Silberinfo Interviews David Morgan
We thought it might be useful to our English readership and therefore are publishing it in mid December 2006.
The interview follows…
Silberinfo: What do you think about the silver ETF? Is it 100 % backed by physical silver?
David Morgan: I will reserve judgment for now. The first two 10Q's, which are required to be filed, did show "real silver", however these were unaudited statements and I am going to wait until the audited statement is filed before I make my final assessment.
Silberinfo: Do you think that Warren Buffet has sold all of his silver? Could you imagine, that it was only "paper silver"?
David Morgan: I wrote a report on Buffett and his silver that is still available to paid subscribers on my website. I also followed the story very closely in our newsletter. I still think Buffett actually only took possession of about 100 million ounces of physical and that was sent to London. It is my firm belief that the Silver ETF is largely comprised of the silver that Buffett once held.
Buffet may have "leased" some paper silver as explained in the Buffett report I referred to on my website but Berkshire Hathaway definitely did take physical for at least 90 million ounces and perhaps the total of 129.7 million ounces. Again, I cannot prove it but think the actual physical amount was probably about 100 million ounces the remainder was in "paper" form, which was resolved many years ago.
Silberinfo: From time-to-time one can read that there's an oversupply in the silver market. Do you agree?
DAVID Morgan: It depends upon what time frame we are speaking. When silver shot up to $50 USD in January 1980 a great deal of physical silver came to the market and was refined into bullion. This silver has been worked off from the market over the past 16 years to a point where not much .999 fine silver Comex grade bars exist today relative to what existed in say the early 1980's. Remember that supply and demand have to equal each and every year. Since mining has not kept up with demand the above ground supply of silver has been eaten up and at this point continues to be eaten up.
However, the amount of silver mined has increased the past few years due to the huge increase in base metal production and even increased primary silver production. The question becomes will the market reach equilibrium at some point and the answer generally is yes. Certainly it is possible that more silver will be mined at some point in the future than is demand by the market for industry. This has been the case for gold for centuries; the reason gold continues to be a good investment is that people seek it as a store of value. Silver offers the same store of value dynamics as gold only better because there will always be an industrial demand it is just that investment demand for silver has not caught up to gold yet. I am fond of saying that whatever is good for gold will eventually good for silver and this has become true, with the Silver ETF, goldmoney.com now offers silver accounts and some wise investors do see that silver has a place in their precious metals portfolio.
Silberinfo: Lately, Frank Veneroso turned bearish on silver. What do you think of his arguments?
David Morgan: First I respect Frank and finally got to meet him at the Gold Rush 21 seminar in the Yukon some time ago. I also admit that the market knows more than any analyst myself, Frank Veneroso or anyone so keep that in mind. However, I do not buy his arguments because silver and gold are married like it or not. If you look at the Bible, the Koran or nearly any book dealing with history or money silver and gold are almost always together. The fact that silver is the "poor man's gold" cannot and will not go away no matter how many people "experts" or not tell you so.
The advantage that investors have is that very little of silver demand is investment demand, whereas most all of gold's demand is investment (jewellery) demand. So my argument is that only a very small percentage of people on a world wide basis need to wake up to the merits of silver investing for the price to continue to move up. Lastly, I expect to see a point where the little guy simply cannot or will not be able to purchase gold it will simply cost too much for him to feel comfortable. This took place at the end of the cycle in 1980 and some potential "gold" investors actually purchased silver because it was cheaper on a per unit basis.
Silberinfo: In your opinion, what is the better investment today: silver or gold? Why? What's so special about silver and why do you prefer silver to gold? Are you bullish on gold as well?
David Morgan: I am bullish on both gold and silver and think all precious metals investors should have both. Silver offers greater opportunity due to the fact it is such a small market and still remains so undervalued relative to gold even as this interview is taking place.
Silberinfo: Would you recommend an investment in a silver mining company with a hedge book?
David Morgan: In some cases yes, we try to avoid it but we are realistic here. A modest "hedge" cannot be avoided in some cases because the backer usually banks want to be assured that the loan they give the mining company is secured. When we consult with mining companies we always emphasized hedging be done on the base metal side and not the silver side if at all possible. If a company has sold forward several years of silver production then certainly we avoid that type of situation.
Silberinfo: What do you think of options and exotic bank instruments like certificates? Would you ever recommend your readers to use bank instruments during a precious metals bull run?
David Morgan: Actually yes, but a very qualified yes. First if and only if that person/broker/money manager/ or some entity has real physical bought and paid for sitting where they can touch it then yes go ahead and speculate in the paper market if that is what you really want to do. It is not my place to tell each individual what suits them best, only they can figure that out for themselves, but be warned that when you are playing the paper silver market only expect paper in return-nothing more! You gain or loss in some silver certificate of banking instrument is only as good as the paper it is written upon. Personally I avoid this with the exception of very modest positions.
Silberinfo: If a big famous Prime European Bank approaches you and offers you 100,000 USD per month for a banner on your website promoting their bank products such as Silver-Options & Certificates, would you consider it?
David Morgan: Possibly, we have been advised on the legal side not to take ads from mining companies but an investment in the real metal would be allowed. If it were merely a paper claim we probably would not take the ad.
Silberinfo: If a friend asked you, how much silver he should own relatively to his other assets, what would you recommend to him?
David Morgan: Depends on the person, his or her age, risk tolerance level and many other factors but at least 5% would be my minimum recommendation. In the investing rule book I stated 10% and as of a few years ago said 20% is more like it. It is impossible to state because it has to be addressed on a case-by-case basis. For those that know nothing about the function of gold and silver five to ten percent is probably sufficient. If you are inclined to really watch your investments carefully and accept the large price swings then higher percentages are in order.
Silberinfo: Do you see a short squeeze in silver over the next years?
David Morgan: Yes there will be a short squeeze in silver.
Silberinfo: In your opinion, why is silver so cheap compared to gold?
David Morgan: Investors are undereducated on the merits of silver investing.
Silberinfo: In your opinion, what are the most prospective projects among the silver mining/exploration companies at this moment?
David Morgan: I get paid for that information and what I like best right now actually involves a potential nickel project that may become bigger than Voisey bay. There is one silver project that I personally toured recently that is a private company presently but once it becomes public our readers will be among the first to learn about it and how to invest in it.
Silberinfo: You are a well-known and highly respected expert on silver. What was the reason why you began focusing on the moon-colored metal?
David Morgan: Passion pure and simple. My study of monetary history, investing, and a fiat backed currency, and how few investors really build fortunes all these things play a factor in my thinking.
Silberinfo: What is your personal price target for one ounce of silver at the end of this bull-run? Or do you think its possible that the bull market won't end - but consolidate on a high level without correcting all or part of the way back down?
David Morgan: To put a paper price on silver may prove to be academic only. In a true currency crisis the paper value of silver could go to anywhere. I am on record as stating that silver could reach $100 USD or more at the top. I expect the top to be on a spike and the price to not last too long at that spike price, once silver consolidates into an equilibrium price it might be in the $20 to $30 USD range basis today's USD (December 2006). I must be careful here because most market go from undervalued to fully valued to overvalued and certainly even silver should at some point become overvalued even in paper terms. However, depending upon what was taking place in the currency markets at the time silver might hit a high level and hold at a high level for a significant period of time.
Additionally, even under normal currency conditions if a true shortage develops which is very likely with silver, then the price could again stay at a very high level for a lengthy period of time.
Silberinfo: As silver is mainly found at surface levels (contrary to gold) and the above-ground stocks of silver have (almost) depleted (contrary to gold) thanks to the silver industry consuming most of it, do you think that there can be a time in the future that silver will be priced higher than gold?
David Morgan: Great academic question, certainly it is possible. Depending upon which study you choose one author stated that silver sold for more than gold in ancient Egypt and another author stated silver sold for 1/5 the price of gold in ancient Egypt. I think the point is simply that silver has a great deal of catching up to do relative to gold. I did have one of my consulting clients phone me years ago and a well known analyst stated that gold and silver would sell at the same price around 2013. Again, I take these types of questions in stride and do not focus too much attention upon them, I am more interested in the here and now and what we can do now to best take advantage of what the market is willing to give us.
Silberinfo: Silver is seen as the small brother of gold, and indeed, silver prices tend to follow gold prices - but the fundamentals are quite different as you outlined and are indeed even more bullish than already for gold. Do you see silver de-coupling from the dominating influence of the gold price in the near future?
David Morgan: Not in the near future, but it is difficult to define because the spread trade that we advised most of our institutional clients on long silver/Short gold has been a fantastic long term trade. In other words silver has outperformed gold just as I predicted so many years ago and in my view will continue to do so for many years to come.
Silberinfo: If the Dollar and other world currencies collapse in the next years, because they are fiat-money, and a disastrous worldwide economic crisis begins, do you think that such a lesson would teach the people (finally) that only a Gold standard can prevent such an event to happen again and that the Gold Standard will/must be re-established? What alternatives would we have and could be thought of?
David Morgan: The greatest lesson of history is that people do not learn the lessons of history. So no matter how people think after the "crisis" hits them in the pocketbook at some future date they will forget eventually. I am not sure a gold standard will be re-established. I think we may see a two-tiered system where only gold is accepted for balance of trade payments between nations but the "fiat" is still used by the citizens within each nation-state. I wrote about the "Amero" in my January 2006 issue and now that word is appearing on the Internet. My readers were well aware of this "new" currency well before the general population.
People are very ingenious and you will see private backed money such as goldmoney.com and many other precious metal backed Internet currencies. Communities will start their own currency systems, barter in some cases does work but not to a great extent. The proposal by my friend Hugo Salinas Price in Mexico provides a method for silver to circulate along with the unbacked peso and if people would actually really study every word in the proposal rather than simply refer to Gersham's Law they might understand how this could become a reality.
Silberinfo: If Gold is being re-monetized in the near future within a Gold-Currency-Standard, do you think it would be a good idea to re-monetize silver as well? What about platinum and/or palladium or even oil? What's the difference to all those metals and commodities when wanting to implement a "new" currency-backing standard?
David Morgan: Quite a question… The truth of the matter is that the only system that has proven to work the best in the past is bi-metalism. That is a gold/silver standard where both are used as money together. Gold is a check on the amount of receipts (currency issued) and silver if NOT fixed to a specific ratio but rather set to the market conditions then silver checks the gold price. I do not have time nor am I in the mood to go through all the reasons but even the Wizard of Oz was used as a metaphor for the bankers going to a pure gold standard. What history tells us is that a gold only standard is only one step away from the banks regaining control and putting the fiat system back into place and the cycle repeats. If you really look at stability you will see a three metal approach. Gold, silver and copper each freely trading against each other based upon the free market and no outside influence. With the recent ban on melting copper or nickel people should wake up to the reality of why coinage is important.
Silberinfo: Everybody knows that every empire in the history of the world has collapsed so far. What are the influences that make the US-Empire collapse as well?
David Morgan: Truth or resistance to the truth. The world and perhaps the United States in particular has a void in leadership. The only way out of any problem no matter how big is a clear recognition of the problem. The simpler and more succinct the problem is stated the better it is for everyone. Because once the people understand the problem they are very resourceful and will do what is in their own best interest and subsequently this becomes in the best interest of everyone else ironically.
However, no leader today is about to say the United States cannot print itself out of this mess it will only be after it is apparent to the financial markets will the obvious be stated. Even at that--- the real cause --a dishonest financial system will be only available on the Internet or Free Press, the mainstream is likely to blame the speculator or hoarders or "selfish" investor. This is far from the truth because the United Kingdom was once the most powerful nation on earth under the pound sterling when their money was honest, when the British went off honest weights and measures the world went to the United States because up until August 1971 the U.S. dollar was gold backed internationally (not internally-although silver was backing the U.S. dollar until 1965).
So will a collapse come? Yes but it will probably come in a different way or manner than anyone suspects at this point. It may be a subtle as some real estate investors getting wiped out, pension funds not paying on their obligations, social programs being moved out ten years in the future, retirement age being moved further out, families upsizing (grandparents/parents/children all living under the same roof), and outrageous prices for food, energy, and shelter. Very little investment is real productive capacity most "investment" simply going to keep the "system" from total collapse. On the other hand out of great stress many great things have happened. When things are good and people are complacent little progress is made, so with all the tension in today's world I still remain open minded that we face one of the most if not the most interesting times in all of history! Never underestimate the ability of the human spirit to soar under the most adverse conditions.
Silberinfo: If the US-Empire is collapsing and ending now, and if because of that (most of) the currencies, markets and economies worldwide enter into a crisis as well (as globalisation has brought "dependencies"), and the major nations worldwide will decide on returning back to some sort of a Gold-Standard, it is clear that those countries will prevail and start rising again strongly that have gold (officially or unofficially). Therefore, do you think that the US didn't sell its gold reserve for that purpose and to have "real" assets "of last resort", but act in a way to make other central banks sell their gold to weaken potential future rival currencies?
David Morgan: Let me start by stating all I am going to say on this is pure speculation/conjecture and to take my view lightly because the fact is I do not know. What I do know is the adage "The Golden Rule" that "He who owns the gold makes the rules." If the U.S. really does have approximately 265 million ounces of gold bullion then of course it would or could become the ultimate place to invest.
However I do not think this is the case much speculation has gone on about how the U.S. gold eventually ended up in the hands of the Central Banks. As much gold as has been lent, swapped, "loaned", collateralised or in some other way used as a derivative for some other application it still must be remembered that the banking system still owns a great deal of gold. Much less than perhaps 30 years ago but still a great deal of gold. This is not true of silver anymore; almost no government owns any appreciable amount of silver.
So in my view the question becomes one that GATA has been very interested in for some time. Let's all find out how much gold the U.S. really has - that is do a full accounting. If it turns out the U.S. has the gold they report then fine, if not well I will leave the consequences up to you to figure out.
Silberinfo: How do you analyse mining and explorations stocks? What criteria do you apply, and what models do you use for the valuation of their projects and assets?
David Morgan: Basically two ways, the first is for producers and this is a standard financial model based upon net present value. We want to see how profitable the mining company is or is not, what potential is has for growth and what political risk does it have due to location. Of course we look at management, the mission statement, how liquid the company is and the balance sheet. These are companies that fit into our top of our Asset Allocation model. This is a dynamic list and does change but most the companies that are able to achieve this level in our model are solid and make good investment sense as long as the commodity bull continues.
The junior sector is almost impossible to apply any exact analytical model at least that we know of and we have tried. Mostly these are story stocks and we do our best to investigate the management, financing, location, underwriters, past history, promotion budget, previous company affiliations, what others in the industry have written, if the project or projects are open pit type or underground potentially. We do not focus too much on how many ounces per share because it can be useful but only when comparing similar situations for example some of the best investments are underground mines but based on ounces per share an investor would miss out entirely on this when in fact the company share price soars. There are so many misunderstanding on how to evaluate a project it is impossible to address without spending hours in an educational environment. We also look at the metallurgy and infrastructure. Certainly this does not cover everything but picking juniors is much more of an art than a science and in my view will always be that way.
Silberinfo: Do you visit the projects of companies you analyse?
David Morgan: In almost all cases either myself personally or one of my associates will visit the project. This is not always the case but most often it is what we do for our readers. The top companies in the Asset Allocation Model we really do not visit because their reporting requirements are so strict that a good financial analysis is usually sufficient.
Silberinfo: What do you think about the promotional campaigns of explorers? Are some of them exaggerating in an illegitimate way just to raise enough capital?
David Morgan: I am somewhat neutral on promotions, you need a certain amount but an investor needs to look at the extremes. If a company only promotes and does not drill then it is close to a "pump" shop, if a company only drills and does little or no promotion then the investors are getting somewhat of a disservice. So what is exactly the correct mix, it is hard to say there is no exact way to balance the two each company is different and we evaluate each that way-meaning individually.
On the second question, this happens and will continue to happen, it is part of the business and most of the time the "potential" or "possibilities" far exceed reality however most of the investment that comes in early is from investment houses and brokers and they fully understand the "game."
Silberinfo: The silver market is volatile. Do you attempt to trade tactical positions in mining shares? If yes, what criteria and models do you use to see, if there is a short-term market top/low?
David Morgan: We do send out intermediate signals to our paid subscribers. There are many criteria and we do not really divulge them but you can see our track record in a recent article posted for public viewing called: Timing is Everything-
This concludes the interview.
16 December 2006
David Morgan (Silver-Investor.com) is a widely recognized analyst in the precious metals industry; he consults for hedge funds, high net-worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, the author of Get the Skinny on Silver Investing, and a featured speaker at investment conferences in North America, Europe and Asia. You can receive a free 30 day trial subscription here http://www.silver-investor.com/joinfreelist.html