8 Answers for: Is This the Final Blast-Off?

At this point, I am a little reluctant to state this is the final blast-off and that we will not see gold below US$1,000 ever again. Certainly the percentages are with the precious metals investors and it seems gold has nowhere to go but up. As we know, you’re at a level that has been resistance in the past ($1,000), and that area has been resistance for gold for quite some time. And once that level is penetrated for three days in a row then you have a strong probability that the trend is going to continue. In fact, we alerted our subscribers to that very fact!

The biggest caveat is that the big, big picture is very tenuous going forward in the October/November timeframe. The powers that be seem to think that the recession is over, but the facts send a different message. Some of these concerns are as follows:

1. Confidence in the dollar is all we have left. Almost anyone paying attention knows the dollar has lost over 95 percent of its value. This was addressed by this writer about eight years ago in an article titled, “Dollar Dotcom”.

2. This faith has probably reached its limit. China, Russia, and some of the Middle Eastern countries have all expressed interest in some alternative to the U.S. dollar. Since in real terms the U.S. economy has been declining for several years, the ability for the U.S. to make good on all of the debt obligations becomes highly questionable.

3. Credit seems to be contracting at a local level and exploding at a bank/financial institution level, as long as your (bank/institution) is favored by the powers in the government. Have any of you tried to get a loan on your home or apartment building lately? How about a loan for your small business? Credit is contracting on Main Street but exploding on Wall Street; this does not yield a strong economy going forward.

4. The U.S. government seems to be progressing into that legislation that we have kept in mind for almost 30 years—the “Monetary Control Act of 1980.” I honestly have not read it in many years, but to the best of my memory, this “act” provides the ability to monetize almost anything. Have some confederate currency you’d like to swap for some Federal Reserve Notes? The bailout schemes are risking the integrity of the U.S. debt previously issued. This is an area to watch very closely.

5. Derivatives had a profound influence on bringing the system down and yet most of the derivatives in the system are still “open,” meaning these bets are not resolved at this time and the value of many is highly questionable. Derivatives pose one of the greatest risks to the entire banking and financial system.

6. Bank failures continue: the FDIC is broke and the balance sheets of many are of grave concern to investors. It is worth your time to check out the safest banks and limit your exposure!

7. Real estate problems are far from over, in our view. The Alt-A and even conventional mortgages have rollovers into 2010 and 2011 and are equal in size to the sub prime fiasco. This does not even consider fully what is taking place in the commercial real estate sector.

8. Social Security is simply a wealth-transfer scheme and I have written about it in the past. With tax revenues down, funding of this program and hundreds of other government obligations can only be funded by more borrowing—but from whom?

One of the questions we are getting quite frequently is . . .If the recession is over officially, doesn’t that, along with the thousand-dollar gold mark, trigger inflation and suggest getting in now potentially (if you’ve been sitting on the fence about gold)?

Investors are always looking for certain signs or indicators to help with their decision-making process. This is especially true in the technical community, and more people are in the technical community today than probably ever before. That is because you have trade stations and all these software programs that anyone can buy and basically run the numbers and come up with a conclusion that gold is breaking out. However, there are no guarantees on this; it’s only a probability.

Deflation concerns still enter into my thinking. Looking at it as I do from a perspective of the real world, things are not really picking up. Not that there isn’t some of that going on, but it certainly isn’t widespread, and this breakout that we had is not very strong.

The easiest thing to say with conviction is, if you’re not in this market you absolutely need to buy physical gold and silver here. Whether it stays above a thousand or drops below is a moot point. When gold goes to 2,000 or 3,000 or more, if you bought it as it broke through 1,000 and then went back under 1,000 for a while, it might make you sad for a day, a week, maybe a month . . . but it’s going much higher in the longer term. So that’s one thing to keep in mind.

Many ask, how to buy silver? Secondly, it’s the general equity market or the overall health of the financial asset market. The general market has a great influence on the mining shares, at least on a temporary basis. So that could color your view as far as what to do now. Personally, I’d be much more favorable toward buying the physical metal rather than the mining equities at this point.

Technically, both gold and silver are overbought. The markets can stay overbought for a very long time and continue to move up and up and up in price, being overbought the whole time. So that doesn’t concern me, as far as will it go higher or not, at this point (October 7, 2009). I do want to advise our readers that, if they’re making a decision on what to do now, be cautious. I’m very, very skeptical of what could happen in the October/November timeframe, so look out ahead.

I was cautious last year through the end of September; that was a good call, except that it wasn’t for a long enough period. If it had been extended through the end of November, we would have gotten back in with our trading portion of the portfolio at the perfect time, instead of getting back in a bit too early. Regardless, that position certainly made good gains if you were in the correct mining stocks. Take a look at Silver Standard from the November low of 2008 until present time, going roughly from around the five-dollar level to over twenty. Four hundred percent on this company! Compare that with some of the junior mining companies, and not many have had that type of recovery.

Oftentimes, I am criticized for my “conservative” approach of putting serious money into a serious company. At this point, let the facts speak for themselves. No one in this market is perfect, and timing is extremely difficult but we do our best and can probably hold our own against almost anybody. However, this isn’t day-trading—I’m not a real in-and-out kind of a trader. I’m much more a position trader, where big moves down occur and no one wants to buy gold or silver anymore—that’s the time to jump on board and add to your position. Then at these highs (which we may or may not be at right now, time will tell) I’m a little bit more inclined to lighten up.

You want to sell in the strength. Very few people seem to learn that, because there’s a philosophical adherence to gold as money and silver as money, and I hold those views myself. However, I also hold the view that if you can take a profit on part of your position—which is what we do—you might as well take it, because it’s available to you.

The idea is to stay fully invested with roughly 75 percent of your funds, and to trade with about 25 percent. That is a good approach, because if the market just takes off and blasts upward from here, you still have the lion’s share of your investment and have left only 25 percent behind. Shorter-term trading with the 25 percent can make you feel good.

Markets do move quite a bit and they are quite volatile, so when you do catch a nice move in one direction or the other, both can help you weather these long consolidation periods. That’s exactly what we did the last time we got a huge move up in the gold and silver price—when gold got up to the $1,000 level or actually beyond it and silver at that time was at $21.00.

I would be much more comfortable saying this is the final blast-off if silver were hitting $21.00 right now as gold is trading over $1,000—that would be confirmation in my book, and I’d be very, very bullish. Unfortunately, silver isn’t leading the charge at this time and that is acceptable. It’s certainly shown some good strength this whole year, but not quite the amount of strength I would expect if we were to see all this inflation pouring into the financial markets. Again, I still suspect that there’s probably some more recessionary, deflationary, depression type of news coming.

Big Picture – Bumps Ahead!

The following is an excerpt from the September Morgan Report. Many have asked what to expect after October 1, 2009. Well, that time has arrived and the following may give you, the reader, some insights into my thinking…

“[W]ith respect to future debt; would it not be wise and just for that nation to declare in the constitution they are forming that neither the legislature, nor the nation itself can validly contract more debt, than they may pay within their own age . . .” —Thomas Jefferson

As we come near the end of summer in North America, we are receiving mixed signals about the U.S. and global economy. The mainstream is speaking about the worst being behind us, both within the U.S. and globally. However, we see things a bit differently.

This month’s quote about debt is one that I found from the most respected Thomas Jefferson. Indeed the current financial (credit) crisis would not be taking place if every nation adhered to the principle of living within one’s means on a national level. Alas, that is not reality and we need to examine where we are presently, and with that, we want to project the most likely road ahead so you can observe carefully for verification and take the correct action.

As the system continues to add more debt to a debt-based system, we know that this “fix” might help bring confidence back into the markets for a short time, but longer term it cannot solve the problem, because excess debt is the problem. This month I want to focus on what the most likely scenario is going from the end of summer to the end of this year and into early 2010.

First, we do provide market timing, but in a very broad sense—meaning on an intermediate-term basis. This timing is where we see very strong upward moves resulting in overbought situations and also looking for “washout” bottoms where buying into this sector is at the lowest possible risk.

Having called the top very near the $21 level in silver turned out to be accurate. But it was a long wait to buy back into the market, with my forecast being to buy until the end of September last year. Well, I admit my top was correct, but I failed at calling the exact bottom, as we now know; looking back, we got a bounce in September and all looked good for a while, and then the bottom fell out into the November timeframe.

Personally, we did buy back in most of our large trading positions during September but held some cash and did get some purchases very close to the ultimate bottom. Looking at those purchases today, the November buys are of course doing well, but the September purchases are about even. Remember, these are large companies as outlined in the top of the Asset Allocation Model. Our Franco Nevada position is doing well; as the best royalty company for gold and oil, it is difficult to think of a better long-term buy-and-hold than that company.

At the beginning of the summer I expressed that we would see a “normal” summer, which meant a broad trading range for the precious metals sector. I am well aware that we have a few more weeks before summer ends officially, but it will end before the October issue. We are going to examine the longer-term trends and then make some forecasts.

Big Picture – Bumps Ahead!

As stated earlier, I was concerned with the macro picture of the global economy going into summer last year and it seemed very few others were concerned with the “rollover” of loans and derivatives coming due one year from the first major warning in August of 2007. In other words, I was deeply concerned that we could see a major move down in the entire financial sector in the August to September timeframe. Well, as we all know, that is what occurred, but it carried on into November. Now we come into the same season and quite frankly I fear that this time may be even worse than last year.

The Fiscal Year 2009 Financial Report of the United States Government is required to be submitted September 30, 2009. My thinking is that anyone who truly understands finance and compound interest will readily see just how difficult it will be for the U.S. to ever dream of meeting many of the obligations that it has promised its citizens, foreign governments, and others. To me, this may be the moment of truth.

Earlier in the year, the Financial Accounting Standards Board (FASB) allowed many institutions in the U.S. to bend the rules in order to preserve the economy. We know, however, that only by a clear assessment of the truth—or in this case, true financial picture—can we determine where we stand exactly and what can be done to address the problem. By allowing the accounting rules to be changed by bowing to congressional and financial industry pressure, many financial firms were given “flexibility” in valuing toxic assets. This was expected to boost bank earnings and improve their capital levels.

And the FASB voted unanimously to let banks exercise “more judgment” in using mark-to-market accounting that has forced billions of dollars in write downs and been blamed for worsening the recession. Now beside the Federal Government, many financial firms are going to report at the same time, and perhaps this time, the mark to market will be more accurate. In other words, I expect to see the markets react to reality as the reports are issued this time. The largest money center banks are too big to fail—JP Morgan, Bank of America, Wells Fargo, and Citigroup. These banks hold about half of all mortgages and two-thirds of all credit card debt.

To fully understand the real situation, we can divide the economy into three main areas. First, the real or physical economy—this is your farming, mining, real estate, manufacturing and wealth creation. In other words, where real goods and services take place. For the United States, this part of the economy has been on a decline for quite some time as the manufacturing base has been moved outside of the country. Certainly new innovation and products are being invented and brought to market in the U.S. and elsewhere all the time, but on a broad scale the trend has been down and many Americans have been displaced by foreign workers.

I cannot emphasize this part of the economy enough, as this is the real world and it is what every human on the planet is truly dependent upon. As the physical economy goes so goes the wealth and well-being of the vast majority of the people on the planet. Now there are two other markets that are supposed to reflect the physical economy. The first being the financial markets, which is the stock market generally. This is where investors can become partial owners of business through stock purchases. The financial markets reflect the real economy but like all financial assets at times, this market (stocks) can be undervalued, fairly valued, or overvalued.

And we also have the money markets—this is the money supply measured in a broad sense by money in circulation and credit extended by loans. Think M3 or the broadest measure of money and credit. What is actually taking place is that the money supply is climbing rapidly, while the financial market has already put in its peak and is falling. Yes, we have had a good bounce but the major trend is down, because sooner or later the equity market does reflect the true economy.

So, the physical economy is going down in the U.S., the financial markets have acknowledged this fact, and the authorities are trying to paper over the whole problem as if this can help. Thus in a concise way, as much as some (mostly Wall Street) have “enjoyed” this recovery, we have based it upon fudging the truth. Once the real numbers come out, most likely in early October we may see the financial markets react in a very big way.

What will add credence to this outline is the breakdown in social services that even the most unaware Americans will be forced to recognize. As social services are cut back, schools become overcrowded, prisons release inmates early, and states go broke, the reality of the physical economy will reach nearly everyone. In our view, this is a watershed moment just ahead and we need to prepare our thinking. This is what I expect, yet markets can surprise any of us. If the stock market were to start selling off in October (as I am suggesting), the bigger question for us is how will the precious metals react?

Tags: david morgan, Morgan Report

Silver as Money? Give Me a Break!

Tom Jeffries of HoweStreet.com Interviews David Morgan of Silver-Investor.com.

Tom Jeffries: David Morgan is editor and publisher of The Morgan Report. Full disclosure: it is my favorite publication. David is one of the leading experts on silver in the world. The Web site is silver-investor.com. You get all the details about The Morgan Report.

Mr. Jeffries: Everybody’s talking about gold’s place in the “new world order.” Woo! Let’s not get spooky, folks. How would you expect silver to act in the event of a world oligopoly, David?

David Morgan: I think that, as I wrote so many years ago in Silver Investing Rules, no one likes to be a prophet of doom, but silver is the money of last resort, and I still believe that. However, gold certainly has a higher monetary aspect to it as basically a store of wealth, a store of value, and a safe haven. Silver has those qualities because it’s an industrial metal as well.

But from a practical perspective, silver is the one that you’d be actually using in times of crisis. Not that you wouldn’t use gold, but if something happened and you needed to get a loaf of bread, a gallon of gas, pay rent, or keep your landlord off your back, and you had some silver coins, that would be a lot more advantageous to you than a gold bar, which would be pretty hard to divide up and pay your landlord or whatever.

So silver really has been money in more places for longer periods of time than gold has, and whenever I make that statement it seems to get some people upset, but it’s a fact, it can’t be disputed. Through all of recorded history it (silver) has far more functionality as money than gold does.

Mr. Jeffries: Okay. I’m playing devil’s advocate for a second here with you, David. I guess that begs the question, and maybe you can explain, what central banks and those wily governments out there are going to do to resist the allure of silver for the average investor? As a money alternative?

Mr. Morgan: Well, that’s a great question, Tom, and it’s a tough one. To really get an in-depth answer to that question you should go to our Web site, silver-investor.com, and go in the archives section and read everything Charles Savoie has written for the last decade.

Mr. Jeffries: Yes, okay; I have read his work he has provided a massive amount through the years.

Mr. Morgan: Readers get an eye-opener on how important silver is as money, what the central banks really think of it through history, and why they basically demonized and demonetized silver as their main concern so many years ago, hundreds of years ago, really. You’re looking back to, say, the Crime of 1873, 120-130 years or so ago.

And once that was accomplished, you went to the gold-only path. And then you had a monetary metal that was much easier to control because the banks had most of the gold anyway. So if the banking community and financiers got rid of silver, you didn’t have a problem with the people (or the peons and underlings, as the bankers view us), and you just had gold, and they owned it, so they could make the rules.

And as you know Tom, and very few do, The Wizard of Oz was basically a metaphor for going to the gold-only standard. There’s a gentleman, whose name I can’t recall, who wrote an article that’s on the Gold-Eagle Web site about how the gold-only standard eventually leads to the fiat system, but when you have bi-metalism, which is where you have both gold and silver circulating freely, not necessarily a fixed ratio by government but what the market could decide, you have a much freer and safer system.

You have a lot more stability in the system than you have on a gold-only standard, but very few people know that, very few people believe it, very few people study it. And if this is the government of the United States, supposedly of the people, for the people, and by the people, you should look at what the people use as money and why they use it.

Of course I take that perspective and because of that, I’m very, very biased toward silver being not only a monetary metal but also probably the most high-tech industrial metal required for today’s world.

Mr. Jeffries: I was shocked, and I don’t know why this was so obvious, standing right in front of my face, when I found out that Dorothy’s shoes were originally silver in The Wizard of Oz and then I realized what Oz is short for ounce . . . I don’t know where I was with that one! The Wizard of Oz, not time for that right now, but do some digging. Web of Debt, a book by Ellen Hodgson Brown, explains it very well.
David’s written about this, it’s just fascinating. Holy Williams Jennings Bryan, Batman! The old Latin phrase comes to mind, talking about these ETFs and banks and central banks and that stuff, Cui Bono. “Who benefits?” in Latin. So, is this Goldman Sachs or is this one of the big guys behind the curtain (as in The Wizard of Oz) playing these ETFs or what’s going on?

Mr. Morgan: It’s the banks. From my perspective, if you look at the Barclay’s Silver Trust, it’s in London. When Buffett bought 129.7 million ounces of fine silver off the COMEX, once he received the silver it ended up in London.

Then Buffett sells his silver and then the silver ETF arises in London, so now Barclay’s bank has some control of a great quantity of silver. Just look at the two best studies on the silver market, depending on which one you choose. I’m going to choose the CPM Group (even though I’m very close to the Silver Institute). In any event, you’re looking at maybe 500-600 million ounces of fine silver in 1,000-ounce bar form. So, the iShares has almost 300 million, which means they have three-fifths, or 60 percent, of the world’s silver supply sitting in their bank more or less. Which is a pretty healthy amount, and then if you subtract the COMEX out of that, they’ve got most of it. In fact, they do have most of it, not counting COMEX, obviously, but the point is that the banks now—or a bank, Barclay’s—has silver in their bank again, which is something that they haven’t had up until the creation of the ETF.

Mr. Jeffries: Tell me something about the Silver Summit in Spokane.

Mr. Morgan: I did a Webinar with Hugo Salinas Price in Mexico and he actually asked that I would be the interviewer, which I consider to be an honor. I met him in person many years ago.

Most people don’t know that Hugo Salinas Price has started a foundation (I don’t know if it’s technically a foundation, but a group) that is looking into using silver side-by-side with the Mexican peso, and this story has been out there for a very long time. It recently got shot down by, guess who, the central banks in Mexico. But the idea to put money into circulation just in one nation-state alone has huge significance, and as Hugo himself said (I’m paraphrasing), even if it doesn’t happen the idea of it happening has a lot of power, because people will realize honest money works!

In the United States, some people are two paychecks or three paychecks away from bankruptcy, thus gold is the last thing on their mind as far as what they can afford. But they certainly could afford some silver, so I think you’re going to see silver really, really take off once we get near the end of this great credit debacle that we’re now experiencing. Again, though, I want to caution everybody: I don’t see that happening in 2009. I’m looking for the final wrap-up in this thing to happen somewhere around the 2012 timeframe.

Mr. Jeffries: Just an amazing time we live in. By the way, I know David’s a very busy guy but he’s kind enough to say he will answer questions. If you’ve got a reasonable question send it along to info@howestreet.com, select David Morgan, and we’ll send it along to David.

If he has the time he’ll respond to it on his weekly podcast on HoweStreet.com. And if you’re wondering about the Silver Summit in Idaho, just Google it; you’ll see David is joined by a lot of top people, including the eminent Hugo Salinas Price.

Precious Metals –What Do I Do Now?

It seems more and more people are waking up to the fact that gold and silver are not only moving up but are also much safer investments currently than any other alternative. At the present time, I treat the commodity differently than I treat the underlining mining equities. As far as buying bullion or coins, basically I think investors should buy them at any time. Certainly you’re better off buying silver at $15.00 than you are if you’re buying it at $20.00, but the metals themselves, from a long-term perspective, will preserve your wealth and possibly multiply it. Many agree that the real metal is your core position. That is the investment that really counts the most.

After that’s accomplished then you can move into a higher risk-to-reward profile, such as your underlying mining equities. I have found those to be actually better risk/reward profiles than futures or options. This is where timing plays a more important part, because these markets can be very dull for a fairly long period of time, as we’ve witnessed during this long consolidation. And their moves can be extraordinary to both the up- and the downside. Many of the juniors that have substantial merit are still undervalued, relative to where they were a few years ago when gold was at the $800.00 level.

We have a long way to go to the upside for the mining equities. But mining equities trade as stocks. In other words, normally, if the general stock market is not performing well, most of the mining stocks won’t either. Of course there are always exceptions. If a company makes a great discovery, that stock will take off; or if a company misstates their financials, their stock will go down substantially. But generally, the mining equities pretty much go with the general stock market.

A bit of caution is advised here, because there is a point—and I believe we’re approaching it rather soon—where the mining equities in general will go opposite to the general stock market. So there will be a day when you’ll see the general stock market going to the downside and the metal stocks going to the upside. Again, I think we’re getting close but think it will actually be taking place in 2010. It might start before the end of this year; at this point, it is a difficult call to make, as gold is moving around the $1,000.00 level again.

It is my belief that most people who are going to participate in the gold and silver market from the next leg up to the top are going to do it through the stock market. Most people are not that comfortable buying physical gold and silver, although it’s the easiest investment you can make. Basically, it’s a phone call . . . send your money and get your metal. It’s literally that simple. Yet as simple as that is, many people will not buy the physical but will jump into the mining shares.

Most people have some type of trading platform, Ameritrade, Scottrade, E*TRADE, you name it. They’ve got a stock portfolio of some type and it’s very simple for them to sit there and press a mouse and buy a stock. That is what is going to take these mining equities to heights we’ve probably never seen before. We’ve still got some more work to do, as far as I’m concerned, going through the general stock market, the general malaise that is hitting the American and world economies, and how that’s going to play out in the short term. I’m rather cautious. Longer term, again, you’re going to see more and more interest in anything gold and silver related, particularly in the stock market.

It is a distinct possibility that buying the physical metal is going to be tougher and tougher at some point. We witnessed that last summer for a fair amount of time, several weeks. The premiums on the physical metal were extraordinary high, relative to what they had been in the past. This was because there was a demand squeeze. In other words, there was a strong demand and the amount of metal that was being put into the market was rather low, relative to the demand. So the premiums went up and up and up, and again stayed there for several weeks.

The premiums are more reasonable right now. But I think the summer of 2008 was a precursor to what we can expect in the future. There could be a time when some dealers are flat out of silver. It’s just too hard to get. The dealer might think they have to pay the wholesaler too big a premium so might not bother with it. Let us not overstate the situation because we’re not there, but we did get a hint of it already.

Most people are probably going to look to the gold and silver equities. They might think, “Oh, the heck with it—I don’t want to pay a large premium on a gold coin or a silver bullion coin when XYZ Mining I just read about on the Internet is going to go to the moon. Get me in.” That is going to bring more and more people into the sector as time moves forward.

Tags: precious metals

David Morgan’s Ten Rules of Silver Investing

Ellis Martin: Many years ago you were asked to write the ten rules of silver investing. Let’s start with that today. Rule Number One, when all else fails, there is silver . . . ?

David Morgan: I was asked to write the ten rules of silver investing for a book titled, Investing Rules. Rule Number One states, “When all else fails, there’s silver.” No one likes to be a prophet of doom, but the simple truth is that silver is the world’s money of last resort. Should a severe economic collapse occur, leaving paper assets worthless, silver would be the primary currency for purchases of goods and services (gold will be a store of major wealth but would be priced too high for day-to-day use). Thus every investor should own some physical silver and store a portion of it where it’s accessible in an emergency.

I wrote that, and it’s as valid today as it was when I wrote it. I haven’t reviewed these in a very long time. If I had to assert one rule of silver investing it would be to buy physical silver. The truth of the matter is, in the absolute worst-case conditions you would want some silver. As I just said, the reason silver is important in a currency crisis is that you’re not going to buy gas with a one- or half-ounce gold coin—it’s going to have too much value.

Silver has been money more often, for longer periods of time, in more places in the world than gold has. And that is because it’s the merchant-class metal, because most of the time in your daily transactions, what are you buying? You’re not buying your car or your house; the car is perhaps a purchase you make every five years, the house sometimes once in a generation. But it’s the silver that passes hands on a daily basis.

Certainly I am a gold advocate. Indeed, as I say in this Number One rule, it’s a way to preserve large amounts of wealth in a very small space and that’s great and all investors should recognize that fact. But if you’re really thinking outside the envelope, silver is absolutely the place you should be for part of your money.

Mr. Martin: We’re not just talking about obtaining physical silver for investment purposes. You’re saying it is also the best metal currency to use in the case of complete economic collapse, in order to obtain either a loaf of bread or a gallon of gas?

Mr. Morgan: Right; it’s more liquid. It’s simple because, you know, $0.25 in today’s money is worth about 14 times. It’s worth $2.50, $3.00, maybe three and a half bucks. So a quarter in silver would probably buy you a couple of loaves of bread or a gallon of gas now in today’s economy. But I want to emphasize, too, that this is absolutely the worst-case scenario. Do I see the worst-case scenario taking place? I don’t think so.

But that doesn’t mean you shouldn’t buy silver. I mean there are lots of other reasons to buy silver. If you go the other extreme—the best-case scenario—the world gets turned around and we start having prosperity everywhere and it’s the best global economy that’s ever happened in the history of mankind. Okay, so let’s take that extreme.

In that case, silver would still make an absolutely excellent investment. Most likely far superior to gold from the aspect that there would be such a boom in industry and such a boom in commerce that there would be so much more silver used by the average person because everyone would have an iPod or two, a flat-screen TV, a couple of computers, another car or a washing machine, more electronic devices. So there would be this huge boom to the silver market. Thus, silver is as much a good-time investment as it is during uncertain economic times.

Mr. Martin: You still have these massive economies like China and India gearing up outside of the U.S., although not quite as much as previously. We could take a look at the last 16 months or so and say that this is just a huge contraction before this massive mega-bubble hits.

Mr. Morgan: This idea of destruction (collapse) is a normal part of life. I wanted to comment on that. Oftentimes, things have to die for other things to grow. An example might be the history of the radio for example. We still have radios today, but the tube style radio had to give way to the transistor radio, and the eight-track tape gave way to the cassette tape, which gave way to the CD. Industries die out and it’s not like the end of the world. That is just part of the normal business cycle.

Now what we’re talking about is much grander-scale—the dying of an economic system that no longer is working properly because basically they’ve built it on a lie. The lie is that you can get something for nothing, that you can print wealth. It can’t be done. So that is where we are on a global scale, particularly from the United States’ dollar perspective. This is a shift that takes place every few centuries, and I believe very strongly that’s where we are right now.

In order to rebuild a system that’s built on truth and honesty and integrity that can get us going really in the direction that we need to go, we need to see the current system reach its ultimate conclusion. I think the global economy is basically tied together, but that doesn’t mean there aren’t going to be great inventions during a downturn. People find better ways of doing things, greater efficiencies, that kind of thing . . . so it’s not an all-or-nothing situation.

I just want to get the impression across that the cycle of life is one thing that might be going down while others are going up, so to speak. It is not all negativity. Sometimes something dying is a good thing, from the aspect that something better (bigger, smaller, better, stronger, etc.) comes along to replace it. In fact, that’s kind of the American enterprise system the way it used to be. Unfortunately, it’s been so corrupted that we are having these problems we are experiencing.

Mr. Martin: David, you know I’m a subscriber to your Web site, and I was on there this morning. I noticed that around 2,000 jobs were leaving the Midwest and heading down to Mexico. Refrigerators from that company aren’t NOT going to be built; they just won’t be built here in the U.S. anymore.

Mr. Morgan: I’ve given the analogy that Great Britain, using the pound sterling, was once the superpower of the world, and they overspent just like America has today. The power shifted from Great Britain to America in the last century. That was a big shift economically, and now we’re seeing it shift again—out of America into China and India for the most part.

The problem is that since it’s all based on the U.S. dollar primarily, then the dollar is the problem. I believe the U.S. will try to print itself out of this mess, and that will affect everybody, as U.S. dollars become worth less and less and less until they become worthless. And that affects business activity everywhere. I believe that could happen, but in the meantime, things continue on, and it is just that a shift takes place. The major productive capacity that was the U.S. worldwide probably up till 1965 or so is moving east.

Tags: silver investing rules

David Morgan on Junior Silver Mining Companies

Ellis Martin: Welcome to The Opportunity Show. I’m Ellis Martin. Today we are talking about the possibility of making real money at this time by investing in silver stocks. Joining me is silver guru David Morgan of silver-investor.com. Thanks for joining us today again.

My indicator when buying a silver stock is getting to know the people that run the company, perhaps looking at the properties, the fundamentals, the chart, and then plugging in intuitively which may or may not be the best way to do it. What are some of your indicators before selecting a company and a stock for investment purposes?

David Morgan: Well, I’m going to suppose that we are talking about the junior mining areas, because in the senior mining area you can look at the balance sheet and income statement and make a fairly good determination of a company’s value. As far as junior miners, and explorers as well, what you said isn’t far off. There isn’t any way to know in a lot of these situations whether a company is going to make a discovery. Some of it is intuition. It is always best in my view to start out with as many facts as possible. At times you can get a feel for the management if they’ve done something worthwhile in the exploration or small mining sector before.

It certainly gives you confidence if the management of the stock you are interested in has found a good mining property in the past. You also want to look at what their cash flow is and what their cash balance is. In other words, some of these companies—as good as some of them are, with some pretty good projects—will probably not continue, because they might have half a million dollars in the bank and their burn rate might be two hundred thousand a month, and obviously within three months they’re going to be broke. Unless they can finance. And this has been very difficult, although recently things have loosened up somewhat.

I said in a recent Morgan Report the best question you can ask management is, “How much cash do you have in the treasury and what’s your burn rate?” This again applies to the junior mining sector, although the principles certainly apply to any size business. How long can you stay in business if things don’t pick up soon?

Another key is to know that the project that they have or the property that they have has potential. That’s a real tough call. Normally, on any of the juniors that we put into The Morgan Report, we have somebody on the project. That doesn’t guarantee it’s going to be a good one but it certainly can get rid of ones that don’t have merit. So, you might have a project that looks pretty good on paper, but once you get down and walk the project you can see what warts it has, meaning how the terrain might lend itself to the overall project. Let’s say it has fairly decent drill results already, but because it’s in an area that is so difficult to access, the infrastructure costs of advancing this prospect into a mining situation are so extraordinarily expensive that the economics just don’t work out.

These are things you really can’t sit at a desk and put in a computer model and say, “This project is going to be profitable once silver hits 15.” Sure, there are people who try to do that. And I have nothing against mathematical tools; I love them, I use them, but there’s nothing like walking a project for a company to get a real flavor for what the potential really is. Yet, in fact, I don’t do it on every project. Someone who does research with me, for me, alongside me goes to some of these projects. Even doing all of that doesn’t guarantee anything, but it certainly can get rid of situations that again might look good on paper but in reality are not.

Mr. Martin: Well, if that infrastructure isn’t there and the roads are not workable and you can’t move enough ore out quick enough in any given day for instance, it doesn’t matter what grade of silver, gold, or copper you have; you may not necessarily have a viable business where you have positive cash flow, especially with a high burn rate and a small bank account.

Mr. Morgan: That’s precisely right, and I’ll give you a real quick example. This major mining company has mines all over the world. Primarily they wanted to be a silver company although it’s basically half gold and half silver. They mine almost as much gold on a cost basis as silver. They have a mine in the southern tip of Argentina that is extremely rich.

The cutoff grade for this project is very high. I don’t remember what it is but for talking purposes let’s call it seven ounces the ton. Which at 7 times 14, you’re looking at $98.00-an-ounce rock; that’s pretty hefty dollars per ton. And in the right location that would be very economic, but this mine is so far out, the transportation costs are so great, that the cutoff grade is high.

I want to make the point that grade is king, but even grade as king doesn’t necessarily guarantee a profit. We can do a coin example real quickly. Let’s say you have pure silver bullion on the moon. You don’t even have to refine it. It’s .9995 and there’s 25 million ounces of it. Is it worth going up there to get it and bring it back? Is it economic? The answer is of course not. I know it’s a corny example. I’m trying to get people to think. I’m trying to point out all of the factors that go into analyzing a mining company that are not really apparent to your average investor.

Most of these small companies are what I call story stocks. They’ve got a great promoter who tells them the story. The story is sexy. It sounds good. It really is enticing. It’s a great conversation piece at lunch or at the cocktail party or at the golf course. But most of them just end up being stories.

Mr. Martin: So they’re never going to go into production and that’s why they haven’t in the two to five years that they’ve been around.

Mr. Morgan: Well it takes usually at least five years to get a company into production. That’s after feasibility study and everything else that goes with it. So a lot of these companies are probably well meaning but they turn out to be nothing more than promotions. I don’t like saying that but that’s the eventual reality.

However, this is tricky! I know of one instance where a company basically went in with an attitude to fleece the mining investor and ended up making a great discovery and made lots of money for themselves and the investors, although that was not their original intent. And there have been others that have been as sincere as can be and don’t come out with anything and basically lose all the money that they’ve acquired from the investing public. So it’s a real tough call. Even if you know who the good or bad guys are, to really know what’s going to happen is still a bit of a guess, because no one knows . . . when you’re looking for something underneath the ground, anything can happen.

Mr. Martin: But the geologist basically is the person I tend to like to hang out with as well to get the truth about what is going on in the ground. Unless they are promoters, they are pretty much going to be truthful with you, especially if they have a great reputation. Do you speak with a lot of geologists in your travels?

Mr. Morgan: Oh absolutely. I always speak with the geologist on the project, especially if I’m doing a mining tour or the analyst tour. What I’m interested in is a geologist who is independent; I talk to two or three of them and ask them about the district or whatever. Most geologists are there to find something—that’s why they’re on the project—and they have to use some imagination on what kind of a deposit could be under the ground. They drill holes they try to make a model and when they model these things, they normally do it on a best-efforts basis, but they are looking at an optimistic perspective most of the time, and you’ve got to remember that when you’re thinking this through.

If you have enough good drill results to get to a feasibility study, you’re going to have to have drilled that thing like Swiss cheese in some cases and then you’re going to have to get a bank to look it over with their analysts and say, “You know what? This thing does make sense, let’s put in a bunch more money and let a mining engineer figure out what’s economic here and what isn’t.” In other words, a lot of money goes into holes in the ground before that thing ever becomes a producing mine.

And even doing that, sometimes they fail. That’s rare but it does happen. So it’s a tough, tough business as well as a very exciting business. There are very few “investments” that you can make (and I used quotation marks because really they’re speculations) where you can put in a few dollars and come out making a lot of dollars. The problem is you have so many to choose from. There are more than 4,000 of them and most of them never materialize. The odds are probably 2,000 to 1 that something you buy actually becomes a mining project.

So a tough game, an exciting game, one in which I teach to “bet a little to win a lot.” These are situations where you know you want to put in a small amount of money and if it hits it’s going to make you a significant amount of money. But you don’t want to put a significant amount of money into a junior mining company, in my opinion anyway.

You should never spend any money that you are going to need. So that’s a warning and a very sincere one for you and anyone else. If you do have some risk capital, is now a good time to get into the junior mining sector? I’d say yes but have a long-term perspective, because I think we’re going to be in a wide trading range through the summer. You want to really do your research carefully and you want to buy a select handful of junior mining prospects.

Tags: david morgan, junior silver mining companies, silver mining

Silver Investing: Risk and Reward

One of the questions I am asked most frequently is, “Where can I invest in precious metals to maximize returns?” The answer is not as straightforward as one might expect.

An area that comes to mind for many is the futures market, where the leverage is great and the rewards can be just as great. However, to be successful requires much more time, effort, and money than many a novice “futures trader” can handle. The amount of success in trading the futures is a very low percentage, something on the order of 2%–3%. It has been my experience having done both futures and stock trading that stock trading/investing is much better suited to most private investors and allows leverage that is similar to and sometimes exceeds that of the futures market.

The advantages are that your risk is better controlled most of the time. I want to be clear: both futures trading and stock investing/trading are risky endeavors, but investing as a whole has risk, as does life itself. The point is, given the risk/reward profiles of futures or stocks, my experience is that stocks are more appealing.

This is a time period when gold and silver have been moving in a large trading range and the underlying mining equities have been reacting in a sluggish manner. That is to state, the mining shares generally have not performed in a manner providing greater leverage than the metals themselves.

There is still plenty of time for an investment in precious metals, but a wise investor should choose carefully ahead of the herd. It is my considered opinion that the window of opportunity exists right now for those who are not in this market or for those who wish to have further exposure to the precious metals. This window of opportunity may not last to the end of this year. In fact, let me go on record and state that the next two to four months should provide one of the best and safest times to purchase quality mining companies. If you can purchase during general stock market weakness and when metals prices are down as well, you can be pretty well assured you are buying low, before the next leg up in this market.

The big money is made if you catch a major trend and stick with it long enough to make substantial gains. Our premise is that the era of paper assets peaked in the year 2000, and commodities were at the bottom. We also believed that the paper money time bomb was ticking and astute investors around the world would seek the safety and time-tested soundness of real money—gold and silver. These two precious metals represent the top tier of all commodities, because they are readily accepted around the world as a means of final payment. Additionally, in times of financial stress, the metals are a store of value.

Basically, you have been given a second chance to buy before the next major leg up in the precious metals cycle and it is my firm belief that this time it will be led by the mining equities, for a number of reasons. First, there are more equity investors in the U.S. and other countries than at any time in history. On top of that fact, many trade from electronic platforms and are only a mouse click away from buying or selling a stock. Secondly, people love to buy with the herd. Once gold clears the US$1000 level again and stays there, many investors will have the confidence to buy into the mining shares.

Most people are lazy to some degree and they will do whatever is easy and convenient, and that means, as stated above, when the precious metals bull begins to run again, people are far more apt to purchase mining stocks than to buy silver or gold coins.

Silver Stocks

At this point in the precious metals cycle, many investors who discover the silver market may think they have missed most of the move. In fact in some cases they are correct. Our financial reports focus on “Money, Metals, and Mining,” and quite frankly, I cannot give you the opportunities we saw and recommended in 2002-2006 . . . but the next leg up will be very worthwhile, especially in light of the fact that the investing public trusts almost nothing in terms of “investment” at this time.

Real estate investing is dead, stocks have rallied but for how long, the municipal bond market looks shaky, and even the sacred U.S. Bond has been shunned to a great extent by foreign trading partners.

The most important fact about investing in the precious metals, actually for almost all markets, is simply that the majority of the move comes in a very compressed timeframe. One way to think about it is that maybe 90 percent of the entire move comes in the last ten percent of the time. If this cycle for silver is going to last 15 years, then the majority of the move upward will come during the last year. I call this the “blow-off” phase, or the “greed-panic” phase. In my view, this will occur because everyone will be dumping the U.S. dollar for something/anything, and the most sought-after class is the precious metals.

Notice I did not state gold, but precious metals. Certainly gold will be sought, but silver and silver-related investments would be the star performer at the end of the cycle. There are two reasons for this. First, silver is more affordable than gold. Those investors flooding into this market during the panic phase will be looking for the best alternative to the U.S. dollar possible, and that will be silver because it costs less per ounce than gold. Secondly, most will do some cursory investigation and find that silver outperforms gold during inflationary times.

To validate my point, think back to the dot-com bubble. Every little company with an Internet address was moving up, and most had very little merit. This is typical of markets– near the end the public rushes in and drives prices to unsustainable levels.

First it must be understood that the universe of true silver stocks is extremely small. My definition of a true silver stock is a company whose primary revenue stream is based on silver. This is an unusual creature because approximately 75 percent of all silver comes from the mining of other metals. Depending upon which study you examine, about 25 percent of silver mined is a result of copper mining, 33 percent is a result of lead/zinc mining, and even 14 percent of silver comes out of the ground as a result of gold mining.

The reason an investor wants a primary silver producer is the fact that the stock price will be leveraged to the price of silver. If an investor buys a stock that has its primary metal as copper yet still yields quite a bit of silver, the company is more apt to move on the price of copper not silver.

Additionally, most miners who are base-metal miners and have a great deal of silver in the mix really do not care about the silver price, and they sell it for “peanuts” to use the proceeds against their primary mining activity. You may find other information on a huge universe of silver stocks available, but take your time to study and educate yourself. Just because a company has silver in its name, or is exploring to find silver, that does not make it a silver company.