David Morgan's top three silver picks.
The Gold Report caught up with veteran silver investor David Morgan of Silver-Investor.com at the recent Las Vegas Hard Assets show. Here he shares his thoughts on silver and some companies that he thinks are noteworthy.
TGR: How will the new silver ETF (exchange traded fund) affect the silver market?
Morgan: Our overall view on the silver ETF is positive. When it was still in the planning stages, I predicted that it would trigger increasing interest in the silver market. Here's why. The two main problems for silver investors are where and how do they buy it, and secondly, once they've bought it, where do they store it? The silver ETF eliminated both of these problems. Investors can buy silver simply by calling their broker, using the symbol SLV. The storage problem is taken care of for them. So I thought there would be a lot of pent up demand, from money managers and large investors, and certainly it's become a very liquid market. So I was correct in my forecast. I think overall the silver ETF has benefited the silver market, and certainly the market is backing up that premise from the standpoint that 100 million ounces of physical silver so far have moved into the silver ETF in a mere four months.
So overall I'm bullish. The one caveat I have for the small investor on the ETF is how it's treated on a tax basis. Although it's a stock, it's considered and taxed as a commodity. So no matter how long you hold it, you're going to be taxed at a higher tax rate than you would if you owned a mutual fund of mining equities. So that's one cautionary note. Certainly if you wish to invest using the ETF, do so, but be advised there are tax implications.
TGR: You said recently that you prefer to focus on mid-caps because they are faster growing and more dynamic than the larger companies. Can you expand on that for our readers?
Morgan: My big premise from the beginning has been to help my readership achieve the most money as safely as possible. In order to achieve that you have to balance your portfolio, even within the sector. Historically the small acorns - which in this case, are your exploration companies - grow the fastest. However, they are almost impossible to pick accurately and successfully.
The next tier, the mid-tier producers, is a little easier to pick. These companies also have very good growth rates. They are actually producing, usually at a profit, and they have great upside growth potential. Sometimes they have mines that have been refurbished, or maybe new mines that have a ramp-up profile. For example, you might have a mine that's mining 1 million ounces of precious metals annually but has the capacity to get to three million ounces over a three-year time frame. That is a growth story. It's something fairly predictable, something on which you can base a financial model and establish a target price. I like those kinds of situations. And also in those types of situations there exists the potential for other projects or properties that the company may hold for further development. So these mid-tier companies offer the best, safest opportunities.
Certainly we've kicked that up a bit by doing research into highly speculative situations - usually these are not so much exploration companies, but companies that maybe have an asset, and we're the first to find it and bring it to our readers' attention.
TGR: What do you believe are the key drivers in the silver market?
Morgan: The main driver for the silver market is industrial demand, which accounts for about 45 % of the total demand. Next is silver jewelry, which accounts for about 25%-27%, followed by photographic demand at 20%. Investment demand makes up only 10% or less. So the main driver is actually industrial demand. That's good - gold doesn't enjoy that. Silver is price inelastic - that is, inelastic on the price side. For example, if you're manufacturing refrigerators, you have to have silver in the circuitry. In fact, there's a new advanced refrigerator by Sanyo, which actually has silver impregnated on the inside in order to kill off bacteria. The cost of that refrigerator might be $1000, yet it might hold only about $2 worth of silver. If silver were, hypothetically speaking, to go to $100 an ounce, the manufacturer would still buy the silver in order to make that refrigerator. It's really not going to impact the price of the refrigerator all that much because it's such a small component of that manufactured good. That holds true in almost all industrial applications. So that is the fastest growing sector of the market and it's also the one where the price is most inelastic.
Industrial demand is an important subset of the silver market, one that is going to grow, in my view, and continue to put a price floor on the market. The wild card is investment demand, which has obviously come on strong with the silver ETF. I think more and more people are waking up to the depreciating dollar, to the depreciating currencies worldwide. Gold and silver are both in the phase two market. I know that fundamentally because it's a fact that gold and silver are rising in all currencies. It's no longer just a dollar phenomenon, so that is a fundamental verification that we have a bull market and we're going into the second major phase.
TGR: Where do you believe price of silver is headed in short and long term?
Morgan: I'm on record as telling Barron's magazine earlier this year that I thought we would see silver trading in the $18 range by the end of 2006. I've backed off that slightly because it looks to me as though we're probably going to get a pullback into mid-November. That's not what I expected earlier this year, but I have more data to work with now. However, I believe we can probably touch the $15 level by the end of December. I'm very bullish on the first quarter 2007. I fully expect to see $18 silver, maybe even higher within the first quarter of 2007.
On a longer term basis, I expect this major market to continue until at least 2010. I think the economy will have more impact on the price than anything else, even greater than the supply and demand fundamentals. If we have what I call a perceived currency crisis, and I personally fully expect to see one, then I think you're going to see four-digit gold, and I believe you could even touch into triple-digit silver. To be totally honest, it will probably be on a spike and it will probably be due to a lot of financial stress perceived in the marketplace. However, having said that, if we don't experience a currency crisis, I still expect to see silver at an equilibrium price, probably around the $30 level, and gold probably around the $1000 level.
TGR: What are your top three silver companies today?
Morgan: Well, of course there are very, very few primary silver miners. Those are the companies people are usually asking about, and they also are the companies that offer investors the most leverage to the price of silver. Two of the industry stalwarts - companies that are primarily silver companies - are Pan American Silver Corp. (TSX: T.PAA, BullBoards) and Silver Standard Resources Inc. (TSX: T.SSO, BullBoards).
Pan American's mission, clearly stated in the company's mission statement, is to become the largest primary silver miner in the world. It is well on the path to achieve that.
Silver Standard's mission has always been to go out and buy as much silver at 5 cents per ounce, in the ground, as humanly possible. The company has pretty much achieved that goal, although in the past several years they have had to pay more than that. Silver Standard has acquired about a billion ounces of silver in the ground. The company has a few potential mining projects in the works. It's a well run, well structured company and it's been a very big winner for us. We bought into it at under $2 a share; it recently traded at $27. Certainly you have to be more careful here than you would have a few years ago, when my work wasn't really being followed very much. I believe there's still a lot of room to the upside, but again, you're not buying it at rock bottom anymore.
The third company I think investors should look at, and do some due diligence on, is Silver Wheaton Corp. (NYSE:SLW, BullBoards) / (TSX: T.SLW, BullBoards). It's a very well-thought-out company. It's basically a finance company, with very low overhead. It makes money off royalties from physical silver. It's a bit volatile, as all the silver stocks are right now, but I like it.
Those would be the three top companies that you probably couldn't get hurt with if you bought them right and held them for the long term.
About David Morgan
David Morgan, editor of the Silver Investor, started investing in the stock market as a teenager. In addition to founding and editing Silver-Investor.com, he hosts "The Morgan Report" weekly radio metals wrap-up for the Financial Sense News hour (www.financialsense.com). His background in engineering with an advanced degree in Economics/Finance gives him a perspective to the financial markets that pure business majors often miss. Mr. Morgan has been published in Barron's, The Wall Street Journal, Futures Magazine, The Herald Tribune, Gold Newsletter, Resource Consultants and many other publications.
His new book, "Get The Skinny On Silver Investing" is now available. Morgan says his main purpose in writing this book is to make the investment community at large aware of what he believe to be the single best investment in the world at the present time-silver.
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