A few weeks ago I had the fortunate experience of attending the Silver Sumit in Spokane, Wash. It was my first time, and I was very eager to see what it was all about. As I was walking down the main hall, I recognized Mr. David Morgan of Silver-Investor.com. He was walking straight towards me. I quickly introduced myself and asked him if I could set up an appointment to do an interview with him. “What about right now?” he asked. I looked at my watch, and told him I'd be back in 5 minutes.
The following is a transcript of that interview. The most gratifying part of this story is that I was able to get Mr. Morgan's profound point of view on the current fundamentals of the silver market and what the price prospects are for the intermediate to long term.
Patrick MonteDeOca: I have the pleasure and honor of meeting with Mr. David Morgan, and I have the opportunity to interview him at the spare of the moment, and I want to thank you so very much for this time.
David Morgan: My pleasure, thank you.
P: I would like to move right into the current condition of the silver market, right after this last correction that we saw, that essentially brought the market down to 26, and its been bouncing since. What do you make of this transition in terms of the price volatility as well as the exchange, the CFTC or the NFA controlling margin requirements?
D: Well, I think you just asked me about 6 questions. I’m going to give you a long answer, but I think it takes a long answer. Silver went parabolic, basically, recently, and it moved from roughly the breakdown area, which was, according to my chart, worth about 19 and them it went all the way up to about 26 or so. It started to wobble a little bit and it looked like it might have been topping out temporarily. In fact, I was out of that trade and then QE2 was announced. And, once QE2 was announced, silver roughly doubled. So, it went from 26 to almost 50, and it went up almost straight up. And it concerned me once it got above the 32, 33 level, and I kept telling everybody because people love buying high; most people I talk to do.
P: 90% of people tend to do that, unfortunately.
D: So I was cautiously optimistic, I think it’s going higher, but if you want to buy silver now, buy some but not all of your position, because you may end up regretting it. And I sang that same song all the way up, and I won’t mention any names, but some of my colleges and peers in the industry were telling me “You’re not bullish enough,” “You’re too cautious.” “You’re too conservative.” I am who I am, and I’ve been in this market for a very long time, probably longer than almost anybody else.
P: One of the major survivors.
D: So, I said “You know, that’s it.” On my short-term trading basis I told everybody I was out of my short term position above the $48 level, and I did a seminar about a month after and one of guys came and brought me these really elegant Belgian chocolates from Belgium -- he came to L.A. from Belgium -- and he said “You saved my bacon because I was way over leveraged, I got out when you got out and I made so much money. I’m here attending this seminar, so here is a thank-you.” I met him in the elevator and he said “You saved my life.” I was thinking “What is he talking about?”
So that’s what happened in silver, well basically we’ve seen the same and then it sold off and it went down around the $33 level and consolidated between $33 and $38 for quite some time, several weeks, and then it started to consolidate at a higher level, it actually forecast that and made a channel pattern up to around the $40-$42 level. Well, as that second consolidations level had been achieved gold did a silver thing that silver had done months before and went parabolic, not the amount of percentage, but very similar pattern if you look at the chart it went from roughly $1,500.
P: What was driving the price of silver ahead of gold?
D: Well, you know, we always get that question and I always give a simplistic answer, but it’s the only truthful answer you can give: There is more buying pressure then selling pressure, that’s what moves them around and visa versa.
P: Plus, it’s a thinner market
D: And so you have to go on an individual case-by-case basis, so you can’t really answer, but in a general way.
P: I think the volatility of silver right now, to gold, is running at about 3 to one maybe, or approximately, 3 - 3 ½ to one.
D: So, gold did the silver thing and silver got crunched. Now I remember when silver was moving up to the $50 level, there was a margin increase, then another margin increase, then another margin increase and finally a fourth margin increase.
P: And, they seem to be happening on Friday, when the markets are closed. A strange coincidence.
D: So the market finally cooled off, sold off, had a sharp correction and then reestablished it’s base until gold went parabolic and it got corrected. It had 2 margin increases if I remember correctly, and it fell off. Well, when Gold fell off from its perch of 1,900, silver sympathized with this and went down even more and we saw this Intraday $26 level, probably only two or three trades there, but very few, it didn’t stay there very long, and now that we are building a base around the 30, $31 level, we’ll have to wait and see if it holds.
So, that’s a long answer, but that is exactly what took place, you can argue in a way that silver actually led gold. It was the first one to make this parabolic move. It got sold off, and then gold did. You can argue the other way as well. It really doesn’t matter, what matters is that when you get those kind of moves up it takes to repair. Other colleges say “It’s just going to bottom, it’s going to shoot right back to 1,900 in no time at all.”
P: Do you see that same relationship competing with gold, or do you see the volume and purchasing demand so to speak that everyone talking about coming from Asia or China, which, by now, everyone seems to know. Do you think that same relationship is going to move on to the next cycle over the next year or two years or do you think that gold will become more prominent as a currency in fact, which seems to be trading like.
D: Yeah, the fundamentals have never been better. And there is going to be continual off take of physical metal from here on out. It will ebb and flow like any market, I think you are going to see more and more going to the Asian markets, as you alluded to, and you are going to see higher gold and silver prices?
P: How high?
D: Really, it’s difficult to say.
P: I don’t want to put you on the spot.
D: No, I don’t mind. Well, there is several ways to get a theoretical price. I wrote an article in my 2003 called “Engineering The Price of Gold” and I explained my thinking, a lot of people just throw out a number, and that is ok, you can throw out a number, it’s a guess anyway. But I use an approach that takes into account what the money supply is and looking at gold as a currency only not as a credit based system but as a physical monetary unit, and if you do that in today’s world you got about $5,000 an ounce, as a minimum.
Now if you did that same study in 1980 for gold you would have full gold cover for the physical notes that were out there at about $400 an ounce and we all know it went to $850. So, in that article, I suggested that, you know, in a panic buying mode or when everyone is shunning the currency that it could easily exceed the theoretical full cover, in other words, where you would in theory go back to a gold standard. So, that could imply that 5,000 is a bare minimum to cover, it could even double like in 1980, that would imply $10,000, which is good because I’m a practical man, before you get to 5 you have to get to 2.
P: Right, and what about the gold/silver ratio?
D: Well, I’ve always stated that it would favor silver and it has. When it’s a bull market, according to my work, when I say the bull market started, doesn’t mean I’m right but it’s my report (laughing), was September of 2003 when the ratio was 80 to 1 and so now the ratio is, you know 50, with levels as low as 40 so if you bought at that time, at the 80 to 1 ratio and put the same amount of money into gold and silver, silver would have out preformed gold 2 to 1 when it hit the 4:1 ratio. I think it is going to get even better than that. I think we are going to see what we call ‘A Classic Monetary Ratio’ sometime in the near future.
P: What period of time do you see that happening?
D: I don’t think we are going to see the ultimate high until definitely after 2012, and I think were probably looking at 2015-2016. David Ben Simon an author, I will throw his name out there, he and I have done a few lectures together and he is using over $200 silver or $160 I believe it is, in 2016 time frame. No one knows what it is, but what I know, well I can’t say I know, but I believe strong, is that we are far from the top and we haven’t seen and we haven’t seen that panic buying mode that we talk about. Now, the mainstream press has talked about the gold bubble, which is this slightly parabolic move that we saw in silver and gold, and from their perspective perhaps it looks that way, but believe me, that is a warm up compared to the real panic buying that I see in the future.
To be continued...
Disclosure: I am long PSLV.
