An Auspicious Time

Posted by David Morgan & Michael Campbell

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Michael Campbell: One of the top silver analysts in North America, David Morgan joins us now. One of the big questions in the silver market is; is there enough physical silver. If you wanted a bar or coin, is there a shortage out there? There’s two very distinct schools of thought, but if there is a shortage that could be a real positive if you were an owner already. I think it’s a very auspicious time. David, what is the impact of the kind of the tragedy and events that we’ve seen in Japan, North Africa and Libya on a precious metal like silver. Is it overblown, is it a really short term impact? What historically has happened in these kinds of major events?

David Morgan: Well, it’s a safe havens data, it’s just like Gold and a lot of people particularly North Americans don’t really buy that story or haven’t. I should say in hindsight, haven’t bought that story for quite some time. I believe that after silver breached the $20/25 level on a global basis the mindset became that silver has every attribute that Gold has. It’s tangible, it’s liquid, it’s recognizable. Everything that makes it classically money and a safe haven. So you’ve seen a lot of more money coming in to silver than you’ve seen in quite sometime. Longer term I would say it will continue up, short term is a little tougher call. Normally the more uncertainty throughout the global markets, actual tragedies like we are witnessing and feel politically in North Africa, the middle East and the disaster in Japan causes people to seek certainty.

So longer term certainly more and more money will be going globally into both Gold and silver – I think particularly silver because as I’ve stated so many times and  previously on your show, there is a point where the poor man’s gold, silver,  is more appealing to the little guy because there ae a lot more of them. $1,400 Gold might be out of the price range for a lot of average people. Not that they couldn’t buy it, it’s just that if you’ve only got $5,000 you can put in this market you’re only going to get two and a half ounces of Gold, but if you buy silver you’re going to get well over a 100 ounces. History has shown to be more liquid believe it or not. Not more liquid from the aspect of cashing it instantly and getting whatever denomination currency you want. Canadian dollars, Australian dollars, US dollars whatever; that’s not what I’m saying. What I’m saying it is liquid from a practical sense meaning that if you wanted to trade it with your neighbor for fruits and vegetables or the local guy for gas, it’s more liquid in that sense.

Michael Campbell: It’s interesting, a major trend doesn’t change…and silver has clearly been a big trend.

David Morgan: I agree Michael, I think that’s the best analysis. The overall trend is what it is and it continues to be up for the metals. People ask very often well, why? That’s a tough question.  What is the predominant reason for buying? The predominant reason is one word, uncertainty. Uncertainty about politics, uncertainty about currencies, uncertainty about political leaders, uncertainty about natural disasters. Just fill in the blank. Uncertainty, that’s the main driver.

Michael Campbell: David I recall a time when you were with us in November of 2008 and silver was on its way to $9. I remember you telling us very clearly that at those kinds of numbers you were looking for a 100% plus gain over the next two years. Obviously that worked out in spades. One of the big debates in the silver market is: do we have a shortage of silver out there? I can find quality people on one side saying no we don’t, quality people saying yes we do. Where do you come down on that question? 

David Morgan: Well, Mike, first of all most people look at what’s going on in the retail market to make the determination if there is a shortage or not. If you look at the bottom in 2008 which you just spoke about, what we saw was a shortage of retail product. There wasn’t enough rounds, maples, eagle’s etcetera. The premium over spot shot up a lot and I wrote an article about the arbitrage where I said markets don’t like these kind of anomalies and they don’t last very long.  I actually forecast that the spread would narrow back toward the spot price of industrial silver, not the other direction; which almost everybody else was claiming would be the case. 

However, now what has taken place my very steadied view is, as I said in London at the end of the year last year, I have never seen the physical silver market as tight as I see it right now. If we lookat the physical silver trust started by Sprott Asset Management at the end of the year last year, they brought in about $600 million of this physical silver. That basically took the price from roughly the $26 level where they entered to where we are at $35 or so. So the answer is,  if any more ETF’s of the caliber of a Sprott start up where you are talking about $500 million, or $200 million and up the price will continue higher. I’m convinced of that. On the other hand, it wouldn’t be a huge surprise for me to see some of these people on the bullion banking side,  or some of the minors,  working through the silver users association. Putting together a fair amount of silver in physical and bringing it to market. Let’s say $300 million worth of silver put on the market all at one time and taking the price down. How long would it last? Probably not that long. I’m not saying that’s going to happen and I don’t have any inside information. I do want to point out is this is a highly volatile market. Emotions running very high. Market do move both directions. As I put in the Morgan report recently, the next two to three years is going to see a significantly large increase in the physical silver supply. Whether it enough to dampen it  up some of this demand or not remains to be seen. So higher yes longer term, shorter to intermediate term Michael is a tough call.

There is a huge demand for solar. Solar plays a huge part in that China continues to double their solar panel production year over year. Whether it’s going to happen in 2011 or not I don’t know, but it could. That silver is going primarily to industry not to the mints who are put on hold you might say. There is a tight supply and any new buying will take it higher. But be a little careful here. I just don’t want people that hear the silver story and fall in love with it. Put too much of their money in only to see the market cool off and come down five dollars or whatever it might do. If you are a buy and hold type of person, you could buy physical almost any time, as long as your time horizon is out a couple of years or more.

Michael Campbell: David, on a longer term basis you are still very optimistic about where silver is going. What about the whole silver sector now, Companies. Are there some up and coming Companies that you would put on our radar screen that you’ve been spending your time with?

David Morgan: There is Michael. First of all let me just state that we’ve revamped our asset allocation model from what we have had since the inception of ‘The Morgan Report’. What I did was put big money in big companies and speculative money in speculative situations. Some of those worked out tremendously some failed and a lot did well. You cannot fail on those as long as you haul longer term.

Michael Campbell: What about names like Pan American Silver…

David Morgan: We’ve got Pan American Silver still at 65 cents Canadian and around an American dollar. Also on the speculative side we had Western Copper which became Western Silver which was as bought up by Goldcorp. On it goes and I’m not suggesting that everything we touch turns to silver but almost. What we are doing this year is focusing more on the mid-tier sector. Where you you can still put in sizeable amount of money because I have a fair amount of bond managers and specialists who follow our work. Where you get good growth without being too speculative. We’ve had very good success with those, of course the market’s been very good so I’m not going to take all the credit, but it’s worked out quite well. Last month one was up 30% in one month and the other was up 50%. So it goes back to my adage that if you pick the correct companies you can actually do better with paper silver than you can with physical. Not to diminish in any way that you should own the physical first, I will not stop that mantra. But well chosen, well researched companies can do quite well. On the speculative side a lot of these specs are now not specs anymore. A couple of good names that I think still have good growth profiles are First Majestic and Denver Silver. Both those companies, if you just go back into The Morgan Report, we were holding First Majestic at $4 for quite sometime and it’s sitting at $18 today. These stocks keep moving up in class. In other words going from a minor tier to the New York stock exchange. They are getting more and more recognition, which means more and more powerful buying can come into these stocks.

We still do speculate, we are looking at a couple right now, but I can’t give any new names Michael because you know how conservative I am. As long as we are making money on the ones I’d chosen a while back we will continue to hold them, but we  are always looking for new stuff.

Michael Campbell: A Stock I have loved for eight years has been Goldcorp, I think the world’s second biggest gold producer. Still think their silver story is overlooked an awful lot. From your perspective has their silver story been accounted for in their stock price? 

David Morgan: I agree, I had the same idea though I’m not going to take a lot of credit for it. I think its a surprise to Goldcorp as well that they are not getting full value. A good producing silver company sells at 50 times earnings. A good producing Gold company sells about 35. So from an investment stand point to actually get the value out of there it could be worth the effort to spin off a Silvercorp or some kind of silver entity from their whole and get higher value.

Michael Campbell: David, great stuff, that’s a great way to finish and I couldn’t agree more about that approach, you want something with some quality and substance if you are going to make any long term gains and create stability in your financial life. David Morgan you can find him with The Morgan report and at www.silver-investor.com.