The Morgan Report Blog

Gold will head to 1480-1525 before a major correction

Gold will head to 1480-1525 before a major correction
David Banister- www.markettrendforecast.com

Excerpted from TMTF November 28th:

Gold has been consolidating other than a spike to an intermediate wave 3 top of $1424, for about 7 weeks or so now.  It’s typical to see Fibonacci periods of time as part of consolidations whether it be an individual stock or a precious metal in this case.  Gold was overbought at the $1425 pivot highs a few weeks ago, and that terminated what I label a “wave 3″ pattern.  This led us into a 4th wave corrective pattern which we remain in now.  My worst case pivot low is expected at $1,321 and so far we have seen $1,331 an ounce and then an ensuing bounce to $1370 ranges.

In the intermediate term then, I’m looking for further consolidation likely for another week or so followed by a breakout over $1425 leading to my objectives of $1480-$1525 to complete the entire rally from the $1040 lows in February of this year.  Many are starting to get bearish on Gold and Silver up here, and to me that is bullish and indicative of “4th wave  mentality”.  In a 4th wave, there is growing bearish sentiment, but not so much as to topple the bull structure.

To wit, last week in my ATP service I recommended a brand new Core Position in the Gold,Silver area and it rallied as much as 40% intra-week at it’s highs.  We are in a super bull market for Gold stocks as I outlined in August of 2009, and we have another four years left to go.  I’m seeing alot of amazing chart patterns in the Junior space that are in relentless climbs.  Owning the the explorers that are finding the Gold is how best to take advantage of the remaining four years.  At ATP, we are exposed to Rare Earths, Silver, Gold, and Oil and Gas related plays in our Core Positions.  Make sure you own hard assets and precious metals resources one way or another.  My silver forecast in late August was basically predicated on the small investor swarming into the Silver market to buy up coins, look for that to continue and Silver to be over $30 in the not too distant future.

Below is my updated Gold forecast using a weekly chart, remember to Keep it Simple!

 

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Silver in the Next Decade

Silver in the Next Decade
By David Morgan 

What can be expected from the silver market over the next decade?  The general thinking is that investment demand will drive silver prices far higher. As well, silver’s unique properties will be in higher and higher industrial demand over the next ten years.

In an effort to compensate for my bullish bias for silver I have been conservative in some areas of possible increased demand. The demand for silver in consumer electronics, for the purposes of this report, is presented as having little to no growth. More and more silver is being recovered from recycled circuit boards. This silver is being recovered even though it is sometimes not economic to do so. In California, for example, silver, lead, zinc, etc., must be recovered for environmental reasons and at a far greater cost than breakeven. This conservative approach takes into consideration that silver demand will probably increase in the electronics industry but so will the amount of recycled silver. For the purposes of this analysis, we will consider the demand growth to recycle rate to remain in balance over the next the 10 years.

Looking back, roughly between 2000 and 2010, we will find some interesting facts about the silver market. Industrial demand early in the decade was roughly 35% of the total market, but by 2010 industrial demand was 54% of the total market, according to the Silver Institute. The silver market was in a deficit situation from about 1990 which continued until 2007 or so, when, according to both the Silver Institute and the CPM Group, mine production brought silver’s annual demand and annual supply into balance. Up until then, the aboveground silver supply was disappearing at the rapid rate of roughly 100 million ounces per year. From 1990 to 2007, according to the best recognized studies covering the silver market, about 1.5 billion ounces of silver were taken from stockpiles. The Global Silver Production Chart indicates that a slump began around 1990. About the year 2000, silver production increased as the global demand for commodities in general and metal in particular took off. The increase in silver mining production was so great that currently the amount of silver mined annually is roughly equal to total annual demand.  For the purposes of this article, we are going to assume that the silver supply is going to continue in the region of a 2%-per-year increase, for the next 10 years. Refer to the Global Silver Production Chart.

What about future production?

Some may be familiar with the terms peak gold or peak silver. According to the United States Geological Survey (USGS), there is more or less nine years’ worth of economic silver in the ground; in other words, peak silver is roughly a decade away. Dr. L. David Roper’s World Silver Extraction Analysis gives a pretty clear picture of the probable future of silver extraction. Refer to the World Silver Extraction Chart.

Notice the silver peak is beyond 2020, and this could be the case if we consider that perhaps silver is only economic for nine or 10 more years (at today’s prices). 

Profitable base metal miners will continue to produce silver as a byproduct of lead, zinc, and copper mining but their contribution to global silver supply is difficult to predict. Gold mining, however, has most likely peaked already, and a full 13% of silver comes to the surface as a result of gold mining. For the purposes of this article, though silver supply from gold mining is decreasing, we are conservatively considering it will remain level.

Solar Energy

According to Stephen Leeb, a financial market analyst/commentator and author, it takes 80 tons of silver to produce one gigawatt (GW) of solar power. Most sources agree that about 7 gigawatts of solar-generated energy have been installed globally and solar energy demand is increasing exponentially.

China has been growing its solar energy base around 100% a year since 2003. The drive for solar energy will continue this decade, but it will account for a very small portion of total energy produced. India plans to increase its solar output to 20 gigawatts by 2020, starting from basically nothing. China continues to project massive growth from the current 5.5 GW capacity to 30 GW by 2020. The US has forecast a similar amount, perhaps 30 GW by 2020.

On a worldwide basis, the generating capacity by 2020 is projected to be 20 to 40 times the amount of current solar capacity. This is a huge compounded rate of use, but according to Jessica Cross, VM Group, her outlook presented at the end of last year to the London Bullion Management Association (LBMA) was for an annual growth rate of 15% over the next 10 years.

Even with this more conservative and perhaps more realistic approach, solar demand could reach 130 million ounces per year around 2014 and continue through 2020. There is not enough silver to provide solar energy for the earth’s six billion-plus people.

RFID Tags

One little-known silver application is its use in radio frequency identification devices (RFIDS), chips or tags that can be read digitally. As I stated in my book, Get the Skinny on Silver Investing, Common RFIDs can be scanned/received only up to 5 metres. Next generation RFIDs will have a silver antenna and can be scanned from a distance of up to 15 metres. Because silver can be thinned and rolled, a silver antenna that can be folded many times is longer, smaller and more efficient. Though there is a small amount of silver in these chips, the expected go ahead from the International Standardization Organization (ISO) for RFIDs in November should really give the metal a boost.

Our preliminary research into this area produced some rather startling results. The minimum use of silver for an RFID is 1/100 of a gram of silver. However, our sources indicate about 100 billion RFIDs will be produced on an annual basis. This would produce a consumption rate of over 30 million ounces of silver annually, and most of this silver would end up in the waste dumps as silver from RFIDs can’t be recycled.

My estimate of 30 million ounces per year is much greater than what was presented to the LBMA by Jessica Cross. Her number is just over 10 million ounces silver per year. This report uses her number. My higher number is based upon the fact that the lowest amount of silver is assumed in her analysis, which means the sensor or scanner is in very close proximity to the actual product. In fact, it may turn out that most RFIDs will use more silver so they can be read from greater distances. More silver is required to transmit electrical signals further. The RFID tag will be used to track more information in the future.

Medical Uses of Silver

Due to its antibacterial properties silver is being used more in medical applications. Bandages and wound cleansers contain silver as do catheters, pacemakers, valves, feeding tubes, and almost any medical device that touches the body. Hospitals also use silver in air ducts to protect against Legionnaires Disease. The estimate for silver’s medical is that it will increase by 100 million ounces by 2020. 

Textiles

The thermal qualities and bio features of silver make it perfect for the commercial textile industry. Silver is used in high end athletic wear for its anti-microbial properties that inhibit bacteria growth that can cause odours.  Traditionally, silver and gold thread, have been woven into garments. The sari in India is often uses silver and sometimes gold thread as an adornment. Slow to start, the forecast is the textile industry will use 30 million ounces by 2020, but this is a very gradual buildup during the 2010 to 2015 timeframe.

Food and Water

Silver will play a significant role in the food industry over the next decade. The FDA has approved the adding of silver to bottled water to help kill bacteria. This government approval opens the door for major municipalities to use silver for water purification at the local community, city, and state level.

Silver-tipped cutting instruments are used in meat processing. It is also used in the processing of milk, in cheese manufacturing, and in the baking industry. The forecast for silver use in the food industry and water purification applications is that it will reach 90 million ounces per year by 2020.

Other Silver Uses

There are other applications of silver. Silver is being used as a wood preservative.  According to the Silver Institute, the amount of silver that potentially could be used to replace Chromate Copper Arsenate (CCA) per the mandate of the US Environmental Protection Agency could reach up to 50 million ounces per year (2005 reporting period).  This estimate might be a bit high as the use of silver for these types of applications is down significantly, to about 1/5 the level reported five years ago. A more conservative estimate is that perhaps 10 million ounces of silver will be uses on an annual basis.

Another significant use of silver is as a superconductor primarily in large industrial and military motors.  At one time silver was held as a strategic stockpile for military applications. It is difficult to estimate silver usage in this area as the information is often a tightly held secret. The likely valid assumption is that the number is buried within the general industrial applications already outlined above. There have been rumors that superconductivity can be achieved in wiring without the use of silver. To my thinking, this is doubtful, but it cannot be ruled out entirely.

A significant amount of silver is made into coins. Congress decided to use the silver in the Silver Eagle coinage program, which ate up the entire US silver supply a few years ago, and now silver must be purchased off the open market to keep the coin program continuing.

The future for silver looks bright indeed from an industrial application perspective. Many established industrial applications uses will continue to use silver and its use will increase in many new application areas will continue to grow at significant rates. In fact the computation is for the industrial side to have a compound silver use growth rate of about 14%.

Recycling – the Wild Card

The use of silver in photography does not have much of an impact on supply as the silver used in the photography process is recycled. The use of silver in this area has declined measurably, the last several years, as digital cameras replace film cameras. The recycling of silver from x-ray film continues but this will also decline as digital x-rays are increasingly used.   

According to both the Silver Institute and CPM Group, the amount of silver recycling on an annual basis is around the 250 million ounces-per-year level. Jessica Cross states she reckons it to be closer to 400 million ounces. You can how difficult it is to get a clear idea of the numbers. For the purposes of this article we will use the numbers from the Silver Institute and CPM Group studies, and figure 250 million ounces on an annual basis and growing.

Much of the silver in high-growth applications can be recycled, such as silver from solar batteries and some consumer electronics, but silver used in RFID tags and most medical applications will not be recycled.  It may be safe to assume a constant rate of turnover at some point, perhaps 2015, where the total amount of silver recycling is 300 to 350 million ounces per year. This number seems high, but it does include coin melt, silver jewellery recycling, photo waste, and electronic waste.

Investment Demand

It is my much studied opinion that the real story and the most misrepresented on the silver market is the true investment demand for silver. Coin demand as perhaps 7% of the total demand apart from investment demand for silver bars. 

In our special report, Silver Fundamentals, Fundamentally Flawed, one can clearly determine that from the middle of 2006 when the ETF (namely, SLV) began, we started with about 130 million ounces of silver in commercial bar form. Take a look at the Transparent Silver Holdings chart. But notice since that timeframe other ETFs have begun, and existing bullion investment companies such as Central Fund of Canada have continued to increase their holdings of silver. If you study this carefully, you will be able to account for all the reported aboveground silver in commercial form. The amount of investment demand for silver is considerably more than reported by any of the official studies.

First let’s clarify the coin market report. Taken as about 7% of the market, we can determine that approximately 30-40 million ounces of silver is taken out of the market as official coins, such as the Silver Eagle, Silver Maple, Silver Philharmonic, and all no name (private mint) silver rounds (silver one-ounce medallions –  serving as coins without a government mint marking).

This number is accurate, but the number that always seems to be missing is the investment demand for commercial silver bars – the type of silver used in industry but held for investment purposes.

Remember, these are approximations, and no one knows the precise amount, but both of the most respected studies on silver tell us that 600 to 700 million ounces of silver exist in thousand-ounce bar form. All of the silver shown in the Transparent Holdings Chart is for investment purposes, with the exception of the Comex. For the Comex, only about half of the holdings (~118 million ounces) are held for investment purposes. The other half, or 60 million ounces, is dealer inventory that is held against multiple short positions. What does this add up to? Though there is a float of 60 million ounces of commercial grade silver available, in the entire world, it has multiple claims against it!

Notice that we have increased from the middle of 2006 at about 250 million ounces, to 600 million ounces at the end of 2009. This is an internal compounded rate of 18%. And 475 to 600 million a year later, means perhaps 125 million ounces of silver were taken up as investment demand between the beginning of 2009 and the start of 2010. We can basically state that investment demand for silver in commercial form has been increasing at about 100 million ounces per year for the past three years. However, Transparent Holdings Chart shows that things have been leveling off the past few months. There is nothing certain in the investment world, but everyone at this point should be asking the question: “What happens if the investment demand for silver in 2010 is 100 million ounces of physical and there is a float of only 60 million ounces available?” Would anyone want to be short the silver market at this point? It would take roughly a billion dollars at today’s silver price to corner that last remaining 60 million ounces of silver.

I  just want to touch on this point one more time before making some conclusions. We have made an assumption that silver production will increase every year over the next decade at about 2% compounded per year. We are projecting that we can add 13 million ounces per year, at a minimum. This is doubtful in reality, since most of the major silver producers – Pan American, Silver Wheaton, Silvercorp, and several of the juniors – are not yet at full production.

However, there are many more variables than just primary silver miners. We discussed the gold miners and briefly outlined the base metal miners. Suffice it to state, our 2% approximation is sufficient to make some sound projections.

The silver market is poised for significant pressure to the upside over the next decade. The amount of increase in investment demand is the primary driver. Additionally, the rate of increase of silver’s industrial use is much greater than the rate of increase of silver production. However, the total amount of silver produced by 2020 could be near the 800 million-ounce mark, an increase of 150-200 million ounces. The amount of increase in industrial demand will be conservatively 250 million ounces by 2020.

Recycling is a factor that cannot be overlooked and will most likely increase over the next decade. The question is whether the amount of recycled silver will fill the supply gap; it seems very unlikely to do so. It is difficult to forecast when the tipping point will come, when investment demand and industrial demand combine at some level to put great pressure on the silver price. To be fair, we must acknowledge the fact that the SLV does hold a great deal of physical silver and this could be mobilized to reduce the price by the market makers. 

The bottom line is that the physical silver supply is very tight and the market is poised to move up on any substantial buying pressure. 

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David Morgan publishes an online newsletter, The Morgan Report, for resource investors interested in silver, silver stocks and the news surrounding what is sometimes called the poor man’s gold. He is also the author of Get the Skinny on Silver Investing, a comprehensive book on silver. David also speaks at resource stock investment conferences throughout North America.

The Gold & Silver Play Has Gone To Greed?

The past few months it seems the gold and silver play has been getting a little crowed with everyone wanting to own gold. While I am a firm believer that these precious metals are a great hedge/investment long term, I can’t help but notice the price action and volume for both metals which looks to me like they are getting exhausted.

Silver – Daily Chart

The silver chart below shows an extremely high volume reversal candle in early November which typically leads to lower prices and some times a major change in the trend. That being said silver remains in an uptrend with the possibility of a bullish pennant forming. On the other hand there is a possible head and shoulders pattern forming. I will be looking for light volume sideways chop keeping a close eye for a possible neckline breakdown or a momentum thrust to the upside for a possible trade.

 

 Gold – Daily Chart

Gold is forming a bullish and bearish pattern also giving us a mixed signal. I am currently neutral on gold and not really looking to take part until we get some type of clear price action.

 US Dollar – 60 Minute Chart

The dollar has shown some strength recently. The US dollar play has been to take the short side, and a couple weeks ago we saw the dollar breakdown from yet another consolidation. It seems like everyone shorted the dollar yet again. That could have been a key pivot low for the dollar. On the weekly chart that bounce was off a major support trend line helping add some fuel to the rally I would think.

The chart below shows the recent rally and breakout to the upside. Currently the dollar is pulling back to test the breakout level (support). It will be interesting to see how this week unfolds. If the dollar bounces then we just may see metals break below their necklines to make another heavy volume drop.

 Weekly Precious Metals Update:

In short, I have mixed feelings for gold and silver. Yes I think they are good long term plays, but after the run they have had it is also very possible a much deeper correction is about to take place and we may not see new highs for another year. That is a long time to have money sitting in an investment when it can be put to work in other investments. I know the herd (general public) is all head over heals in love with gold and silver which is one of the reasons why I think we are nearing a top if we didn’t already see it a couple weeks ago.

Don’t get me wrong I’m not saying to sell of go short metals… not yet anyways. They are both still in an up trend but some interesting things are unfolding which could cause big action in the coming weeks.

Join my trading newsletter and get my ETF trading signals, daily analysis and educational material: www.TheGoldAndOilGuy.com

Chris Vermeulen

The Market Continues The FOMC March Upward

With the election over and congress divided, it may be difficult for the president to get much done. None of this will take affect until the near year but traders are asking the big question… Will the government work together as a team or will it be a stalemate?

Today’s whipsaw action after the FOMC statement shook things up as it always does. We saw gold, silver, the dollar, SP500 and bond prices go haywire. It took about 30 minutes for the market to digest this news in that time a lot of people lost money because of the wide price swings. Trading around news, I find, is a net losing trade over the long run and I advise never to do it. Rather wait for a trend to form and trade any low risk setups that come your way.

I truly believe that the market has already priced in most news and events which unfold, and that news tends to agree with the overall trend of the market. Of course there will be short term blips on the charts from the news, but they tend to be minor setbacks in the underlying market trend. That being said, the trend is our friend, and while so many are trying to pick a top in the equities market it makes me cringe because they are fighting the trend and the Fed.

Successful trading is done by trading the trend, and during choppy times you may get roughed up a bit and need to alter your strategy for shorter term momentum play, but overall you gotta’ stick with the trend until proven wrong. Once the trend reverses and confirms, only then can you start shorting the market.

Last week we took another long position near the lows on the SP500 as it dipped down to key support with the market internals confirming our entry. This low risk setup gets us into a market at an extreme, meaning we are in the money usually within hours of entry and the market tends to keep well above our entry point until its ready for another surge higher or a break down.

I agree with those of you who think the market is WAY over bought and due for a strong pullback, and I find myself squirming in my chair when I take another long position way up here in the lofty SP500 prices. But over the years I have found that if it’s hard to pull the trigger, then it should be a good trade if all the trading rules have been met, and if it’s a clear chart setup (meaning an easy looking trade) you better watch out!

SPY – SP500 ETF Exchange Traded Fund

This chart shows two charts. One of the 10 minute intraday chart covering 6 trading sessions. It shows where we had our recent entry point and also shows how the stock market tries to buck traders off a bull market.

The bottom chart shows the daily chart and today strong reversal candle closing at a new multi month high. Again, the market is way over done and I never recommending chasing a stock, commodity or index, but to wait for a pullback to support before getting on the bull.

Mid-Week Trading Conclusion:
In short, the market is still trending up so stick with the trend for now and DO NOT, for any reason, chase the market just because you want in. Wait for an intraday dip on the 30 minute chart if you’re dieing to get involved.

The average bull market lasts about two years and the Fed plans on pumping money into the market long enough to make this a 2 year bull market. I’m not saying we get higher prices for that long, but that’s more or less what plan for the guys manipulating the market up. So when it does fall there is plenty of room so hopefully the 2009 low is not broken which would not be good.

If you would like to receive my Daily Trading Commentary, Charts and Trades be sure to join my newsletter: www.TheGoldAndOilGuy.com

Chris Vermeulen

Quantifying Quantitative Easing

Many investors are struggling to understand the ramifications of the recently announced QE2 plan. Quantitative easing, or more simply known as money printing, is a dilution transaction similar to issuing more shares for a stock. The dilution has two primary affects: a decrease in the value of the initial shares and a redistribution of wealth from the original owners to the new owners.

The most significant difference between stock dilution and currency dilution is of course that publicly traded companies tend to use the funds raised through dilution to add value by investing those funds – whereas governments don’t add value by diluting a currency.

In this case, $900 billion will be diluted to purchase US treasuries so the primary benefactor of the quantitative easing will be the US federal government and the financial institutions selling that debt. However, capital flows can rarely be controlled and the newly created money will find its way into other markets and asset classes.

Interestingly, the $100 billion per month figure that has been mentioned as the target rate for QE is almost exactly what is needed to rollover maturing treasuries coming due – so it could be argued that the plan is to effectively finance the US Federal debt which would eventually lead to a complete monetization of the treasury market. Supporting this argument is the recent projection made by ZeroHedge that the Federal Reserve will own more treasuries than China by the end of November.

In an attempt to measure these affects, we can compare the size of the quantitative easing plan to the size of several markets.

  Outstanding $900B as Percent
of Market
Diluted value of $900B
entering market
US GDP $14,500.00 6% $0.94
US Federal Debt $14,500.00 6% $0.94
M2 $8,750.00 10% $0.91
M1 $1,800.00 50% $0.67
Currency $900.00 100% $0.50
Treasuries $11,030.00 8% $0.92
Municipal $2,670.00 34% $0.75
MBS $8,860.00 10% $0.91
ABS $2,600.00 35% $0.74
Money Market $3,900.00 23% $0.81
Corp Bonds $6,720.00 13% $0.88
Silver $24.30 3703% $0.03
Gold $2,475.00 36% $0.73

If the QE2 funds went into the currency market, its value would fall in half. However, $900 billion is roughly 6 percent of US Federal Debt. Inflation is defined by the growth in the money supply. If using M2, the QE2 plan would dilute the money supply by 10 percent. $900 billion represents 36% of the world’s gold supply, so an equivalent move upward in price could be seen if the money finds its way into the gold market. QE2 is 37 times the size of the world’s estimated silver supply so a flow of capital into the silver market could be explosive.

A dollar on November 1st is now worth 92 cents if measured in treasuries or 91 cents if measured with the money supply. It can be seen that inflation as measured by the growth in money supply is projected to increase by 10 to 20 percent on an annualized basis.

The result will be a double digit real negative interest rate and a carry trade opportunity to sell treasuries and other US dollar secured paper at a cost of near 0 percent while accumulating real assets such as precious metals and other resources that cannot be diluted.

David Morgan Explains Why Silver Is Catching Up, Why It’s Broken Out and Where It Goes From Here

Sunday, October 31, 2010 – with  Ron Holland


David Morgan

The Daily Bell is pleased to present an exclusive interview with David Morgan (left).

Introduction: 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” (Morgan James Publishing, 2009), and featured speaker at investment conferences in North America, Europe and Asia.

Daily Bell: David, welcome back and thank you for sitting down with us today. Remind us about the difference between silver and gold both as precious metals and money metals.

David Morgan: “The major monetary metal in history is silver, not gold.” – Nobel Laureate Milton Friedman in an interview with James Blanchard at the New Orleans Investment Conference. November 7, 1993. The above quote is fact of monetary history but few in the West study or know silver’s history. Yes, gold is money but silver has been used as money more often, in more places, by more people than gold ever has.

Daily Bell: Why has silver been known as the peoples’ metal?

David Morgan: Because of value per unit, as this interview takes place gold is about $1400 US per ounce and silver is about $25 per ounce. Since most transactions are small daily transactions by all people it is known as the peoples’ money. Silver buys your small items—food, water, energy, and clothes for example. Large settlement purchases would be done in gold.

Daily Bell: What is the gold/silver ratio and where is it today? Has it closed the gap since we last spoke?

David Morgan: It is the price of gold in dollars divided by the price of silver in dollars. As of this interview that would be 1400/25, which is 56. The ratio has moved from 68 to 56 in the past six weeks and it has moved in favor of silver since our last interview.

Daily Bell: Since the historical range is said to be 15/16 to one (silver versus gold) it sounds like there’s a long way to go. Does price manipulation continue?

David Morgan: Yes, but a spokesperson for the CFTC has finally come out after three years and I expect some formal announcement soon. Bart Chilton’s statements so far are straight to the heart of the matter and our readers are encouraged to look at his statement on the CFTC website.

Daily Bell: Let’s return to the previous question. Has silver broken out?

David Morgan: Yes, both gold and silver broke out in early September 2010. Silver has now achieved a new nominal high over the March 2008 high of $21 and this has sent many investors to take another look at the silver market.

Daily Bell: What countries are most hospitable to silver mining today? Mexico and Peru you mentioned last time we interviewed you.

David Morgan: Those two countries are normally fighting for first and second place as leading silver producing countries. As the global economic picture continues under stress all investors need to consider that what might be hospitable today may not be so tomorrow.

Daily Bell: Any important silver mining companies you want to mention?

David Morgan: I prefer to leave that to my paid membership service The Morgan Report that can be accessed at my website: Silver-Investor.com. We do look at more than the silver market; for example we were the first to begin reporting on Rare Earth Elements.

Daily Bell: Let’s ask some technical questions. Where does silver go from here? What are the best investments to make throughout the business cycle, and do they change over time?

David Morgan: On a very short term basis gold and silver are overextended on a technical basis and could pullback. On a longer term basis silver and gold are going far higher in paper terms in any currency you wish to name. Addressing the second question, I will make the assumption you are restricting this to the precious metals. On that presupposition, the best investments very early in the cycle are penny mining exploration companies, in the middle part of the cycle the best is mid tier producers to top producers, favoring the mid tier as they as a group are taken out at premiums by larger companies. At the end of the cycle the mania/panic phase almost anything with gold and or silver in the name will fly like crazy and fundamental worth means very little. This is the very dangerous part of the cycle but can be very rewarding.

I wish to add that this is based on previous cycles of all markets, but with the currency crisis that is now being experienced globally it may not be prudent to sell physical gold or silver for your local currency until the financial system is on firm ground.

Finally, after the financial system does stabilize there could be a time when your gold (silver) would be able to purchase well run businesses (like the Dow?) for very favorable prices.

Daily Bell: Is there more recycling? Is silver uneconomic to recover?

David Morgan: There are two main studies on the silver market and they disagree on this point. According to one silver recycled in 2009 was the highest ever, while the other study claimed it was off noticeably. I am bias to the bullish case because almost all recycling was a result of silver halide (film) processing and that has fallen off dramatically the past several years. Many applications that MUST use silver have such a small but necessary amount that it is uneconomic to recover. This is why silver is “consumed” because this type of silver usage does end up in landfills.

Daily Bell: How much is the industrial demand for silver?

David Morgan: Basically 50% of the market or slightly more. It continues to increase as silver’s use in solar, water purification, and food processing/preservation will increase dramatically over the next decade.

Daily Bell: Is the silver market in a deficit situation?

David Morgan: No, the deficit ended in 2007.

Daily Bell: From 1990 to 2007, according to the best recognized studies on the silver market, about 1.5 billion ounces of silver were eaten out of stockpiles. You agree?

David Morgan: Yes, it is pretty apparent by looking at the above ground supplies in the public domain.

Daily Bell: How much is silver increasing? Two percent per-year increase?

David Morgan: On a net average basis from roughly the year 2000 all mining activity (base metal and silver) has increased between 2-3 percent per year.

Daily Bell: Was there a slump in global silver production in the 1990s?

David Morgan: I would state it as the mining industry was fairly flat through the 1990 to 2000 time frame. Once the commodity cycle bottomed around 2000 we have seen a general increase since that time until present.

Daily Bell: What about future production?

David Morgan: Future production will peak at some point and due to several factors, energy costs, environmental considerations, and protectionist attitudes in the future.

Daily Bell: What do you think of the current economic crisis? Are Western countries handling it well?

David Morgan: This is the financial crisis that I and several others in my field have predicted for so long. It is proceeding pretty close to how I have expected it to proceed and the Western countries have handled it to the best of their ability. Which means they have ignored the fundamental flaw in the system and pretended they know what they are doing.

The world is swimming in debt and so far the solution is to borrow more money, or increase the debt even further. That is saying you can borrow yourself rich, and that can be done until you cannot make the payments anymore. All indebted nations are holding interest rates low so their debt servicing is “manageable” but in reality it is mathematically impossible to service the debt but very few in official roles (government) will ever admit this startling fact.

Daily Bell: How well have the bailouts worked?

David Morgan: From a psychological level fairly well, meaning the masses of people globally still think government can solve these problems but we reached the point of no return in August 2007. That is when trust in the entire system broke down to the point where banks and brokerage houses would not accept “paper promises” from each other. From a practical standpoint they have not worked and continue to stress the system.

Daily Bell: You have written, “According to the USGS (United States Geological Survey), there is more or less nine years’ worth of economic silver in the ground; in other words, peak silver is roughly a decade away.” Can you elaborate?

David Morgan: Yes, that is based upon a silver price of perhaps $12 to $15 per ounce, so as the price of silver increases there is by definition more silver that becomes economic (profitable) to mine. Also, new mining techniques became available where open pit operations of rather low grade material is economic when it the past in was not. There is nothing to say that another breakthrough could take place and extend the mining of minerals further into the future.

Daily Bell: Has gold mining peaked, and what does this mean for silver?

David Morgan: Gold mining has peaked by all indications and since 13% of the silver supply comes as a result of gold mining it will have some effect, but very minor at this point.

Daily Bell: How does silver fit into solar energy demand?

David Morgan: Almost all governments globally are looking for green energy and that means solar energy primarily. Silver is used in several ways for solar – from mirrors to reflect to sun, to solar panels and electrical distribution.

Daily Bell: Do India and China play into this equation?

David Morgan: To the extent that they will use solar and more importantly to the extent that they will increase their electrical distribution networks. A decade ago the average Chinese used 1/70th the amount of silver that the average North American used. As China continues to move toward a high technology society the use per person will increase dramatically. Just think of how many cell phones and laptops are in China today compared to a decade ago.

Daily Bell: Is silver the money of last resort?

David Morgan: As I wrote in the Ten Rules of Silver Investing (Click here now for a FREE copy), I had this to say:

“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 will be the primary currency for purchase of goods and services. (Gold will be a store of major wealth, but will 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.”

Daily Bell: How should people invest in silver?

David Morgan: Too many investors, upon deciding to beef up the metals portion of their portfolio, buy too much physical silver at once-and in the wrong forms. Beginning metals investors should concentrate on pure bullion bars or coins, in smaller sizes, looking to pay a minimum premium over the actual metal value. Avoid commemorative coins, decorative items, jewelry and other collectibles, all of which carry large premiums and have limited resale markets.

Daily Bell: Should people buy mining stocks?

David Morgan: If you are a typical investor, you cannot expect to be an expert on silver and the silver market- but you can invest in the people who are. Once you have established a core holding of physical silver, leverage both your knowledge and your buying power by purchasing the stocks of mining companies. These shares are highly responsive to changes in silver prices, frequently producing much higher percentage returns than the metal itself.

Daily Bell: Should people dollar-cost average?

David Morgan: Dollar-cost averaging is an ideal way to implement Rule 2. By making same-dollar purchases at regular time intervals, you wind up buying more metal when prices are low and less when they are high. This approach helps you develop discipline, erasing the “trader’ mentality that infects many market participants and instead fostering an “investment” philosophy. Dollar-cost averaging also eases some of the sting when prices move against you, allowing you to view the downturn as an improved buying opportunity rather than a disappointing loss. There is a dollar cost averaging program that I am favorable to and it can be viewed here: www.Silver123.net.

Daily Bell: Should people be wary of bullion dealers?

David Morgan: Because of the specialized nature of the physical metals markets, selection of a well established dealer with a quality reputation is essential. A good dealer will provide timely execution of your trades at fair prices with reasonable fees. Note, as well, that the lowest price is not necessarily the best price. In the past, some dealers who squeezed their price margins too low in order to attract clients were unable to make delivery, leaving those clients holding the bag.

Daily Bell: Where should people take delivery of silver?

David Morgan: While it is wise to keep some of your silver where you can get to it easily, it is also important to keep the bulk of your metal in a safe place – especially as you holdings increase. However, if you establish an account with a brokerage warehouse or other public storage facility, you should make sure your holdings are kept segregated and that you can inspect them when you wish.

Daily Bell: Should people speculate?

David Morgan: Depending on your individual goals and our personal tolerance for risk, a small portion of the assets you commit to silver can be used for speculation, perhaps in futures contracts or options on futures. Never forget, however, that this type of trading is speculation, NOT investment.

Daily Bell: Where can people find out more information?

David Morgan: You do not need to be a student of the silver market to profit from your metals investments. However, you will greatly increase your chances of success-and the size of your potential profits-if you understand the fundamental factors that drive silver prices and pay regular attention to current supply and demand considerations. There now are many writing in the silver space, when I started over a decade ago it was probably only three of us. Certainly you can visit many websites these days and find all kinds of differing view on the silver market.

The readers can find my work at the following sources:

www.TheMorganReport.com

Twitter@silverguru22

YouTube – silverguru

To find my speaking schedule is it best to get on our free mailing list.

Daily Bell: Should one invest in silver or collect it?

David Morgan: Owning fine silver items – including rare coins – can provide great enjoyment and personal satisfaction. Like paintings and other artworks, they are beautiful and often quite valuable – and, if you are astute at buying and selling, they can generate large profits. In spite of this, however, always view such holdings as collectibles, NOT as investments. When you need your silver – or simply want to cash in – you do not want to have difficulty selling or be forced to forfeit a large aesthetic premium, both of which are likely with silver rarities.

Daily Bell: Should one stop at 10 percent of one’s portfolio?

David Morgan: No matter how good the market looks – or how worried you are about the future of civilized society – you must always remember that silver should make up only a small portion of a well-diversified portfolio. I recommend committing no more than 25 percent under the current economic conditions.

Daily Bell: David, your time is most appreciated. Thank you again.

David Morgan: It is my pleasure. I really enjoy the great work you are doing. Keep it up.

The Morgan Report Blog