Talking Metals with David Morgan

By Michelle Smith — Exclusive to Silver Investing News

David Morgan, founder of the Morgan Report, is often considered an authority on silver, but he considers himself a precious metals aficionado. More than that, he identifies himself as a teacher. Early on, Mr. Morgan put the brakes on our interview to make something clear. “Silver and gold are not my mission statements,” he said. “My mission is to teach and empower people to understand the benefits of an honest financial system. What we really need is a system where it is fair, honest, and transparent for everyone involved, from the poorest to the richest, and everyone between.”

SIN: Why is silver better as a monetary metal than other options?

DM: This is my opinion, silver’s monetary aspects are as good as gold, or perhaps even better, because it’s been used more often, more places, for more transactions than gold ever has. It’s often said that silver is the poor man’s gold. Silver is also the merchant metal in history. When the free market has been able to determine what money is, the free market has gravitated to using silver much more often than gold.

SIN: If silver has been the free market choice, why do central banks now focus more on holding gold?

DM: Well the old adage that “he who owns the gold makes the rules” I think is very apropos. Therefore, central banks make the rules. If there is ever going to be a monetary system that re-establishes precious metals, gold would be their choice because they own it.

Gold [alone] is not really the best choice in my view. Gold and silver together seem to be the best asset to control the propensity for the system to corrupt over time. If you have a bi-metallic standard, then one checks the other. Is it perfect? No. Corruption would exist, but on a much, much lower scale than we see in today’s system.

SIN: Do you believe there is silver manipulation?

DM: Let me be real clear, as I never want to be misquoted on this. The long-term trend cannot, CANNOT be manipulated. Within the long-term trend, the price can be manipulated from time to time, and it is.

SIN: In a global and electronic investment environment, how is that manipulation accomplished?

DM: It’s accomplished by the electronic world. It just happened recently on the 29th of February. Basically 550,000 million ounces of silver were sold on paper that doesn’t exist on an exchange anywhere in the world. A great deal of selling of naked shorts, or silver that doesn’t exist, drove the price down substantially. That’s how it works.

SIN: So the manipulation takes place in the paper markets?

DM: Right. Remember, the price of silver is pretty much set on the commodities exchanges. So when that massive short selling takes place, it drives the prices down for everybody, physical [silver investors] or otherwise.

SIN: Then who benefits from manipulation?

DM: The shorts, the people who are betting the price of silver will go down. In the commodities markets it’s a zero sum game. If I win a thousand bucks, you lose a thousand bucks on the assumption that I’m short and you’re long and we have opposing contracts.

SIN: You have described the market in stages of the wave. What stage are we in now?

DM: No one knows exactly until it’s over. The initial phase, where no one is really in the market except people, like myself, who really are concerned about the financial system, that wave is done. That I’m certain about.

The next leg up is this one I believe we’re starting, where you have institutional money come into gold and silver in a large way. That’s usually during the middle portion of the market. I really think the mid phase is going to be somewhere around the $1,650 level [for gold] and the $35 level for silver, close to where we are now.

From those levels you could probably see both the metals double. And so you are looking roughly at $3,000 gold and $70 silver. That would be the next phase, which I think is going to take place around late 2012 or early 2013 and probably last for a year and half, so until the mid part of 2014.

After that is completed, there will be a pullback that will be probably be sharp and deep. That will scare a lot of people out of the market. Then there will be what I call the blow-off, or panic phase, and those are usually very short, very volatile, and extremely lucrative if you know what to do.

I could be wrong, but that’s how markets generally move. In my view, the metals markets are the most emotional markets out there. The reason being is that they are coveted as money.

SIN: Why is silver so volatile now? What moves the market?

DM: Buying and selling. Use a penny stock, for example, that has a million shares outstanding at a dollar a share. With a million dollar market cap, some not very big players can come along and say, “I’m buying $200,000 worth,” which is like 20 percent, and move the market up 30, 40, or 50 percent just by a little bit of buying. And the same thing on the sell side. That’s an illustration of the silver market which is extremely small.

SIN: Given that volatility, would you say that silver is better suited for, or unsuitable for, any investors? Or would you say it’s a wise investment across the board?

DM: I always try to look at it on an individual basis. Because of that fact, it is unsuitable for some people. I truly believe that everyone who believes what I believe about the financial system needs to have some protection, which means precious metals. Does that require you to have silver? No. If you’re older, can’t take the volatility, don’t like the swings in silver, or you don’t buy into silver being a monetary asset, I would suggest you just go to gold. If you are able to take the volatility and you understand the silver market, I think the best mix is silver and gold.

SIN: With the various ways that you can invest in silver, what is your take on the best way?

DM: I’ve been very consistent here. I think you should start with the physical metal first. And for almost everyone, unless you are an institution or an extremely high-net-worth individual, you should do it in the coin realm. I believe you should have both silver and gold coins. And put it in a place where you know that you own it. I recommend dollar-cost averaging. There is a program I am affiliated with at www.silversaver.com. That’s a good way for most savers, or the middle class, to get involved. It’s available for Canadians and Americans.

That’s the fiscal realm. Once that’s established, the best way to get leverage in the market in a manner that is safer than the other silver investment options is through mining equities. They break down into three classes: top tier, mid-tier, and speculative. Mid-tier is where we focus most of our effort. They have a greater growth profile in most cases.

A lot of people in my sector tend to focus way too much on the junior sector. These stocks really cannot be analyzed. In most cases, they’re stories, but these story stocks have a horrible track record. About one out of 4,000 actually becomes a mine. To find good ones really takes a lot of time, effort, and diligence. Everyone wants to find that stock that’s sold for 50 cents and goes to $250 bucks. That’s a very rare event. It happens about every 30 or 40 years, but those are stories everyone remembers.

SIN: Are there any silver companies that you like a lot and would recommend?

DM: One from the mid-tier that I would recommend is First Majestic Silver (TSX:FR,NYSE:AG,FWB:FMV). That stock is already up 400 percent, but I still think it has more potential to the upside.

From the speculative section, Mines Management (AMEX:MGN). It’s one of the largest copper-silver deposits in the world. It’s in Montana and it’s not a mine, it’s a speculative situation. It’s got about 260 million ounces of disseminated silver, which means it’s not very rich grade. It’s very undervalued, if and only if, it actually becomes a mine. So it’s very risky because it’s all or nothing. You would only want to put money into a Mines Management situation if you can afford to lose.

SIN: Why haven’t mining stocks been performing along with silver prices?

DM: Because of the advent of the ETFs. By law, managed money is not allowed to buy the commodity. They are required to buy equities. The ETF allowed them to buy an equity that is actually just a commodity. Now they can buy silver without any of the mining company risk. So most of the [silver] money that would have gone into [silver] equities is now sitting in ETFs.

I still believe the equities are a very good place to be. For one, they are very undervalued right now by any metric you want to use. And two, most of the latecomers in the cycle to the market will go into stocks and not into the ETFs. So you want to buy low. The equities are unloved and unwanted so the time to buy, that’s now.

SIN: With regards to investment strategies, what advice do you offer small investors, say those who pull $100 or $200 from their paychecks, versus the high-net-worth investors?

DM: Basically the principles apply whether an investor is small or large. But for small investors, I say forget the mining equities. You have no business being in there. There’s just too much risk. Start stacking silver, which means you just buy $100 or $200 a month. And you can do that with silver and/or gold.

For someone that’s large that wants to go into both the physical realm, then the mining equities, I would use the same principle. Go ahead and buy, but buy over time. And strive to buy the best. That means buying the best mining companies first. Then you can move into the mid-tier or speculative categories. People get very excited when they catch on to the gold or the silver story, but the best way to approach any market is with thought, intelligence, and patience.

SIN: There are concerns about investors’ ability to get their hands on physical silver, and there are warnings to avoid investment vehicles where you invest money, but the silver is supposedly in someone’s care. What is your advice about ensuring that your silver is accessible?

DM: My advice from the very beginning is very consistent here: buy it and take it. You must be able to put your hands on it. Again, there are individual cases, maybe elderly people or those in an apartment who for some reason don’t want to take it home. But in almost all cases, I really believe you should buy it and touch it.

If your personal circumstances prevent that, you have to look at the best alternative. That’s where it gets rather tricky. But the best place to do a storage program I think is Idaho Private Vaults. There are also ETFs. One that I like is Sprott Asset Management’s Physical Silver Trust (NYSE:PSLV,TSX:PHS.U). The problem with PSLV is there is a huge premium at times. And I wouldn’t recommend it unless the premium is somewhere around seven to ten percent, about the same premium you pay at a coin shop.

SIN: Even with ETFs, there are concerns about how those operations really work. Are those concerns valid, or are they scare tactics?

DM: That’s a matter of opinion. And in my opinion, yes there is valid concern because there is counterparty risk, and no one really knows the counterparty risks. You have to be forthright in stating that. How much? We sometimes don’t know until after the fact.

The way I approach it is if you have your physical silver and gold stashed away, then you want to branch out into the ETFs, go ahead. But don’t consider an ETF to be your primary silver investment. There is of course the caveat we just discussed. If your personal circumstances dictate that you just cannot take the metal, I would suggest you invest in a few options. Let’s say you go for PSLV. The Central Fund of Canada (AMEX:CEF,TSX:CEF.A,CEF:U) is a good one, and also look at Bullion Management Group. If you put a third [of your investment funds] into those three, then you are pretty well protected.

Securities Disclosure: I, Michelle Smith, do not hold equity interests in the companies mentioned in this article. David Morgan holds equity interests in the recommended equities listed in this article.