David Morgan on the Global Economy, Inflation, Recession and Where Silver Is Headed
Sunday, May 15, 2011 – with Anthony Wile
The Daily Bell is pleased to present an exclusive interview with David Morgan.
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: Let’s ask some general economic questions first. We asked some of these last time, but you can update us. Are we at the end of the economic crisis in the West or is there more to go?
David Morgan: We are not at the end of an economic crisis in the West. The crisis is a debt crisis that emanates primarily from the reserve currency of the world which is the US dollar. Until this debt problem is resolved one way or the other crisis will continue. It may not manifest in a manner or in a time-frame that most people expect nonetheless it will continue.
All debts are paid eventually. There’s two ways for this debt situation be resolved. One is by a direct default on the debt of the US government and the second is by defaulting on the currency itself. At this point in time almost everyone expects one or the other as the Federal Reserve has taught us time and again. Over and over, it comes into the marketplace to boost the markets by printing more money and stimulating the economy a global basis, and eventually that makes the currency worthless. Right now there’s a fluctuation between the United States and the European markets. The euro is no better than the dollar. All fiat currencies and are based upon the faith credit or trust of the nation state or global economy as a whole.
Daily Bell: Is America due for significant inflation?
David Morgan: The problem with inflation is that it is measured in today’s “1984″ world. What we find is that government’s statistics mean very little. Since the US government takes out food and energy from the overall inflation index, the index is almost pointless as those are the two most important facts for any living human being. Thus government economists can say that inflation is whatever they want to say. Inflation is probably somewhere around the 10% level in the US, and of course again the things you need the most food and energy keep increasing in price.
But many people don’t understand is that there’s no need for a hyperinflation for the US economy to have a greater collapse than already exists. In advanced capital markets, the bond market is a governor on the overall health of the system. As interest rates increase because people no longer trust the currency, the bonds fall in value. This is basically what took place during the Volcker administration of the Federal Reserve back in 1980.
Daily Bell: A crashing bond market is hugely deflationary.
David Morgan: Perhaps, but if we look at what we know as an absolute fact right now, it looks as if the Feds wish is to inflate the problem away. Of course this can only go on for so long, as sooner or later someone determines that the dollar is not worth the paper it’s printed on and gradually people start to move their dollars into anything tangible that’s not a paper asset. This is why the precious metals are such a strong indicator what’s going on under the surface of the global currency markets.
Daily Bell: How about companies. They seem to be doing better. Is this a good sign?
David Morgan: Big US companies are full of cash at the present time. However they’re not ready deploy this cash because they really don’t know where a good place to put the cash to work exists. US consumers are burnt out, basically, burned as blackened toast. They can’t borrow any more; their only savings is their overprice “home,” and that’s still falling in value. Since so much of the US economy is based on consumerism these companies have decided to sit on their cash. Off course, it’s a good sign that some companies are profitable; in real free market capitalism profit is a legitimate motive.
Daily Bell: How would you grade Ben Bernanke’s performance as head of the Fed?
David Morgan: I would give him a B-, and I know that may seem shockingly high.
Daily Bell: Yes, that’s high to us. We’d give him a Z.
David Morgan: He’s in a horrible no win position; at this point, he has far less control than many think. His press conferences do not seem to be helping. I recall watching him on “60 Minutes” and his lower lip was quivering as he spoke. I thought this poor fellow is not a practiced hypocrite like most of the U.S. politicians; he should do as little in public view as possible. So, I will withhold further comment for now, but from what I have seen, my advice would be to send a Public Relations type to read a prepared statement.
In my view there is only one thing that will help and that is an immediate return to the Glass-Steagall Standard that was removed during the go-go derivative years. We must let this truly worthless debt perish and soon before the whole system does a repeat of 2008 and never gets off the mat.
Daily Bell: Seems like the mat is as good a place as any. Is significant inflation “baked into the cake?”
David Morgan: Not necessarily! First, as an Austrian-oriented economic observer, let me be clear that there is enough “money” in the system to cause a hyper-inflationary blow out in 12 milliseconds. So, it is NOT a function of how much funny money that is in the system but what it is doing.
If the velocity is very low, then it is as if the over-abundance of “money” does not even exist because the currency is just sitting. In the U.S. the turnover is very low because there is little demand for money as consumers have stopped spending. Overseas, however, the velocity is increasing. But until the velocity gets to a point where it is having an impact on prices, which is how most people understand inflation, we cannot be 100% certain that inflation is baked into cake. A deflationary wild card could still take hold.
For a quick thought experiment, let us say overnight all commodities are settled in Chinese yuan. The U.S. dollar is suddenly void—is that inflationary? It would be hugely deflationary and have the same effect as the end of a hyperinflation. The currency is worth –NOTHING! So in a bond default bonds are worth nothing, and the currency has value; or in a currency default the currency becomes worthless and the associated bonds as well. Go watch the movie “Gone with the Wind” for a good reminder about the beliefs surrounding money and what kind of lessons lie ahead.
Daily Bell: Where does silver go from here?
David Morgan: To be clear we are doing this interview after silver nearly hit $50 and fell to $33 and change. At this point (mid May 2011), silver will establish a trading range in my view. It is far too early to know what that range will be or even if I am correct.
Daily Bell: What are the best investments to make throughout the business cycle, and do they change over time?
David Morgan: Yes, they do change over time,. Early in the cycle from a hard-money point of view, almost any exploration company is a good bet and these companies are usually more dependent on promotion than merit. As the cycle matures then mid-tier growth companies do the best overall. Finally, in the final mania stage, the real crummy penny stocks do the best … but be careful! Throughout the entire cycle a pure silver or silver and gold (metal) investment is usually superior to a gold or silver stock investment.
This has been proven again and again, and each year I verify it for my members. We’ve beaten the heck out of the averages, but most investors don’t. In other words, following the example in The Morgan Report would have provided very superior gains to a pure silver or gold investment.
Daily Bell: Explain why silver has historically been called the people’s money.
David Morgan: Silver has been used for longer periods of time, in more places in the world, and by more human beings for money than anything else … period! End of story! If you have the ability to think then no further comment is necessary.
Daily Bell: There are some that believe that silver is a secondary money. And that gold is primary money. What about you?
David Morgan: Gold is worth more per ounce than silver and has been since the beginning of recorded history. In that sense it has a higher unit value (more value per ounce). Both serve their purpose.. Gold for international settlement and silver for individual settlement.
Daily Bell: Why did silver take off in the past few months?
David Morgan: The physical market has finally taken control after all these years.
Daily Bell: Why did it drop?
David Morgan: You can build a case in several ways, but primarily the continual increase of margin requirements brought the leveraged silver speculators down and down hard.
Daily Bell: Yes, the old trick. When silver and gold go up, it’s a bubble and the exchanges have to take action by raising margin requirements and wiping out a slew of small investors. Funny, the stock markets never raise margins when stocks are on the way up. Anyway, is it still a bull market for silver?
David Morgan: Yes, as we discussed earlier, until the debt bubble bursts precious metals will reflect just how bad the debt problems are.
Daily Bell: Can you comment on the gold-silver ratio? It has come under attack as a false or made up ratio from some.
David Morgan: It is not made up; divide the price of gold by the price of silver to gauge it accurately. It is a way to measure which metal is doing better in terms of the other one. For example when I started pounding the table to buy silver, the ratio was 80 to 1. It took 80 ounces of silver to buy one ounce of gold. The ratio is now 40, which means at this point in time silver has been twice as profitable as gold in the same time frame … BUT could you have stood the volatility?
Daily Bell: Good point. Is industrial demand for silver growing? Is there enough silver around?
David Morgan: Industrial demand continues to grow and is estimated to by 60% of the market by 2015 from the current 54%, mostly due to solar, water purification, and food preservation/packaging. There is enough silver — as price determines who gets the silver. This is not to say that a squeeze cannot take place and “shortages” do appear in certain areas. For example, both the U.S. and Canadian mints are NOT keeping up with demand.
Daily Bell: How much is the world’s silver supply increasing? What about future production?
David Morgan: Silver is increasing by around 3% per year and that will continue for the next 3-4 years, after that time frame things could get a bit dicey and we might see silver go back into a deficit situation similar to what existed between 1990 and 2006.
Daily Bell: Have gold and silver mining peaked? Do India and China play into this equation?
David Morgan: I will stick my neck out and venture the supposition that silver production could peak in 2015-2016.
Daily Bell: We’ve suggested the same possibility.
David Morgan: Indian and China both play significant roles primarily in their industrial use of silver, and that’s where some of the demand is coming from on the margin.
Daily Bell: Does price manipulation continue?
David Morgan: Yes, but it is becoming less and less effective. As our work indicated so long ago, once the physical market takes over, then the paper pushers will have a very difficult time “managing” things. But never give up on the (silver and gold) paper pushers! They are very imaginative.
Daily Bell: Where will silver end up at?
David Morgan: We called the breakout at $19 and rode it up to around the $46 level. No one knows what paper price silver will end up at… but I am on record that silver would make it to at least $100 by the top, so let’s stick to that for now and visit it again later. It is really an error to focus too much energy on the paper price. An ounce of silver and an ounce of gold never change in value actually; it is the price that is quoted in paper currency that varies. This is a reflection of the debasement of all currencies globally.
Until the debt bubble bursts or is resolved, money metals will continue to see price pressure to the upside. Of course, all markets move up and down … and from time to time gold and silver will see their prices knocked down. A true, ultimate paper price for silver or gold is impossible to forecast accurately.
Daily Bell: What countries are most hospitable to silver mining today? Mexico and Peru you mentioned last time.
David Morgan: Same this year, with China number 3. There are concerns surrounding Mexico because of the drug wars going on in that country. Quite frankly, some of the miners are near the vicinity of trouble. There have been reports of some mining incidents do to the drug problems.
Another factor that we get asked often is whether a country might nationalize a mine. This surfaced recently in Bolivia and it is a concern. Might I suggest anyone that wants to examine this in depth read Resource Wars by Michael Klare.
Daily Bell: Any important silver mining companies you want to mention?
David Morgan: We reserve this for our paid membership but there is lots of information available on the Internet and many ETF’s and even silver funds are available that people can find with very little effort. Let me remind everyone that a simple non leveraged silver investment has outperformed any silver index so far. However, again, our portfolio has done much, much better than a silver only investment.
In other words, I and our members (that follow our model) have made much more money in the mining stocks than a simple silver only investment. The stocks have lagged the metal in this most recent move, and for those that understand market cycles and want to catch up to the people that bought silver at $20 to $25, it can be done by careful selection of mining companies and the ability to hold on tightly.
Daily Bell: What’s going on with the CFTC? Any news on the silver manipulation front?
David Morgan: The CFTC has been very quiet. There are several suits that have been filed and the authorities are doing their best to put all “manipulation of the silver price” suits into one large class action suit. We are purportedly getting close, but don’t hold your breath. Governments can outlive individuals by hundreds of years, if you know what I mean.
Personally, it would benefit so many to see some resolution to this question. It has been at the heart of the silver world for so long. The opinions are so strong on both sides of the argument that I doubt any resolution would satisfy both sides. But a clear and fair rule regarding market manipulation equally applied across the board would go a very long way in restoring faith in the system.
Daily Bell: Can the powers-that-be continue to control the price regardless of CTFC action, or are they losing control?
David Morgan: They are losing it as mentioned previously; this is not to say that they cannot come up with all kinds of rhymes and reasons to further “control” things but in the end the free market wins. There will be times such as now that we will experience silver finding it way to a trading range and the market cooling off for weeks, or perhaps months. But the powers-that-be can only raise margins so many times. As long as the debt bubble continues to inflate, the pressure on precious metals will continue.
Daily Bell: Will the world end up with a new currency in the near future? Will it be silver and gold based?
David Morgan: Tough question. Steve Forbes former presidential candidate recently forecast a return to the gold standard by the United States within the next five years because a gold standard would help the nation solve a variety of economic, fiscal, and monetary ills. Such a move would stabilize the U.S. dollar, restore confidence globally and reassure the U.S. bonds market. Under a gold standard reckless federal spending would be impossible.
As Forbes pointed out, the United States used gold as the basis for valuing the U.S. dollar successfully for roughly 180 years before President Richard Nixon embarked upon an experiment in pure paper money that has contributed to a number of woes that the country is suffering from now. The only probable 2012 U.S. presidential candidate who has championed a return to the gold standard so far is Rep. Ron Paul (R.-Tex.). But the idea makes too much “sense” not to gain popularity given the terrible performance of the US economy. “If the dollar was as good as gold, other countries would want to buy it,” Forbes said and he has a point.
My main concern is not a return to a gold standard; in fact we are quite favorable to it. The concern we have is how much of the reported gold is held by the U.S. Treasury? In other words, would the U.S. have unencumbered gold to back the U.S. dollar? We ask the question because through the years so much information has built strong cases that the “gold” in Fort Knox is perhaps gone, or at best not owned by the Treasury.
Daily Bell: We’ve heard the same stories. An audit would be nice. Any other points you want to make? Any articles or websites you want to point out?
David Morgan: Let me state for your U.S. readers and soon all your Canadian readers, please check: http://www.Silver123.net.
This is a site that offers a silver savings program. That is a monthly accumulation program that once it is set up it continues as long as you wish. In the past this was primarily directed to the small saver but it now is also competitive for very large purchases. This methodology takes advantage of one of my Ten Rules of Silver Investing which any of your readers can obtain for free just by visiting our website: http://www.TheMorganReport.com.
Daily Bell: You do not write much in the public domain anymore. Why is that?
David Morgan: I spent so much of my time and money to spread the word on the problems in the financial system and why precious metals were part of the solution it took a full decade of my life. I do not regret one minute of it, but that work is on the Internet for anyone that wants to visit my thinking from the bottom until say 2010.
The demands for my time became overwhelming so my efforts are now directed to our paid members, although I still find the time to send something of merit to our free list once per week.
Daily Bell: Thanks for your time and for sitting down with us again.
David Morgan: My pleasure…