David Smith: Love And Fear Trade Buying Will Drive Metals, And These Miners Higher. . .This Year

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Despite their recent underperformance, David H. Smith, Senior Analyst with The Morgan Report, remains bullish on precious metals, especially silver and palladium, as the "love trade" heats up and the global economy adds more debt to the system. Smith believes that the secular bull run in precious metals will be reignited later this year and that investors should take advantage of the regular volatility native to silver prices. In this interview with The Gold Report, Smith provides some of the silver and platinum group metals equity names he owns and that could offer significant upside, even from current prices.

Bull Bear Up Chart

The Gold ReportDavid Morgan, principal of the eponymous The Morgan Report, and Equity and Economic Analyst Chris Marchese recently co-wrote "The Silver Manifesto." A major theme in the book is the "debt bomb." Please briefly explain what that is and why investors should be concerned.

David H. Smith: "The Silver Manifesto" was written to inform and appeal to precious metals investors with all levels of experience. A lot of our new subscribers are getting connected with the silver story, but there are others who have been in the trenches for quite a while. David and Chris wanted to make the fundamental case for silver a compelling one. The debt bomb is technically the piling on of derivatives and central-bank-induced debt from ultra-low interest rates and quantitative easing.

Central banks think they can control bank runs or a credit contraction by pumping money into the system, or through capital controls, but they are playing with fire. As evidence, I would point to an excellent study done by Dr. Antal Fekete a few years ago—not long before the 2008 crisis—where he demonstrated that it was entirely possible to have hyperinflation, with the price of derivatives spinning out of control, and deflation—where money/credit drained from the system so fast that it overwhelms central banking's ability to cope.

TGR: Do you risk marginalizing yourselves with this apocalyptic narrative?

DS: I don't think so, because we're simply saying that the debt that has been created is not going to be paid off. I could see something of a slow-motion implosion where we have degradation over time by inflation, which is basically a tax on savers. We could have a series of devaluations and debt write-offs that would cause people to lose a large percentage of their financial security. It wouldn't happen over a few days but rather over years.

But even if by some miracle we don't witness that type of collapse, there is still what Frank Holmes calls the "love trade," which is happening in a massive way with the purchase of physical gold and silver by people in China, India and other countries. That's really become a much more potent force than it was even a few years ago and looks set to continue.

TGR: What are some things that every silver investor needs to know about the market?

DS: First, silver is called the restless metal for a reason—it has a much greater volatility than gold. People have to plan for and expect that. Second, it has a stronger correlation to the price of gold than most people realize, as much as 90%, according to work done by Adam Hamilton of Zeal Intelligence. If we see gold moving up while silver is quiet, silver is probably getting ready. Third, whereas gold movement into China and India gets most of the headlines, silver is also being accumulated in massive amounts by these countries. Last year it's estimated that India bought around 28% of the world's newly mined silver. And fourth, as David Morgan likes to say, about 80–90% of the potential of the entire bull run can be available to investors during the last 10% of the time it takes to complete the cycle. David has studied this topic in depth. There will be some outsized gains available if people are willing to step up and take calculated risks. I hope to be one of those people.

TGR: You have talked about what you call the Tsunami Return Wave. Would you please explain?

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Disclosure: 

1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and ...

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