David Morgan: Silver Bull Market Is Not Over

by: Hard Assets Investor

David Morgan, Publisher of 'The Morgan Report' discusses his outlook on the silver market.

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" and featured speaker at investment conferences in North America, Europe and Asia. Continued debt concerns around the world will keep investor appetite for the gray metal strong, he says. HAI's Sumit Roy recently caught up with Morgan to discuss the outlook for the silver market.

HardAssetsInvestor: Why has silver been falling over the past couple of weeks? Is it related to the whole "fiscal cliff" situation?

David Morgan: I think the fiscal cliff is overplayed. There are many long-term problems with the debt-based monetary system and the fiscal cliff situation won't change that.

Fundamentally, that translates into higher metals prices.

But right now, there are a couple of things that are going on. One that I don't think has been addressed much is the new tax laws in the United States, which are causing some selling.

For example, if you have a cost basis of $10 silver, and you've been holding it for several years, you're better off selling it before the end of the year and taking your gains at current tax rates, rather than rolling it through into 2013, where it's a disadvantage on a tax basis. This is something that I don't think too many have addressed, but it is something that is influencing current price action.

Another thing is, there is a lack of interest or participation in the markets generally this time of year. We saw a lull last year near the Christmas timeframe. It looks like we're experiencing that again this time. The short interests in silver - read the banks- are able to move the market greater when the volumes are low. We are seeing a replay of last year's price action.

HAI: How is silver industrial demand doing? Can you explain what's going on there-is the downturn in the solar industry having an impact?

Morgan: Solar's situation with silver is bullish overall, because it's a demand that really didn't exist in any significance several years ago. Over the last four years or so, demand for silver from the solar industry has been steadily increasing up until 2012, at which time it has decreased.

That being said, there are a couple problems with solar. One, it's really not a very efficient way to generate electricity and it's very inefficient on an economic basis. In other words, you're much better off burning coal, natural gas, oil, etc. Any other generation method is superior in economic terms to solar.

However, growth in solar has been so robust the last few years because of subsidies. The government came along and said, "Well, we know this is inefficient economically. But it's green energy. And, therefore, we like it. And, because it's not competitive on an economic basis, we will subsidize you if you put solar panels on your home."

One of the leaders in the solar space is Germany, which on a nation-state basis, has probably been the most aggressive in putting up solar panels on government-owned properties. However, while the German economy is strong, the [Germans] are experiencing problems because of the sovereign-debt crisis in the eurozone. In turn, they are not subsidizing solar to the extent they were previously.

Now solar has to compete on a free-market basis. The consumer now has to think- if I could spend a dollar and get this much power out of solar, or I could spend a dollar and get five times the amount of power out of the conventional method that I have on my wall, what am I going to choose? Well, most people will vote with their pocketbooks.

Still, there are too many subsidies that still do exist for solar to cave completely. But the downturn in solar is going to have an impact on silver demand and it's not going to be as robust as we once thought.

HAI: Shifting gears, central banks have been big buyers of gold in recent years. In your view, is it possible that one day they will be big buyers of silver as well?

Morgan: In my view, no. Most governments don't recognize it officially, though maybe unofficially they do. But if governments did become buyers, it'd be extremely significant.
Take a look at China, which owns about 90% of REEs (rare earth elements). Let's say that the [Chinese] owned 90% of the above-ground silver supply, which is roughly 2 billion ounces, counting the coin market. For bullion, it's 1 billion ounces. Combining bullion and coins, 2 billion ounces, 90% of that is 1.8 billion ounces.

That would be a significant amount in silver terms, but a relatively small amount in dollar terms [$54 billion at $30/oz]. They would basically control the silver market, just as the Chinese control the rare earth element market right now. It's unlikely that would ever happen, but I wouldn't rule it out completely.

It wouldn't necessarily have to be a nation-state doing the buying. The silver supply and the amount of what it represents in dollars is so small, that it could be taken on by a few wealthy entities. We're talking Arab sheikhs, multi-national corporations, or something like that.

HAI: Silver mine production is forecast to grow 4% this year. What's the outlook for supply going forward? Will growing output keep a lid on prices?

Morgan: Supply is something that I looked at when I did my 10-year study a couple of years ago, and I've been right on this one so far. I forecast that we would see significant increase in the supply of silver through 2014 or so. We'll see growth in 2013 and probably the following year. After that, I am going to stay with my original analysis and that is that there will not be any significant increases in the supply of silver.

On the other hand, demand will continue to grow- maybe not so much on the industrial side-but definitely on the investment side. Investment demand will grow because of two reasons. One, the global economic structure is based on falsehoods, on lies and debt. There's really no structural change taking place unless it's needed. Thus, people, entities, sovereign wealth funds, hedge funds, pension funds, and the like will be gravitating more and more toward precious metals. That's the big picture.

As for the little guys- the retail investors- they will be looking more toward what they can get. And they'll see gold above $2,000 and they will find that silver is cheaper than gold and more affordable than gold.

They'll choose silver over gold, whether or not that might be their first choice or not, based purely on the economics. That will force greater gains in silver relative to gold, in my view. I've said this for years-on a percentage basis, you'll see silver spike much higher than gold once the market gets overheated.

HAI: Are there any disadvantages of owning silver relative to gold?

Morgan: One you hear all the time is that it's too bulky, that it takes up too much space. But if you look in an iPhone, that's roughly the same size as a kilo of silver. A kilo of silver is about 33 ounces. And silver is about $30/oz, or almost $1,000 for a kilo. So $1,000 in silver is the size of an iPhone.

I just bought an iPhone and that was about $400. The iPhone is for a unit volume- in other words, how big of space it takes- extremely valuable; $400 in this little space. But silver is about twice as valuable, taking up the same volume. In that context, is silver bulky? Well I would suggest, against an iPhone, it's not bulky.

But, it is bulky relative to gold. Against a gold/silver ratio of 50, it would seem 50 times bulkier. If we account for density, it's actually slightly greater than 50 to one.

Against gold, yes it is bulky, at the current ratio. If silver were to narrow the ratio to one-tenth the price of gold, would it be too bulky then? Let's look at an example at the current ratio; what if you invest $10,000 in silver? That $10,000 would be the same volume as 10 iPhones. Let's say we put in $30,000. That's 30 iPhones. That's still not very much space. Can the average investor invest $10,000, $20,000, $30,000, even $50,000 in silver? Perhaps so, but it would not really take up that much space.

If you're talking $2 million, or $7 million, or $100 million, or something that a large hedge fund or a money manager or a pension fund might be throwing into the market, and they're doing the physical terms, then the space could be a consideration. But those types of investments are almost always stored in a vaulting facility that's well recognized.

Thus, this argument about it being too bulky, I really don't buy into it very much. As a thought experiment let us say that gold and silver sold at the same price- would silver be too bulky then?

HAI: What's your outlook for silver prices over the next year? Will they ever surpass $50 again?

Morgan: I certainly haven't seen anything to persuade me that the bull market is over. But the long consolidation we've had since the end of April, 2011 has been trying on the best of us, yours truly included. Until I see a significant change in the global debt situation, I cannot help but be bullish on gold and silver.

I don't see a change. I do think we'll see a $50 an ounce in 2013.