Silver continues to outperform gold and should be part of every investor's portfolio, according to David Morgan, editor of The Silver Investor. Read excerpts from The Gold Report's recent interview with Mr. Morgan.
TGR: In a recent article, "How to Buy Gold for $252 an Ounce," you stated that, in real terms, gold is not really trading at a 24-year high. If it were, it would have to be trading at over $1,000 per ounce. Could you explain that statement, and give us your thoughts on where silver is headed?
Morgan: The biggest factual point we can make is that silver continues to outperform gold, and that gold is much more followed by the public and the present investment community than silver is. When gold was making a new 18-year high, and it was being talked about all over the Internet and in the mainstream media, it was being discussed in nominal terms, meaning a nominal dollar. That's what I referred to in the article you mention. My point was that $1 in 1980 does not equal $1 in 2005.
TGR: You also mentioned in that article that silver had already reached an 18-year high months before gold.
Morgan: That's right. But unless you're reading the Morgan Report or you are a dedicated student of the silver market, it really didn't make much news. Yes, there were articles on the Internet, and there may have been one or two in the mainstream press-I missed them if there were. But it was sort of ho-hum. Silver has always been sort of the underdog, or the underdog metal, if you will. Certainly, gold gets a lot more attention. That's okay. But if you want to focus on making money, you need to include silver in your portfolio because year after year silver is up -- by about 30% in 2005 -- and in 2005 it basically matched what the bulk of the indexes, such as the HUI, did. So, from a safety point of view, at least in my opinion, if you bought and paid for your physical silver with no leverage whatsoever, it performed as well as a basket of major gold stocks.
TGR: Can you talk next about China and its role in driving this commodity cycle, and especially what that means for silver?
Morgan: China is, in my view, in a super cycle commodity. China is in a macro-economic cycle that will go for many years. And it's going to drive the whole commodity sector. And I base that opinion on human nature. Having a master's in finance and economics, I studied Maslow's hierarchy of needs. I think it's pervasive among the human species, regardless of continent or religion, that people strive to better themselves. And it's human nature to get a greater benefit from the least amount of work. And we all want to have more material wealth if we think it's going to benefit our lives. The Chinese are no different than the Russians or Americans or South Americans or whomever. But now the Chinese have a huge trade imbalance with the Western powers, primarily the U.S., which has resulted in their having all kinds of excess cash on hand - at least on a national basis, though not necessarily on an individual basis. However, the national wealth does trickle down economically. Obviously, there's a lot more wealth being created in China. They want everything that the West has.
TGR: You're referring to the pent-up demand we are hearing so much about.
Morgan: Exactly. So everything in economics follows from the fundamental fact that all wealth is created out of the ground. Even though I've heard arguments refuting that point, if you stop and think about it, every commodity comes from the ground. And anything that we use in the real world that is material based comes from a mining activity of some sort. For instance, all plastics are oil-based. All of your laptop computers have all kinds of exotic metals in them, but people, even environmentalists who are out there whacking on their computer right now saying, "Don't disturb the earth," don't stop to consider the fact that without iridium, palladium, silver and other metals, and without oil for plastic, you're not going to have a laptop. Period. You're not going to have a car, and you're not going to have glasses; you're not going to have anything else.
I am a very big advocate of good stewardship of what resources we have. And I think the world at large understands it. However, China has kind of been given a free pass on that. From a personal point of view, I am not really that happy about it. But I don't make the laws. I believe this super cycle will drive commodities for another decade at least. There will be ups and downs, and there will probably be some dramatic pullbacks, but it's here to stay. And it's based on the fact that everybody wants a better life for themselves and a better life for their children.
TGR: Can you comment on silver fundamentals in the future-what else is driving the metal?
Morgan: People who are well studied in the silver market-there are not many left-have been hearing this supply and demand story since the mid-'70s. There were a lot of forecasts in the mid-'80s that the silver supply was running out, and that any minute now, the silver price was going to explode. And that didn't happen. So a lot of people who were students of the silver market, from the '70s through 1985 or so, pretty much gave up. Despite the empirical evidence, nothing happened. From all the data ever collected on mining activity through 1985, silver had hit an upper ceiling. The most silver ever mined in a given year was about 355 million ounces. And it looked as if, looking at the data, that the most you're ever going to get per year from the silver market was 355 million ounces.
Well, that was still a deficit situation in those days, meaning that the amount of silver mined annually was not meeting the annual demand. Which is not the same as a shortage. It just means that the silver stocks on the ground were slowly being used up. Between 1985 and today, the amount of silver being mined on an annually has increased rather dramatically, to around 550 million ounces. That's an increase of 200 million ounces per year over that 30 year period. So, that forestalled this big supply and demand squeeze in silver. Yet, during all those years that silver production was being increased, still the deficit pressed on-depends on whose study you used-from about 1990 on. There was a build-up in stocks on the ground, according to both of the major silver studies from 1979 to 1989. For that ten-year period silver prices spiked so high that in 1980, a lot of silver was sold back into the market, and that above ground supply came into the hands of the silver bullion dealers.
So, for the last 15 years, we've had a deficit again and the amount of 550 million ounces has not met the demand on an annual basis, and again the supply must meet demand, so how is it met? It's met because, starting in about 1980, 1990 or so, we had about 1.5 billion ounces more silver above ground than we have today, so the stockpiles have been eaten away slowly but surely. I believe the average consumption rate has been about 100 million ounces a year. And just now the best studies in the world think that there are probably about a billion ounces of total silver, and only half of that is in bullion form, meaning 500 million ounces. That means that there are only about five years' worth left.
TGR: I'd like to ask you about two companies that are not in your model portfolio, but we'd like your comments on them. The first is Minera Andes (TSX.V:MAI ; OTCBB:MNEAF), and the other is Minco Mining & Metals Corp. (TSX: MMM, AMEX:MMK).
Morgan: Minera Andes is a company that was featured in the Morgan Report several times, but not formally. It's a company that is very solid and, of course, it has generated interest recently because of Rob McEwen's stock purchase.
TGR: Right. That was a big announcement . . .
Morgan: It is definitely a good company. I really can't say enough good about it. Is it priced too high to buy it now? No, I don't think so, but it is one of those companies that you have to be patient with because it is in a real tough league. And it is a development company, and it is truly a mining company which is one of the hardest businesses on the planet.
TGR: And what about Minco Mining?
Morgan: We like Minco Mining. We like the management. We don't follow it real closely. We think it's a good bet if you're not averse to taking a risk in investing in China, and as you know, we are not. We are very bullish on China. So we definitely think it's worth the risk. But let me add just one caveat. The world today is a very unstable and dangerous place, and the world has always been rather unstable. There are periods of history where it is a little more or perceived to be more stable than others, but it really isn't a real safe place to be. Thirty years or so ago, the expressions "Good as Gold" or "sound as a dollar" had some meaning because the dollar was convertible to gold, and there was nothing more sound than the dollar. Holding cash in U.S. dollars was probably the safest thing you could do. But the world has changed significantly since then. And I do believe that China is a huge bull market, so I think it's well worth it. I think that Minco is a good conservative investment for anyone who wants to take the risk in China.
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