David Morgan: Silver poised for gains but play with caution
David Morgan grew up trading silver futures in the days of the Hunt brothers and in this exclusive interview with SmallCapPower.com he discusses the silver market, its relationship with gold and offers his perspective on playing the space.
SmallCapPower.com: David, French President Nicolas Sarkozy and German Chancellor Angela Merkel along with European Central Bankers, announced an amended deal to bail out Greece, although few details were made public. Franco-Belgium bank Dexia will also receive a bailout. Are these permanent solutions to sovereign debt problems or did Sarkozy and Merkel just kick the can down the road?
David Morgan: The market’s acting like it’s significant but they’re not real changes, unfortunately. There’s no way to just come to the rescue by printing more funny money and saying it’ll solve the problem. It doesn’t; in fact, it just extends the problem. As you said, it kicks “the problem” down the road. It’s unfortunate that no political will exists anywhere in the world to meet this problem head on and that is to either restructure the monetary system or restructure the debt or both. And no one is really doing that. The old adage of “just print more and make it go away” is not a solution.
SmallCapPower.com: Will the European Central Bank’s moves have a significant impact on the price for gold and silver?
David Morgan: Longer term, yes. On a short-term basis it’s still going to take some time for the market to come back to gold and silver. It ’s a tough call at this point because people who understand what’s happening are buying physical metals as we speak. I’ve talked to a couple of the larger wholesalers in the United States and they have indicated to me that the volume is rather low and buyers and sellers are about equal at this point in time.
I think it’s going to probably take a couple months to establish a very firm bottom and come back up at the levels that we saw just weeks ago, meaning US$1,900 gold and US$40 silver. I’m looking for those levels to be re-established by the end of the year where silver’s pushing toward the US$40 level or so, and gold’s probably above US$1,800, maybe pushing US$1,900. I don’t think you’re going to see much more than that for the rest of the year.
But I have to provide a caveat: If this ECB deal blows apart or something happens after this announcement that the markets don’t like, then all of a sudden there could be a huge rush to the metals. I don’t foresee that but in these times you really need to think ahead of the curve because things are happening rapidly. In fact, UBS recently published an interesting article on Europe’s “black swan.” It talked about a potential default situation coming in the next six months in Slovakia, which no one’s really talking about. There are these “black swans,” as a lot of us like to refer to them as, out there and none of us know exactly who, when, where one could happen. But one could happen.
SmallCapPower.com: You often provide counsel to investors and fund managers looking to invest in the silver market. If someone called now asking for some advice, what wisdom would you offer?
David Morgan: Well, I’d start by asking them: Do you currently have any physical metal? If the answer was no, I’d say buy it at current prices – regardless. I wouldn’t say it buy all that you want at this price, but buy what you need. I’d say the minimum that you should have varies with each individual. An individual would require less than a fund manager, for example. Determine that amount and make the purchase right away.
SmallCapPower.com: David, you’re a silver expert. You publish The Morgan Report, a newsletter that specializes in silver investing. And silver demand, unlike gold, consists of both strong industrial and investment demand. Is industrial demand enough to sustain and even drive the silver price higher? Or is investment demand the key driving force now and for the foreseeable future?
David Morgan: It’s investment demand. Going back about a decade or so, industrial demand was about 35% of the silver market. Today it’s about 55%. So, obviously, the fastest growing segment at one time was industrial demand. But that’s been superseded by investment demand in the last few years or so. It is investment demand, just as it is with gold, that’s driving the silver price higher.
But what I find interesting about that question, which is a good one, is that the investment demand seems to be swinging toward silver rather than gold. Let me explain that a bit. You have to go back in time to find out the exact numbers, but for every dollar that was invested in gold, you might have one-seventh of that amount going into the silver market, so maybe $0.12 going into silver. Today, in the physical market, you’re getting about an equal amount. So, for every dollar going into gold you’re getting roughly another dollar going into the silver market, which obviously puts a lot of pressure on silver because the silver market is a lot smaller market than the gold market. The silver market cannot absorb that kind of demand without forcing the price to stabilize and move higher. Now, that doesn’t mean the silver price is going to instantly shoot up. But what it does suggest is that the demand for silver has increased over what it was some time ago.
SmallCapPower.com: Does that mean if you had to choose between buying gold and buying silver right now, you would buy silver?
David Morgan: You know, I wouldn’t say that. It’s a nice presupposition but it depends on who we’re working with. For example, if we’re working with someone that is near retirement or retired, I would probably suggest they get some silver. But I’d also recommend that they establish a strong position in gold. The reason for that is gold is much less volatile and they’d be able to sleep better at night.
I’d probably recommend something similar to a fund manager because gold is more stable. I really think you should have both metals, and I’ve been a proponent of both all the way up. Gold is the money of last resort, even though silver’s been used as money more often in more places than gold has in monetary history. Today, however, gold is more sought after for protection than silver. And I think that will remain the case.
I’ve never suggested that anyone go silver-only. That’s not to say that some of our subscribers aren’t so enamoured with the silver market that that’s all that they have. But I have both.
SmallCapPower.com: You said your near-term silver price was around US$40 and probably US$1,800 for gold. What sort of prices are you expecting as far out as2015 or so?
David Morgan: The answer is none of us know but if you go back to early 1980 or late 1979, when the markets were going wild in silver and gold, we had peaks in both metals. Gold was around US$850 in the spot market and silver was near US$50 in the futures market. In theory, at that time you could have a full cover for all the currency and checkbook money out there. Full cover means for every dollar that’s out there, it could be covered by the value of gold in reserves. And we would have only needed gold to be at US$400/oz in order to achieve that and yet we were above US$800. So, I wrote an article called Engineering the Price of Gold. And I said in that article, and you can verify this if you wish to, that we could have gone back and had a gold standard for currency for the dollar bills in your pocket.
What would the cover ratio be today? The number is around US$5,000/oz for gold. And that’s a conservative estimate. So, what that suggests to me is that we have a long way to go to 2015 and since we know that the price went well above the theoretical cover ratio in 1980, there’s no reason to think it couldn’t do the same again.
And what would the silver price be? That’s much more difficult to determine. But what normally happens is gold gets to a certain price – and we may be there now – and the people who are late to the party say: “I can’t buy gold, it’s US$2,000 per ounce. I’m going to buy silver because with $2,000 I can get a lot of coins whereas with gold I only get one.”
I think silver will nail the ratio at the top of the market where you will get the classic 16-to-1 ratio or better. I think it could get to a 10-to-1 ratio where gold’s only selling at ten times the price of silver the next time precious metals peak. And I like the 2015 number. I think that’s about the time where you’re going to see a peak in these metals. That’s assuming that everything holds together that long.
SmallCapPower.com: How are you playing silver now? Should the average investor take the same approach?
David Morgan: Personally, I am cashed up. I got out of all my trading positions some time ago. I didn’t like the stock market action over the last few months so I was building cash and continue to do so. A lot of the mining shares are undervalued and I told my readers to go ahead and start buying all the way through the rest of the year. That’s the approach I’m taking. Some of these stocks have become very cheap. I like to do what the professionals do and that’s accumulate rather than, say, “Oh, that’s the exact bottom, I’m all in!” only to be disappointed a couple weeks later. It’s better to say: “Well, it looks awfully cheap and I’m going to buy it because it’s cheap.” But realize that these equities could get even cheaper before they start to move up again.
SmallCapPower.com: Are there some small cap names that you’re following that could rise with a boost in silver prices?
David Morgan: First of all, I’ll give you a large cap name that has been in the news recently and that’s Silvercorp Metals Inc. (TSX:SVM). In my view, Silvercorp was kind of a victim of some short sellers. I think that’s been put to rest but the stock’s been beaten up. Silvercorp’s a pretty conservative way to play the silver market. It does have that China factor, which some people like and some dislike. It’s a China discount as far as I’m concerned. But they also have a very nice project in Canada.
As far as the juniors go, one that currently that I own is called SilverCrest Mines Inc (TSX-V:SVL). They’re in Mexico and pretty undervalued. It’s been on our list for quite some time. I think that if you buy into that company and you’re willing to execute some patience, SilverCrest is going to pay off rather significantly.
SmallCapPower.com: What about some names in the mid-cap space?
David Morgan: We started focusing on that segment of the market several months ago because I felt that in what used to be the mid-cap space for us are companies that have since become top-tier companies. In other words, companies that at one time were $200 million market-cap companies now have market caps above a billion dollars. There’s room for growth using mid-caps as a conservative approach to the market.
One would be First Majestic Silver Corp. (TSX:FR), another would be Endeavour Silver Corp. (TSX:EDR), and another would be Fortuna Silver Mines Inc. (TSX:FVI). I have three to four more in that list but I won’t give them all. Anyone who’s followed the silver market is familiar with Fortuna, First Majestic and Endeavour. And these are companies that have already made great moves. We held First Majestic at $4 for a very long time and I told my readers: “Please don’t sell it!” And finally the market got with it and that stock did really, really well. But, you had to be patient. And I think it’s got more upside potential. I think all of them do or they wouldn’t be on the list.
But I do want to provide another caveat here: Silver investing is not a beginner’s place to start. If you’re going to just buy silver and you’re a beginning investor, I’m fine with that. But when you start moving into the mining shares, unless you’re a seasoned stock market investor, putting any money into the silver market on the equity side is difficult. It can really wear you out unless you have some experience. I care about people and I was pretty young when I began. Any kind of move up and you’re elated; a significant move down and you’re destroyed. It’s just not for the faint of heart.
SmallCapPower.com: Are there some investment themes in the silver space that you expect to play out in the fourth quarter of 2011?
David Morgan: One thing is to look at the ongoing demand, not so much on the investment side, but on the industrial side. One example is nano technology. Silver plays an important role in that. And although it wouldn’t be a great deal of silver, it’s still key to a lot of medical applications. So you’re going to see the word “silver” used more and more often. The more technology the world develops, the more silver’s going to play a part.
The “new uses for silver” side story is far from over. In high-end homes you’re seeing countertops impregnated with silver for its antibacterial properties. The same thing is happening with door handles. Japanese manufacturers are putting silver on the front of some of their cell phones to kill germs. Steering wheels on high-end cars in Japan use the same process. I think silver has a bright future as a biocide.
SmallCapPower.com: Thank you for talking with us, David.
David Morgan (Silver-Investor.com) is a recognized analyst in the precious metals industry; he consults for hedge funds, 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 numerous investment conferences. He can be reached at: www.TheMorganReport.com or silverguru22@hotmail.com
Interview Disclosure: This interview was conducted by Brian Sylvester on behalf of SmallCapPower.com. Mr. Sylvester and/or his family may own shares of the companies mentioned in this interview.
David Morgan may own shares in all of the companies mentioned in this interview.