A precious metals author and speaker, and he’s consulted with bullion banks, mints, mining companies, hedge funds, and pretty much anyone who’s anyone in the industry. David Morgan is the founder of the website silver-investor.com and he publishes a monthly newsletter called the Morgan Report.Click the play button above to listen to the interview, or you can read the transcript below
David Duffield: Hi it’s David Duffield here and I’m very excited to have a special guest on the line today. We’ve got David Morgan who’s a precious metals author and speaker, and he’s consulted with bullion banks, mints, mining companies, hedge funds, and pretty much anyone who’s anyone in the industry. He’s the founder of the website silver-investor.com and he publishes a monthly newsletter called the Morgan Report. Thanks for joining us today David.
David Morgan: Well my pleasure thank you.
DD: So just before we get started on the overall picture of money and metals, can you give us a quick snapshot of your background for those listeners who aren’t familiar with your work?
DM: Oh certainly. In my book I point out that I was 11 years old when the monetary currency or coinage changed in the United States. Up until and through 1964 we had 90% silver coins circulating as the money of course. We also had silver certificates, and in 1965 under the Johnson administration they stopped producing 90% silver coins and started producing what I call the Johnson slug, which were quarters, dimes, halves, all minted with basically copper and coated with nickel plating. Cupro-nickel is how we referred to them.
I was getting paid 25¢ a week allowance and I was way out in the country and there wasn’t any place to buy candy, which as an 11 year old probably was my motivation. So I was saving these coins and I had a pretty good stack, maybe $10 worth or something, and all of a sudden I get paid by my dad and there’s this odd looking, different looking quarter.
Now it struck me and I didn’t know at that point in time where my life would lead or anything else, but what it did do was sparked a question in me. The question was very obvious even to an 11 year old, but very few adults asked the same question and that was how can these be equal in worth? One is silver and one is not. I didn’t hold that question and I didn’t obsess about it, but it did affect me.
So moving forward I basically moved into the sciences, and my first degree is actually in Engineering, but I was always fascinated by money. I did a lot of self- study all the way through school, particularly in my later years meaning my junior, seniors in high school all through college and when we got out and started working. I was very much enamored with the financial system and predictably the gold and silver markets and I started trading in the futures market in my early twenties. Fast forward to several years I worked in industry, not in the financial industry, and actually in the aircraft industry, which I don’t point out often, but I’m going to let your listeners know that. I finally was let go and started working as a consultant on my own and actually for a short time starting in a field that I really am passionate about and that’s the precious metals field and also looking particularly at the macroeconomic picture, which I studied on my own for so long. I had several people that are pretty famous in the last bull market that mentored me. One of them Harry Brown who’s the two time candidate for the Libertarian Party in the United States. He wrote a newsletter and several books about banking and honest money, and many others along that ilk that I’ve met along the road I worked with and studied what they did.
I had a real strong base for what monetary history has shown us when we get in these fiat-only regimes and the outcomes that never come out well at all. In fact in every case the system that’s failed more or less, in some cases the downward pressure has been significant, but not devastating, and in other cases basically wiped out the population for all practical purposes. I knew that, but after getting the website started I started to publish articles that were very basic articles about the big macro picture and what happens under these financial systems. I would encourage your listeners to go to the website and just go into the archive section and start reading some of those early works. Now some of them are inaccurate as far as perhaps price predictions looking back because when I started the website silver was actually under $5 an ounce, and now of course we’re north of $30. But a lot of the principles apply forever and a day, they are sound principles on what happens in these financial situations.
One article that I wrote I said in all history these systems have failed, but what has me the most concerned is it’s never been a global system before. You could argue the Roman Empire was global, it really wasn’t, but it certainly took up a great deal of the population on the planet at the time, but everything is interconnected to US dollar, which is the reserve currency of the world no matter what currency system you’re on, be it the Australian dollar, the Canadian dollar, whatever. Everyone is tied to the US dollar and as the dollar goes so goes everyone else. This concerned me a great deal and still does because with the inability to rectify the problem at this point, something’s got to give sooner or later and there are two things that can happen. One is you can default on your promises, which in a way the United States did in ’65 by stopping minting the coins officially in August 15th 1971 when Nixon closed the gold win so they were no longer offered a contract with all of our international trading partners that you can paid in gold. You’re only going to get paid in these pieces of paper from now on and we’re going to float the currency and the currency is worth whatever the market says it’s worth. We go into today and the default would be on the United States bond that you Mr Bondholder be it China that holds massive amounts of our debt or Japan or some people in the Middle East or Europeans or whomever’s holding US bonds or debt instruments be it short, long, or mid-term. The truth would be that we cannot pay these back and we’re defaulting on them. You’re only going to get 50¢ on the dollar, which is what recently happened in Greece. That would be one way to rectify the problem. In other words there’d be a huge contraction in money supply, but let’s be honest, we borrowed more than we could pay back and you’re going to have to take what we can give you.
That’s very unlikely to happen in the United States and the more likely scenario is you default in a different way and that’s to default on the currency. The way you default on the currency is you just keep printing it and printing it and printing it until it becomes worthless. As we’ve all heard, it’s becoming worth less and worth less and eventually it becomes worthless or near worthless, and worthless to the point where your people don’t accept it and would rather own anything but a US dollar.
We’re not at that point right now even if you though if you look at the Federal Reserve’s own data they’ll tell you that the 1930 dollar, which is when the Federal Reserve was started in the United States, it’s now worth about 3.5¢, It has lost about 96, 97% if its value, which is a miserable failure when your mandate is to keep a stable currency. I mean it should be the same – a stable currency would be within a few percentage points of where it started, but it’s not. It’s lost almost all of it. At the current time the velocity of money, the amount of money that’s in the system, is huge, but it’s not moving and that’s called the velocity of money. Because of that we’re seeing basically a contraction and lots of talk about depressions and deflation, and actually that’s accurate at this point in time. What we don’t know is which way it’s going to go. It’s more likely to go into a default and debasement of the currency, but in certain periods of time as we get to that point, we certainly get these areas that we’re in now where you’re seeing sluggishness in the economy and very slow turnover of money.
DD: Okay so there are two scenarios: one is to default and the other is hyperinflation. How do you think silver will respond in either of those scenarios?
DM: Okay so well first of all you’re right at default and I don’t like to say hyperinflation in the US because I don’t think it’ll get there and I don’t think we’re going to see the Zimbabwe situation here. I think if you just doubled the prices of gas for example, which is certainly high inflation, it’s 100%, but if you doubled the price of gas I think that would be enough to bring this country to its knees. Silver in an inflationary environment does better than anything in past history. There is nothing that gets even close to what silver can do for the investor in that type of scenario and that’s all the data we have up until now.
Does that guarantee that it’ll happen this time? No, but it’s highly highly likely that it would. In that kind of environment silver outperforms gold, it outperforms wheat, and it outperforms just about anything you can name. But remember history rhymes and it doesn’t repeat exactly. If there are food shortages or other factors, which probably will be in this one, there could be something that does better, but I’m very confident that silver will be one of the top assets to hold. The thing about how you can’t eat silver and you can’t eat gold is very true, but it’s also true that you can’t store food for a long period of time and you can’t put $40,000 worth of food in a small briefcase or that type of thing. There are advantages to both and I really think you just have to use some common sense here.
I think you should really plan out if you’re new to this material and certainly I’d encourage you before you make any moves to study and not just study my websites, but study others that have written about this, get some monetary history underneath your belt (in other words study it somewhat), and then make a decision.
When you make a decision don’t jump in with both feet; go ahead and accumulate some gold, go ahead and accumulate some silver, and do it over time. I believe there’s still time left before things get worse and again no one knows exactly how it’s going to play out. There will be areas on the planet that are probably relatively not going to change very much and there will be others on the planet that will be very very different so that’s something to bear in mind as well.
DD: The scenario as you see it playing out seems pretty clear cut right now, but what was it about silver so many years ago that made you want to set up the website and obviously at that time silver was pretty much unloved I think you mentioned under $5 an ounce. What made you want to get into it at that stage?
DM: As I said earlier, I didn’t go into detail, but I was sort of what you’d call a newsletter junkie. I was on this path to learn as much as I could outside the economic mainstream about how finance really worked and what happened through monetary history and that type of thing. One of the best writers in the field was called Economic Research Counsellors, and they were based in Vancouver, British Columbia, and the head of that was Jerome Smith and Harry Brown, who I mentioned earlier who actually worked for Jerome. I read all of the gold guys and Smith was more or less a silver guy and pointed out silver was actually a better investment than gold was and I studied everything that he wrote. I subscribed to his newsletter service and I talked to the Economic Research Counsellors because you could get them on the phone. I really felt that of everybody that was in the field, they were the best and that was personal opinion and of course opinions vary.
When I saw this new bull market going to start, I just knew that it would and it would at the bottom. Silver was at the lowest point it’d ever been on an inflation adjusted basis. It was cheaper than it was during the Great Depression; yes it was 22¢ in the Great Depression, but at $4 when I started on the website, on an inflation adjusted basis it was less expensive than 25¢ represented in the Great Depression so it was an all-time historical low. Whenever you can buy any commodity and I don’t care if it’s wheat, I don’t care if it’s rice, I don’t care if it’s any cotton, cocoa, it doesn’t matter. If you can buy a commodity under the cost of production and be patient, you are guaranteed to make money. I knew the production costs of silver, the real true cost was probably around $6 or $7 and here you’re finding it at $4 so I was pounding the table for free.
My site was really a non-member site for quite some time and telling everybody to buy silver, buy silver. Silver just had better dynamics and it wasn’t very well understood and no one really studied it. It was only really one or two other writers on silver and really only one on the internet and that was Ted Butler. Ted had a few articles out there on silver before I started my site. Ted didn’t really have a site and he’d just would write articles and have them posted on other sites, but he does have a website now.
In my heart of hearts I felt silver was as important if not more important than gold and somebody’s got to tell the story and when I was getting my degree in finance I talked about my Engineering degree and I went on after some time I went back to school and went to mainstream school. I didn’t go to the Mises Institute, but looking back I probably wish I had. Regardless, I got my degree in Economics Finance and so I just went full circle and said it’s going to happen and it’s up to me. I really didn’t have that kind of attitude although somewhat I started as a research site. I started as a webpage, built it myself, and said everything about silver that I can gather, and I’ll stick it on this page so don’t have to hunt for it all the time. Then slowly – not too slowly – it actually happened pretty rapidly and developed into Silver-Investor, and that’s the long story.
DD: Okay. So from here, silver going up substantially in price looks to be a no-brainer, but how much volatility do you expect? Silver’s renowned for being pretty volatile so how much volatility do you expect and are you like other people that believe the market’s manipulated to the downside?
DM: Right I have to be honest here. First of all, how much upside is left? The answer’s a great deal, but we’ve already gone from let’s call it five dollars, which is more like four-ish, but five into 30 so it’s up six fold. For silver to from 30 to 180 would be another six fold increase. Will it get that high? Possibly it will, but it’s really hard to pick a dollar price when you’re in a debased currency system like we are.
That’s a good question, but I think an even better way to refine the question is how do you think it’ll respond for purchasing power for me? The answer to that is I think it’s going to at least maintain your purchasing power and probably increase it substantially. And substantially to me is like a threefold increase. I think that’s a question that gets people a little more comfortable with buying at this level.
If you believe what I believe that this system is a train wreck unfolding before us in slow motion, then you’re motivated to take some kind of action, and taking some action would be to prepare, and to prepare you need precious metals and that’s only to preserve purchasing power for the future so you can trade silver for some other good or service that you may want in the future. That’s the best way I can relate it, don’t get too hung up on the paper price, but it’s important because everyone thinks so, but really you need to do a paradigm shift to your thinking.
Once you catch on to what’s going on with the financial system and you understand why precious metals are important, what you need to think about is how many silver coins do I have today versus what I had a year ago. If you have more then you’re obviously wealthier by definition. If you have 20 coins and a year ago you had 10 then you’re twice as wealthy. I don’t care what the paper price is because what you really need to focus on and it’s hard for me to even do it at times, is to focus on what am I doing? I’m accumulating real wealth that’s preserved purchasing power for all of recorded history. Yes the price fluctuates, but the ounce of silver never changes. I have 20 ounces now, I had 10 before so those things have not changed and they’re still sitting in my shoebox or whatever, but what has changed is the amount of paper that it will trade for, but that paper eventually becomes worthless – at least it always has in the past. I think that’s a better way to fix the paradigm, again very few people can do that because we’re brainwashed into thinking my net worth is how many Australian dollars do I have? I sell my house, I sell my car, I cash out my bank account, and I turn in my five Krugerrands. How many Aussie dollars do I have, and that’s my net worth. Well in reality you have a bunch of paper that at some point probably won’t buy anything.
There hasn’t been a paper currency in the history of the world that has ever survived more than about 200 years. I’m not saying it’s worthless now; I don’t want to misconstrue anything. Certainly we need to do our transactions in these currencies and we all do and I understand that, but the point I’m trying to make is for long term planning, especially under today’s conditions, you need to factor in that these things don’t last forever and I don’t think we’re going to see this whole system hold on much longer than perhaps five years, I’d say ten at the most. There could be other things that could come up and they may issue a new currency, they may issue a global currency, and it’s hard to predict which way it’s going to go, but I do know that the precious metals are probably the best place to park some of your wealth until things get straightened out one way or the other.
DD: Okay. There’s some good advice there because silver is definitely volatile so it’s just a different mind-set really, and a really different way of looking at it the way you suggested.
DD: For someone just becoming aware of this and doing their research is the entry level point buying physical silver because there’s a lot of controversy around the exchange traded funds and other paper representations of silver. What’s your advice to people brand new to this?
DM: Absolutely. I am not a bullion dealer, but I have from the very beginning and will to the end, whatever that means, advocate buying physical metal first. That is absolutely the place anyone should start with a precious metals portfolio is with precious metals. It’s that simple.
There are several ways to do it and anyone listening can go to the website silver-investor.com and get on our free email list. This is totally free and what you’ll get for the first couple of weeks or so is ten rules of silver investing. These are for beginners primarily, but they work well for even seasoned investors, but they’ll definitely keep you out of trouble. The reason being is a lot of people get excited about the markets after they start to learn about them and again jump in with everything they’ve got savings-wise all they’ve decided they want to buy. The price goes against them and they end up upset and perhaps it’s a long consolidation period and they sell up and other things happen.
These ten rules are written with my experience in this market so I suggest you start slowly, I suggest you accumulate, I suggest if you’ve never bought before start with a small amount so you see how you’re treated and see how long it takes to get your coins. All this is pointed out, and I’m not going to go through all of them because they’re fairly detailed, but you’ll get that for free. If you look at those, maybe even print them out and study them which will give you a really good in this market and give you some very good comfort about how to approach this market. There are all these little booklets out now and there weren’t many ten years ago knocking about in the gold and silver market or how to begin or how to purchase and all that. I kind of chuckle a little to myself because I’ve been giving this stuff out for free for a long time and glad to do so. I’m here to make a living and make money of course, but I’m also here to help others and I think one of the best ways I can is to let everyone have this information for free and let them determine the best to approach these markets. The methodologies that I outline are one of the most common sense sound ways to go about it.
DD: So physical silver for the entry level people makes a lot of sense, but I know you spend a lot of your time analyzing stocks and gold and silver stocks have underperformed compared to physical in recent years so just wondering what your outlook is for those. I believe it’s quite bullish so I’m wondering why that is that case and why you think they will hit their straps soon?
DM: Yes and a good introduction there. Once you’ve accumulated a fair amount of physical, then if you’re willing to increase the risk reward profile, the best thing you could do is give them the underlying equities and they come in the three basic classifications: top tier, mid-tier, and speculative stocks. I believe from my experience of being through one bull market myself that you’re going to see the biggest bull market in these equities and mining shares that you’ve ever seen in the history of mankind. That’s an extremely bold statement, but I base it on what I know. What I know is the last time we had a bull market and it peaked January 21st 1980, in the last few months and carried on past the peak in gold actually, the mining shares went absolutely ballistic. People were buying them hand over first, and at that time it really was a one entity market. It really was a US only phenomenon. There wasn’t really anybody in Europe or South America or China or Russia or any of the places that are now deeply involved in the precious metals buying.
The second thing is the internet. Almost everybody in the United States and really it applies globally, has got some wealth. I’m not talking about everyone, I’m talking about people that are on the internet have some type of trading platform. They’ve got an Ameritrade, E*Trade, Scottrade, I don’t what the equivalents are in Australia, but everyone’s got a trading platform. Excuse my arrogance, but most people are not that motivated until they are running on an emotion of greed and fear. Once that emotion kicks in, they will be motivated strongly to buy, and they’ll buy gold and silver, but most people will not buy physical gold and silver. They’ll feel it’s too late so people will rush off and start looking at any stock that has gold or silver in its name, especially cheap stocks, and most of these aren’t worth purchasing by the way. They will buy them because they’ve missed the party and feel that the retirement isn’t going to carry them though, they haven’t saved enough, there will be thousands of scenarios that boil down to one thing. If I don’t get in the gold and silver markets, I am screwed. I see what’s happening now so I’ve got to get in. I think that’s going to be a global phenomenon, people are going to much rather click a mouse from their home and buy a mining share than they will to get in a car, call somebody over the phone, and buy physical metal, especially when these metals get higher priced. These small stocks, particularly all of them across the board because the same thought pattern will be going on in some of the institutions and these intuitions can’t buy penny stocks, they’ve got to buy the Pan Americans, the Gold Corps, the Agnico Eagles, and the Newmont Minings. They have to buy these huge billion dollar companies because they can’t move millions of dollars into a penny stock then sell out of it because they’d own the whole company. Even the large stocks will move like penny stocks when this thing takes off. That’s my belief system, and does that guarantee it’ll happen again? No. It is what happened in the late ’79, 1980 time frame, and again since we’ve got the internet and everyone’s got a trading platform and people’s nature doesn’t really change, they’re going to do what’s the easiest for them. They’re going to be all over the chat rooms and talking about ‘Oh this mining company down in Australia, they said …’ and people get really emotional about them and this one’s going to discover all this gold and I’m going to be richer than rich and on and on. These things just build on themselves and gets into a buying frenzy.
The thing that’s really tough in those situations for someone like me is to pick a top or try to get some money out of these things because they will get overvalued even in paper terms. It’s going to be tough, but I’ve already thought about it and I’m not really that concerned. I’ll do my best and I’m certain that we can make it profitable for membership, but that’s the way I see it. We’ll have to wait and see, and it could be different this time, but I doubt it.
DD: If picking a top is your biggest problem then you’re doing okay. Can you just explain to the guys how stocks are leveraged to the price of silver?
DM: Sure. It’s in my book and there are several articles on the internet so if what I’m about to say confuses you just look it up on Google, ‘leverage mining companies’, or something like that. Basically if you take the cost of gold as being at a fixed price – well the price of producing gold is pretty much a fixed price, at least on an annual basis, and sure prices change, but let’s just make it real simple. So it costs $1000 to produce an ounce of gold, I’m just producing a random number. In most cases it’s much less than that. If the price of gold is $1000 an ounce, obviously you’re not making any money at all, but if the price goes up to $1200 an ounce, you’re making 20% profit on that mining company. They leverage because as the price goes up and the cost of mining is fixed, there’s a huge leveraging factor. Generally speaking, the result of gold companies is usually about 3 to 1. So if gold goes up 10%, a mining company will go up 30%, but the reverse is also true, which means that if gold goes down 10%, the mining company can go down as much as 30%, so leverage works in both directions.
The other factor is one I mentioned before and I won’t belabor it, but there’s so much emotion around money, particularly the precious metals once this market gets in the final leg of the mania phase, the panic phase, the ‘I’ve got to own silver and gold or my financial life is ruined’. You can take all of that out of the equation because what happens then is a parabolic move beyond belief, and I believe this time it’s going to be something for the record books.
DD: Okay so if mining stocks do make that parabolic move, do you see much risk of government intervention whether that’s a super tax or any other legislation that you can see?
DM: I don’t rule that out, but governments usually move very slowly and those types of parabolic moves usually don’t last very long and that’s the hardest thing because you said my biggest problem is picking a top, when this happens – if it happens, it’s a nice problem to have. The other problem is that knowing human nature of what kind of blow back I’ll get. ‘You’re a traitor’, ‘Oh you were an insider’, ‘Oh you were part of the establishment’, ‘Oh I knew I shouldn’t have trusted you’. All this hate mail will be coming my way for just telling people to take some money off the table. What I’m trying to do is to help them, but they get so emotional about money – a lot of things, but particularly money. Nothing seems to motivate people like money does. This belief system, a lot of people will be new to it, and these are people that have studied my work for more than a decade and trust me and whatever and they’ll be seeing me as something being wrong with me. Don’t you realize that silver’s not going from 200, it’s going into a thousand or whatever comes up at the time. But regardless, I’ve got to keep my cool and keep my head and do my best. Not do good, but do my best and say, ‘Look, here’s my reasoning, agree or disagree, but here’s what I’m doing’.
I think there’s nothing better about my service than me telling people that our members what I do because right or wrong at least it’s honest. It’s like he’s taking a profit here and I don’t think he’s right, but at least it’s up on the record so to speak so people can see how I’m approaching the market and that type of thing. Right or wrong I have to live with it. I think it’s a real benefit and not many in the industry that I’m in do that. I think it’s a good way to go about it. My plan basically is as this goes parabolic, if it goes parabolic; this is scale out on the way up because no one can pick an exact top. If you think you can that’s an amateur’s attitude, get over it. If you get can within 20% of a bottom or top you’re going to do extremely well and that’s good as any professional can ever do.
But as you scale out and things start to go crazy and Time magazine comes out with ‘The gold rush is here’, and that’s a good clear indicator that mainstream’s catching on. That’s a good time to start exiting because that means you’re getting near the top. There are other indicators that you can use, but again the plan will be to take some profit, some more profit, some more profit along the way and love what you get.
My mission statement is to teach and empower people to understand the benefits of an honest financial system. Gold and silver aren’t even in my mission statement. What we really need is to get back to some honesty in the financial markets again because that’s what benefits everybody. I mean if you make tons of ‘money’ in the gold and silver market, good for you. That’s my plan personally and that’s my plan for my members, but it doesn’t benefit anybody in the long run because what we need is honesty and integrity again because that’s how you’re going to get the global markets moving again. The whole thing’s built around confidence and trust, and the confidence and trust is breaking down rapidly and that’s why we’re in the fix we’re in. My mission is to fix that problem. When you fix it on an individual basis or maybe on an entity basis or your family trust or that type of thing is to hold precious metals for now, but we need to get back on track as a planet of human beings to start having integrity in all of our dealings, especially in our financial affairs because everything’s based on the economy. If your economic system is based on a lie, which it currently is, obviously things are going to break down.
DD: Interesting. I’m sure it’ll be an eye opener for many of the listeners so really appreciate your time today David, and just before I let you go, can you tell our listeners how they can read your reports and get in contact with you?
DM: Absolutely. The easiest way is to go to the website and there are a couple of ways to get there and one is silver-investor.com and the other way is to type in themorganreport.com. Either of those will get you there. If you can’t remember either of those you can just type in David Morgan silver into any search engine like Google and it’ll take you right to the website.
DD: Excellent. I really appreciate your time. Thanks again.
DM: My pleasure, thank you.