Typical pre-teen boys may be as committed to collecting coins as they are baseball cards, but to find 11-year-olds intrigued by the M1 money supply, fiat currency and the silver standard would be a rarity by anyone’s standards. David Morgan, whose interest in silver dates to that tender age, was one of the rare ones—and still is. Although his horizon has expanded considerably since those days, he now stands out among the world’s preeminent silver authorities, investment experts and worldview economists.

All’s been decidedly unquiet on the precious metals front since David’s last exclusive interview with The Gold Report this past April. Back then, U.S. Treasury Secretary Hank Paulson had used the term “financial crisis" more than five times in a recent speech, circumstances in which, as David put it, “the attraction to precious metals becomes more urgent.” At that time, he also speculated on whether there is enough silver above the ground if just 10% of the baby boomer population were to put 5% of their net worth into silver. According to David, the answer is a resounding “no.” David sees some silver lining the recessionary thunderheads, and a spring that may bring see an “Obama Rally” burst forth.

The Gold Report: When you talked with The Gold Report in April, silver’s 200-day moving average was $14.66 and gold's was $785. To say we’ve experienced turmoil since then is something of an understatement. What’s your view of what’s happening in those markets today?

David Morgan: Both silver and gold markets have become victims of the credit crisis, which actually started in August of 2007. Things really got going to the downside on the annual rollover of August 2008 and that has continued. If you look at gold irrespective of the dollar—in other words, vis-à-vis other currencies—it’s doing quite well. And if you look at gold in U.S. dollars vis-à-vis any other market such as the Dow Jones, the S&P 500 or the oil market, it’s actually holding up better than most markets.

Silver is doing not as well as gold, but better than the base metals. And since silver is really an industrial metal and a monetary metal, you would expect it to perform during recessionary times as it has—better than the base metals but not as good as gold.

TGR: When do you expect silver and gold to bottom out?

DM: We have seen the bottom already. Of course, you never know a bottom until a good amount of time later, but all kinds of technical indicators as well as sentiment indicate to me that we have seen the bottom I announced this to our members last weekend.

TGR: How will you recognize the bottom?

DM: On a weekly chart you can see a weekly bottom; on a monthly chart, a monthly bottom. You can only know a bottom for certain by hindsight. But right now, as I said, technically and sentiment-wise, we have hit a bottom. Sentiment is awful, even some gold bugs are predicting gold to go lower. Having said that, no one can call a bottom exactly every time.

TGR: So most gold bugs are looking to see gold going even lower.

DM: I wouldn’t say “most.” I know that some are. And it’s, again, sentiment. Things have become so bad in all the markets that even the gold bugs are starting to question whether gold can maintain these prices. Technically, silver’s already hit the major uptrend line, but gold hasn’t. The major uptrend line for gold lies around the $640 level. Is it going to get there? No one really knows.

The volatility is what we’re talking about. The volatility is extreme in all markets, gold being one of them. Just since the credit crisis really manifested in August of 2008, we’ve had days where gold was up by $90 and other days where it’s been down $50 or so. The swings are considerable. Going forward, I think there will be more of the same, days when gold’s up well over $100 and probably down the same.

TGR: You said in the past silver tends to be more volatile than gold. Considering the swings you anticipate for gold, what do you expect to see in silver?

DM: Silver, of course, is a smaller market, so it’s subject to greater moves both up and down. You may see some dollar up days where silver just takes off and goes up a couple or three bucks at a time. I don’t think you’re going to see that on the downside until we get much higher. In other words, you won’t see a $2 down day from the $10 level, but you may see that once we approach the $25 or $30 level.

TGR: Jay Taylor (who produces the weekly Gold, Energy & Tech Stocks newsletter) says that from his perspective silver does well in an inflationary environment—better than gold—and in a deflationary environment, gold does better than silver. Do you agree?

DM: Jay’s right. Professor Roy Jastram’s The Golden Constant (The Golden Constant: The English and American Experience, 1560-1976, New York: Wiley, 1977) really shows that gold holds its own in a deflationary environment.

Silver doesn’t or hasn’t in the past and there could be several reasons for that. The primary one is government interference in the market place. On a per capita basis, the amount of silver per person was much greater in the past than it is today. I don’t know if it will do well in a deflation or not. I suspect that this time silver will do relatively well in a deflation. Look if we use silver against oil, or the Dow, or base metals it is doing fairly well, the problem is people do not know how to correctly evaluate (value) assets. History repeats, but it doesn’t repeat exactly.

The reason silver probably would do well in a deflation this time is because there’s so little available and it holds every monetary aspect that gold has. It’s rare, it’s divisible, it’s a store of wealth and it’s fungible—in other words, every ounce is like any other ounce regardless of whose stamp is on it. Because of those facts, I believe that people who probably are priced out of the gold market will go to the next best thing and, the next best thing is silver.

TGR: What causes silver to not perform as well as gold in a deflationary environment? Is it the fact that silver is also an industrial metal and industrial uses decline during deflation?

DM: That’s the primary argument and it has merit in today’s world but if you read my website and look at the history of silver as money as researched by Charles Savoie you will get a far more accurate picture. In a deflationary environment, since 70% of the base metals produce silver, if there’s a big recession, there will be a lot less silver available because there’ll be a lot less base metal mining production. So supply actually contracts automatically in a deflationary environment. So, again, on a per capita basis, there may be less silver minded per person in a deflation than there is in an inflation.

TGR: Why wouldn’t that drive the price up?

DM: It could. That’s my point. That could cause the price to go up. Again, the market knows more than anybody. However which market are we talking about the free silver market or the paper derivative silver market? I believe that the supply of silver is so small relative to the population base that it won’t take much new buying to carry silver far, far higher. You have to remember that silver hit $50 an ounce in 1980 and there was roughly four times more silver available above ground than now. Also, the money supply was about one-seventh the size that it is now. So if you use those facts—that the silver supply, instead of being two billion ounces of fine bullion, is less than 500,000 ounces and that the money supply, M1, is about six or seven times greater—that shows you a high, high potential that silver could certainly go up.

TGR: Would you advise your newsletter readers to look at obtaining physical silver and, if so, coins or obtaining it through COMEX?

DM: Both. Anyone new should start with coin silver and the reason for that is it’s money of last resort. People always talk about gold as being the money of last resort and certainly it is in a sense, but in a practical way, it’s not.

If you had a collapse of the currency where you actually had to barter, it’d be pretty tough to use a one-ounce gold coin to buy gas or bread. But with silver that could be accomplished easily. I’m not saying that’s going to happen. I’m just doing a thought experiment here. Silver is more divisible, it’s a smaller value per unit, and if you have coins, you’re in the best shape for that scenario. Once that’s established, then I think it can go to investing in silver bars.

As far as taking delivery off the COMEX, that’s usually for higher-end investors because one bar is 1,000 ounces, so that’s like $10,000 per bar and a lot of investors aren’t capable, or it would represent too much of their net worth to take that much silver in one lump form. 

Tune in tomorrow for Part II of this article.

From now until the end of this year, David Morgan is offering free subscriptions to The Morgan Report. You will be given full access to the Members Only portion of the website and read all of his recommendations, access the webinars, the seminars, the audio updates, the special reports, and the alert service.

Seduced by silver at the tender age of 11, David Morgan started investing in the stock market while still a teenager. A precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the silver-investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems ahead and reasons for investing in precious metals. David considers himself a big-picture macroeconomist whose main job as education—educating people about honest money and the benefits of a sound financial system—and his second job as teaching people to be patient and have conviction in their investment holdings. A dynamic, much-in-demand speaker, David’s educational mission also makes him a prolific author. In addition to The Morgan Report, he writes Kitco’s weekly Money, Metals and Mining Review. His articles have appeared in The Herald Tribune, Futures, The Gold Newsletter, Resource Consultants, Resource World, Investment Rarities,