Mike Gleason: It is my privilege now to welcome back David Smith, Senior Analyst at The Morgan Report, and regular contributor to MoneyMetals.com.

David, thanks for joining us again, how are you?

David Smith: You bet, Mike. It's great to speak with you again.

Mike Gleason: Well David, we published an article you wrote on inflation this week on our MoneyMetals.com website, and it's really great, by the way, and I hope everyone listening will take a few minutes to read it, because the subject matter, that being inflation, is very timely.

Right now, metals are suffering because of a rally in the U.S. dollar. There's lots of talk on Wall Street about how well the dollar's performing over the past few weeks, but traders, of course, are focusing exclusively on the dollar's exchange rate with other world currencies. You and I know that isn't really what matters. What counts is not how many euros or yen the dollar will purchase, it's how much gasoline, or housing, or food it will buy. And the reality is that it buys less of those things every year. We have inflation regardless of whether you define the term as an increase in the money supply, or as an increase in the price of goods and services.

However, precious metals have fallen in recent weeks simply because the dollar is stronger in foreign exchange markets. The fact that the dollar buys more yen is trumping the fact that the dollar buys less oil. It's as if we have deflation but the truth is, inflation is actually positive and starting to accelerate. So, what gives here, and how long do you think it will be before Wall Street figures out what is really happening to the dollar's value, David?

David Smith: Well, Mike, I think a lot of it has to do with Wall Street looking at the exchange rate because they're asking themselves what effect will it have on the profitability of companies that do business overseas or that import things and it has a significant effect on them if there's a change in the dollar's relation vis a vis to the currencies.

But the more immediate effect happens to the rest of us because we start paying more with inflation for things that we buy and sell on an everyday basis. So we're in a different universe from Wall Street in that regard. I don't know about you, but I've noticed the price of services going up substantially. Some prices have stayed the same for several years at the grocery store, beyond just the normal seasonal fluctuations of produce that you might expect to be more like avocados certain time of the year.

But a lot of other things, too, that normally have been pretty stable seem to have a built-in upward bias and all that does is to take more and more purchasing power out of our pockets, yours and mine, and the people listening to this, and place them someplace else. So, it's kind of a subterranean type of thing that's going on but it's not to the good for any of us.

Mike Gleason: Yeah certainly, well put and obviously the markets seem to be focusing very much on what it does relative to those other currencies and not really what it's buying, like you said right there. I mean everyone can attest to the fact that things are getting more expensive. There's no doubt about that.

As you have written, inflation is a destructive force for most of us. The powers that be have done a masterful job of painting a degree of inflation as somehow healthy for the economy, but you spend a lot of time traveling in South America, as you mentioned in this week's article. So you've seen firsthand what is happening in places like Argentina and I guess the government there has given up talking about how wonderful it is that money buys less every year. Obviously nobody there is going to be buying that line of bull anymore.

In Venezuela, people are starving, and violence is on the rise. Talk a bit if you would about what a rampant inflation looks like on the ground. You recently took another trip to South America. Tell us what it's like when confidence in the money begins to fail.

David Smith: Well, it's very insidious and ultimately it tears away at the fabric, the social fabric of the country because it encourages all sorts of malinvestments and people buying things that they don't need just to have the money put into something that they can probably barter with down the line. I mean, have people owning five refrigerators. The demand goes in ways that aren't productive at all.

In South America, they've dealt with this for a long time. Macri now, who was a very forward-thinking individual that was elected a couple years ago in Argentina, things were looking really good. But here's the problem. If we define inflation as an increase in the money supply, a lot of what's happening now that Macri's having to deal with really was the increase in the money supply under Kirchner, the former President of Argentina.

I remember very distinctly, her person, I don't know whether she was a central banker but she was a very high person up in the monetary creation universe of Argentina saying that we see no connection between an increase in the money supply and inflation. And that was just absolutely absurd because by definition she's 100% wrong.

And so now those effects which take time to develop are rippling through the economy and they're causing a lot of trouble. And a lot of it is not Macri's fault but he may pay for it politically at the next election next year and they may try to reelect someone that gave them the same thing they did before, which is going to guarantee more and more inflation and more destruction of the currency.

And you know what's really sad, too, this has been happening several times in the last century with Argentina, is that people have learned to keep their money out of pesos, either buy things with it or have a false refuge of the U.S. dollar. So for example, you can have a bank account in U.S. dollars in Argentina. But what happened last time, just a few years ago, is that the banks when things got really tight, they actually converted those U.S. dollars, without the permission of the account holder, into pesos. So, even though people had done something that was going to help them quite a bit in the inflation, they were taken out at the last minute, blanked by the banks themselves. Illegally of course, but what could you say? And so their accounts became worthless as a result.

So, a lot of effects that aren't immediately observable are going to take place but as things go down the pike there, you get a lot of strange relationship in terms of people's behavior toward it.

Mike Gleason: Of course, the conventional wisdom is that the U.S. is well-insulated from that sort of currency crisis. America's much wealthier and the dollar is too important in world trade for it to be abandoned. We would acknowledge that those things are true but we don't think either of them have been written as a commandment in stone or that it will remain true from here to Kingdom Come. So, what do you see as the important similarities and differences between the U.S. and a place like Venezuela or Argentina and how would you gauge the risk of a currency crisis here at home?

David Smith: Well first of all, I think anybody in our country who thinks “Well, I won't worry unless we end up with 100% inflation a year or 1000% a month like you have in Venezuela”… that's really waiting until the horse is out of the barn because I don't care if it's five percent – let alone 10% or 15%, each year – at five percent inflation, that means that your money is worth 95 cents on the dollar at the end of that year.

Every year it goes on, your Social Security payments that you're going to get, which are not really indexed to the real rate of inflation, are going to be eaten away. And so, it's more like an army of termites eating away at your house. And you go, "Well, it's still standing and I really can't see anything going on." But inside the structure is being destroyed, one bite at a time and then at some point the house falls down, which is a little late to do anything. You want to keep the termites under control or get rid of all of them before that happens.

And so even the five or ten percent inflation that goes on here, which is substantial really, is nothing to not be concerned about. And it happens, as I mention in the article, the government will tax you on phantom profits. So let's say your stocks go up ten percent this year and five percent of that is inflation. You're paying tax on that five percent that you didn't really earn because it's not there. But yet you get taxed on something that really didn't happen to you.

It has all sorts of negative consequences and it's very debilitating over time. It's something that people should be worried with even if it is true that the government says we're just trying to get two percent inflation, which they have now – and it's actually maybe four or five times that – that’s still very corrosive to your ability to maintain your purchasing power.

Mike Gleason: I know Senator Ted Cruz has introduced a bill to get rid of that illusory gain where you are taxed on the gain that's as a result of inflation. He wants to back that out. Of course, they would probably be using the government's inflation numbers anyway if they were to put that through, which we all know is artificially low.

Now the reason you do regular traveling in Mexico and South America is to visit with people in the mining industry and tour some of the projects being covered there at The Morgan Report. Talk for a minute about how gold and silver miners have been doing in recent months. Metals prices have been rising since the end of 2015, but not dramatically. Fuel prices meanwhile are now back on the rise, so that will have a significant impact on cost, to be sure. So, are miners profitable in general David, and is there enough capital to fund some exploration for reserves to replace current production?

David Smith: The places that I've visited this last year, a number of them have really gotten to be fairly profitable, even before the increase in fuel prices because they've really cut costs and things like this. So, they're doing pretty well.

But regarding the issue of capital involved in the gold process and finding it, it's not just a matter of throwing a bunch of dollars at things, it's a matter of what are you going to find? And so, the deposits have become further and further apart of any size, and it takes two to three times as long to develop a project from the first hole that they find gold in that looks good, to production, and much, much more expensive.

And so, in a sense, it almost doesn't matter how much money you throw at some project, if you're not finding much or if it takes so long to develop that becomes inconsequential in relationship to the output.

Mike Gleason: I recently heard a statement from a top mining executive, I believe it was the head of GoldCorp., saying that we've reached peak gold and that after some 40 years of increasing mine supply we're now to the point where we're going to start to see a decline each year. The World Gold Council has indicated the same thing, so this may very well be a narrative that gets more and more traction. And if it does, you have to think it could drive the price.

So, what are your thoughts on the idea of peak gold, David, and what are the ramifications if it does become a reality that we are going to start to see a decrease in the annual production from this point forward. Because the world's demand for gold is still very robust, maybe not so much here in the west right now, but it is in the east, and let's not forget China and India alone make up 35% of the world's total population and they already can't get their hands on enough gold as it is.

David Smith: This is something that I think is definitely a big factor. Pierre Lassonde at Franco-Nevada has commented on it and he made a very trenchant comment about six or eight months ago saying in the 80s and 90s, every year they would find a 50 million ounce deposit and they would find eight or ten, ten million ounce deposits and they would find five million ounce (deposits) too numerous to mention. And that hasn't happened in the last 20 years. So I think the biggest one that I'm aware of was Fruta del Norte, and that was 2006. And that's just now getting to the point of production.

But this is going be a big deal. It's going to keep happening even if they find a couple more good-sized deposits that we don't know about. I think the days of easy money of finding big deposits and bringing them into production, cost effectively, and timely, are (in the) past. It takes up to three times as long now to move from finding that first deposit that looks good or that first hole that looks good to actually producing. And it's becoming more complex with environmental concerns, etc., you name it.

So, I think we're in for more of the same. And you know, David Morgan has long made the comment which I think is extremely important and overlooked by many people, and I know people listening to this have felt, “Well, prices have been low and longer than we thought” and they're getting losing faith and all that, but they really should remember that I think we're getting very, very close to that realization on the part of the broader market that things have changed.

And David has always said you know, if you have a lot of supply of something but you have a demand that starts outstripping that supply, it almost doesn't matter over the intermediate term how much you have because the price is going to go up because demand is the true driver. And I think we're going to start seeing that later this year and if this trend gets underway, reestablishing the trend that started two years ago, the bull trend in the metals, in the miners, we're going to see substantially sustainable prices for the next three to five years.

So, it really is the quiet before the storm and it's just something that people really need to steel themselves for and pay attention and not lose faith just before the turn happens.

Mike Gleason: Yeah, very well put. Well, David, we're about to enter the summer months here and in many years seasonality in the markets, and in particular the PMs, has lent to some lackluster price action during these upcoming few months. So, what do you expect here over the short to medium term in the metals through these summer months and as we move towards the end of 2018?

David Smith: Well in the summer, there can be a double bottom in the miners, almost no matter what's going on with the trend that preceded it. There tends to be a primary bottom in late June, early July. And then the secondary bottom in late August, just before everybody comes back from their European vacations and gets back to the trading desk. And I suspect it'll look like that again this year.

It would not surprise me with the weakness we've seen in physical gold and silver and the demand domestically that we could see an attempt by the floor, so-to-speak, to drive prices down through recognizable support levels in gold and silver on the technical charts and shake out the last of the weak holders.

What happens a lot of times, especially silver, it's even more evil if you want to call it or whatever, but more spooky than gold because it will establish two or three lower lows and all of a sudden the technical charts turn down and then it turns right around and you've got a false bottom that came in there, a bear trap, so-to-speak, and take off. I would look for that sort of thing to happen not only in the physical price but also the miners themselves.

So, right now the better miners are holding up reasonably well. I mean obviously they're backing and filling and that type of thing but they're not in a downward path. And so if the whole sector was going down I would just about lose hope, but it's not the case. The better run miners, as we talked about earlier, that are making money now, the smart money knows that and they're taking positions in it. And the smart money also continues to do their buying programs in physical gold and silver.

And this is something that The Morgan Report, David Morgan's flagship newsletter has said over and over, and we say the same thing on his blog and of course in Riches In Resources, where we have articles that you can read for free. Just start boning up on what's going on and don't listen to the people on Wall Street that are touting their own story to get commissions. And just keep, when you can, buy gold and silver and I think that you will be vindicated and you will feel very, very good in the near to intermediate term.

Mike Gleason: Yeah, it's certainly very much still on sale and one of these fundamentals that we just spoke about with rising energy costs, you have to think at some point it's going to either destroy the supply to the point where we have to get a bounce because we'll have a supply-demand imbalance in physical metal or it's going to cause the cost of production to go up to the point where we're just going to have to see higher prices as a result of that, just the fact that it's more expensive to pull the stuff out of the ground.

Well, David, thanks as always for your time and your great insights. We really enjoyed that article you did this week and we urge everyone once again to check it out. It's a great commentary on the subject of inflation. Keep up the good work my friend and we look forward to catching up with you again before long.

David Smith: Thank you, Mike. And anybody that reads those articles that wants to write in with a comment, as you probably know, I answer all of them. Or if I'm out of the office or something, somebody at Money Metals does, so we value and honor everyone's comments to stimulate the thinking and so don't hesitate to make a comment and we'll address it.

Mike Gleason: Well that will do it for this week, thanks again to David Smith, Senior Analyst at The Morgan Report and regular columnist for MoneyMetals.com, and the co-author, along with David Morgan of the book Second Chance: How to Make and Keep Big Money During the Coming Gold and Silver Shock Wave, which is available at MoneyMetals.com and Amazon. Pick up a copy today.