Introduction: David Morgan, editor of the Morgan Report and founder of Silver-Investor.com, started investing in the stock market well before turning 18 years of age. Several years ago, Morgan put his life long study of free-market economics to work researching the economy, stock market behavior, precious metals, especially silver. Although very familiar with gold, Morgan believed that silver needed more exposure and would be utilized increasingly as technology continued to demand more and more of the metal. He has followed the silver market daily for over thirty years.
Daily Bell: Thanks for spending some time with us. You are among the best known silver analysts in the business. When did you become interested in silver, and why?
David Morgan: I became interested in silver when the coinage of the United States changed from being 90% silver to becoming a clad coin of virtually little value. I was eleven years old at the time and this was the "event" that ignited the spark, so to speak. Why? Well, looking back I knew instinctively even as a young child that something made of silver had to be worth more than something made of copper and zinc, yet in the market they both traded for their "face value" equally. This gave me pause and made me ask, Why-why don't people see the difference? What is money? Do precious metals matter? You can imagine I had lots of unanswered questions at the time, and even today find it so interesting how many people take things at "face value" without ever thinking about them. We might conclude that I have always "run deep"-I ponder and question almost everything in life, particularly economics.
Daily Bell: Can you give us some background on the difference between silver and gold both as precious metals and money metals?
David Morgan: Throughout history, about 10 times as much silver has been mined than gold. In the 12th century to about the 17th century, silver was worth about one-tenth to one-twelfth the price of gold. During the time of Sir Isaac Newton, who put England back on a gold standard to recover from a horrible financial crisis, he was asked to determine the "correct" ratio of silver to gold and set it at 15.5 to 1. This I call the classic or monetary ratio, and that stood while most of the world was on the silver standard. Remember, the pound sterling was a defined weight of silver.
Silver has been used as money in more places by more people for longer periods of time than gold. But the greatest lesson of history is that people do not learn the lessons of history, and today most "metals heads" think that only gold is or was a monetary metal and only gold this and only gold that. Yet the fact is that silver tracks gold 85% of the time, which is a strong correlation.
Further, if you are expecting currency destruction, as I have been preparing my Morgan Report readers to do, you will know that silver was by far the best performer the last time we got close to a currency crisis. In 1980 we were much closer than most people realize; without Paul Volcker setting interest rates as high as he did, the U.S. dollar might have fallen into the dustbin of history at that time.
Gold is money and does preserve your wealth-that is its primary purpose and it has served that purpose for a very long time and will continue to do so in my view. Silver, however, is primarily an industrial metal at this point and is one of the most important to any society using electricity, which is basically everyone on the planet today. Silver is also a monetary metal and was considered as such in all the romance languages, because the word for money and silver are synonymous in those languages. In fact the word for money in the Jewish Torah is silver, as well.
Silver does have a safe-haven-preservation-of-capital aspect as well as gold, but most people never take the time to look into silver, because the market really gets little to no mention from the mainstream press. It is my considered opinion that anyone who understands our current financial conditions should have both silver and gold in their possession.
Daily Bell: What is the value of silver as a money metal today, and why has silver been known as the peoples' metal?
David Morgan: As stated in my previous answer, the real monetary metal of history is silver, not gold! Silver's value, like gold's, is the value you give it. I am not trying to be cute here-we do have some determination of the value of things. For a quick example-I sell my monthly financial report for US$130 per year, but would also take six ounces of silver for the same product. So, I am willing to give more value for silver than the current bid/ask on the exchange. This is just one of many examples of good money chasing out bad. I would rather be paid in something I think will maintain value instead of something I know will not.
Daily Bell: What is the silver/gold ratio and why hasn't silver kept up?
David Morgan: The ratio is currently around 60 to 1. I am not sure what you mean by "kept up"-basically silver had outperformed gold from 2003 until May of 2008. Once the financial crisis hit, there was a big run into safety and that included gold, so gold held up better than silver from that point for several months. Since the beginning of 2009, silver has far outperformed gold on a percentage basis.
Longer term, I expect the trend will continue and silver may get to a ratio of 30 to 1, or maybe 15 to 1-the old classic ratio. We may even see 10 to 1; it really depends on how many people invest in the physical silver market and how tightly they hold on, as the reserve currency of the world is no longer accepted as a means of payment on an international level. Once the U.S. dollar becomes a means of settlement only within the U.S. it will have a huge impact on the precious metals, yet at that time it may be next to impossible to buy real metal in bulk-as hard as that may be to believe now.
Daily Bell: Is there price manipulation of silver?
David Morgan: Yes. The current price can be manipulated by buying and selling pressure and this does take place, but the overall trend cannot be manipulated in my view. In other words, the main trend for silver is up, but within that main trend, large sell-offs can occur due to huge amounts of selling of derivatives that cause price changes but have nothing to do with the fundamentals of the silver market.
Daily Bell: When will silver break out?
David Morgan: If you mean break out of the most recent high of $21 per ounce, I would guess it might take until 2010. It might happen later this year, but I think the "deflationary" forces that are taking place might still put some downward pressure on the precious metals later this year. This upsets people because they see all the credit being pushed into the system, and they scream INFLATION, yet they must realize that credit and money are not the same thing, and the normal time lag between credit and that credit becoming money takes time. Once the credit is monetized then it can expand throughout the rest of the economy and result in inflation.
Daily Bell: Are you experiencing an upsurge in interest about silver?
David Morgan: Actually, near the end of May I was, due to the fact that silver had its best month in 22 years. So I did get more interviews, e-mails, and calls than usual.
Daily Bell: You do a great deal of public speaking. What do you emphasize most in your talks?
David Morgan: Education; I do my best to give a full, objective presentation of silver from a top-down perspective. Once you understand the basics of the silver market, it makes it much easier to speak about different ways to invest in this sector.
Daily Bell: What countries are most hospitable to silver mining today?
David Morgan: Mexico and Peru are tops and happen to be the biggest producers as well.
Daily Bell: What are some of the most important silver mining companies-large and small?
David Morgan: First it is important to mention that 70% of the silver brought to surface by mining is a result of base metal mining. And among the top ten silver producers in the world you will find companies like BHP, KGHM Polska, Goldcorp, Rio Tinto, Pan American Silver, and Industrias Peñoles. As far as primary silver companies, you can look to Pan American Silver and perhaps Hecla, Coeur, and Silver Wheaton.
For smaller companies I like the ones that have large upside, and we have several on our list. I normally do not reveal this information for free, but will mention a few here: Endeavour Silver, First Majestic, and Great Panther. We are currently looking at a company that has made a discovery of perhaps a Sullivan type, so once the analyst tour is completed later this month, we might want to visit that, if you are inclined to give me a follow-up interview.
Daily Bell: What do you think of the current economic crisis? Are Western countries handling it well?
David Morgan: Oh my! I have spent most of my life studying economics and I forecasted this crisis, as anyone who really studies my work would know. I think it will end badly: lots of people will be displaced and unable to find work, most will lose faith in the system, and it is going to take a very long time to get the physical economy (the real economy-not the paper pushing) back on solid ground. Almost everyone will not understand the true cause and will blame the free market or capitalism-because they are so under educated on what a real free market does and how it operates.
Western countries are NOT handling it at all. So far it is business as usual, per the Keynesian model that the U.S. can print its way out of this mess. Of course this cannot be done. Based on previous monetary history, we have a 100% guarantee that it will fail, yet the men and women in power all pretend that everything is going to be alright.
Daily Bell: Do you believe in the bailouts taking place in America?
David Morgan: No; as I said, the massive credit expansion that is being produced by the federal government of the United States is going to make the situation the worst possible.
Daily Bell: Can you explain the genesis of the financial crisis? How can it be ameliorated?
David Morgan: That is a tough question for a concise interview, but let me state that anyone really wanting to get a handle on this can read almost anything from the Mises Institute and start to understand the reality of our current situation. As basic as I can state it-once a lie is accepted as truth the decline begins. The U.S. dollar started out "as good as gold" and was fully redeemable into gold on an international level. France saw the U.S. had printed far too many dollars and basically called the bluff. Once this took place Nixon cut off the gold supply and announced we are all "Keynesians" now. This began the demise of the U.S. dollar as the reserve currency of the world. We are now entering into the last couple of chapters of this story that has been repeated many times through history.
The only way to ameliorate this is to:
1. Loudly and clearly define the problem so succinctly that everyone understands it at a very deep level.
Something such as, "Fiat Money ALWAYS fails!" Printing more "money" does not solve the problem, it only makes it worse. We need to admit the U.S. dollar is now worth 3 cents, relative to the 100 cents it was worth in 1913 when the Federal Reserve was established. We need to admit this system favors those who print the money over those who are forced to use it in the marketplace. Money should be independent and equal to everyone everywhere, and that means a system that favors no one.
2. Propose a solution that is clear and concise. This could take several forms, but going back to a strict gold standard would be difficult in my view.
Daily Bell: Where does silver go from here? What are the best investments to make throughout the business cycle, and do they change over time?
David Morgan: Silver most likely will back and fill and trade in a wide range during the summer months. It is possible that gold needs to make one more shakeout low before the next major leg up, but this remains to be seen. Regardless, the metals are headed higher in terms of purchasing power.
The best investments do change during the business cycle and there is a lot of good research on that topic. I prefer not to answer it, because in my much-studied view we are now outside of any type of business cycle-we are in a survival cycle, which is very different. This is where real capital (not printed paper) becomes scarce and is highly prized. This requires a clear understanding of what is really taking place . . . not what you see and read in the mainstream press.
As far as a currency crisis is concerned there is a very exact way to "play" it, and that is where I give my best effort to my paid subscribers. Let me just state that the easy money has been made in this cycle and the really big money lies ahead, but it is much more difficult to time it well and get out with real profits.
Daily Bell: What are the most important-seminal-articles of yours that you would encourage everyone to read? Where can they be found?
David Morgan: The best idea is to go to Silver-Investor.com and sign up for our free e-mail list, click here.
For the best articles, visit the archives section on our site and, of particular note, consider reading:
While visiting Silver-Investor.com, consider buying my book, Get the Skinny on Silver investing, or any of the educational DVDs and CDs – for more information, click here now.
Incidentally, the Morgan Report is also available in German, click here to view.
Daily Bell: On behalf of all of our readers we thank you for sharing your views with us – and for your courageous and important work.
David Morgan is one of the best silver analysts around. In fact, he may be one of the best precious-metals analysts, generally. Unlike many in the field, he has spent an entire career studying free-market economics as well as silver. And he understands, therefore, the relationship between silver and free-markets in a way that many analysts – and even free-market economists – don't.
Read great Austrian economists, even those as wonderful as Murray Rothbard, and you will find a great deal of information on gold, and a great deal of admiration for the yellow metal. Yet somehow the white metal is given short shrift. Listen to Morgan, however, or read his articles, and you will soon find out that silver's history is just as glorious – and ancient – as gold's, and that silver tends to track gold on a historical basis, as he explains in his interview above.
In fact, silver was always known as the "people's money" because it was not nearly so expensive as gold. It was silver that was used for town commerce and to pay tradesmen. It was silver that was used to pay for items in the market and to pay debts to family and friends. More than that, silver remained a barometer historically whereby the average citizen could find out what the wealthy were doing to manipulate gold, and if they were.
Historically, in societies with market-based metals standards, silver traded in a ratio with gold that was fairly predictable. Thus it was easy to tell if one metal was becoming involved with a manipulation of some sort – since the ratio would start to change. Instead of trading at 15-to-1, silver might suddenly be trading at 20- or 30-to-1, and the price fluctuation would be a sign that some sort of potential difficulty or shortage.
Here's another interesting quality about silver – it seems to command passion from its closest observers that gold does not. We have discerned from close study that those who promote gold standards are animated by a discomfort with paper money manipulation whereas those who spend their lives in the study of silver have developed a strong affection for it, beyond what might be expected based merely on its value. Maybe this is the case because in addition to being beautiful, silver is also a ductile, healthy and useful. Certainly it is more democratic than gold. Its lesser value allows common folk to possess it without financial strain.
There are other attractive aspects. Silver's health aspects were well known to the ancients. There is a saying "born with a silver spoon in his mouth." This not only connoted riches, we have heard, but also long-life, as silver definitely has anti-bacterial and even anti-viral qualities. This was realized, apparently, even before people knew bacteria existed. What was known, was that those who came into daily contact with silver, and ingested silver regularly, were healthier than those who had no access to it. In fact, that was why tableware was made of silver and why those who could afford silver flatware were envied. Polished silver utensils were beautiful, but the reason to use them had as much to do with health as eye appeal.
Today, holding silver may be as good for your wallet as your health. If one grants a modern ratio of 16-to-1, and gold is at US$1,000 and silver is hovering around US$15, then the ratio most certainly remains out-of-wack. Using this ratio, the price of silver should be closer to US$62.50 than US$15. And if gold were to travel to US$2,000, using this ratio silver would eventually close in on US$125 an ounce.
Does this sound unlikely? Perhaps today. But wait until gold begins another leg up, as is likely inevitable. Those who can afford gold will continue to buy it, but those who cannot will turn to silver. That is how the ratio is affirmed. This is also why various forms of paper-gold and paper-silver become valuable toward the end of bull market in money metals (such as the one we have today).
Toward the end of a long bull run, more and more investors want to buy precious metals, but by then they have grown too expensive. Investors will then proceed to buy paper derivates, including mining stocks – not because they want to, necessarily, but because that is what is available in a reasonable price range. And that is also how you can tell a bull market in metals is growing long in the tooth. Watch for mining stocks to rise precipitously. Fortunes have been built at the end of precious metals bull runs. And we have no doubt they will be again.