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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

David Morgan Explains Why Silver Has Broken Out and Catching Up and Where It Goes Next

Commodities / Gold and Silver 2010 Nov 01, 2010 - 03:20 AM GMT

By: David_Morgan


Best Financial Markets Analysis ArticleDaily Bell: David, welcome back and thank you for sitting down with us today. Remind us about the difference between silver and gold both as precious metals and money metals.

David Morgan: "The major monetary metal in history is silver, not gold." – Nobel Laureate Milton Friedman in an interview with James Blanchard at the New Orleans Investment Conference. November 7, 1993. The above quote is fact of monetary history but few in the West study or know silver's history. Yes, gold is money but silver has been used as money more often, in more places, by more people than gold ever has.

Daily Bell: Why has silver been known as the peoples' metal?

David Morgan: Because of value per unit, as this interview takes place gold is about $1400 US per ounce and silver is about $25 per ounce. Since most transactions are small daily transactions by all people it is known as the peoples' money. Silver buys your small items—food, water, energy, and clothes for example. Large settlement purchases would be done in gold.

Daily Bell: What is the gold/silver ratio and where is it today? Has it closed the gap since we last spoke?

David Morgan: It is the price of gold in dollars divided by the price of silver in dollars. As of this interview that would be 1400/25, which is 56. The ratio has moved from 68 to 56 in the past six weeks and it has moved in favor of silver since our last interview.

Daily Bell: Since the historical range is said to be 15/16 to one (silver versus gold) it sounds like there's a long way to go. Does price manipulation continue?

David Morgan: Yes, but a spokesperson for the CFTC has finally come out after three years and I expect some formal announcement soon. Bart Chilton's statements so far are straight to the heart of the matter and our readers are encouraged to look at his statement on the CFTC website.

Daily Bell: Let's return to the previous question. Has silver broken out?

David Morgan: Yes, both gold and silver broke out in early September 2010. Silver has now achieved a new nominal high over the March 2008 high of $21 and this has sent many investors to take another look at the silver market.

Daily Bell: What countries are most hospitable to silver mining today? Mexico and Peru you mentioned last time we interviewed you.

David Morgan: Those two countries are normally fighting for first and second place as leading silver producing countries. As the global economic picture continues under stress all investors need to consider that what might be hospitable today may not be so tomorrow.

Daily Bell: Any important silver mining companies you want to mention?

David Morgan: I prefer to leave that to my paid membership service The Morgan Report that can be accessed at my website: We do look at more than the silver market; for example we were the first to begin reporting on Rare Earth Elements.

Daily Bell: Let's ask some technical questions. Where does silver go from here? What are the best investments to make throughout the business cycle, and do they change over time?

David Morgan: On a very short term basis gold and silver are overextended on a technical basis and could pullback. On a longer term basis silver and gold are going far higher in paper terms in any currency you wish to name. Addressing the second question, I will make the assumption you are restricting this to the precious metals. On that presupposition, the best investments very early in the cycle are penny mining exploration companies, in the middle part of the cycle the best is mid tier producers to top producers, favoring the mid tier as they as a group are taken out at premiums by larger companies. At the end of the cycle the mania/panic phase almost anything with gold and or silver in the name will fly like crazy and fundamental worth means very little. This is the very dangerous part of the cycle but can be very rewarding.

I wish to add that this is based on previous cycles of all markets, but with the currency crisis that is now being experienced globally it may not be prudent to sell physical gold or silver for your local currency until the financial system is on firm ground.

Finally, after the financial system does stabilize there could be a time when your gold (silver) would be able to purchase well run businesses (like the Dow?) for very favorable prices.

Daily Bell: Is there more recycling? Is silver uneconomic to recover?

David Morgan: There are two main studies on the silver market and they disagree on this point. According to one silver recycled in 2009 was the highest ever, while the other study claimed it was off noticeably. I am bias to the bullish case because almost all recycling was a result of silver halide (film) processing and that has fallen off dramatically the past several years. Many applications that MUST use silver have such a small but necessary amount that it is uneconomic to recover. This is why silver is "consumed" because this type of silver usage does end up in landfills.

Daily Bell: How much is the industrial demand for silver?

David Morgan: Basically 50% of the market or slightly more. It continues to increase as silver's use in solar, water purification, and food processing/preservation will increase dramatically over the next decade.

Daily Bell: Is the silver market in a deficit situation?

David Morgan: No, the deficit ended in 2007.

Daily Bell: From 1990 to 2007, according to the best recognized studies on the silver market, about 1.5 billion ounces of silver were eaten out of stockpiles. You agree?

David Morgan: Yes, it is pretty apparent by looking at the above ground supplies in the public domain.

Daily Bell: How much is silver increasing? Two percent per-year increase?

David Morgan: On a net average basis from roughly the year 2000 all mining activity (base metal and silver) has increased between 2-3 percent per year.

Daily Bell: Was there a slump in global silver production in the 1990s?

David Morgan: I would state it as the mining industry was fairly flat through the 1990 to 2000 time frame. Once the commodity cycle bottomed around 2000 we have seen a general increase since that time until present.

Daily Bell: What about future production?

David Morgan: Future production will peak at some point and due to several factors, energy costs, environmental considerations, and protectionist attitudes in the future.

Daily Bell: What do you think of the current economic crisis? Are Western countries handling it well?

David Morgan: This is the financial crisis that I and several others in my field have predicted for so long. It is proceeding pretty close to how I have expected it to proceed and the Western countries have handled it to the best of their ability. Which means they have ignored the fundamental flaw in the system and pretended they know what they are doing.

The world is swimming in debt and so far the solution is to borrow more money, or increase the debt even further. That is saying you can borrow yourself rich, and that can be done until you cannot make the payments anymore. All indebted nations are holding interest rates low so their debt servicing is "manageable" but in reality it is mathematically impossible to service the debt but very few in official roles (government) will ever admit this startling fact.

Daily Bell: How well have the bailouts worked?

David Morgan: From a psychological level fairly well, meaning the masses of people globally still think government can solve these problems but we reached the point of no return in August 2007. That is when trust in the entire system broke down to the point where banks and brokerage houses would not accept "paper promises" from each other. From a practical standpoint they have not worked and continue to stress the system.

Daily Bell: You have written, "According to the USGS (United States Geological Survey), there is more or less nine years' worth of economic silver in the ground; in other words, peak silver is roughly a decade away." Can you elaborate?

David Morgan: Yes, that is based upon a silver price of perhaps $12 to $15 per ounce, so as the price of silver increases there is by definition more silver that becomes economic (profitable) to mine. Also, new mining techniques became available where open pit operations of rather low grade material is economic when it the past in was not. There is nothing to say that another breakthrough could take place and extend the mining of minerals further into the future.

Daily Bell: Has gold mining peaked, and what does this mean for silver?

David Morgan: Gold mining has peaked by all indications and since 13% of the silver supply comes as a result of gold mining it will have some effect, but very minor at this point.

Daily Bell: How does silver fit into solar energy demand?

David Morgan: Almost all governments globally are looking for green energy and that means solar energy primarily. Silver is used in several ways for solar – from mirrors to reflect to sun, to solar panels and electrical distribution.

Daily Bell: Do India and China play into this equation?

David Morgan: To the extent that they will use solar and more importantly to the extent that they will increase their electrical distribution networks. A decade ago the average Chinese used 1/70th the amount of silver that the average North American used. As China continues to move toward a high technology society the use per person will increase dramatically. Just think of how many cell phones and laptops are in China today compared to a decade ago.

Daily Bell: Is silver the money of last resort?

David Morgan: As I wrote in the Ten Rules of Silver Investing (Click here now for a FREE copy), I had this to say:

"No one likes to be a prophet of doom, but the simple truth is that silver is the world's money of last resort. Should a severe economic collapse occur, leaving paper assets worthless, silver will be the primary currency for purchase of goods and services. (Gold will be a store of major wealth, but will be priced too high for day-to-day use.) Thus, every investor should own some physical silver-and store a portion of it where it's accessible in an emergency."

Daily Bell: How should people invest in silver?

David Morgan: Too many investors, upon deciding to beef up the metals portion of their portfolio, buy too much physical silver at once-and in the wrong forms. Beginning metals investors should concentrate on pure bullion bars or coins, in smaller sizes, looking to pay a minimum premium over the actual metal value. Avoid commemorative coins, decorative items, jewelry and other collectibles, all of which carry large premiums and have limited resale markets.

Daily Bell: Should people buy mining stocks?

David Morgan: If you are a typical investor, you cannot expect to be an expert on silver and the silver market- but you can invest in the people who are. Once you have established a core holding of physical silver, leverage both your knowledge and your buying power by purchasing the stocks of mining companies. These shares are highly responsive to changes in silver prices, frequently producing much higher percentage returns than the metal itself.

Daily Bell: Should people dollar-cost average?

David Morgan: Dollar-cost averaging is an ideal way to implement Rule 2. By making same-dollar purchases at regular time intervals, you wind up buying more metal when prices are low and less when they are high. This approach helps you develop discipline, erasing the "trader' mentality that infects many market participants and instead fostering an "investment" philosophy. Dollar-cost averaging also eases some of the sting when prices move against you, allowing you to view the downturn as an improved buying opportunity rather than a disappointing loss. There is a dollar cost averaging program that I am favorable to and it can be viewed here:

Daily Bell: Should people be wary of bullion dealers?

David Morgan: Because of the specialized nature of the physical metals markets, selection of a well established dealer with a quality reputation is essential. A good dealer will provide timely execution of your trades at fair prices with reasonable fees. Note, as well, that the lowest price is not necessarily the best price. In the past, some dealers who squeezed their price margins too low in order to attract clients were unable to make delivery, leaving those clients holding the bag.

Daily Bell: Where should people take delivery of silver?

David Morgan: While it is wise to keep some of your silver where you can get to it easily, it is also important to keep the bulk of your metal in a safe place – especially as you holdings increase. However, if you establish an account with a brokerage warehouse or other public storage facility, you should make sure your holdings are kept segregated and that you can inspect them when you wish.

Daily Bell: Should people speculate?

David Morgan: Depending on your individual goals and our personal tolerance for risk, a small portion of the assets you commit to silver can be used for speculation, perhaps in futures contracts or options on futures. Never forget, however, that this type of trading is speculation, NOT investment.

Daily Bell: Where can people find out more information?

David Morgan: You do not need to be a student of the silver market to profit from your metals investments. However, you will greatly increase your chances of success-and the size of your potential profits-if you understand the fundamental factors that drive silver prices and pay regular attention to current supply and demand considerations. There now are many writing in the silver space, when I started over a decade ago it was probably only three of us. Certainly you can visit many websites these days and find all kinds of differing view on the silver market.

The readers can find my work at the following sources:


YouTube – silverguru

To find my speaking schedule is it best to get on our free mailing list.

Daily Bell: Should one invest in silver or collect it?

David Morgan: Owning fine silver items – including rare coins – can provide great enjoyment and personal satisfaction. Like paintings and other artworks, they are beautiful and often quite valuable – and, if you are astute at buying and selling, they can generate large profits. In spite of this, however, always view such holdings as collectibles, NOT as investments. When you need your silver – or simply want to cash in – you do not want to have difficulty selling or be forced to forfeit a large aesthetic premium, both of which are likely with silver rarities.

Daily Bell: Should one stop at 10 percent of one's portfolio?

David Morgan: No matter how good the market looks – or how worried you are about the future of civilized society – you must always remember that silver should make up only a small portion of a well-diversified portfolio. I recommend committing no more than 25 percent under the current economic conditions.

Daily Bell: David, your time is most appreciated. Thank you again.

David Morgan: It is my pleasure. I really enjoy the great work you are doing. Keep it up.

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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