Introduction: David Morgan is a widely recognized analyst in the precious metals industry and consults for hedge funds, high net worth investors, mining companies, depositories and bullion dealers. He is the publisher of The Morgan Report on precious metals, author of "Get the Skinny On Silver Investing" (Morgan James Publishing, 2009), and featured speaker at investment conferences in North America, Europe and Asia.
Daily Bell: David, welcome back and thank you for sitting down with us today. Remind us about the difference between silver and gold both as precious metals and money metals.
David Morgan: "The major monetary metal in history is silver, not gold." – Nobel Laureate Milton Friedman in an interview with James Blanchard at the New Orleans Investment Conference. November 7, 1993. The above quote is fact of monetary history but few in the West study or know silver's history. Yes, gold is money but silver has been used as money more often, in more places, by more people than gold ever has.
Daily Bell: Why has silver been known as the peoples' metal?
David Morgan: Because of value per unit, as this interview takes place gold is about $1400 US per ounce and silver is about $25 per ounce. Since most transactions are small daily transactions by all people it is known as the peoples' money. Silver buys your small items—food, water, energy, and clothes for example. Large settlement purchases would be done in gold.
Daily Bell: What is the gold/silver ratio and where is it today? Has it closed the gap since we last spoke?
David Morgan: It is the price of gold in dollars divided by the price of silver in dollars. As of this interview that would be 1400/25, which is 56. The ratio has moved from 68 to 56 in the past six weeks and it has moved in favor of silver since our last interview.
Daily Bell: Since the historical range is said to be 15/16 to one (silver versus gold) it sounds like there's a long way to go. Does price manipulation continue?
David Morgan: Yes, but a spokesperson for the CFTC has finally come out after three years and I expect some formal announcement soon. Bart Chilton's statements so far are straight to the heart of the matter and our readers are encouraged to look at his statement on the CFTC website.
Daily Bell: Let's return to the previous question. Has silver broken out?
David Morgan: Yes, both gold and silver broke out in early September 2010. Silver has now achieved a new nominal high over the March 2008 high of $21 and this has sent many investors to take another look at the silver market.
Daily Bell: What countries are most hospitable to silver mining today? Mexico and Peru you mentioned last time we interviewed you.
David Morgan: Those two countries are normally fighting for first and second place as leading silver producing countries. As the global economic picture continues under stress all investors need to consider that what might be hospitable today may not be so tomorrow.
Daily Bell: Any important silver mining companies you want to mention?
David Morgan: I prefer to leave that to my paid membership service The Morgan Report that can be accessed at my website: Silver-Investor.com. We do look at more than the silver market; for example we were the first to begin reporting on Rare Earth Elements.
Daily Bell: Let's ask some technical questions. 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: On a very short term basis gold and silver are overextended on a technical basis and could pullback. On a longer term basis silver and gold are going far higher in paper terms in any currency you wish to name. Addressing the second question, I will make the assumption you are restricting this to the precious metals. On that presupposition, the best investments very early in the cycle are penny mining exploration companies, in the middle part of the cycle the best is mid tier producers to top producers, favoring the mid tier as they as a group are taken out at premiums by larger companies. At the end of the cycle the mania/panic phase almost anything with gold and or silver in the name will fly like crazy and fundamental worth means very little. This is the very dangerous part of the cycle but can be very rewarding.
I wish to add that this is based on previous cycles of all markets, but with the currency crisis that is now being experienced globally it may not be prudent to sell physical gold or silver for your local currency until the financial system is on firm ground.
Finally, after the financial system does stabilize there could be a time when your gold (silver) would be able to purchase well run businesses (like the Dow?) for very favorable prices.
Daily Bell: Is there more recycling? Is silver uneconomic to recover?
David Morgan: There are two main studies on the silver market and they disagree on this point. According to one silver recycled in 2009 was the highest ever, while the other study claimed it was off noticeably. I am bias to the bullish case because almost all recycling was a result of silver halide (film) processing and that has fallen off dramatically the past several years. Many applications that MUST use silver have such a small but necessary amount that it is uneconomic to recover. This is why silver is "consumed" because this type of silver usage does end up in landfills.
Daily Bell: How much is the industrial demand for silver?
David Morgan: Basically 50% of the market or slightly more. It continues to increase as silver's use in solar, water purification, and food processing/preservation will increase dramatically over the next decade.
Daily Bell: Is the silver market in a deficit situation?
David Morgan: No, the deficit ended in 2007.
Daily Bell: From 1990 to 2007, according to the best recognized studies on the silver market, about 1.5 billion ounces of silver were eaten out of stockpiles. You agree?
David Morgan: Yes, it is pretty apparent by looking at the above ground supplies in the public domain.
Daily Bell: How much is silver increasing? Two percent per-year increase?
David Morgan: On a net average basis from roughly the year 2000 all mining activity (base metal and silver) has increased between 2-3 percent per year.
Daily Bell: Was there a slump in global silver production in the 1990s?
David Morgan: I would state it as the mining industry was fairly flat through the 1990 to 2000 time frame. Once the commodity cycle bottomed around 2000 we have seen a general increase since that time until present.
Daily Bell: What about future production?
David Morgan: Future production will peak at some point and due to several factors, energy costs, environmental considerations, and protectionist attitudes in the future.
Daily Bell: What do you think of the current economic crisis? Are Western countries handling it well?
David Morgan: This is the financial crisis that I and several others in my field have predicted for so long. It is proceeding pretty close to how I have expected it to proceed and the Western countries have handled it to the best of their ability. Which means they have ignored the fundamental flaw in the system and pretended they know what they are doing.
The world is swimming in debt and so far the solution is to borrow more money, or increase the debt even further. That is saying you can borrow yourself rich, and that can be done until you cannot make the payments anymore. All indebted nations are holding interest rates low so their debt servicing is "manageable" but in reality it is mathematically impossible to service the debt but very few in official roles (government) will ever admit this startling fact.
Daily Bell: How well have the bailouts worked?
David Morgan: From a psychological level fairly well, meaning the masses of people globally still think government can solve these problems but we reached the point of no return in August 2007. That is when trust in the entire system broke down to the point where banks and brokerage houses would not accept "paper promises" from each other. From a practical standpoint they have not worked and continue to stress the system.
Daily Bell: You have written, "According to the USGS (United States Geological Survey), there is more or less nine years' worth of economic silver in the ground; in other words, peak silver is roughly a decade away." Can you elaborate?
David Morgan: Yes, that is based upon a silver price of perhaps $12 to $15 per ounce, so as the price of silver increases there is by definition more silver that becomes economic (profitable) to mine. Also, new mining techniques became available where open pit operations of rather low grade material is economic when it the past in was not. There is nothing to say that another breakthrough could take place and extend the mining of minerals further into the future.
Daily Bell: Has gold mining peaked, and what does this mean for silver?
David Morgan: Gold mining has peaked by all indications and since 13% of the silver supply comes as a result of gold mining it will have some effect, but very minor at this point.
Daily Bell: How does silver fit into solar energy demand?
David Morgan: Almost all governments globally are looking for green energy and that means solar energy primarily. Silver is used in several ways for solar – from mirrors to reflect to sun, to solar panels and electrical distribution.
Daily Bell: Do India and China play into this equation?
David Morgan: To the extent that they will use solar and more importantly to the extent that they will increase their electrical distribution networks. A decade ago the average Chinese used 1/70th the amount of silver that the average North American used. As China continues to move toward a high technology society the use per person will increase dramatically. Just think of how many cell phones and laptops are in China today compared to a decade ago.
Daily Bell: Is silver the money of last resort?
David Morgan: As I wrote in the Ten Rules of Silver Investing (Click here now for a FREE copy), I had this to say:
"No one likes to be a prophet of doom, but the simple truth is that silver is the world's money of last resort. Should a severe economic collapse occur, leaving paper assets worthless, silver will be the primary currency for purchase of goods and services. (Gold will be a store of major wealth, but will be priced too high for day-to-day use.) Thus, every investor should own some physical silver-and store a portion of it where it's accessible in an emergency."
Daily Bell: How should people invest in silver?
David Morgan: Too many investors, upon deciding to beef up the metals portion of their portfolio, buy too much physical silver at once-and in the wrong forms. Beginning metals investors should concentrate on pure bullion bars or coins, in smaller sizes, looking to pay a minimum premium over the actual metal value. Avoid commemorative coins, decorative items, jewelry and other collectibles, all of which carry large premiums and have limited resale markets.
Daily Bell: Should people buy mining stocks?
David Morgan: If you are a typical investor, you cannot expect to be an expert on silver and the silver market- but you can invest in the people who are. Once you have established a core holding of physical silver, leverage both your knowledge and your buying power by purchasing the stocks of mining companies. These shares are highly responsive to changes in silver prices, frequently producing much higher percentage returns than the metal itself.
Daily Bell: Should people dollar-cost average?
David Morgan: Dollar-cost averaging is an ideal way to implement Rule 2. By making same-dollar purchases at regular time intervals, you wind up buying more metal when prices are low and less when they are high. This approach helps you develop discipline, erasing the "trader' mentality that infects many market participants and instead fostering an "investment" philosophy. Dollar-cost averaging also eases some of the sting when prices move against you, allowing you to view the downturn as an improved buying opportunity rather than a disappointing loss. There is a dollar cost averaging program that I am favorable to and it can be viewed here: www.Silver123.net.
Daily Bell: Should people be wary of bullion dealers?
David Morgan: Because of the specialized nature of the physical metals markets, selection of a well established dealer with a quality reputation is essential. A good dealer will provide timely execution of your trades at fair prices with reasonable fees. Note, as well, that the lowest price is not necessarily the best price. In the past, some dealers who squeezed their price margins too low in order to attract clients were unable to make delivery, leaving those clients holding the bag.
Daily Bell: Where should people take delivery of silver?
David Morgan: While it is wise to keep some of your silver where you can get to it easily, it is also important to keep the bulk of your metal in a safe place – especially as you holdings increase. However, if you establish an account with a brokerage warehouse or other public storage facility, you should make sure your holdings are kept segregated and that you can inspect them when you wish.
Daily Bell: Should people speculate?
David Morgan: Depending on your individual goals and our personal tolerance for risk, a small portion of the assets you commit to silver can be used for speculation, perhaps in futures contracts or options on futures. Never forget, however, that this type of trading is speculation, NOT investment.
Daily Bell: Where can people find out more information?
David Morgan: You do not need to be a student of the silver market to profit from your metals investments. However, you will greatly increase your chances of success-and the size of your potential profits-if you understand the fundamental factors that drive silver prices and pay regular attention to current supply and demand considerations. There now are many writing in the silver space, when I started over a decade ago it was probably only three of us. Certainly you can visit many websites these days and find all kinds of differing view on the silver market.
The readers can find my work at the following sources:
YouTube – silverguru
To find my speaking schedule it is best to get on our free mailing list.
Daily Bell: Should one invest in silver or collect it?
David Morgan: Owning fine silver items – including rare coins – can provide great enjoyment and personal satisfaction. Like paintings and other artworks, they are beautiful and often quite valuable – and, if you are astute at buying and selling, they can generate large profits. In spite of this, however, always view such holdings as collectibles, NOT as investments. When you need your silver – or simply want to cash in – you do not want to have difficulty selling or be forced to forfeit a large aesthetic premium, both of which are likely with silver rarities.
Daily Bell: Should one stop at 10 percent of one's portfolio?
David Morgan: No matter how good the market looks – or how worried you are about the future of civilized society – you must always remember that silver should make up only a small portion of a well-diversified portfolio. I recommend committing no more than 25 percent under the current economic conditions.
Daily Bell: David, your time is most appreciated. Thank you again.
David Morgan: It is my pleasure. I really enjoy the great work you are doing. Keep it up.
We want to use this commentary not just to reinforce David Morgan's idea of silver as money but also to clarify why silver (and gold) are stores of value. The reason we want to reinforce the idea of silver and gold as money is because there is a good deal of controversy right now over money, and what it is. The Daily Bell carried an article just the other day called "Debriefing a Sovereign Money Hater."
This article was about the contention of a friend of ours that the swelling sovereign money movement is actually an Anglo-American dominant social theme – a US fear-based promotion using COINTEL and military disinformation specialists coming out of nowhere and posing as "enlightened" investment types. He claims that even the rhetoric of these sites is somehow similar to that of some of the Tea Party sites and that the language used by the sites is all very similar. We weren't convinced by this argument, but he was so emphatic that he finally wrote about it – even though we couldn't help throwing cold water on it. It seems a little "far out."
Why would US military intel, which has helped with many promotions in the past such as Operations Paperclip, Gladio and Mockingbird want to become involved in the sovereign money movement? He believes it is because Austrian economics and free-market thinking are gaining a great deal of ground thanks to the failure of Keynesian economics, the unraveling of the economy and the truth-telling of the Internet. As a result the central banking promotion that is fundamental to the cash flow of the Anglo-American elite is coming under pressure.
He who controls the national money supply controls the nation, a famous banker once said. The elite is fearful it is losing control of its ability to print money-from-nothing via central banks. The intel-industrial complex, which basically enforces the will of the Anglo-American elite domestically and around the world, was called on to create another false flag event. Call it Operation Sovereign Currency.
His point: If central banking should fail, due to push back and revelations of manipulation and corruption, the elite needs something to fall back on. This is now being provided for. As we've said, we are not sure we buy it.
But there IS a bigger point to be made regarding the blossoming sovereign money movement – one that we here at the Bell want to make ourselves. It has to do with the fundamental nature of money. As we wrote above, the sovereign money movement is confusing what money is.
Sure, as Murray Rothbard point out, it is whatever society decides it is. But he also pointed out that gold and silver were overwhelming chosen as "money" by competitive processes. Silver and gold are malleable, portable, beautiful (rare) and durable. It is no accident that the modern world has settled on gold and silver as money, and did so through the democracy of the marketplace in pre-history.
The reason we want to mention this is because of the modern founder of the sovereign money movement, Ellen Brown (we call her acolytes Brownians) has come out with a very interesting new article about money called Time for a New Theory of Money. In it she makes the point that the "the original (money) unit of measure was a weight of grain."
Now Ms. Brown is a very intelligent and literate person and a wonderful writer as well; also, a caretaker of her lovely, aged mother in a retirement village. We have a hard time believing she is a US intelligence operative (!) but she is certainly an energetic and convincing proponent of her views that the state ought to be in charge of money "on behalf of we the people."
We have argued in the past in fact that this is a misreading of history. Free markets created money, circulated it and if we want unmanipulated money – gold and silver via free-banking – then money should be DIVORCED from the state not welded to it as Ms. Brown is arguing.
In her latest article, (well written as always) she uses Sumer to make her case that the state has always been in charge of money and that the Sumerians used grain as money. But how old was Sumer? It had its beginnings "as a collection of farming villages before 5000 BC through its conquest by Sargon (Sharrukin) …" according to AncientNearEastTripod.com.
In fact, we believe gold and probably silver were likely in use as repositories of value long before Sumer arose. Here we have a potential date for the use of gold: "Process Metallurgy is one of the oldest applied sciences. Its history can be traced back to 6000 BC," explains Neon.Mems.Cmu.
Thus, we can see from this quick research on the 'Net that we come up with a date for the appearance of gold (used for purposes of metallurgy) which is at least 1,000 years older than the use of grain-as-money as Ellen Brown represents it.
Ellen Brown apparently (we are certainly willing to be corrected) wants us to believe that ancient humanity did not use metals as a store of value until the Neolithic age around 5000 BC. But this seems highly unlikely. Gold is to be found via placer mining around stream beds and the most likely hypothesis in our view was that gold was utilized as an adornment and for other uses not just 8,000 years ago when metallurgy was invented but 10,000 years ago or 12,000 years ago or even 15,000 years ago or earlier. Silver may have come onto the scene somewhat later, but not much.
The mysterious Cro-Magnon were making deeply hued paints and using them splendidly on cave walls 30,000 years ago. Is it possible that such advanced humans (who wore hats and even sewn clothes) were not familiar with gold nor silver? This begs comprehension. No, the chances are that gold (and silver) were stores of value long before either the advent of Sumer or the Neolithic.
It is much the same with farming. There is evidence that humans gathered wild grain LONG BEFORE farming (and the Neolithic) came to pass. Probably many thousands of years. Investigations of pre-history bear out that humans used the basic building blocks of the Neolithic long before city states came into being.
For Ms. Brown, to continue to insist that gold and silver as stores-of-value somehow arose with Sumer or even later flies in the face of human history. It breaks the rules of human tool-kit evolution. Long before cities were erected, human beings were utilizing sophisticated hunting and building tool kits. Here is a strong statement: There is, in fact, NOTHING in Sumer or any other great Neolithic civilization that was not in a sense anticipated by human technology THOUSANDS OF YEARS earlier – and that includes the value of money metals.
In all of recorded history, the state NEVER invents anything. It merely appropriates what seems to work in the private market. Money evolved in the tribal marketplace. Gold (and perhaps silver) were recognized as repositories of value long before there was Sumer, or grain banks or weights and tallies of municipal grain. Throughout history and with increasing emphasis, human beings have chosen gold and silver as money because of the properties mentioned above.
Ellen Brown DOES NOT WANT THIS TO BE, in our humble opinion. No, she doesn't wish to acknowledge this because it would interfere with her determination to advocate for the primacy of the STATE in all money matters. She cannot insist on state solutions if money is seen to have evolved privately. But it did evolve in private, tribal settings, in tribal trading and tribal "marketplaces." History shows us this pattern clearly. To present anything else is sophistry.
Ms. Brown is a most brilliant person. We always retain the hope she will come over "from the dark side" and argue for freedom and free-market money with the passion she now argues for state control of money. In fact, we have even written that her municipal solutions (especially if they are presented competitively) are probably better than the horrible monetary situation we have now. (We try not to be close-minded.)
But think of all the good she would do if she argued for free markets instead of what we call regulatory democracy. With all her brilliance, she is confusing people! It does not help to distort the true evolution of money, which arose within the context of the private tribal marketplace. The sooner that money is privatized once again (hopefully via free banking) the better off, freer and more prosperous people shall be – not only in the West but around the world.
Come over to the light, Ms. Brown! We stand on the other side and see there – right there – David Morgan himself is beckoning to you. He is a big man and will see you safely ashore.
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