David Morgan: Silver Overdone Now, But Headed Higher in 2011

 |  Includes: COPX, CU, GLD, SIL, SLV, SLW
by: Hard Assets Investor

by Lara Crigger

Gold's record highs might steal all the headlines, but savvy investors know the real story lies in silver, where futures for December delivery topped $22/oz earlier this week—their highest levels in 30 years.

Why has silver risen so far so fast? For answers we turned to David Morgan, the founder of www.silver-investor.com and editor-in-chief of the monthly precious metals research guide, "The Morgan Report." As one of silver's most vocal bulls, Morgan has spent more than 30 years educating investors about this often-overlooked metal.

Recently HAI Editor Lara Crigger spoke with Morgan about the rise of "gold's poodle," including his stance on silver miners, the promise of green technologies and when we can expect a market correction.

Crigger: Hiding behind the gold story, and maybe not getting as much attention, is silver. We just hit $22/oz in the futures market last weekwe haven't seen those levels since 1980. Is silver just riding on gold's coattails right now? Or are there more factors at work here?

Morgan: There are more factors at work. At least two to three decades ago, there was an article that came out with the headline, "Silver is Gold's Poodle." I laugh, because that is really a metaphor for silver. If I ever wanted to increase my newsletter subscription, I should probably change my title to www.gold-investor.com.

Silver has better dynamics than gold from an investment perspective, but fewer people are willing to invest in it. It's a smaller market and therefore more volatile. But the dynamics of silver are better, because it has every attribute of classical money that gold holds—that safe haven status—and it's better recognized as money on a global basis, not just a North American basis. On top of that, it has industrial demand, and most of those applications are price-inelastic, meaning demand will be there regardless of silver's price. So, long term, silver really does have a better investment profile than gold does.

I'd say that more people are waking up to that fact, and I'll say it from empirical evidence as well.

Crigger: Has the rise in silver prices been what's made people sit up and take notice? Or is something else going on?

Morgan: It comes in spurts. I got a lot of interest from "big money" at the bottom of the market, and now here we are again at the top of the market, and I'm getting the same types of inquiries from the same types of entities.

Or, well, a relative top. I mean, obviously it's a new high; we can't dispute that. But whether or not we're going to get a correction? I believe we will. I believe we're overdone temporarily. I believe that we're going to see some profit-taking.

Crigger: That profit-takingwill we see it in the next couple weeks? The next couple months? How much farther does this rally have to go?

Morgan: Well, on a short-term basis, I already sold out my short-term position, expecting this profit-taking. I was a bit early for two reasons: 1) I like to sell at strength, and 2) I had to go to the Toronto Gold Show and I hate having open positions when I'm onstage. They never seem to work out. But I trade for myself and I'm not the greediest guy on the block anymore, so I don't have to get every penny out of every trade.

Is $22 it? On a short-term basis, I'd say it probably is. I hate calling the exact numbers, but it's so overbought; all the technical indicators have been indicating that for a while. Certainly markets can overextend, especially the metals.

All those indicators I've looked at, plus experience, tell me we're due for a correction within the next week or two or so. Not much further out. Now I do expect a correction to be rather short and sharp, and not very long. And I do expect prices in the metals to be higher than they are right now by the end of this year.

So I just want to make clear that I'm expecting a correction in all markets in the October/November time frame. And that may be a re-entry point for short-term basis. For 2011, however, I believe the general trend is going to be up for the metals.

Crigger: For all the metals? Or just for silver and gold?

Morgan: No, just silver and gold, although copper's been performing well, and I could be off. I'm reluctant to side on the mainstream, who are mostly saying, "We really have recovered; there is no double-dip." I'm sorry; I'm not in agreement with them at this point in time. Obviously I hope I'm incorrect and there is a recovery. I hope I'm missing something. But from what I'm looking at, the debt situation has not been corrected or addressed in any realistic manner.

Because of that I have to go with what I've studied and observed for 30+ years in this industry, and that is, you just can't throw a bunch of paper at this problem and expect it to be fixed. That is not the solution, that's the problem.

Crigger: Now, as you said earlier that when we see a pullback, we may see more people enter the marketand certainly we've seen a lot more people entering the market now than in years past. But silver's a smaller market than gold is. Can we expect all of this new money to move the market substantially?

Morgan: Yes, it does. I mean it will move it more up and down. The "problem" about silver is that it doesn't take much buying and selling in the market to move it. Therefore if the new large buyers that are in that market are professionals and they decide to take their profits, and most of their holdings are on paper, then you'll see a correction, a pullback. You'll see a backwardation. It's just the way markets move.

Crigger: Let's switch gears and talk about miners for a moment. The new Global-X Silver Miner ETF (NYSE Arca: SIL) launched earlier this year, and it has already accrued over $100 million in assets and it's performed remarkably well. What are your thoughts on this ETF? Is this a good deal for investors?

Morgan: We wrote about that in the Morgan Report, and we're favorable to it really. I think it's good. Maybe it detracts from my business, but so be it, because that is a good way, I think, for the general investor to get exposure to equities without having to do a whole lot of studies on silver.

What's fascinating about it is how quickly it acquired capital versus, say, the copper fund [Global X Copper Miners Fund (NYSE Arca: COPX)]. From an objective perspective, the copper fund really has better companies in it than the silver one does!

I hate to say that, but there aren't a lot of really top-grade silver companies, because silver is a pretty rare or scarce metal by itself. A "pure" silver company is impossible, other than Silver Wheaton (NYSE:SLW) perhaps. You're always buying into a company that has some exposure to the base metals. So there aren't a lot of choices. There's a subset, maybe a handful—literally five or fewer—of really good companies; everything falls into the "other" category. In that "other" category, some are honestly better than others, but it's not easy pickings.

The point is we like the SIL. I'm actually thinking about using that as part of our holdings as sort of a proxy, maybe more on the trading side. I haven't made up my mind yet. But yes, we like it and the market likes it.

Crigger: Given increasing investment in silver and the increasing applications being found for it, do you think that we'll see a reversal of the supply situation we're seeing in the metal sometime soon? Will the market move from surplus back into deficit?

Morgan: Yes, it will. I wrote about that in the March Morgan Report; it's probably the best report I've written this year. Basically, I took a blank sheet of paper and said "I don't know anything about silver," and I started studying again, going out the next decade.

Now, whenever you make a 10-year projection, you're going to make some mistakes. But based on the increased activity for the green energy movement (and that's primarily solar that uses a lot of silver), water purification, food purification and/or storage (meaning silver-impregnated plastics to go in food wraps, and silver in the meat-cutting plants and so on), it's going to put silver into a deficit.

When? I will guess within the next couple of years. The increase in demand from industrial players alone will put us in a deficit, but then if you add on top of that the continuing—and, so far, increasing—investment demand, there will certainly be a deficit. So, on a total supply/demand basis, yes, we'll go into a deficit probably within two years.