David Morgan on the Fundamentals of Precious Metals and Why They Are Better Than Ever

The Daily Bell is pleased to introduce to our readers David Morgan, of Silver-Investor.com. David is well known for his deep knowledge of the metals market and frequently provides his analysis on this and related topics through interviews posted at his YouTube user channel, Silver Investor.com.

Following is a partial transcript of David Morgan's January 4, 2013 interview entitled "2013 Outlook − Will Fed QE3 and QE4 Cause 2013 Price Explosion?" David is also the subject of a Daily Bell Special Report: "The Best Silver Analyst I Know and How His Ideas Have Helped Me Protect My Assets and Make Profitable Silver Investments."

Q: Many investors, including ourselves, might often be irritated by the apparent disconnect we see between paper markets and the physical market... Do you see an eventual end to the paper market being the primary price-setting mechanism for metals globally...?

A: It will continue until it ends and I do expect it to end. We've already seen a precursor to what will happen. If you go to the financial crisis of 2008 both gold and silver manifest – more in the silver market than gold; it's a smaller market. But you really had two markets at that time. For a brief period of time you had the retail market that was about $13 or so when the paper market was around $9 so you had a 30, 40% premium if you were going to buy any retail silver, be it government-stamped coins like a Canadian Maple Leaf ... gold primo was also substantial but not nearly as much as silver was. And it was a very, very tight market in physical supply. ...

So there will be a disconnect. No one knows when. I think a lot of silver bulls, gold bulls, are kind of just waiting for that to happen. I do think it will happen. I don't know exactly how or when but I think you will see it. And again, it's already taken place at a small level but I think it will happen in a way that will be a very huge discrepancy.

The first thing to look for if you want to see when it's taking place is just to watch the market closely. When you see a backwardation – and backwardation only just simply means that the spot market, the get-it-today price is higher than the next month out in the futures market or any month out in the futures market, and this happens in all commodities, not just the precious metals – normally it's about a three-day event ... and usually it takes a few days and then the market corrects and then you get a normal contango, which means that the spot price is lower than the next future month and then the futures months beyond that. When you see it go for a week or two and there's some backwardation where you have to pay more for the real metal now than some future hypothetical price in the future, that will be a very, very strong signal that something is wrong in the silver market. Could happen in the gold market, could happen at the same time, could take place, again, in any market but the metals market particularly is where I expect to see it. And I do think it'll take place in silver before gold, although you cannot rule out gold having the same situation.

For more on David Morgan, please see the Daily Bell Special Report: "The Best Silver Analyst I Know and How His Ideas Have Helped Me Protect My Assets and Make Profitable Silver Investments."