The Silver Trap - and Its Explosive Trigger

January 31, 2005

The Silver Trap is composed of 1) Too little silver in the world, 2) Too much demand for silver from China and other countries, 3) Dollar inflation. Put it in an equation and it looks like this:


*Silver price explosion

The trigger is about to detonate, the time frame however cannot be known exactly. Those that attended the recent Vancouver Investment Conference know that near term my forecast is for a wide trading range in the precious metals based mostly upon the USD Index. This expectation however can change instantly because of politics or financial events. Regardless, the Silver Trap will ensnare most of the world's economies, large and small - the wary and unwary, rich and poor, high and low - all God's creatures - who have forgotten about the power of this explosive money metal and how quickly prices can rise once a tipping point is reached.

Like gold itself, silver is often underestimated. We do not live a long time - not relatively anyway - certainly not long enough to absorb anything near the vast sweep of human history with all its advancements and repetition. If we did, we would not so hastily discount the impact of precious metals on the human psyche.

Unfortunately (for some anyway, in this decade) too many in this modern world still take their cue from John Maynard Keynes who coined the famous contemptuous phrase "barbarous relic" when referring to gold and its contemporary position. Now if I had been there, I would have countered thusly: "Barbarous relic! No, Mr. Keynes, in a 100, even 1,000 years when no one reads bothers to read your incomprehensible, socialist rhetoric, people will still buy gold! They will travel to the ends of the earth to find it, and dig it, as they have for tens of thousands of years … "

This I truly believe - gold and silver are central to the human experience. They are linked to conquest, glory and mortality - to birth and death, passion and terror. We are born with an affinity for gold and silver just as we are born with a love of beautiful things. Only gloomy central bankers and dismal economists could predict the demise of precious metals as stores of value - but then again, these are people who believe that bits of paper - fiat money - can substitute for auriferous mineral formations of timeless worth.

Many otherwise intelligent people in financial circles simply will not acknowledge the deep hold that precious metals have over human beings. They keep trying to be scientific about it. They discuss money in terms of "sterilization" or 'M1, M2 and M3." Believe me, the Goths, Huns and Mongols of history's bloody narrative were not looking to loot paper notes - or even government bonds.

Too many apparently don't recall the 1970s, when gold and silver reached $800 and $50 an ounce respectively - and were last priced near their historical par. (What is that in today's prices? Read my Engineering the Price of Gold) Certainly no one is still alive who witnessed the founding of this country with acceptance of bimetallism - gold and silver - and government involvement only to assure honest weights and measures.

Itchy Trigger

My friends, the trigger is straining for release. Increased monetary expansion and even higher demand are putting intolerable pressure on the market. Here's what the BBC had to say about the Chinese economy just the other day: "China's economy grew at its fastest pace for six years in 2003, adding 9.1% to gross domestic product, official statistics have shown. … The growth rate in the final three months of last year was even more rapid, up 9.9%. China's strong performance was due to growth in trade, foreign investment, and consumer spending."

Meanwhile, what happened to George Bush's pledges of fiscal rectitude? The Washington Post reports: "Additional war spending this year will push the federal deficit to a record $427 billion for fiscal 2005, effectively thwarting President Bush's pledge to begin slowing the flow of government red ink, according to new budget forecasts unveiled Tuesday. … Administration officials rolled out an $80 billion emergency spending request, mainly for Iraq and Afghanistan, conceding the extra funds likely would send the deficit above the record $412 billion in fiscal 2004, which ended Sept. 30."

More American government spending and a higher Chinese growth rate - this is not anyone's idea of how to control inflation and moderate money generation. Of course it will be pointed out that precious metals have not truly broken out - though both gold and silver have nearly doubled in price over the last few years -and therefore precious metals are not indicating our-of-control inflationary pressure. My answer: Just wait.

I am not going to go into a long dissertation here about how and why precious metals prices remain where they are despite evidence that fiat currencies continue to expand aggressively. Whether metals prices are in some sense being "controlled" will ultimately become a moot point, given the pressures to print money on both Chinese and American governments.

Chinese leaders, in recent reports, seem to be taking the point of view that their fast pace of growth will not result in a so-called hard landing. What is sure is that Chinese leaders believe that the economy must perform at a high level to satisfy the demands of the Chinese population, especially the rural population that has not yet fully participated in the benefits of the boom.

In the United States, the government under President Bush seems to believe that no amount of spending can sink the U.S. economy and that the war status demands whatever spending is necessary in any case. But you simply can't print this much money without disrupting the world economy. The dollar's value has already fallen dramatically relative to other world currencies and as we've pointed out, prices of silver and gold have nearly doubled. Can anybody for certainty state that the trend is about to reverse? Certainly it is possible and I do not rule it out entirely. (see my Behind the Financial Power Curve)

As stated previously the market will decide and investors should prepare for uncertainty ahead. One of the best places to invest for uncertainty is money real money, gold and silver. Both will do extremely well even if the airplane goes down.

The Solution Exists in China's Own Back Yard

In this article, I have referred to the three triggers of The Silver Trap - lack of silver, monetary expansion and industrial demand. But I have also called what is going on in the silver market a "crisis" waiting to happen - because Chinese demand simply will not wane. It will actually only grow stronger, I believe, as more and more high-tech products utilize silver and the "compressed" Chinese industrial revolution begins to encompass the 300-500 million rural workers who thus far have been left out.

Not only have I referred to the silver market's imbalance as a "crisis," I have also suggested that the solution to it may lie in China's own 'back yard" - in the vast, underdeveloped silver mining regions of Inner Mongolia.

I have traveled to China and seen for myself the potential of Inner Mongolia where the Chinese have been mapping promising silver mines for years. I have written that the best way to explain the significance of what may occur in the Erbaohuo Silver Mine Belts of Inner Mongolia is to "remind precious metals investors that the most successful recent mine strike was Goldcorp - this once junior-mining entity [that] generated a market cap of hundreds of millions with a gold strike the size of, say, a single train boxcar a quarter-mile down."

In a white paper on the region, "Special China Report Two - Regional Focus, Secret Mines and Silver Partners," I then added, "What we are talking about in Erbaohuo is relatively shallow silver spread over a region of dozens and possibly even hundreds of miles. If these silver areas are actually connected by geology, and it does seem possible, then we are looking at more silver than a boxcar full of gold!"

This is what is known as a "mining district and these types of regions are the kind everybody in the business eventually comes to discuss and envy. Who hasn't heard of the Carlin Trend for example? Now whether or not this area in China becomes a "district" will depend on development potential and hard work. Yet the reward of having an ample supply of silver and base metals often found with silver might prove a great help in solving China's growing demand for commodities.

I have already announced in my reports a company that is fully positioned to take advantage of the potential of the Erbaohuo Silver Mining Region- and I am soon to go back to China (expected to be no later than April this year) to re-evaluate this company's position, including its formal - and powerful - relationship with one of the most prominent of China's multinational corporations.

Some have written that any new mining by the Chinese will dampen the price of silver. Well, friends, in a true free market, the demand for silver will dictate how, where and when new silver discoveries and development take place. In any event, silver is priced well below its modern-day historical average, and even lower when its relationship to gold is taken into account. Supply may merely stimulate more demand, as happens so often, and the increased action in the marketplace may merely destabilize an already unstable situation - causing The Silver Trap to detonate sooner rather than later.

The real question is whether or not sufficient new mining can come on stream before the pitifully small amount of Comex-grade silver is depleted. New mines take time to develop and the critical need for silver and other commodities continues unabated. This will put further pressure on the price of commodities. I therefore remain steadfast on this point; Not enough production will be ready soon enough to bring the silver market into equilibrium - not until the price explosion in silver is in the record books, anyway.

When I return from China, I will make clear the size of the opportunity that I see ahead of us for silver prices, and for this company in particular. Those of you interested in what I believe is the "silver market opportunity of our lifetime" may contact me at for information about my travel plans or to subscribe to the Silver Investor.

Silver Investor

January 31, 2005

David Morgan
Stone Investment Group

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

Silver has 47 protons and 61 neutrons