Silver Interview

September 20, 2002

Let start the interview

The Mint has recently announced that they will be purchasing silver on the open market. How much of an impact will this have on the silver market?

There are two ways to analyze this Pat. First the Silver Eagle program uses about 10 million ounces of silver per year. So if you think of an additional requirement of 10 million ounces in a world than mines over half a billion (500 million) ounces per year, it seems rather insignificant. This is the approach the some analysts use. In fact this is what you will read in your normal newspaper.

However, valid this looks; it really does not give an accurate picture. Here's why? First and foremost the silver market has been in a deficit situation for 12 consecutive years. So, this means that ALL of the silver produced by mining activity is demanded by the market and MORE. We must really look at the above ground stockpile and determine if an additional 10 million ounces will have an impact or not.

I am going to give the most bullish case possible. According to the CPM group's Silver Survey 2002 about 400 million ounces of reported and unreported silver is available above ground. This study estimates between 300 and 500 million ounces. I am going to use the low number of 300 million ounces to build my case. Now just over 100 million ounces are located in COMEX approved warehouses. The other 200 million ounces is held privately. I consider these 200 million ounces to be in strong hands. Mr. Warren Buffett of Berkshire Hathaway owns 130 million ounces of the 200 million. It cannot be proven but consider this silver to be available only at much higher prices than we currently have. Now if we take the 10 million ounces the Mint needs versus only 100 million ounces on the COMEX we are looking at fully a 10% total demand. This is only part of the story however.

Most analysts go a bit further when looking at the COMEX. There are two categories of inventory on the COMEX, one is registered and the other is eligible. At the current time, there are about 60 million ounces in the registered category and 40 million in the eligible category. Most analysts agree that the eligible category is held by long term investors that have the warehouse receipts and merely use the COMEX as a storage facility. The 60 million ounces is owned by the dealer community and this silver is what is most available to the market. Perhaps, this is too bullish but if we look at a demand of 10 million ounces versus only 60 million in the registered category, then we are looking at nearly a 17% increase in demand. I will admit, this is as bullish a case as could possibly be made, but my purpose is to allow people to follow my reasoning and to consider all possibilities. The real affect will undoubtedly be less, than my best case scenario, but far greater than what is published in the mainstream press.

We receive questions about gold and silver's performance during a Depression. Would you comment on this?

This is tough, but I will. First people must understand we were on an honest money system during the last Depression and our country was in a balance of trade situation where we were cash positive.

That is more money coming into the country than going out. Now, we are a debtor nation, in fact the biggest debtor nation on Earth, and have spent the last 30 plus years on a fiat paper money system.

To be as simple as possible here is the short answer. Under government jurisdiction gold was raised officially from $20.67 per ounce to $35.00 per ounce for nearly a 70% gain. Silver is a different story, silver hit a low of 25 cents per ounce during the Depression. However, several laws were passed and eventually the U.S. Government became a buyer of silver at $1.29 per ounce, the official monetary price. This may be wishful thinking but I think the point needs to be made, if you were a good or lucky investor and bought silver near the low of 25 cents and sold it to the government about 5 years later, the gain you would have enjoyed would have been 500%. Compare that five fold "potential" gain for silver, against the 70% gain for gold. This is one of my main areas of focus; I truly believe that silver has more potential for appreciation than gold.

Another area of concern that people express to us is the confiscation issue, will gold and/or silver be confiscated?

First, I do not know for certain, but I highly doubt it. It appears to me, that the government might become a buyer of both the metals some time in the future. It would be similar to what we just discussed. The government at some point will most likely be forced back on to an honest moneysystem and central banks that have sold all this gold the past several years may become buyers at far higher prices than today. This view is not held by many, but this is what I expect. The U.S. probably would not become the first to go back to an honest money system; most likely another nation would be the first. Silver, might have a little different scenario. We must remember, when the U.S. became the buyer of all silver at $1.29 per ounce, a huge 3 billion ounce stockpile was obtained.

This of course was used for coinage, but some was in the DLA stockpile. At one time the U.S. government considered silver to be a "strategic" asset and the Defense Logistics Agency was in control of it. If the government decides later that it needs a silver stockpile again for defense purposes, then it might be possible to see the U.S. become a net buyer once again.

Do you believe the silver price is controlled in some way, and more importantly why?

Pat, it is obvious that silver is not in a free market and I feel that the case can be made without even discussing leasing. Ted Butler is correct and leasing does play a very significant part in silver's price, but let us put that to the side for now. To answer your first question Pat, I would answer it by asking you a question. What commodity can be in a deficit situation for over a decade and sell for less than the cost of production? Basic common sense tells us this is not right, look at how many silver mines have gone out of business. No the silver market is controlled by the amount of futures contracts sold on the Futures Exchange. This condition cannot last forever because there is less and less physical silver available year after year. At some point this fact will become recognized by the market and the price will move up substantially. Also, this new coinage act the President just signed allows the Mint to buy silver wherever it can find it. The original bill passed in 1986 mandated that only domestic silver be used. By allowing the Mint to buy silver on the world market is prevents some obvious pressure on the U.S. silver mining industry, which has been ravaged over the last several years due to low prices.

Your second question is far more interesting. I feel the reason silver has been kept low is two fold.

First, the Silver Users Association is like a private club of big corporations that use silver and have agreements with non primary silver producers to obtain the silver they need to do business. For example, Kodak might have a contract with a few of the big industrial miners and buy the silver needed for photography directly from that entity. As most people know about 70% of the silver mined comes from byproduct mining, it is as a result of mining lead, zinc, copper, and gold for example.

These miners really do not care about the silver price and are happy to sell it to a Kodak. The other factor is that gold and silver tend to move together. If silver took off on its own then it would focus tremendous attention on the gold market. However, once the gold and silver market really starts to grab the attention of the investment community I do expect silver to lead gold in the final phase up, just like it did in the late 1970's early 1980.

That comment leads me to ask this question, where do you see the precious metals markets currently?

Pat, we have just experienced phase one of a three phase bull market. Most financial markets go up in three distinct phases. The first phase is the low participation, disbelief phase. This is where we saw gold go from about $250 to $330 and then pullback to about $300. The Bulls got overexcited at $330 and now that the metal has moved back down some bulls are questioning themselves as to whether this is truly a bull market or not. Between the three up phases there are two corrective moves. The first corrective move is what we are in as we are doing this interview. The weak hands are shaken out and the price action consolidates. Once this consolidation is complete then the next move up begins, this time there is more participation and the true believers of course see very good gains on their precious metals holdings. Once this phase has exhausted itself, then we see another corrective phase. This corrective phase is usually long and rather scary. This is where the market adage "the market will wear you out, or scare you out", takes place. Many holders of metal will be inclined to be disappointed in no further advances, some quick declines will take place and generally a great deal of the precious metals investment moves into "new" investors hands. Once this is finally accomplished, the last and final phase takes place. This is the area that is the most exciting and produces spectacular gains. This is what we witnessed from October 1979 through January 1980. This phase is where the big money is made. I feel it is extremely important for investors to know, that ninety percent of the move in the metals come in the last ten percent of the time. In other words, if we truly have a secular bull market and it is ten years long for example, the majority of the gains will be made in that final year.

David, I know you and you do your homework, you are devoted to your research and sincerely wish to help people with their investments in the metals, how does one subscribe and are you offering anything special for our readers? David: Yes, to subscribe, you can call our Toll Free number 877-610-9962, you can sign up on the web site using any major credit card and lastly you can simply send us your order by personal check or money order. If paying by check please make it payable to : Stone Investment Group 21307 Buckeye Lake Lane Colbert, WA 99005 Please specify that you are acting on offer number 2288CC. You can make this notation even if you sign up over the internet.

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David Morgan ( 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

The melting point for silver is 961.93 °C - 1235.08 °K