David Morgan: Gold Plays An Important Role In Monetary History

In this interview, Sprott Money talks with David Morgan about several topics. We have picked out some interesting parts of the discussion: long and short term outlook for the metals, as well as the part about the gold standard.

The world never has truly gone off a gold standard, as the dollar took over the role of the world reserve currencyin August 1971:

David Morgan: If you go back in history about a decade and you look at the BIS, the Bank of International Settlements, that’s the bankers’ bank. They accounted in one thing and one thing only, and that was gold. That’s the only thing they accounted for, gold.

Now, if you’re talking about the central bankers’ bank, you’re talking about basically the monetary powerhouse of the entire globe. The only thing that they care about is how much gold you have in a nation state. I would certainly say that that somewhat carries merit. The problem is that we really don’t know who owns what because of all these swaps, interconnections, hypothecations, and rehypothecations.

I’ve always thought what would be the event. No one knows. But, if it ever came to light that there is no real gold in Fort Knox, and of course there’s a lot of conjecture about that.

If somehow there was a Senate investigation or whatever, pick your idea, and it came to light internationally that “oh no! we opened up the curtain and we saw the wizard, and the wizard is naked. There’s no gold at Fort Knox. The US has no gold reserve at all.”

If that were ever to come to light I would think that the US dollar could take a huge plunge. Because the perception, maybe not the reality, maybe the reality, is that the US still has a large gold hold, around 265,000,000 ounces of fine gold.

I doubt it, but again, the market’s perception. So, you could look at different currencies through history and basically, like it or not, gold bug or not, gold plays an extremely important part in monetary history.

The average public is very happy just to believe whatever the government tells them. What is going to wake people up?

David Morgan: I think it’ll be a slow wakeup call. I think it’ll be a series of events, or reality checks, I’ll call them, that take place. I’ll give you a few examples.

Going to the gasoline station and having to wait in a long line. Or, going to the gasoline station and the high grade is out but only medium grade exists. Or, diesel isn’t there. In other words, a disruption in the production chain in something as critical as energy.

And, food. going to the grocery store and your favorite brand of XYZ, you name it; bread, peanuts, pizza, I don’t care what it is, all of a sudden that’s not carried any more. Or, the price of that particular item has gone up substantially. Or, the size has been reduced substantially. Or, again, the shelf is bare. Like, you used to carry this here. Well, that’s out of business. Or, they don’t carry it any more. We’re not going to stock it. The markup is too high.

I think there’ll be kind of subtle little things like that. The general populace will start to realize that things are costing more. There are not as many choices as before. There are disruptions that are coming about in my Internet service. There are disruptions in the energy supply. There are disruptions in the food supply.

Those will be things that’ll cause people… Because that’s on the ground stuff that people do on a daily basis that, awake or asleep, they still will kind of get a wakeup call, so to speak, if they see a disruption. I think that’s what’ll take place.

On top of that, of course, us that are more awake and more aware will be questioning when is the next bail-in coming and what country is it going to be. And, probably, hopefully. preparing ahead of time until that, in my view, eventuality does take place.

Short term forecast for gold and silver:

David Morgan: Within a year I’m upbeat on 2014, but not extremely so. I mean the breakdown point technically in gold was about $1,550 and in silver $26. Both the metals are under those levels right now.

I think both metals will be above those levels in 2014, but not significantly so, although I do have to give the caveat that anything could accelerate. If there’s some big disruption somewhere, some gold delivery that doesn’t take place, or silver, or something along those lines, then certainly the market could accelerate. But, I don’t see that in 2014.

Long term forecast for gold and silver:

David Morgan: Longer term much higher in value. I don’t like to give a paper price although I can. I’m on record back in the early 2000′s saying silver would make it to $100 an ounce, and I think that’s very realistic.

Again, I think it’s the value. I’m along the lines of Mike Maloney and others that you don’t want to focus too much on the paper price, although that’s what everyone does and rightfully so. Because if you sell metals you’re only going to get it for currency. You’re going to take that currency, and it’s either going to be a greater amount or a lesser amount than the currency you put into the investment.

You really want to look at the value, what does an ounce of silver buy historically, and what does it buy today. That is the gauge you should use to determine whether or not it’s fair valued, undervalued, or overvalued.

If you look at gold, the old adage is, of course, a fine men’s suit. You want to look at an ounce of gold, does it still do that? Or, if it buys ten suits then you might consider the fact that it’s overvalued on a historical basis.

That’s the way I’ll be looking at it more than the paper price.

I think it’s going far higher. I think you’re going to see gold overvalued and silver overvalued, and I think in an extreme way. As I just outlined, I think you’ll see where an ounce of gold doesn’t buy one fine man’s suit, it buys 10 or 50 or some extreme metric. I really think that’s where we’re going.

I think we’ll get there before ten years. I think ten years from now… I’m an optimist really. I might not sound it after I’ve been painted with the doomer broad brush, and in some cases that’d be valid. But, I’m a realist is what I am. I’m in the reality of what’s going on in the financial system. And, things are getting worse, not better, in my very studied opinion.

Regardless, I think ten years from now we could definitely be on the upswing. There are a lot of things out there, like the nanotech world, what’s going on in the energy frontier as far as being able to perhaps upgrade the system as a whole and use energy sources that are worthwhile.

I’m not talking about solar and wind. I’m not against them, but they’re really not very efficient. But other areas that might deem higher energy flex density where people have more energy available on a per capita basis, the better that is the higher living standard you have. That’s pretty easily proven.

Ten years out I’m pretty optimistic. But, I think getting to ten years out is going to be very trying over the next few. I’m looking for round numbers, if you want them.

I think $5,000 an ounce gold is probably realistic. Depending on your view of silver, if you’re super optimistic like me and you think it could follow a ten to one ratio you could use that number. Or, you think the current 50 to 1 or 60 to 1 ratio is more appropriate you could use that number.

I think we’re probably going to get to a minimum of the classic monetary ratio of 16 to 1 and as high as 10 to 1. I’ll be consistent here. I wrote about that many years ago. So, if you saw $5,000 an ounce gold then that would imply one tenth would be $500 silver.

But, let’s get past $50 again. I want to be very practical. People ask me all the time what’s the ultimate price. I say let’s be practical. Let’s see it above $26. Let’s see how it trades. Let’s get it back above $30 and see how much interest are in the metals.

I’ll go on the record as saying this. I know markets fairly well. You’re not going to see too much buying by the nonsophisticated money at these levels, unfortunately. But, what you will see once you see silver and gold work their ways higher, once you get the gold above, I don’t know, pick a level, $1,500; $1,600; $1,700, there’ll be a lot more interest in it.

And there’ll be a lot of money spent on the metals once they break to new highs. You’ll see a lot of money come into gold above the $1,900 level, and you’ll see a lot of money come into silver above the $48 level.

It’s not too late, because I think they’re going far higher than that. It’s not nearly as advantageous as buying today. But, the interest in the market today is at a low, and that’s how lows are made.

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