest in a commodity. So what is?

David Morgan  13:03

Well, I think ETFs are the best way. Futures is not the best way. Options, they’re not the best way. So for a commodity, probably the ETF is the best way.

As far as the metals are concerned, I would say the best way is to buy it physically, because then once it’s purchased, you don’t have any costs. Whereas if you have an ETF, you got a management fee, you got some slippage, and you got some fees. It just kind of compounds on each other.

Some are great and some aren’t but still, there’s an ongoing taking of your cash, let’s say that you’re going to have to pay for it.

Whereas on a physical investment in gold or silver, you might have a storage fee, depending on how much you have but basically, once it’s paid for, it’s a done deal. So there’s that.

However, I’d say again, the other part to do on commodities, which isn’t a direct investment is to look for underlying equities that feature that.

For example, if you go to ADM, Archer Daniels Midland, then have a despot and basically all the foodstuffs. It’s equity. It’s a solid company. Is it going to react just like the soybean market? Is it going to react with the cattle market? No, but it is going to react to the overall trends.

That’s what I think, personally, is better than an ETF. It’s just I’m trying to ask me… Sorry, Robert, I’m trying to answer your question as succinctly as I can, because that’s not a direct commodity investment but there’s a compromise.

Let’s say you wanted to buy copper instead of buying futures. You could buy a copper mine like Kennecott. There’s some others that you could buy that would be reacting to the copper price pretty proportionately to what the commodity itself would do.

Robert Leonard  14:42

Yeah, when you’re talking about the underlying companies that… Or you can buy companies that invest in the underlying commodity or precious metal I thought of MicroStrategy, the company that’s been investing heavily in Bitcoin lately.

A lot of people don’t want to necessarily invest in the cryptocurrency directly. They’re investing in MicroStrategy so they’re getting that indirect exposure to Bitcoin that way. I’m assuming it acts the same way with commodities.

David Morgan  15:06

Perfectly understood. Yes that is it.

Robert Leonard  15:09

So when we do invest in a commodity through an ETF, what are some of the underlying risks that exist that might not exist if we buy a precious metal physically?

David Morgan  15:18

Well, there’s all kinds, but most of them are at the tail end of the curve, meaning the risk is there, but it’s very slight, but it’s possible. One would be a shut down in the stock market. That’s ridiculous but what happened in 9-11 could be a cyber attack, which is a commodity, the cyber attacks.

Cyber attacks are going on all the time. 24/7, all the time. They are mitigated most of the time, and most people don’t know about them, because you’ll hear it on the nightly news. However, that doesn’t mitigate the fact that it’s happening.

ETFs do have more costs, I think. You can make an argument on either side, so won’t go on outline. There’s a management risk in ETFs.

Sometimes, one of the parts about ETFs that I don’t like depends on which one. If I’m going to be specific, they’re boutiques, they’re very small so your spread to get in and out is very large. Now, that’s not necessarily true in a big commodity like copper, but let’s say for palladium. It might be a buy-sell spread that’s astronomically big to get in and out and so that would be a detriment to that particular ETF.

There isn’t a perfect investment out there. There’s risk in everything but I would say one of the better ways I think, personally, and I’ve studied this for a long time… I think you get a commodity that’s represented by a company, that you have a cycle at the top tier, like again, Kennecott copper.

I think you’re looking at something as long as their finances are good and strong, they got a good balance sheet. They have money in the Treasury. Once you’ve made that determination, now you’re making a bet on copper pretty much with less slippage than they probably do with an ETF on it.

Robert Leonard  16:59

Here at The Investor’s Podcast, we’re big into value investing and understanding the underlying value of what we’re buying. How does an investor with this type of strategy, who typically follows that type of strategy? How do they approach the valuation of commodities? How do you know when it’s the right time to buy?

David Morgan  17:15

Yeah, that’s a very good question. It hasn’t really ever been answered that well. There’s a book in my library, not one behind me, but the big one in my basement. The book is called “You Can’t Lose Trading Commodities.”

Now, I just told you that 99% of the people that try to trick commodities lose. So there’s lots of losers in commodities.

However, this book was built on a premise, I’ve read it a couple times. So the premise of the book is that if it costs, I’ll do silver or what I’m most familiar with, but you can do with hogs, cotton or any commodity.

If you can buy that commodity, for less than the cost of production, and start to average down you have to have a plan, you have to have it planned out extremely well.

However, if it costs $15 an ounce to get silver out of the ground, and silver is trading at $12, you can’t lose trading commodities if, according to this book and there’s a lot of good information, you start buying silver $12. Now, no silver mine in the world can produce silver. I should say there’s no. There’s very few silver mines that produce at $12.

The average cost of production is $15. You are now in the silver business and you’re doing a better job of mining silver than most companies that have put up all kinds of millions of dollars to get a mine functioning, to get the mill and to get the transportation, everything goes into the mining business.

You now put on a hat saying I’m a silver miner, because you just wrote the commodities market and bought silver, because that’s what this silver mine does. It sells mined silver in the marketplace. It cost them $15 to do it. Now it costs you $12. You’re doing a great job as a silver miner.

The plan then is you buy it. You can only buy a commodity when it’s under the cost production. You start there and then you plan for it to go down by 20%. Then you buy more. So that goes from 20% to $2.40 cents, so I’ll round it to two so that it’s 10, you’re allowed to buy it again. You actually buy more so you buy one contract at 12. You buy two contracts at 10. Then you’re only allowed to buy more if it goes down another 20%. That 20% of 10 would be two, so it’s 8. Silver got down to 8 and you would buy like four contracts. You find this all out ahead of time. You got to have the cash to do this.

Though now you’re one of the best silver miners out there. I mean, one of the best silver mines in the world can only produce silver 7.50 so you’re competing with them now and all these others are going to be going out of business, if silver stays at that price for very long.

Normally when a commodity and it’s not just silver again, it could be soybeans, oats or corn. I’m trying to name other commodities for clarification. Then you’re basically making a business where there are thousands of people working for them.

Think about how many people are involved in the cattle industry. I mean, just think about all the fast food restaurants that sell hamburgers and think of how much of a chain there is around beef, for example.

Now you are all of a sudden a cattle rancher and you never leave your office. You’ve got a cattle ranch product, beef at a price that most cattle ranchers can produce it at. So that’s the idea. “You Can’t Lose Trading Commodities” is a fascinating book. I don’t know, I doubt it’s still published. I’m sure you can probably find a used copy probably for a couple hundred bucks. I’m guessing it might be cheap.

I liked the idea about it. In fact, it actually influenced my approach to the markets early on, because I thought it makes a lot of common sense. How long are you going to be buying a car that cost $20,000 to make and you can buy it for $16,000? I mean, you start buying that all the time and market it up to the going rate.

Eventually the client will come back to the going rate. How long do you have to wait for the answers? Usually, usually not too long.

So these opportunities do come up. They don’t come up often but that was the premise of the book. I like that question. I haven’t had to think that deep in a while.

Robert Leonard  21:16

Great. I’ll be sure to put a link to that book in the show notes below. So anybody listening that wants to go check that out, you can click the link below and purchase that book there.

David, you speak most frequently about silver. Why is that? Why is silver your preferred commodity or just precious metal?

David Morgan  21:35

Well, partly it is philosophical. When I started looking into the metals pretty hard, as I talked earlier, I was more focused on the gold market. However, then in my youth, the Hunt Brothers got involved in silver and saw silver outperformed gold substantially in December of 1979.

I was in futures then. I was doing futures and bought silver at about 300. I watched it go to 800 from December to January. I watched it like triple in a couple of months. I thought that was genius. I didn’t consider myself all that lucky. I consider myself smart.

Regardless of that, silver in a year’s time went from $6 to $50. I then thought, “Wow, this silver does so much better than gold.” So I started looking at silver.

Then I got into the history of silver. Silver is a more fascinating metal to me than gold because silver has so many industrial uses that weren’t really known about through most of monetary history.

For most of the time, when both silver and gold serve the exact same purpose and only one purpose, which is money. Then the gold and silver ratio is around 16 to 1 or lower. It’s only when silver was demonetised and the bankers basically said silver is not money. It’s something else back in 1873, specifically, that we saw the silver and gold ratio go above 100 a few times.

If silver reestablishes its role as money which it’s actually doing especially with the blockchain and cryptocurrencies, you could see the *inaudible* the silver ratio comes back down to what I call the monetary ratio, which is 16 to 1. Right now, we are about 80 to 1 so I fully expect that silver will outperform gold over the next few years.

Anyway, it’s a fascinating topic. It does everything in a high tech society. You can’t live without it. It’s totally indispensable. We cannot have this Zoom call without silver. We cannot have a flat screen TV without silver, a cell phone, a laptop or a membrane switch and these touch switches that you have on your phone when you touch. You have to have silver for that. It goes on and on.

It’s usually micrograms that we’re talking about. Think of how many cell phones are out there. Billions. So it does add up.

I looked at the 5g network and I did a rough envelope calculation. If everyone switched to a 5g phone, that alone is like 88 million ounces of silver. There’s again a very small amount in every phone, but we’re talking how many billions phones there are.

Robert Leonard  24:00

Why do you think most investors, especially millennials, my generation, avoid precious metals as an asset class?

David Morgan  24:07

Undereducation is my view. Of course, I’m biased. You talked about value investing. I mean, if you go back to Warren Buffett, a well known investor. Silver was at around $5 in 1999. Warren Buffett bought basically 20% of the above ground silver supply, and it came off the COMEX, off the commodities exchange and it was at $5 as I said, or slightly below that.

If you did an inflation-adjusted price for silver at that time, it was the lowest price on an inflation-adjusted basis it’s ever been in all of history.

Buffett is known as value investors. He bought silver as a value investor. He bought at a value that was unheard of. It’s never been that low in recorded history. He bought again 20% of the above ground supply. *inaudible* is gold buddy. He loves silver, he’s done in it a couple times.

When you take that into account, a billionaire bought it, but the millionaires were ignoring it. Then you looked at the annual statement from Berkshire Hathaway, which I studied diligently. It found out that silver didn’t even show up in a report. Wait a minute, you just bought 20% of the above ground silver supply. This caused a real spike in the silver price temporarily.

In your annual report, you don’t even mention it. Because by law, if you own something, that could be another stock, another company or fleet of cars, or whatever it is, if less than 2% of the overall holdings of that company, you basically have to acknowledge it. You don’t even have to write down what it was.

So in the miscellaneous category was the exact amount of silver he owned in dollar amounts. It was called miscellaneous. That was 20% of the world’s silver supply.

That shows you how big Berkshire Hathaway is at that time. This is back in about the early 1990s. How big Berkshire Hathaway was then… We’ve got three decades since then, and they only represented less than 2% of Berkshire Hathaway.

Now Berkshire Hathaway is a big company. I’m not saying it’s some startup, but I’m also trying to equate it to the overall stock market. Look at Tesla, look at Amazon or look at IBM or some of these other companies and get a perspective to how small the silver market is.

As far as value goes, it’s the most undervalued investment, bar none, and happens to be a commodity. It happens to be a commodity that will rot and it won’t be *inaudible*. It’s so small that you can store it fairly easily. It’s been something that’s been of monetary significance to generations for millennia, from 5000 years, roughly.

If the millennials ever woke up to the silver story, I think that there could be a huge influx of new monetary demand in that precious metal. Also, there’s, again, this is my take, mostly, but you’d have to make up your own mind. There is a philosophical component as well, as far as when societies did best when they were the most fair, when let’s say the ability for everybody to have equal opportunity existed.

There’s a direct correlation, Robert. This is pretty provable between the soundness of the monetary system and the moral structure of society. The more unsound the principles are about money, the more moral decay there is in the society.

Someone we have had a strict by metallic standard, where everybody’s treated equally on a monetary basis, the moral structure of the society is very high, much more honesty, much less chiseling off of each other. People are people. It’s going to happen no matter how sound the monetary system is but as that *inaudible* degrades, you see more and more of a decay and a moral decline.

Robert Leonard  28:03

You mentioned if millennials ever woke up to the undervaluation in Bitcoin, then we might see a significant change in the price of silver. Do you think that’s ever going to happen with Bitcoin and cryptocurrencies becoming as popular as they are as other alternative assets? Equity crowdfunding, just high flying tech stocks, do you think precious metals and specifically silver is ever really going to get the attention of millennials and even younger generations?

David Morgan  28:25

I don’t know. I wouldn’t say I doubt it but I will say it’s possible. The reason I say that is, I’m an ambassador for a project called LODE. The URL is AG, which is the atomic symbol for silver: AG.LODE.one. It’s the world’s first cryptographics and silver-backed monetary system.

As these cryptocurrencies become more and more popular, especially millennials, some of them…

Let me say, I certainly don’t want to offend anybody, but the more that I’m grounded into the monetary basis of is it real or is it not?

There are two basic theories of money. It’s a sound thing of value, cowhide, silver or salt, or it’s illegal *inaudible*. I

 tell you, this is money because I say so. I have the authority to command you to have to use it for all your debts, public and private. In fact, I command you if you’d only pay me the tax only by using that, I have control over you. So there’s the legal aspect. Then there’s the species aspect. Species is a fancy word for commodity money.

I think as your generation or the millennials, I have two millennial daughters, by the way, so I have some, some acquaintance with them. We do speak quite often, actually. But the point is, there would be, I think a gap that could be filled by understanding that this particular crypto actually is backed by a commodity that’s valuable.

Let’s say silver does what it did in 2011. It goes from the $9 level to the $50 level in a year and a half. Then it goes from, let’s say the $25 level now to the $250 level three years from now.

Well, if you have a crypto and that’s backed by silver, that may start attracting people. Any mark that starts to move rapidly attracts people, but if it’s got that double edge to it, where it’s not only on your phone. However, if you want to, you can not only spend it and all of a sudden that $16 a gallon gas is really only costing you $1 because you bought silver at the right time or invested in cryptocurrency so you can spend it directly.

Also if you wanted to save it, you could also use your phone and say, “Send it to me, I need my 25 ounces, I want 25 of my 50 ounces sent to my address.” That can happen as well.

I think it is. To me, it’s almost imperative that silver get reinstituted as a monetary metal through the blockchain. I don’t see it appealing to the millennials without that. I think to people like me, the gray haired people that go out and go to a coin dealer and buy it at home, those days are gone.

I think unless there’s a utility value to it, where you can go and say, “Look what I just did, guys, I just bought this whole round of drinks. And you know what’s so funny? The bill came out to 2000 bucks. But you know, what? Isn’t that crazy? David Morgan and I bought silver. It was 20 bucks. Now it’s 200.” That type of thing.

Robert Leonard  31:27

Yeah, I agree. I don’t think that silver is going to gain any popularity with millennials and Gen Z unless it does something with blockchain, like you were just talking about. I think that’s the only way you’re going to see any sort of meaningful or material size of populations of millennials get interested in that topic.

You mentioned that silver is very undervalued. What’s going to make the market realize that undervaluation? What’s going to be the catalyst?

David Morgan  31:50

That’s the best question. The answer is I really don’t know. There’s all these quaint sayings like the cure for low prices is low prices. Yes, you could say all this stuff.

I think one of the things that’s interesting is when you go and you study what I do, and you look at what the elitists are doing… There was a conference in Davos, which some of your audience are probably familiar with.

In that audience, there was a gentleman named Scott Minerd, the Chief Financial Officer at Guggenheim. He was being interviewed by the Bloomberg financial guys. They said, “Scott, what’s your number one goal for 2020?” He said, “Silver.”

These guys just rocked back in their chair and couldn’t believe that word came out of his mouth. They said, “Wow, well, why not gold?”

So gold is actually pretty close to its all-time high but silver is off 60%. Again, value investor. So interesting, Robert, is this is the first year in a very, very long time, where investment demand for silver has exceeded industrial demand.

Industrial demand for silver is somewhere between 50 and 60% of the whole market. More than half of the market is just for industry. The rest of it is made up for silverware, jewelry and investment or monetary demand, which usually runs around 10% of the market.

This year, more than half of the silver purchased was purchased by primarily big guys, or let me say that a different way, big money through the ETFs. It was about 50%  of the above ground available silver on an annual basis.

That means we’re definitely in a structural deficit this year, because the amount of silver for industry is 50%. The amount in investment demand is 50% and 25% for jewelry and silverware. That didn’t go away, there’s still jewelry demand and silverware demand.

What’s going to happen is the idea that it starts to move. Momentum investing, you know, when Robinhood sees a certain company start to go, everybody jumps on it, especially now with all the algorithms.

Almost all the algorithms are based on momentum. Something’s moving, get on board, something quits moving, get off. There’s really nothing wrong with that. You can be a value investor and a momentum investor. There’s lots of ways to deal with the market.

In fact, there are so many strategies. That’s why so many people get confused and don’t make any money. They don’t really have a plan. I mean, there’s a plan. There’s a way to play certain teams, right? I don’t know what your sports are, if you can play them.

Certain teams you’re up against, their weak spot is their outfield. We’re going to hit over second base and third base every time that we can and our big hitters are going to try to hit it way out there. That’s a strategy for that particular thing.

Same thing in investing in commodities or ETFs, options or certain stocks, big company versus small company, micro cap, foreign stocks. There are so many things and you have to have a strategy basically for all of them.

It doesn’t have to be very complicated. I keep things very simple but if you just jump into the same strategy every time and you know you go up to the next baseball team and they got the best outfielders in the whole league and they try to hit all these high flies, you end up with zero on the scoreboard. So that’s a bit of an analogy.

Robert Leonard  35:10

Unfortunately, this year I am a Boston sports fan. We had the Red Sox and Patriots struggle a little bit. Celtics had a good run, unfortunately, fell just a little bit short, but a big sports fan here. So totally understand the analogy and appreciate it.

I’m looking at the stock chart for SLV. For pretty much end of 2014 until March of 2020, silver really didn’t do much. It was more or less flat. If you zoom out and you look at it from a high level, it was more or less flat and then in March when Coronavirus hit, we saw it tank. It almost cut in half, but then as Coronavirus has gone on, it’s up significantly. It’s almost tripled, it’s up about 100% from that low. That’s the highest it’s been since early 2013. So in seven years or so. What’s causing the spike in silver? Are we seeing a flight to what you call safe money during uneasy times?

David Morgan  36:00

It is monetary demand primarily. Again, if you go back to this Scott Minerd situation, somebody out there, it’s probably him and others are buying silver because they know the best thing on the board just means that you’re looking at all aspects of investment possibilities. Then again, that was at a Bloomberg finance question.

Basically, it said that everything that’s out there is investing, what’s your favorite commodity and he said silver. So now to see here at Davos shocked me. Really someone had the wherewithal to say that… He’s very bright, in fact, *inaudible*, I hope he’s not offended if you ever hear this.

It was like me talking and not that I’m anybody but he was very articulate about how the financial system is really running itself into the ground, basically by what they’ve done in the real estate market about the subprime mortgages and all this other stuff that’s gone on on these very…

Let’s call them smart people that have done this financialization of the system, based on a lot of higher math that really doesn’t work and not in the long run.

So it is monetary demand. Again, melding that monetary demand with blockchain for your generation I think is the only way out, as far as getting silver to catch the public’s attention.

I mean, if silver didn’t have the ability to melt the blockchain that we’ve just discussed, and it was only my generation, maybe one below me that was interested in the silver market, it probably did what it did in 1980, where it went up on a spike.

I’m famous for making that statement that silver will wear you out if you are scared. So it’ll wear you out in seven years. You outline… Who cares? It’s going sideways. I should be in Amazon, I should be in Tesla…

I get it. Certainly I’ve always advocated and don’t put all your money into precious metals, because you want to be able to invest in Tesla or momentum stock. It’s a balanced portfolio but to have too balance, you actually need a precious metals component. It doesn’t have to be that large.

When silver really starts to move, higher prices beget higher prices, since it’s such a small market, you can see it really *inaudible*. So I think there is one more leg up in the precious metals market. It will be led by gold.

Big money goes into gold for wealth protection. Small money goes into silver to become wealthy.

Silver, if it does what I expect, could take people into a game changing wealth situation, if you buy enough, but not by that much. I mean, if silver does what I expect it to do, we’re looking at getting the ratio back down to let’s say 40 to 1 minimum, which means it’s going to outperform gold by double. If it goes to 20 to 1, it’d be a four fold increase over gold.

Most banks are saying gold’s going to 3 to 4000. I think that’s low. I think it’ll go to five or six, but let’s just say it goes to four, that’s double. If silver does four times better than a double, that’s *inaudible*. So eight times 25. You’re looking at $200 silver. You have that on your blockchain account.

Is that going to be as good as Bitcoin now? Maybe not but it’s certainly a component of a balanced portfolio and the most undervalued asset class in history and some of the money in more places and more times and used more as transactions in money than gold ever. The monetary metal of history is silver, not gold.

Robert Leonard  39:26

How do you feel about that?

David Morgan  39:28

I’m neutral to positive. I wrote an article that you can read, it’s on the net, just go to David Morgan, my two bits about Bitcoin. It had a pretty interesting background. We want to go into it. I gave you my general background.

I said that governments hate competition. Bitcoin does what some think it’s going to do. Governments are going to either quell it in some way. So I’ll just go on to The Morgan Report. I wrote this as my private work that’s paid for. *inaudible* my talking about…

I said look, “The government is not going to get rid of Bitcoin, Etherium, or Litecoin, or any of these things. What they are going to do, in my opinion, you’re paying me for my thinking, my intellect, my tribe, my staff. If you want to get a mortgage, you can’t use Bitcoin. You have to use the Fed coin.”

So I say the banks are obviously going to the Central Bank with digital currencies. As you all know, and most your listeners would know, a digital currency is not a cryptocurrency. It can be put on the blockchain however.

If they mandate that we go to the Fed coin in the United States, you can only get a mortgage with a Fed coin. You can only get utility setup with a Fed coin. You can only get a car loan with a Fed coin. You can only purchase a school bond with a Fed coin.

However, you can have your Bitcoin. You could pay me in Bitcoin to consult with me, to buy my book or to transact in some other way. They’re not going to do away with it.

I think they’re just going to kind of move it off to the side where yes, it’s useful for Bitcoin to Bitcoin transactions, but any major purchase, you’re going to have to be in their system, which means a mortgage or any kind of loan, signature loan, whatever, utilities, any of that stuff that’s essential for life on the planet, for at least in the Western world, you’re going to have to use their system. You can’t use Bitcoin.

Now there will be an arbitrage available. Somebody is going to be able to figure out how to exchange that Bitcoin for a fee and move it into the Fed coin, maybe, or someone that’s rich in Bitcoin might say, “I’ll buy an apartment for Bitcoin. No, no problem. Here it is, let’s do it.”

They’ll mitigate it, that’s what I said in that article. I didn’t say it succinctly and in that depth but I alluded to it way back, whenever I wrote that article years ago, that if it starts to become too big of a competitor, watch. They’ll do something and that’s in my view what they’re doing or going to do.

Robert Leonard  41:50

In your book, “The Silver Manifesto,” you wrote about how to build a precious metals portfolio. Walk us through that.

David Morgan  41:57

A lot of people go broke buying cheap stocks. I mean, the best thing you can do is buy the best. When anyone ever, in the human experience, goes to rent a house, you might have the ability to rent a house for $1,000 a month and that’s your upper limit. You’re going to look for the absolute best deal that you can get for 1000 bucks. You get the best value for that thousand bucks.

If you buy a car, you’re going to get the best car you can for the money. If you’re going to buy clothing that’s a little sketchy, but most people want something durable, you’re going to buy a pair of jeans, you might buy those hundred dollar jeans, very thin. I don’t think so. I think I’d rather spend 70 bucks and get those suckers that are going to last for eight years.

Anyway, most people buy the best they can but when it comes to stocks, people buy the cheapest thing they can find, which is absolutely unbelievable. For anyone that knows and uses common sense, what you want to do is what you do with everything else in your life. You want to buy the best value that you can for that dollar invested.

So you want to buy the best of the best. Most people don’t teach anything about the stock market correctly because the only thing I teach about the stock market is how to make money in the stock market.

The only way you make money in the stock market if you go long or bet stock prices going higher is to buy stocks that go up. Stocks that don’t go up, you shouldn’t buy it. If you buy stock that goes from $5 to $500, how many new highs does that stock make?

Robert Leonard  43:22

100?

David Morgan  43:23

We don’t know but a whole lot of them. And so, the best and safest way to buy a stock is when it makes a new high. Think about it. *inaudible* teaches *inaudible*. William O’Neal teaches us, the founder of Investor’s Business Daily. When the stock goes from five to six, that’s a new high, how many sellers are there?

Robert Leonard  43:42

Not many. They think it’s going higher. Momentum.

David Morgan  43:46

Many think it’s going high. How high is high? A bar to five. It’s two weeks later. It’s now at six how high is it going to go? I don’t know. But I’m not selling yet. It might go to 10.

So now there’s very little selling pressure. Stocks, commodities, automobiles, they move on buying pressure and selling pressure. If there’s no selling pressure because it made a new high, any little bit of buying pressure takes it even higher.

Now it’s at seven. So now how many people are going to sell? Well there might be a few. I made you know two bucks on a $5 investment. Well I made a huge percentage. It took me three months. I’m out. I’m going to take my profits.

A lot of people say they don’t know how high it is high. They will hold it back there and put a stop at six, in case it drops off and makes a bucket share on a $5 investment. That’s 20%. A couple months, it’s a pretty good deal. Then the stock goes to 10. Then it goes to 20 and then it goes forever. So those are exceptions.

However, you look at Amazon, you look at Tesla, you look at any of these stocks. You’re getting the FAANG stocks. Facebook, Amazon, Netflix. Look at how many new highs are made.

People are brainwashed. I’m going to say *inaudible*. You sell when it’s the ultimate high or close to the ultimate high, but when you buy a new high, especially if the early new high, you are taking a lot less risk. If you’re buying a stock that went from 10 to five, and it stayed at five for three years ago, man I’m buying the stock. It is cheap. It’s gonna stay at five for another three years.

However, this is what no one teaches. This is the basic fundamentals of how to make money in stocks. Most people think they want to make money in stocks. Most people are actually speculators. They don’t admit it to themselves, but their idea is, “As soon as I buy the stocks, it will go up.” Then it doesn’t. It goes down and then they’ll rationalize it, “So well, I’m an investor, I’m going to hold for the long term because this company’s got great fundamentals.”

But their intent wasn’t to be an investor when they bought it. They didn’t buy it going and saying, “Hey, I’m going to buy the stock and hold it for the rest of my life and watch it go sideways for half my life, whatever.”

I’m exaggerating slightly, but there’s another thing that investors do that just destroys me. That’s called a round trip. You guys talk at five goes to 25, you hold it all the way and it goes all the way back down to five. It’s called a round trip, one from five to 25 to five, and you held it the whole time. What kind of investor is that?

You have to treat investment like a business. You got to just be absolutely… have some rules that you can’t violate. If a stock loses this much, sell it.

Another thing that’s basic is adding the winners and sell the losers. Most people roll on up on these three stocks they’re going to sell and they’ll add to their losers.

Averaging down is usually for losers. Once in a while it’s worth doing, but that’s an exception, not the rule. Basically, you never want to average down on stocks going down. You could average up on a stock when it makes that new highs. You buy that $5 stock and it’s a 10. Then that stock does go to 550. Then there are stocks to do that. So you could actually double your position at 10.

So you’re buying at a new high? Yes, I am. Because you probably know something about the company. I mean, it helps to know something about a company more than just momentum.

However, the point I’m making is that most people don’t have any clue about that. They buy these cheap stocks. They buy them low, they hold them the wrong times, they sell the ones that are doing well. They hold the ones that aren’t.

There are so many mistakes made by the general investing public. It is absolutely irritating somebody like me, but it happens all the time. There’s very few people that I think really want to make money in the stock market. They just don’t understand what’s really going on.

A lot of people that start in the stock market lose will go with a mutual fund or maybe a wealth planner, stockbroker, whatever. Most stockbrokers really aren’t that good. Some are. I don’t want to be too negative here but there’s a lot less to it, than most people think they make it a lot more complicated.

I’ll just quote Bill O’Neil again, he said, “If you can’t buy six stocks and make money, you don’t know what you’re doing.” I like that. I don’t like long lists. I can’t really study more than maybe 10 companies, I have a staff. So we’ve got maybe 25 stocks, some are speculations, some are mid tier companies, and some are top tier companies, probably 15 stocks.

The point is that you don’t need a lot of stocks to do well. In fact, you actually better be more focused than not.

Robert Leonard  48:07

I forget who it was that said it but somebody, a super investor, it might have been even Buffett, said diversification is when you don’t know what you’re doing. However, I think that’s what he talks about is buying stocks that have fallen, because they seem cheap is a big mistake that a lot of new value investors specifically make. They think they are trying to catch a falling knife.

When I first started investing, I’m only 25 now so I’m not super old. I started investing about 10 years ago, that’s what I did. I would always try and buy companies that looked cheap because they had fallen in price.

I didn’t realize at the time that there was probably a pretty good reason for that. Then I started to study the Motley Fool’s way of investing. I’m not sure if you’ve heard of them.

David Gardner specifically talks about buying your winners and selling your losers. That has really made a big impact on how I invest. I have also added a component of momentum investing to my value investing, so I’m not catching those falling knives.

David Morgan  48:57

I do want to be a little bit clear, because I know I’ve confused some people but when I talked about commodity investing and buying under the cost of production, that’s a commodity.

So we’ve been talking about stocks for the last 10 minutes or so. There are two different forms of investing here. So in the commodity side, I am saying to buy low, because we’re talking about a need, we’re talking about cotton or soybeans or whatever. That’s a whole different investment than buying a company which is buying the stock. So I don’t want to confuse you.

But wait a minute, David said to buy low. Well, I said to buy low when it’s a produced commodity, or when you’re buying a company now you basically companies are supposed to move on earnings.

When you’re a shareholder, you have the rights to the earnings of that company and they pay you in dividends, stock appreciation or both. Bond investors are different if there’s a corporate bond so that XYZ hypothetical company issues bonds, bond investors actually have rights to the assets of the company, not equity investors.

Equity only have equity holdings, so they only have rights to the earnings of the company, but if the company goes bankrupt, the bondholders have the ability to collect on the land, the building, the chairs, the computers, the furniture, their automobiles and everything else that was connected with that company.

Robert Leonard  50:15

Without cash flow, how is investing in commodities not considered speculation?

David Morgan  50:21

I wouldn’t say it is anything but speculation. I mean, there are three classes in the commodities market. One is speculation. One is commercials. Then there’s the largest trading funds.

Basically, the only non-speculators are the commercials. The commercials are the ones that produce the commodity. If you are a cattle rancher in Montana, and you run a near 250,000 head, you better be able to sell those beef at a profit.

The commodities markets exist, but you’re not there to speculate. You’re there to make a profit. And so who takes the other side of that trade? That’s a speculator.

So you got the commercial interest and you got to speculator, that’s as simple as I can make it. There are other factors in there. But no, it’s rank speculation, or you’re the producer. That’s it. It’s more complicated, but not a lot more complicated.

Robert Leonard  51:14

What I like about that is a lot of strategies that I think people compare to investing in commodities. I know they’re not the same, but things like day trading. People think they’re investing, but they’re not. They’re actually speculating.

I’m glad that you’re at least willing and open to admit that, hey, investing in commodities is often a speculation, and not necessarily an investment per se. I really like that.

David, thanks so much for joining me today. Where can everyone listening go to learn more about you and everything you’re working on?

David Morgan  51:43

My main website is TheMorganReport.com. I have a free newsletter, sign up for that, then go to the blog. At the top of the blog, anyone in your generation would know, but there are little icons at the very top for Twitter, YouTube, Facebook, and LinkedIn. So you can get on my YouTube channel, Twitter feed. I don’t do much on Facebook. I do have a fairly big LinkedIn presence.

Then all the stuff I do on the blogs is easy to find. I write up that summation every week. I do about three podcasts a week, or interviews a week. I do a weekly podcast called The Morgan Report Weekly Perspective. I look at the financial news and I usually cite my sources. Then I usually wrap up the weekly perspective with something about the metals market. I usually start with the stock market.

Robert Leonard  52:36

As always, for everyone listening, I’ll put links to all of David’s contact info on his social media. Anyway, you can connect with him in the show notes if you’re interested in learning more about what he’s got going on, and maybe reaching out to him, you can do that below in the show notes.

David, thanks so much. I really enjoyed our conversation.

David Morgan  52:52

Thank you, Robert. It is fun for me too.

Robert Leonard  52:55

Alright, guys, that’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week.

Outro  53:01

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