David Morgan: The Latest Skinny on Silver

http://www.theaureport.com/pub/na/6209

It's often called the Poor Man's Gold, but according to Silver Guru David Morgan of The Morgan Report and www.silver-investor.com, silver is poised to outperform gold. The amount of silver mined meets industrial and investment demand. We've reached equilibrium, Morgan explains. In this exclusive interview for The Gold Report, Mr. Morgan gives us the straight skinny on silver and highlights several silver juniors.

The Gold Report: You stated last June that silver is trending gold and will outperform gold by about 30%. What will be the catalyst?

David Morgan: Well, there's several. Silver is the bipolar metal, as I refer to it occasionally, because it's both an industrial metal and a monetary metal. If you look at the industrial side, it's very bullish even in these recessionary times, meaning that silver needs to be used in all kinds of industrial applications. There might not be as much manufacturing on a global basis as there was during the times when the economy was doing better from 2000 to 2007. However, a lot of manufacturing is still taking place. As it occurs, there's a tradeoff, with less manufacturing in some sectors and more in others. The amount of cell phones in China and India continues to grow. Another one would be solar energy, which is projected to increase rapidly over the next decade.

There's a big impetus by several governments, again on a global basis, to install more green energy. Solar is at the top of that list. Silver plays an important part in that story. On top of that, you've got water purification, which is something I was talking about many years ago and continue to because silver is a very unique biocide. Due to that, the EPA has actually okayed silver's use in bottled water, which very few people know about.

Then, of course, in food processing, the unique properties of silver are used in meatpacking plants where you'd have silver tip appliances like the saws and cutters, etc., because for sterilizing purposes they do not spread any bacteria. Some of the new packaging plastics have a bit of silver in them on a microscopic level. Once the food is packaged and you have the silver in there, it's going to prevent any kind of spoilage or bacteria growth. On top of that, you've got other applications like the radiofrequency identification tags, and on and on the list goes.

The other side is investment demand. Here is where I think there's a little confusion on this subject, because a lot of the main studies in silver just emphasize investment demand as coin demand. It is talked about as being 5% of the market. If you look at 660 million ounces of silver being mined presently, and you take 5% of that, you're looking at 33 million ounces. An accurate number for coin demand is somewhere between 30 and 40 million ounces on an annual basis, but that's coin demand only. What very few of these studies really emphasize, which is really a big part of the investment demand, is how much of the commercial bars are used for investment purposes. Let's look at the largest silver ETF (SLV). It holds roughly 300 million ounces of silver in commercial bar form. But it's all for investment purposes. So, there's more to the investment story on silver than most people realize.

TGR: Why aren't we seeing the pressure in the market yet with all the industrial demand?

DM: I would say the pressures are there right now. Have they started to build up yet? Perhaps. They're not as strong now as they will become over the next few years. As there is more and more silver demand on the industrial and on the investment side, the price is going to go up.

You've got to look at where silver is at right now. It's certainly off the $21 nominal high that we saw many months ago. We're still hanging around $18 compared to the $5 or less it was based at for almost 20 years. That's quite a run, and even in inflation-adjusted terms, it's a pretty good return on your money. Is it going higher? Yes. When is it going to start? I'm not sure. It's going to be in this idling period for a while.

The dynamics are so strong that I don't see it continuing all year. I believe strongly that the closing price in December 2010 in silver is going to be above the $21 level. In other words, silver will be making a new (nominal) high this year!

TGR: Don't you think that silver production has ramped up to meet the current and potential future demand coming within the next year or two, save a crunch by an industrial giant like China?

DM: Yes, I do. This isn't opinion. This is based on some of the best studies on silver, which I have subscribed to for years. The amount of silver on an annual basis mined meets the silver demand on an annual basis for all industrial and investment demand. We've reached equilibrium. That wasn't the case for 15 or 16 years when there was a deficit and it took the silver above-ground stockpile from 2 billion ounces to roughly half a billion ounces of silver.

Over the last few years, the big ramp-up in the commodity boom has taken a lot mining activity to much greater levels than it was about a decade ago. And because of that fact, there's been a lot more silver coming out of the ground on an annual basis and a lot of it's been because of the base metals boom. Anyone that studies silver even slightly these days knows that about 70% of silver comes from a result of mining other metals like lead, zinc, copper or gold. I expect actual silver mining to increase with the primary silver producers over the next couple of years. I'm not so sure that it will on the non-primary mines like RTZ, Rio Tinto Ltd. (NYSE:RTP) and some of these other large base metal miners that produce a great deal of silver. In fact, these huge mining houses actually produce the most silver, even though it's not their primary metal. There isn't a huge demand for all the base metals, but it's still there.

As you say, China's the driver, so it's hard to predict because there's a good case being built that China is ahead of itself. There's going to be a decrease in their productive capacity for a while. They've basically overextended their credit system as the United States did several years ago. We may have a pause in the market on that side. Longer term, I think we're going to have to see more demand on both sides. I don't think that the mining activity can keep up over the next decade. I think if you look out over a 10-year timeframe, the amount of investment and industrial demand for silver will be greater than an increase in the mining activity that's available over the next 10 years.

TGR: According to very recent reports, China is still experiencing a 12% per year growth rate. This has to apply some pressure at some point to silver.

DM: You've got to look at how that number is derived. The Chinese are starting to do what the U.S. is doing. In other words, China is not a consumer economy where 70% of the growth of the economy is based on consumption, but it's much more based on consumption than it was a decade ago.

What I want to point out is not that it's really become a consumer society, but it is trending that way or more so. How much funny money was put into the system by the Chinese to get that growth rate? That's where you really have to think about common sense economics. If you go back and look at the U.S. and you've got to print $5 of funny money to get $1 of GDP growth, how much real growth are you getting? You are seeing the same thing now with China as they're throwing out a lot of funny money into their system in order to produce that 12% growth rate.

You got to look behind the numbers sometimes to see what's really going on. Unfortunately, that's the case for the Chinese right now. There are areas that they probably overbuilt. They've got excess capacity. In other words, they've basically caught on to the Keynesian system, where top-down control of the economy is going to do great according to the political powers, but in the long term is fatal. In some ways, they're very free market and in other ways they're a very controlled economy. I don't want to sound like I'm talking out the both sides of my mouth. It's actually a fact. That's true of the U.S. as well. There's a lot of management to the economy and there are some pockets that are truly free market, but not much in either case.

TGR: When is the best time to get into silver and in what capacity?

DM: From the standpoint of the actual metal itself, any time is the right time as far as I'm concerned. You don't have to worry about market timing. I mean, $18 silver is obviously more than it was 10 years ago when you could probably get it at around $5. Again, I believe it's going far higher. It's something tangible, something real and something outside the financial system. When you own silver coins or bars or both, you actually have real money that's recognized worldwide. If you own the real thing, don't worry too much about the price. Buy the real thing. That's where you start your precious metals investing.

TGR: Why is there so much concern about the silver-to-gold ratio?

DM: I think that too much emphasis is put on the ratio. It's a metric that many follow to value the silver price relative to gold. It's useful in trading between the two metals, which I have taken advantage of a few times during this bull market. It's something that can get overblown and no one knows what the correct ratio is.

When you get silver really moving and the euphoric panic part of the market engages, it tends to really move faster than gold because it's a smaller market and you have a lot of money moving into the market. That's where you see silver overtake gold on a percentage basis. So we could be 60-to-1, 50-to-1, 40-to-1 and stay 40-to-1 for a long time. Then when then market goes into this panic buying mode we could go from 40-to-1 to 20-to-1 and then 10-to-1, as an example. That whole process from a 40-to-1 ratio to a 20-to-1 ratio might take two to three months. Again, is there an exact perfect ratio for silver to gold? No there isn't. The ratio does suggest that silver is still undervalued relative to gold.

TGR: Do you have a timeline for when silver may overtake gold?

DM: I don't have, but I'll be consistent. I've been asked this before and the answer has been probably 2012-ish. If you look at some of the analysts work, they put timelines at sometime between 2011 and 2016. Basically, if you forecast, you should put a price and no timeline or time and no price. That way you can't get cornered. Who wants that? That's no value to anybody. But a guess is a guess. I don't think you're going to see a really big move in the metals until 2012 or later. However, I do expect both gold and silver to make new nominal highs this year and silver to outperform gold by 30%.

TGR: You stated in your April newsletter that you believe gold and silver are oversold now. You're building cash as you expect a big selloff to be coming soon. What aggressive moves of a speculative nature are you making with some of that cash?

DM: I was referring to the big selloff in the general equity or general stock market like the S&P 500 or the DJI, not the precious metals. As a result of that big selloff, I would expect that metals and mining equities would be taken down. The metals and mining shares are not poised to move down by themselves presently. They're actually moving sideways and they're in a high-consolidation pattern that may briefly intensify.

If the stock market sells off sharply, then and only then do I think we'll see the metals hit as well. We're looking at the juniors in addition to the producers. With the juniors, I'd say there's probably a lot of value if you know what you're doing and the same could be said for the majors. You've got to look at it individually on a case-by-case basis. For example, we gave a report on a company last month. The dynamics are good and the financing on the company is $.35 with the stock selling at around $.28. Whenever the general public can buy a startup company like this underneath the financing costs that all the insiders and brokers were able to purchase the stock for, it's usually a pretty sure thing. I can't give a sure thing. No one can. Yet I know a lot of my readers are sitting there on the bid at $.28, which is a very smart savvy sophisticated way to play it. There are several more out there.

TGR: What can you tell us about some of the silver companies that you're following?

DM: Well, I own First Majestic Silver Corp. (TSX:FR;OTCQX:FRMSF). I really like it. I've actually bought some more of that company. One thing that's held that stock down is that CEO Keith Neumeyer is rather on the aggressive side. I admire that. Like any CEO, he's competitive. He's said, We're going to produce this much silver and he's missed the mark several quarters in a row. So I think the market has beat him up and the stock. Now he is basically meeting or exceeding his numbers. But the market isn't paying attention to that fact yet. I want to add the word yet. So I think there's an opportunity there.

TGR: Are there any other companies that you like right now?

DM: Well, there are a lot of silver companies that I like, such as Fortuna Silver Mines Inc. (TSX:FVI; Lima Exchange:FVI), although I don't own it at this time. We've written a recent report on that one and it continues to improve. I've been in and out of it a couple of times. I like that company.

Another one is Great Panther Silver Ltd. (TSX:GPR). I did an interview with one of their principals in Vancouver just a couple of weeks ago. They've made great strides. Not only have they increased their production, but more significant is the economics of their production. They have a better smelting contract and are getting their costs down. The Great Panther story continues to get better.

SilverCrest Mines Inc. (TSX.V:SVL) is another one that we own. The only thing I'll comment about SilverCrest is that I like a lot of things about it. One thing about a heap-leach program is that gold leaches out pretty nicely. Silver doesn't really leach that well. The reason that SilverCrest is going to do well on a heap-leach situation is because there's a fair amount of gold in that project. You're going to get a lot of gold content. You'll get silver with it, but again silver doesn't leach out in the percentage basis that gold does. Gold leaches out much higher percentage-wise than silver does. So you're going to get a fair amount of silver actually that's going to be sitting in the tailings, but that's the way it is.

Silvermex Resources Ltd. (TSX.V:SMR) is another one that I own. We've been in and out of that stock once. I think my readers got a profit. I actually took a loss because usually when I have a new recommendation, I get in after I recommend it. If I won't get in ahead of time I tell people. I mean that's all I'm required by law to do and I do it, of course. I like it. It's really a hard effort to become a producer. There's a different growth curve between discovery and a producer. Silvermex is kind of a mix as they are looking for more metal, drilling more, and they're also looking to produce. So I like the company. I don't expect it to be a huge hard target, but I think it'll stay within the pack.

Silver Standard Resources Inc. (TSX:SSO;NASDAQ:SSRI) is a company that we've been with since it was $.65 Canadian. I think anyone who was a subscriber to The Morgan Report way back in the beginning who bought that stock at $.05 or less is happy and still should be holding it. We never let go of it totally. We did say when it got into a weird formation it looked like a sell. As soon as I said that, the stock did start falling off rapidly. This was just before the announcement of Bob Quartermain leaving the company. It's starting to base again.

Kootenay Gold, Inc. (TSX.V:KTN) is another one I like. They are well managed and I like it. I saw them at the PDAC before I went on to Hong Kong and Singapore. They announced at that time they were looking to do a deal with the old Sunshine Mine. They got knocked out of that and quite frankly, I'm happy about it. I don't see Sunshine Mine being the asset that I believe strongly that it was back several years ago when Sterling Mining Co. (OTCBB:SRLMQ) obtained the rights to that or an option on the mine. So much has changed since those days to today. If it was me and I was consulting with any mining company, basically I would be not that favorable to Sunshine. I know that I might get beat up next time I go to the Silver Valley because that mine is very close to where I live and I do visit the area. I work for my subscribers. I don't work for anybody else.

I still own Mines Management Inc. (TSX:MGT;NYSE:MGN). It continues to progress. It's like the MAG Silver story and you've got to be patient on that one. It's very undervalued relative to its peers. The only fairly big negative is that it's an all-or-nothing deal. I believe it's going to happen or I wouldn't own the stock or recommend it. But it's got the one deal discount in Montana. I believe Montana is much more favorable to mining now than it's been in a long, long time. I'm very as certain as a human being can be that this situation will move along and become a mine. There is a lot of value left in the stock at this point. Again, it's a mine and because of that it's going to move like a producing mine or a mine going into production which is much more slowly. So do your own due diligence. I like it. I own it. I wouldn't buy any more yet. I'm certainly not going to sell what I own.

TGR: Are there any that you've sold that you'd like to talk about?

DM: Minefinders Corp. (TSX:MFL;NYSE:MFN) is a stock that we are out of. If I could ever say that I did one perfectly, it was that one. We were in at the bottom and now out at the top. I'm still watching it and they have good projects. I have to compliment the team. They've done whatever it takes to get that thing into production. They've had several challenges. They've overcome them all. I think now probably is a safe point to buy the stock again. I don't own it presently. If you want a producer, and you want to buy it pretty near the start of the growth cycle, I think now or around now is probably a good time to look. Do your own due diligence on that.

MAG Silver Corp. (TSX:MAG;NYSE:MVG) is just a great story. It's real hard to find a company that's as valuable on an asset basis than MAG Silver. You can look at Silvercorp Metals, Inc. (TSX:SVM;NYSE:SVM) as one that's probably a little bit better. MAG is a very rich, plentiful resource. I think that stock has been overly beat up because of the Fresnillo situation. They were trying to do that takeover bid, which didn't happen. So things have calmed down. I think you've got to be patient on that one. I don't own it at this time. I'm looking for a better entry point, but now isn't a bad time to start accumulating the stock.

TGR: David, this has been great. We appreciate your insights.

Seduced by silver at the tender age of 11, David Morgan started investing in the stock market while still a teenager. A precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the silver-investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems ahead and reasons for investing in precious metals. David considers himself a big-picture macroeconomist whose main job as education-educating people about honest money and the benefits of a sound financial system-and his second job as teaching people to be patient and have conviction in their investment holdings. A dynamic, much-in-demand speaker, David's educational mission also makes him a prolific author. In addition to The Morgan Report, he writes Kitco's weekly Money, Metals and Mining Review. His articles have appeared in The Herald Tribune, Futures, The Gold Newsletter, Resource Consultants, Resource World, Investment Rarities, The Idaho Observer, Barron's, The Wall Street Journal-and, of course, The Gold Report.

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Disclosure: 1) Ellis Martin: I personally and/or members of my family own shares in the following companies mentioned in this interview: None. I personally and/or my family are paid by the following companies: None. 2) The following companies mentioned in the interview are sponsors of The Gold Report or The Energy Report: First Majestic, Great Panther, SilverCrest, Silvermex and Minefinders. 3) David Morgan: I personally and/or members of my family own shares in the following companies mentioned in this interview: First Majestic, Fortuna, Great Panther, Silver Crest and Mines Management. The Silver Investor does accept payment from companies for republishing rights and email distribution to the free email list.

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