David Morgan on Drutter’s Divergence and the Silver Price

In recent weeks, a YouTube user known as Drutter has been making the news with his videos, many of which track the growing divergence between the market price of silver and physical demand for Silver Eagles from the US Mint.

Perhaps most notably, Michael Maloney, founder and owner of GoldSilver.com, came forward in a video to give credit to Drutter for noticing the divergence. The caption of the video notes that “the precious metals community was astounded that a guy working from his backyard with a coffee and a cigarette was able to come up with data that industry heavyweights had missed with the information right under their noses.”

However, while there is much information available on the fact that this divergence is occurring, few have offered an explanation for why it is happening. To address that question, Silver Investing News (SIN) contacted David Morgan, publisher of The Morgan Report. In the interview below, he not only answers that question, but also explains why Drutter’s findings were not a surprise to him. Additionally, he touches on silver’s recent price action and gives his short-term outlook for the white metal.

SIN: To start off with, could you give our readers a brief explanation of what Drutter’s divergence is?

David Morgan:It looks to me like the main point is that you have good buying, particularly in the coin realm, Silver Eagles, and yet you see this divergence between an increase in Silver Eagle purchases and a decrease in the price of silver, and you have long consolidation periods. Mike Maloney made the point that the bull market’s intact, there’s massive buying in Silver Eagles and the price has been decimated recently, particularly the last couple of years and in particular the last few months.

Therefore, based on this Drutter’s divergence, it seems to me Mike Maloney was implying we’re getting ready for another upsurge. That’s how I see it — it’s basically a divergence between physical buying, particularly looking at coins, and the price.

SIN: Is Drutter’s divergence something you watch when predicting silver price movements?

DM: I look at a lot of things. I want to be clear that I am not just a trader, I am a long-term investor. But I do trade, and I let other people see how I trade in the membership part of my website. I had done a video for my members showing that on all of these big moves so far, we come back and touch the breakout point.

Let me explain. I went around the world saying that no one knew how high was high when silver was still trading near the $5 level and the breakout point was $5.55 the ounce. It finally broke out at $5.55 the ounce — I forecast that would happen in September 2003, and it did.

The price shot to $8.40, then it came back and briefly touched the $5.55 level and then it moved up. The next big move up was up into the twelves or so; then it came back down and touched $8.40. Then it moved all the way up to $21 before coming back down to touch into the nines. Then it moved all the way up to the $48 level.

I mentioned in the members video that we might see it touch back down to the breakout point, which was at QE2 at $19 an ounce, roughly. I said, “believe it or not, if this silver market holds true to form, I wouldn’t rule out that we’ll retrace all the way back to this $19 level,” and that’s pretty much where we’re at right now.”

My point was that silver can make these big moves, and it usually comes back and touches these breakout points, so don’t be shocked if it comes back and touches this $19 level.

So I did look at it, yes I did, but probably from a slightly different perspective than [Drutter] did.

I want to give Drutter credit, and I will — I think he did a good job. But he’s certainly not standing alone; as far as him seeing something that no one else did, I don’t think that’s the case. In terms of the basis of his argument, I think that’s been noticed by many people, myself included.

SIN: Do you think industrial demand is a factor in why this divergence is occurring?

DM:I think that the mainstream financial people would say it is, but I don’t think that explains it. What explains the divergence is the amount of leverage in the system using derivatives.

For every buyer, there has to be a seller, but what most people don’t really stop to think about is that most of that selling that’s matched is a fiction. You’re buying silver, but you’re getting a piece of paper instead of silver. So if there was no such thing as the derivatives market, the price of the silver market would be far different than it is right now. But if you can’t tell in a lot of instances whether you’re buying real silver or buying a silver fiction, then the price is suppressed because it’s easy to produce something that doesn’t exist, but there’s labor involved in producing physical silver.

So there’s a huge mismatch between “silver being sold” and the amount that really exists. That goes back to the heart of Drutter’s argument and my argument — all of our arguments — that there is a disconnect between the price in the physical realm.

SIN: The silver price took a big fall last week and the expectation seems to be that it will stay down in the short term. Do you agree?

DM: Yes, I agree that it will stay down in the short term. Of course, what everyone wants to know is how short a time period. No one really knows, but let me put it this way: for any market, there is only a certain amount available at a given price. That holds true for the silver market as well as any other market.

There’s only so much silver available under $20 an ounce. There’s even less available under $19 and even less available under $18. So the lower it goes, the shorter timeframe it’s going to stay there. Even if people panic when it goes short term into the lower prices, the reality is that the entire silver market can’t be bought at $19.70 per ounce. There are only so many offers of physical silver at that low price, and it’s a small, small amount. Once that’s taken off the market, then it starts to pressure the market back up.

SIN: To finish off, what resources can you offer our readers?

DM:We have a YouTube channel = silverguru

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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

Interviews conducted by the Investing News Network are edited for clarity. The Investing News Network does not guarantee the accuracy or thoroughness of the information reported. The opinions expressed in these interviews do not reflect the opinions of INN and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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