With gold and silver continuing their strong advances in the wake of the Fed’s QE∞ announcement last Thursday, The Doc sat down with silver expert David Morgan for an EXCLUSIVE INTERVIEW regarding gold and silver’s fundamentals and where Morgan sees the metals heading over the next 12 months.
Morgan believes the big gains seen in the metals over the past month was the market pricing in QE3, but believes particularly silver has much room to run, stating that the metal will most certainly double from here, and will most likely triple from here. Morgan believes silver’s nominal high near $50 will be broken to the upside in 2013, with silver likely reaching $60-$75/oz over the next 12-15 months.
Morgan also discusses the current supply side for silver and the massive physical tightness in the market, potential BIG, BIG problems for Barrick if it’s Pascua Lama mine fails to reach production (anticipated to produce up to 40 million oz annually).
The market’s premier silver analyst concludes by discussing his expectations for silver to massively out-perform gold going forward, and states that he expects the silver/gold ratio to narrow to at least 10 to 1, and states that silver is moving towards par with gold!
The Doc’s EXCLUSIVE MUST LISTEN interview with silver expert David Morgan of Silver-Investor.com is below:
Regarding his outlook for silver, Morgan states be believes that silver may never be seen under $30 again:
‘I’ve told everybody that anytime you can buy silver under $30/oz or the equivalent in gold, do it, for the long term. These are physical precious metals purchases. It might have looked like not that great of a statement until recently, and now will we ever see $30/oz silver again? I don’t know, but I doubt it! We might get a pull-back to $32, it could pull back to $30 or $28, but I doubt it, I think the time to accumulate over the past 15 months was a gift! Unfortunately most people don’t buy the gift, they wait hoping to see it go lower, and of course it doesn’t, so they end up buying higher.
When asked about the ease in which silver recently cleared the $30 level recently Morgan replied:
I really like the way silver is trading, it’s trading very bullish as if the shorts are scrambling to get out. There’s alot of short covering going on. From the latest COT report, the Big Boys are kind of playing tough, and it doesn’t look like that much short covering is taking place yet from the commercial side, but that remains to be seen.
Regarding speculation that the other commercials might be turning on the presumed large short of JP Morgan Morgan stated:
Yes, it’s pretty clear. I have to tip my hat to Ted Butler, he was really the first to bring the COT reports to everyone’s attention. Yes, I think that’s a point to be made with the public COT data, but no one knows the real absolute true short position. The reason I state that so emphatically is that all we can see in the data is what’s on the COT. We can’t see what the OTC derivatives market looks like. JP Morgan could be net LONG for all we know! Now I’m not saying that they are, but what I am saying is that the OTC market DWARFS the public market, and between the Swiss banks and the offshore banks and all these other places that the bankers do their stuff – there could be a net position that doesn’t really line up with what we see in the public data. That doesn’t necessarily mean that’s true, what I’m trying to point out is that we don’t really know their true positions. We don’t know what their OTC positions are.
We don’t really know who’s on the hook! Maybe JP Morgan has counter-parties with all the major central banks of the world and that’s why they keep so much clout! We just really don’t know. You need to really think about how the banking system operates, and how much is in the seen world vs. how much is in the unseen world, which for these derivatives which are taking down the system, are mostly in the unseen world. We don’t really have any way of knowing what they’re doing.
When asked about Barrick’s troubles at it’s Pascua Lama mine as well as silver’s overall supply side fundamentals Morgan replied:
To give a little background, the Pascua mine was a huge, huge find. In some of my earlier lectures I made a big deal about the size of that discovery, because it’s huge! I stated that having between 20 and 40 million ounces of silver coming out of the mine on an annual basis once it hit full production would be significant- very, very significant out of one mine.
Now to the question- is it going to come out, can they do it economically, they’re on the hook with Silver Wheaton, what will happen? The answer is no one knows. Is it potentially a huge hazard for Barrick? Absolutely!
The cost overruns are substantial, on top of that this contract is locked in with Silver Wheaton- Barrick took the financing and it’s turned into a problem. How big of a problem, we don’t know.
As far as the overall picture for silver production, the silver market is still very, very tight. Silver was in a deficit for about 16 straight years until 2007. Since then there has been a ‘surplus’ mining wise & recycling. Mining supply does not equal demand. If you add in the 200 million ounces that are recycled every year on top of mining supply there’s actually been a surplus. That surplus is eaten up by investment demand. Right now the investment demand has been doing well, and I think it will increase.
Silver is almost counter-intuitive. You really see more demand as the price goes higher. That’s insane because we’re taught in economics 101 that supply and demand regulate price. That’s true in silver to some extent, but I’ve been watching silver for 40 years, and I know from watching it that it’s one of the biggest momentum plays out there. The guys that trade whatever’s moving, they don’t care if it’s silver or Kumkwats, silver has a tendency to move violently both up and down, and they’ll jump on that momentum and you will actually get more volume as it’s moving up for awhile, until the price gets too high, and you’ll see alot of shorting and everything else, and of course you have to factor in the manipulation.
It’s a market that really moves when it catches alot of attention and big money.
When asked about the sustained uptrend in the silver/gold sales ratio by the US Mint David stated:
The market is much tighter than most people expect on the silver side. That trend is something I predicted years ago. As gold continues to go higher and higher, generally it becomes priced out for most people. We are fairly close to $2,000/oz gold. That’s approximately a mortgage payment, whereas silver is still affordable for most people at $30/oz, as well as the dynamics which are superior for silver than gold in my opinion.
I think you’ll see that trend continue, and it doesn’t surprise me. I was actually a little surprised that it took as long as it did for that trend to become established.
The Doc then asked how David sees the sustained uptrend in the silver/gold sales ratio affecting the silver/gold price ratio:
Eric Sprott made a very good point several years ago that the amount of dollars going into gold and silver were about the same. You’re verifying that- even a better ratio with the US Mint Silver Eagle sales ratio to Gold Eagles.
It will put pressure on the price of silver- more-so than the price of gold, for the ratio to narrow. Remember we’ve already been down to 36-1. It then rose to about 60-1 and now we’re back to the low 50’s again.
I really stated very early on that I felt the ratio would get to the classic ratio of about 16 to 1. The natural historical ratio out of the ground is about 12 to 1, and today’s natural ratio is about 9 to 1. This means that for every ounce of gold mined out of the ground there’s about 9 ounces of silver- globally on a net basis.
I really think you will see a ratio of about 10 to 1 at the top of the market. Bunker Hunt believed that the correct silver to gold ratio was 5 to 1. I’m not suggesting it will get to that level, it could get to 10 to 1.
I’m working on a study on whether silver could ever reach par with gold. I’m just asking the question and doing the study and giving my views to my paid readers. What I’m suggesting is that the ratio is out of whack, and it’s going to move towards par.
There’s alot of hedge fund managers out there that are gold centric. They really understand gold- most of the businessmen in Hong Kong understand gold, but they don’t understand silver at all. The argument is always that it’s too bulky.
Well obviously at par (with gold) it’s not too bulky. When is it not too bulky? At a 5to1 ratio? 10 to 1? 20 to 1? I think once the manipulation is pushed out of the way, and we see the real price determined by the physical market, the free market will make that determination.
We know that when silver touched $50 (in the 80’s) the silver to gold ratio touched 16 to 1. I think that this time it will do better than that, I really do. Whether my guess of 10 to 1 is correct or not remains to be determined, but we do know that there is less physical silver available today than there was during the Bunker Hunt days.
We also know that it’s a global market today rather than just US people that were concerned about the US inflation that was rampant in 1979- 1980 until Volcker came in and raised interest rates enough to quell inflation expectations.
We also have a global financial situation that makes the 1980’s look like the most stable monetary system that ever existed in the universe! We have alot of factors now that in my book make it almost a certainty that we’re going to see not only a new nominal high price established in silver, but a NEW REAL HIGH! In today’s paper terms, that would be well above $135/oz.
I think we’re far from the top, and I don’t think it’s going to happen in 2013, I think the final high will likely be around 2016 which will be the tough call to make, and you will have to look at what will that silver purchase. That’s what a free market is all about. That’s the way to think about it at the top, because we could be in a currency crisis where the paper price is more or less meaningless.