Michael Campbell: You have made a lot of money in silver over the last two years but you are more interested, more excited and enthusiastic now. Why?
David Morgan: Yes I’m more bullish now actually than I was the previous 10 years. In the March 2010 issue of the Morgan Report I did a study that took me a while to do, on what would silver be as an investment starting in early 2010 and going out ten years. We already had a history of what it was like from 2000 to 2010 and most of my analysis at that time took in everything into account of course. But primarily it was the monetary phenomena of destroying the currency which of course it’s a global phenomena because as we all know the US dollar is the reserve currency of the world. So I took out a clean sheet of paper and said I am going to pretend I don’t know anything about the silver market and what I discovered was the increase in mining of silver has been significant over the last decade, and will continue over the next probably three years or so. Certainly there is a lot more silver coming to the surface from mining activity than there was a decade before and that only makes sense because of the commodities boom overall, in the metals, agriculturals you name it .
On top of that, you’ve got more investment demand and more industrial demand. So we broke them apart, looked at them all and basically the industrial demand is getting bigger than ever and it continues to grow. The reasons for that is several fold but the three main ones are energy which is solar, food which is basically processing and packaging where they are using nano particles within containers and plastics because silver is a natural biocide. So something which could be on the shelf for four days can now be on there a lot longer because of the silver impregnation into the plastic, can or whatever. Then you’ve got water purification where silver plays a vital role as well.
If you discounted everything else, you really shouldn't but if you did, in other words if you discounted all the electronics, all the electrical especially with China building up infrastructure even further, super conductivity, the RFID Tags, the clothing industry that is using more and more silver and on and on and on, if you discount that to zero you still come out where in about four years or so, you are at a deficit again in the silver market. Meaning that all mining and recycling does not meet the total demand from industry alone and that discounts no investment demand.
So Mike, I have to say as thorough as I can be that whenever you go out ten years there are going to be errors. I am not perfect it’s a projection, it’s a best case scenario and I am biased. I am really for honest money and an honest financial system that’s my mission statement. But, even if I am off in a lot of these areas I still can not build a case for the bear side of the silver market regardless of the worst deflationary depression in the history of mankind.
Michael: I think is so interesting, a lot of times we look at the precious metals and we are really just talking about the debasement of currency. But there is this other side, silver being an industrial commodity, a side many people ignore. Is this demand side that’s coming out of the industrial use you've just chronicled, and that supply isn't sufficient to meet that demand putting a bottom in prices?
David: Absolutely, and you’ve got to look at the investment demand and the investment demand of course has picked up substantially since April 2006 with the advent of the ETFs for silver. Then you've got to look back in history, look at the Central Fund of Canada for example. Do you think Stefan Spicer and his group are done buying silver? I don’t think so. What about Bullion Management Group and Nick Barisheff, are they done buying silver? I don’t think so. What about Sprott Money or Sprott Asset Management with the PSLV physical silver trust. They are just getting started do you think they are done buying silver? What about the Zurich Cantonal Bank, Eric Mayer who I had the privilege of meeting in one of my last trips to Europe. They have roughly 79 million ounces of fine silver in Swiss Alps do you think they are done buying silver? These are just a few of the big players. Where are you going to go Michael with the system that we have now that is so corrupt and the debasement on the currency so great while they are trying to solve the debt crisis by printing more money. Do you think people that are in the know that can really think through the problem are going to give up on it. So if you factor in a very modest amount of silver demand for the investment side, which I think is going to accelerate greatly in the future, but being conservative, if you keep a steady state 100 million ounces a year which is a joke. I mean, there is going to be far more than that in my view. But if you use that conservative number to fill the investment demand on top of the industrial demand, it’s game over eventually.
Now, I want to be very clear on something here because I am biased but I try to be as objective as possible, I cite my sources whenever possible, I just gave you my opinion but there are going to be substantial increases in the silver supply over the next three years. We have some very substantial significant mines coming on stream. And I say coming on stream and I want to put that in quotations and the reason I say that is these are projections going forward, but let’s look at the other side of it. It all comes to fruition, there are going to be some analyst's out there saying look at the increase of silver, look at increase silver, look at the increase and I am saying I have looked at it and you’re right it’s going to increase I agree. But then we have the geopolitical side of the equation. Look at what happened to Peru, look at what happened to Bolivia, Mexico is getting shakier by the day, so just because these things are projected to happen doesn’t necessarily mean they will. I hope that they do, I am pro-mining. The problem is if things start to unravel more and more and more not only do people have a financial survival mentality but so do nation states and that’s what we’re starting to see with the Bolivia’s and the Peru’s and on and, on you know Venezuela has been that way for years. So this is something else that you need to factor in your thinking.
Michael: When we wrap it all up in a ball, could you could summarize where you think silver prices are headed, pick your time frame?
David: Okay but before I get to the why I think prices are going higher, I want to digress a moment and talk about a seminar that I gave in Los Angeles very recently, one of the most important lectures I gave really was on the economy not on silver per say. In that economic lecture I focused on how we are set up for a currency crisis, in all aspects that you want to name and I compared it to the 1923 Weimar republic. The last slide that I showed and it was the most important, it’s called the M1 Multiplier. Basically it is the turn over of money. In other words, how much a dollar turns over in the economy and when that number is below one and it is, and the reason I am making this point, is it just hit a new low. What that means is that no matter how much is out there or printed or in credit or available, it really doesn’t matter at this point in time because what matters is how much is being circulated and right now it’s basically at a stand still, it’s below one. It’s below one which means that whatever is out there is being tightly held and so this is a highly deflationary at this point in time and nothing else can really be said about it. Now, that doesn’t mean that we don’t have inflationary pressures building at a phenomenal rate behind the scene or openly, but what it does mean is the psychology right now, especially I would say in United States, is I would rather hold on to a dollar and pay down my debt or save for a future that is uncertain than to spend that dollar in the circulation.
Now, that is looking primarily at the USA. Now, if we take that and put it to the side and look at the velocity of money on a global basis, the velocity there is not, and this is my best guessestimate, is not nearly as low as it in the US so we have to factor that in of course. I mean you could have basically everyone in the US holding on to their money because they are scared of the future and they are way over indebted and at the same time you could have people outside the US saying I don’t want these dollars, I want to spend them as fast as I possibly can. Now, I am not saying that’s happening but that’s sort of the trend. I think it’s a very important concept to understand.
Michael: What would our listeners google to find the M1 chart you reference?
David: Just google the M1 Money Multiplier.
Michael: You deal with in the Silver Investor with a variety of subjects from the big picture economy right down to what silver stocks you have been looking at. You look at all sides of silver stocks, who is developing a mine, who is coming on stream who has got significant assets already producing, can you give us a couple to put on our radar screens?
David: You bet. We call them top tier companies but in reality in the last 10 years they were mid tier with high growth rates that had the best risk to reward profile. A lot of those companies have grown into billion dollar companies or greater and we still think those are fine for conservative investors. That would be like Pan American Silver Corp PAAS on the Nasdaq. I own Pan American. One that’s really not a silver stock that I hold a great deal of personally is Franco Nevada FNV on the TSX. I really like the royalty model they have there is so much upside and so little downside. Its basically a gold royalty company with some oil as well so it’s energy and gold, I like that one on the top tier. In the mid tier you have First Majestic Silver Corp. FR.TO on the TSX and that one has really moved a great deal. We are very patient with this one, I knew the fundamentals and I knew I was right and not often do I have that kind of conviction. We had that stock at $4 and it just seemed that it would stay there around the $4 level or lower forever. It took off, it’s moved a great deal, now it’s comes back. If you’re going to get that one at the right price or if I start buying in now and to plan to buy it over the next three months I think that is a very good stock. There are several that fit that model which is a producer with upside potential for more production, more efficiency and also more exploration.
On the junior side, we don’t want to give any of those out but we have just found a brand a new royalty company run by some of the best people in the industry and this is going back to early days of the Morgan report when it was called the Silver Investor and in those days there was Chap Mercantile which is a little unknown penny stock that turned into Silver Wheaton. We have had quite a few like that, we have had some of them hiccupped and done poorly and drop off the list I mean no one in this industry is perfect. With Juniors we teach not to buy one stock and don’t put too much into a speculative stock. Sometimes a speculative stock becomes and Silver Wheaton and when that happens on the way up I am not afraid to add more money to it because it’s a different company. If you bought Intel when they were just drawing up chips on the board and hadn’t produced one, that’s a whole different investment to when they become the world’s greatest producer. If you can get them when they’re at the growth curve and they starting to become recognized that’s a far safer investment than when it was in the drawing board stage if you catch my drift.
Michael: What do you look for when you’re trying to identify sort of up and comers?
David: Mostly it’s the people, that’s the number one. This goes back years that Dr. Bill Green who taught Geology at the University of Idaho, told me if you find the right people they will keep working till they find it or get it, and that’s a general statement but it is fairly true. Of course you’ve got to have capitalization, I mean you have the best people in the world if they don’t have any money behind them they are not going to be able to do anything. There are several factors but I say people is absolutely number one if they have done it before chances are they can do it again, not every case but it’s more likely so that’s key especially on the junior side because there is really no analytical model that you can use.
Michael: You’re right this is a sophisticated business and when you’re looking at, but your advice to look at the track record of people I think is very well taken. That’s where one should start and that’s the same way when you are looking for analysts. David Morgan has spent his sort of adult research life looking at the precious metals and the broader economic implications that impact the precious metals and specifically silver of course with the Morgan Report and you can find him at www.silver-investor.com. David your insights are much appreciated.
David: Michael it’s always a pleasure thank you.
"Meaning that all mining and recycling does not meet the total demand from industry alone and that discounts no investment demand."
Mining (735) + Recycling (215) = 950 Moz
Total fabrication 880 Moz
Just relating Morgan's statement with the official data about the physical silver market.
Anyway, for a shortage to kick in inventories should decrease considerably.
Morgan, other than Butler or Nielson, says nothing about it, neither here nor in other occasions