David Morgan makes a case for silver
Typical pre-teen boys may be as committed to
collecting coins as they are baseball cards, but
to find 11-year-olds intrigued by the M1 money
supply, fiat currency and the silver standard
would be a rarity by anyone’s standards. David
Morgan, whose interest in silver dates to that
tender age, was one of the rare ones—and still
is. Although his horizon has expanded
considerably since those days, he now stands out
among the world’s preeminent silver authorities,
investment experts and worldview economists.
All’s been decidedly unquiet on the precious
metals front since David’s last exclusive
interview with The Gold Report this past April.
Back then, U.S. Treasury Secretary Hank Paulson
had used the term “financial crisis" more than
five times in a recent speech, circumstances in
which, as David put it, “the attraction to
precious metals becomes more urgent.” At that
time, he also speculated on whether there is
enough silver above the ground if just 10% of
the baby boomer population were to put 5% of
their net worth into silver. According to David,
the answer is a resounding “no.” David sees some
silver lining the recessionary thunderheads, and
a spring that may bring see an “Obama Rally”
The Gold Report: When you talked with The Gold
Report in April, silver’s 200-day moving average
was $14.66 and gold's was $785. To say we’ve
experienced turmoil since then is something of
an understatement. What’s your view of what’s
happening in those markets today?
David Morgan: Both silver and gold markets have
become victims of the credit crisis, which
actually started in August of 2007. Things
really got going to the downside on the annual
rollover of August 2008 and that has continued.
If you look at gold irrespective of the
dollar—in other words, vis-à-vis other
currencies—it’s doing quite well. And if you
look at gold in U.S. dollars vis-à-vis any other
market such as the Dow Jones, the S&P 500 or the
oil market, it’s actually holding up better than
Silver is doing not as well as gold, but better
than the base metals. And since silver is really
an industrial metal and a monetary metal, you
would expect it to perform during recessionary
times as it has—better than the base metals but
not as good as gold.
TGR: When do you expect silver and gold to
DM: We have seen the bottom already. Of course,
you never know a bottom until a good amount of
time later, but all kinds of technical
indicators as well as sentiment indicate to me
that we have seen the bottom I announced this to
our members last weekend.
TGR: How will you recognize the bottom?
DM: On a weekly chart you can see a weekly
bottom; on a monthly chart, a monthly bottom.
You can only know a bottom for certain by
hindsight. But right now, as I said, technically
and sentiment-wise, we have hit a bottom.
Sentiment is awful, even some gold bugs are
predicting gold to go lower. Having said that,
no one can call a bottom exactly every time.
TGR: So most gold bugs are looking to see gold
going even lower.
DM: I wouldn’t say “most.” I know that some are.
And it’s, again, sentiment. Things have become
so bad in all the markets that even the gold
bugs are starting to question whether gold can
maintain these prices. Technically, silver’s
already hit the major uptrend line, but gold
hasn’t. The major uptrend line for gold lies
around the $640 level. Is it going to get there?
No one really knows.
The volatility is what we’re talking about. The
volatility is extreme in all markets, gold being
one of them. Just since the credit crisis really
manifested in August of 2008, we’ve had days
where gold was up by $90 and other days where
it’s been down $50 or so. The swings are
considerable. Going forward, I think there will
be more of the same, days when gold’s up well
over $100 and probably down the same.
TGR: You said in the past silver tends to be
more volatile than gold. Considering the swings
you anticipate for gold, what do you expect to
see in silver?
DM: Silver, of course, is a smaller market, so
it’s subject to greater moves both up and down.
You may see some dollar up days where silver
just takes off and goes up a couple or three
bucks at a time. I don’t think you’re going to
see that on the downside until we get much
higher. In other words, you won’t see a $2 down
day from the $10 level, but you may see that
once we approach the $25 or $30 level.
TGR: Jay Taylor (who produces the weekly Gold,
Energy & Tech Stocks newsletter) says that from
his perspective silver does well in an
inflationary environment—better than gold—and in
a deflationary environment, gold does better
than silver. Do you agree?
DM: Jay’s right. Professor Roy Jastram’s The
Golden Constant (The Golden Constant: The
English and American Experience, 1560-1976, New
York: Wiley, 1977) really shows that gold holds
its own in a deflationary environment.
Silver doesn’t or hasn’t in the past and there
could be several reasons for that. The primary
one is government interference in the market
place. On a per capita basis, the amount of
silver per person was much greater in the past
than it is today. I don’t know if it will do
well in a deflation or not. I suspect that this
time silver will do relatively well in a
deflation. Look if we use silver against oil, or
the Dow, or base metals it is doing fairly well,
the problem is people do not know how to
correctly evaluate (value) assets. History
repeats, but it doesn’t repeat exactly.
The reason silver probably would do well in a
deflation this time is because there’s so little
available and it holds every monetary aspect
that gold has. It’s rare, it’s divisible, it’s a
store of wealth and it’s fungible—in other
words, every ounce is like any other ounce
regardless of whose stamp is on it. Because of
those facts, I believe that people who probably
are priced out of the gold market will go to the
next best thing and, the next best thing is
TGR: What causes silver to not perform as well
as gold in a deflationary environment? Is it the
fact that silver is also an industrial metal and
industrial uses decline during deflation?
DM: That’s the primary argument and it has merit
in today’s world but if you read my website and
look at the history of silver as money as
researched by Charles Savoie you will get a far
more accurate picture. In a deflationary
environment, since 70% of the base metals
produce silver, if there’s a big recession,
there will be a lot less silver available
because there’ll be a lot less base metal mining
production. So supply actually contracts
automatically in a deflationary environment. So,
again, on a per capita basis, there may be less
silver minded per person in a deflation than
there is in an inflation.
TGR: Why wouldn’t that drive the price up?
DM: It could. That’s my point. That could cause
the price to go up. Again, the market knows more
than anybody. However which market are we
talking about the free silver market or the
paper derivative silver market? I believe that
the supply of silver is so small relative to the
population base that it won’t take much new
buying to carry silver far, far higher. You have
to remember that silver hit $50 an ounce in 1980
and there was roughly four times more silver
available above ground than now. Also, the money
supply was about one-seventh the size that it is
now. So if you use those facts—that the silver
supply, instead of being two billion ounces of
fine bullion, is less than 500,000 ounces and
that the money supply, M1, is about six or seven
times greater—that shows you a high, high
potential that silver could certainly go up.
TGR: Would you advise your newsletter readers to
look at obtaining physical silver and, if so,
coins or obtaining it through COMEX?
DM: Both. Anyone new should start with coin
silver and the reason for that is it’s money of
last resort. People always talk about gold as
being the money of last resort and certainly it
is in a sense, but in a practical way, it’s not.
If you had a collapse of the currency where you
actually had to barter, it’d be pretty tough to
use a one-ounce gold coin to buy gas or bread.
But with silver that could be accomplished
easily. I’m not saying that’s going to happen.
I’m just doing a thought experiment here. Silver
is more divisible, it’s a smaller value per
unit, and if you have coins, you’re in the best
shape for that scenario. Once that’s
established, then I think it can go to investing
in silver bars.
As far as taking delivery off the COMEX, that’s
usually for higher-end investors because one bar
is 1,000 ounces, so that’s like $10,000 per bar
and a lot of investors aren’t capable, or it
would represent too much of their net worth to
take that much silver in one lump form.