Silver/Gold/REE Review

September 18, 2009

Many have been asking what is going to happen with gold and silver this month, and I maintain it is a tough call. The September month is usually pretty positive for the metals. In fact, there have been several articles talking about the last chance to buy gold under $1000. Frank Holmes, a much respected fund manager, spoke recently about September being one of the best months to be in the metals markets. I certainly don't disagree with Frank. I'm pretty bullish for September but I'm very cautious going into October.

As addressed in last week's article, I am personally more comfortable buying the metal than the stocks here, but the stocks are outperforming, currently. I think buying the metal is different from buying the equities or futures or options positions, because by buying the metal you can hardly go wrong. Certainly there was a push into the metals in 2008 where we peaked out-silver above $21 and gold over $1,000.

Gold has surpassed that level again, and on Tuesday I sent an update out to our subscribers stating that the odds are clearly in favor of the metals continuing higher for a while. However, the commitments of traders in both gold and silver are flashing caution alerts in my view, and by any technical measure, both the metals are overbought.

Experience shows that a market can stay overbought for a very long time and continue higher and higher. However, remember the real estate market?

I now have a pretty good projection on where I think we will top on this rally, and the question then becomes how big a correction will we see? What if the general stock market drops off during October-how will that affect the mining shares? If the Dow gets hit in October, will that send gold and silver even higher?

Longer term, I think we're going to see far higher prices in both metals. Having said that, I think the best approach for the physical metal is just dollar cost average. Just discipline yourself to buy so many dollars' worth of gold or silver or both, each and every month. This approach provides you a very good price basis as these metals continue their upward path. This same technique can be used if you own a gold mutual fund, but I do not advise it for individual stocks.

In theory, the best way to do it is to pick a day of every month and put in the same dollar amount. So, for example, on the first Monday of every month, obtain $100 worth, regardless of price, and do that consistently, month after month after month. It accomplishes two things: first, it teaches discipline; and second, you don't have to think about it-you just buy that dollar amount. Thus, when the price is high you're buying less metal, and when the price is low you're buying more metal. And over time as long as we're in a bull market, and we are, you will actually do far better by using that discipline. Whereas if you try to time the market exactly and get in and out, it can be done certainly, but it's much more difficult than most people think.

In the September issue I quoted Thomas Jefferson:

"With the respect to future debt; would it not be wise and just for that nation to declare in the constitution they are forming neither the legislature nor the nation itself can validly contract more debt, than they may pay within their own age."

In my view, Jefferson is probably one of the best thinkers, and there were several, who formed the foundation of the United States of America. And we were very blessed, in my view, to have such great people involved in that undertaking, from an intellectual basis. Then of course it was put into practical terms and really worked quite well until the basic principles were ignored.

What a concept: to only live within your means as a human being or your nation state. Today, the U.S. is selling away its children's futures, so to speak; there is too much debt-that's the problem! The U.S. has not lived within its means for quite some time and was actually in far better shape in the 1930s than it is today. It was far more self sufficient on an individual basis and as a nation state.

If you go back to the last bull market in the metals, to 1980, the country was in better shape than it is today. The debt problems and the ability to service the debt have become a very big concern. We're seeing this in the mainstream financial press. China basically has enough U.S. dollars and is looking for an alternative. Russia's saying something similar. Japan is concerned. Most everyone who holds our debt is concerned.

A recent article addressed a proposal that said wouldn't it be great if we had a global currency that would usurp the dollar as the universal standard. This is stuff in the mainstream. We are in uncharted waters. We are in a situation where we have a debt-based economy and there really is no way to pay it back in the foreseeable future. Doesn't this lead to a very, very big financial crisis? It always has. We're witnessing that now. Some people are well aware of the true condition of the debt bomb exploding, and others are ignoring it. And still others are saying it's really not that big a deal, we're going to come out of it. Time will tell.

I believe there is a misrepresentation of what's really going on. What we have is a money supply that continues to increase, if you count money as credit. That means with all these trillions of dollars that are coming out, basically out of thin air, or with computer entries going into the same failed banking system that's already put us in this predicament, you have the financial assets that represent on paper basically the physical economy your businesses.

Financial assets have actually come down substantially from when the credit crisis started in 2007, but they are making a brief rally here and personally I think it is about over. More important than money and more important than ownership of a business is what is the physical economy actually doing, because this is what is required for all of us to eat, have shelter, and make a living. And that has been deteriorating in real terms since about 1968 in the United States of America. You might get some controversy on that statement, but the facts are there, if you look, on an inflation-adjusted basis. In real terms, the physical economy in the United States started going down in about that timeframe. Certainly people got paid more "money" for their goods or their services. But in real terms, was the wealth per capita increasing or decreasing? The answer is "decreasing." Your standard of living might have gone up, you might be in a bigger house, but the debt load to carry the mortgage on that house required both mom and dad to work to pay the mortgage.

Also in the September issue we discussed the rare earth elements sector, which was written about by Clint Cox, who, I'm honored to say, has been contributing to The Morgan Report for quite some time. In my view, Clint is one of the foremost authorities in REE. He is as picky as I am, meaning that he really selects companies very carefully and really hasn't come up with any at this point that have met his strict criteria. We did have a REE company earlier and took profits after a double.

A lot of these companies have a great story. They might have a great (rare) element but they really don't know the business to the extent that you could actually make a profit with the grades that they have obtained in different parts of the world. China basically has a monopoly on the rare earth element field, owning roughly ninety percent of the market. It's a fascinating story. The market is extremely small but it's imperative for your hybrid cars and many high-tech applications. So we're watching it carefully. The REE sector isn't something we focus on in every issue, but we usually have Clint report to us at least two to four times a year.

Since China has such a huge percentage of the market share, if a company outside of China had rare earth minerals or metal that was in high demand and it was one of the few in the western hemisphere, it could do quite well. There will be a lot of them, just like anything in the resource sector. There's a lot of hype and promotion around a lot of these small companies that don't merit that kind of investment participation. A lot of people don't know better, but some do, and they are just betting on the fact that it will be a bunch of not so sophisticated investors who will buy the party line and invest in the stock, when the actual merits of the company really don't warrant people putting in that kind of money. That's sort of the history of investing in these small junior companies.


It is an honor to be.

David Morgan

Mr. Morgan has followed the silver market for more than 30 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. Mr. Morgan has just written a free report titled, Silver Fundamentals, Fundamentally Flawed, which can be accessed here: Free Silver Report. To receive full access to The Morgan Report, click the hyperlink.

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

Most silver is produced as a byproduct of copper, gold, lead and zinc refining.