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Gold and Silver versus the Petrodollar Peril

Commodities / Gold and Silver 2014 Jun 27, 2014 - 10:58 AM GMT

By: David_Morgan


Transcript: Welcome to Radio, the online source for market opinions.

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: Gold and silver versus petrodollar perils, maybe explain to us what you feel that is and why investors should be concerned about it.

David Smith: Well, the petrodollar is a term for US dollars that are used by different countries in exchange for buying petroleum and other goods. It’s extensive enough that it has come to be called the reserve currency of the world – but now that status is beginning to change.

It has been underway for several years and it’s now picking up speed with a deal that the Russians and the Chinese signed for a natural gas agreement. It’s going to be very significant, and it won’t be paid in petrodollars.

The extent of that significance for the United States is that we depend upon being able to print an almost unlimited amount of dollars and circulate those outside the country so that we can export our inflation -and so we can buy a lot of goods at cheaper value than would be the case otherwise.

If the petrodollar, which is defined as a dollar circulating outside our country for that use, comes into question as to how frequently it’s going to be used, that’s going to change the whole metric for us.

I was thinking this morning, not just for us but even with countries that are so-called dollarized. There are countries in South America where the currency is actually the US dollar and then there are other countries like Argentina which has its own currency, the peso, but it has one of the largest accumulation of dollars anywhere in the world.

So you could imagine if the value of that dollar were to decline substantially, it would have all sorts of unexpected and unintended effects, and not just for the US.

JG: What could be some of those effects for Argentina and other countries?

DS: Certainly it would increase inflation. It would increase the concern people have about confidence in the monetary unit itself. If you think about it with the debts that we’ve been running over the last few years, confidence is primarily what’s holding it up. If people lose confidence they may want to hold something else. The lifeboat gets pretty crowded when that happens and there aren’t many options. The other lifeboats that are around have been the historical ones – gold and silver.

I think the record flows of gold and silver into private hands, as well as public entities over the last few years is an indication people have that all is not well with the petrodollar, in addition to the other things we’ve discussed. They know that gold and silver will give them an opportunity to have insurance and assurance. That’s a pretty powerful concept for putting away part of your wealth to try and preserve it in that way.

JG: Well, the Canadian dollar has gained a couple of cents on the US dollar over the past few weeks. Take a look at what has happened to the British pound over the last six months. It has gone from being $1.50 something to around $1.80.

DS: Currency moves have been all over the board. What’s interesting also are some of the elections that have been going on in the UK and in the different European countries. There’s an unease which is becoming more and more obvious that people are uneasy about the debts being run by their governments.

All of that chips away at confidence and so it seems to me that even though the metals are very quiet now – they’re trading in a sideways range, but they are moving to a position where we’re going to see some interesting fireworks. Not necessarily predictable exactly, but certainly there’s going to become increasing volatility, probably before summer ends while people are waiting to do something after Labor Day. But what if it turns out that something gets underway before then?

JG: Within these elections and business-friendly prime minster being elected, are they likely to lift their restriction on gold sales?

DS: It seems like they may lift it or at least lower the amount of current taxation. Either way, you’re going to see a continued flow of gold and silver into India.

This would make imports more transparent. To all accounts – Narendra Modi is a free market capitalist, a lot more so than his predecessors, and there are high hopes for him. The Indian indexes are responding favorably as well, so we will see what happens. This is one more straw in the wind that should underpin gold and silver prices, – and may well take India back to the top spot in terms of gold consumption as the year progresses.

JG: The banking system in the US, is it healthy?

David Smith: It depends on how you define it. A lot of the so-called bad bank loans have been sequestered by the Fed and somehow those are supposed to be fed back into the system later on. But a number of banks have failed the stress test they were placed under to see how they might handle themselves in the crisis.

The thing a lot of people don’t realize – regarding the average people like you and me is we think we can access our money just like that. But the reality is, there are all sorts of legal impediments placed in our way that would suddenly become visible if there was a concern on the part of the bank about a run or a financial panic along the lines of 2008.

People who may be overly confident really might want to look under the hood so to speak to see if they really want to have everything they own in a location where they might not be able to access it when and if they really needed it.

JG: I know a lot of folks are concerned about a Cyprus haircut as they call it, where the bankers go in and take a certain amount from accountholders. If you have a certain amount in a bank account, anything above that, they can haul it off. Both Canada and the US have legislation that allows the government to seize your personal gold.

DS: Well, the so-called bail-ins where banks get into trouble and then they have their depositors help them out by – so to speak volunteering to give them some of their money – which is not volunteering at all. That is definitely written into the banking language. It’s hard to believe that it’s even there, and yet it is. Furthermore most of the countries throughout the world have some form of this language.

I think what bothers me – and watching what’s going on with the metals being so quiet – is that we’ve got inflation starting to move up in a big time way, especially with food but also with a lot of other goods and services that do not reflect themselves in the annual monthlies that the Fed puts out.

I remember an individual – I think it was Michael Ballanger who talked about inflation and he said inflation is like toothpaste. Once it’s out of the tube, it’s impossible to get it back in. The Fed wants a certain amount of inflation but they want to be able to control it and they actually think that they can do that. But once that toothpaste gets out of the tube, we can’t stick it back in. Not to mention that a lot of times you can’t have a decision about where it goes either.

JG: Well, anytime a government thinks they can control inflation – if you’re old enough, you will remember the late 70s where Canada brought in price and wage controls and they did nothing to control prices but they sure did keep your wages down.

DS: It caused all sorts of speculations. In the United States, we had the same thing, wage and price controls – they didn’t work very well. In fact it didn’t work at all and I will never forget – I think it was President Ford where his idea about controlling inflation was to come out with these little WIN buttons which stood for Whip Inflation Now. The moment they were produced, it was laughable and of course if that’s the best you can do, then it’s no good at all.

So I think we’re headed for higher inflation. It’s going to kind of stair step upwards as we go on. Some people feel that by this time next year we could be in a pretty severe bout of it. It’s hard to tell right now but the point is all this is going to be beneficial for precious metals holdings, but it’s not going to be good for the general stock market.

JG: David, Cambridge House is holding its annual resource conference but it’s not the same resource conference you went to last year is it.

DS: It’s a little bit different and I will be looking forward to going up this weekend. It was primarily a resource sector conference in the past. Now they have a good, strong resource presence, but also there will be technical, high-tech companies in attendance and speakers about wealth preservation through tax work strategies, etc.

I think they’ve got three speaker halls rather than two, so it will be interesting to see how the attendance is and the breadth and depth of the presenters.

JG: A lot of people in the resource industry are finding that they have to diversify if they’re going to stay alive.

DS: That’s true. The good news is that the companies which do survive in the sector are going to be the strongest ones. It should be easier for people who have done their homework – when the next up leg of the bull market begins in gold and silver – to pick a winner. A lot of the dogs and some of the outright frauds just won’t be around anymore.

JG: One of the analysts I talked to in the past year or two, says we’ve seen, say 1200 resource-based junior companies shrink down to eight hundred. Even now he still says no, they could use some more pruning to make sure everybody is healthy, because when you have losers mixed in, investors don’t know where to go where their money will be safe.

DS: That’s true. They’re left for dead but some of them are still hanging on. The downturn has taken a heavy toll already and it’s going to continue until just the strongest have survived.

JG: How are PGMs doing?

DS: The PGMs have been holding up well. Platinum and palladium just continue their little stair stepping movement up and I think one of these days you’re going to see a pretty powerful breakout that leaves some gaps behind. A lot of pressure and tension is building, and the fundamentals just keep getting better and better.

Jim Goddard: And the gold versus silver index?

David Smith: When looking at SIL which is a silver miner’s index, the volume is increasing. We have a bullish falling wedge from a technical analysis standpoint. Gold is a bit more obscure. There’s a triangle that’s coming together in an apex, which indicates it’s going to make a pretty good-sized movement one way or the other.

The trouble with triangles, is that there’s a one-third chance they can break out in either direction. So my bias is up but until the market tells me which way, I’m not going to try and tell it anything at all. I’m watching intently to see which way the triangle breaks out. It could be this week or next week Jim. It’s so close to that apex point. So we shall see.

JG: Will the election in Ukraine make any difference?

DS: No, I don’t think so. Compared to the systemic issues that are driving gold and silver higher are – that’s just one little thing. Ukraine’s just a symptom, not a cause by any means.

JG: David, thanks for chatting with us.

David Smith: It’s been good speaking with you Jim. Have a great day.

Jim Goddard: My guest has been David Smith, Senior Analyst for the Morgan Report which you can find online at You’re listening to Radio. Find us on Twitter, @TalkDigitalNet. Comments about the show can be sent to info@ I’m Jim Goddard.

David Morgan

Mr. Morgan has followed the silver market for more than thirty years. He wrote the book, Get the Skinny on Silver Investing. Much of his Web site,, is devoted to education about the precious metals, it is both a free site and does have a members only section. To receive full access to The Morgan Report click the hyperlink.

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.

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